On Fund Holders Constraints On The Behavior Of Fund Managers

Investment funds have a long history of over 100 years, which began in 1868 when the Foreign and Colonial Government Trust, the first investment fund of the world, was established in England. A decade has passed since investment funds were first introduced into China. Although the investment fund Industry has achieved certain development, a lot of problems emerged. The most serious problem is the conflict of interests between unit-holders and their fund managers, which becomes a critical hindrance to the further development of investment funds in China.To restrain fund managers from impairing the interests of fund-holders, several ways could be followed. In academic circles, much attention is paid to such ways as supervision of governmental institutions, supervision of custodians or self-regulation of fund managers. Most of the scholars fail to explore the way of imposing restraints on managers on the part of unit-holders. This paper, however, will concentrate on this angle. In brief, the main content of this paper is: fund-holders should enjoy extensive rights to strengthen their supervision over managers and to restrict managers' rights in a reasonable way. Besides, the article will take contractual-type funds as the objects of study. The article is divided into six chapters. Chapter one consists of three sections. Section one analyzes the existing problems in investment fund industry of China. Section two explores the origin of the conflict between unit-holders and fund managers. Inconsistencies in interests and asymmetric in information accessibility between these two parties make it possible for fund managers to infringe the investors' rights and interests. In section three, the article puts forward four issues which are the keys to the resolution of the problem mentioned above. Firstly, the legal relation between unit-holders and fund managers must be clarified. Secondly, a limitation must be imposedon the investors' rights to restrain fund managers. The third question is that the cost of the investors to get the fund information must be reduced, or it will be impossible for them to supervise fund managers effectively. The last question is that unit-holders must find a way out of 'the dilemma of group action'. Actually, the four issues above have posed the main structure of the article.Chapter two analyzes the juridical relation between unit-holders and fund managers. Before that, the article needs to define the legal framework of the investment fund as a whole. First, the legal foundation of the investment fund is trust. Furthermore, this article holds that the 'pattern of joint trustee' should be adopted to regulate the relations of the three parties, because this pattern is comparatively beneficial to the protection of investors. Under this pattern, the juridical relation between the unit-holder and the manager becomes very clear: the unit-holder is both the trustor and the beneficiary, while the fund manager is one of the two trustees. Thus the fund manager is under fiduciary obligations to work for the sake of maximum of the unit-holders' benefit. At the same time, unit-holders get the legitimate justification to exercise their supervising rights.Based on the conclusion of chapter two, chapter three explains the limitation of unit-holders' rights to restrain fund managers. To protect the interests of unit-holders is the aim of fund legislation. On the one hand, fund-holders must be entitled to extensive rights to supervise the managers; on the other hand, the fund managers should enjoy discretionary managerial authority to a reasonable extent. Consideration must be given to all the parties in the fund Industry, so that no only the investors but the managers and the custodians can benefit from their work. Because of the principle of trust and the characteristics of investment fund, the investors should not exercise excessive supervision over the managers. In a word, the investors should supervise the managers in view of the legitimacy of their actions, not the soundness. Chapt...