Research On Early Warning Disclosure Rules Of Funds

Although China’s "Securities Law" and "Acquisition Management Procedure of Listed Companies "(hereinafter referred to as "the "Acquisition Procedure")have established provisions on the early warning disclosure system,the dispute on the fund’s concerted action has not stopped.The biggest controversy is: Assume that funds under the same fund manager respectively holds less than 5% of the shares of a listed company,but when the funds combined the shares and reach above 5%,should they fulfill their disclosure obligations in accordance with the above provisions? The above questions can be motivated by three questions: Is there a legal basis for calculating the shares of different funds managed by the same fund manager? Should it be presumed to be a concerted person? If the person acting in concert is presumed,is the fund manager performing the obligation to disclose information on the shares in accordance with the existing regulations? What impact will it have on the market?Article 86 of the Securities Law of “Acquisition of Listed Companies”,stipulates the principle of disclosure of shareholding between investors and concerted parties.In2006,Articles 12 and 13 of Acquisition Procedure reveals the combined calculation of the shareholdings-the shares registered under the investors and who are not registered in their names but the investor can actually dominate the voting rights,the shares should be combined.However,there is a dispute over the interpretation of the rule.First,the “shares”themselves are more extensive than the “shares that can actually dominate votingrights”.As previously analyzed,“shares” include voting shares and non-voting shares.Second,the semantics of “the shares that actually dominate voting rights” are unknown."Dominant voting rights" refers to the exercise of voting rights,that is,the decision to vote? Or does the disposal of voting rights represent the investment decision-making power? It’s not explained.The two interpretations correspond to different understandings of the legislative purposes of the early warning disclosure rules.According to the system explanation,both the provisions of Article 86 of the Securities Law on combined shares or the preceding articles are listed in the section on the acquisition of listed companies,as part of the acquisition regulation system,serving the regulatory requirements of acquisition behavior.Therefore,large holdings are often considered a prelude to the acquisition.In order to defend against the acquisition,it is advisable to use the subject of voting rights as the “holder” to facilitate the prediction of possible acquisitions.At the same time,as an information disclosure system aimed at enhancing transparency,public investors will be made public by large-scale transactions,which will help release market information behind investment and generate information transmission effects on securities price changes.The early warning disclosure system not only helps predict acquisitions,but also implements other functions.From the consideration of price fluctuations,the definition of “holders” should be more open to investment behavior,and those who have investment rights and who can influence the securities market price,supply and demand also are necessary to be exposed.The system value determines the system design and legislative ideas,and the corresponding rules can be established.Due to the divergence of understanding of“actual domination”,it may directly affect the basis for the combination of funds by same manager.The definition of a concerted person can be found in Article 83 of the Annex to the Acquisition Procedure.The Acquisition Procedure firstly define the definition of concerted action through "investor and investor","by agreement or other arrangements" and "cooperating to expand the voting rights that can be dominated".And the presumption of concerted action by investors with related relationships by Inadequate enumeration.On subject,the fund holds the identity securities is identified as an “investor”.On subjective element,the contractual fund is not “human”,can’t express and form a meaningual connection with each other.However,as the fund’s meaning agency or executing agency,form same investment tactics for its funds are possible.It may form a kind of meaning contact,but the subjective element is more subjective,and whether there is a meaning connection,it’s difficult to distinguish.As far as the behavioral requirements are concerned,the fund,as an important secondary market participant,has the appearance of “joint increase”,but the actual action is not to expand the voting rights of listed companies.Synchronous increase does not mean actions to jointly expand voting rights.Therefore,there is no relevant evidence proven that the funds of the same manager constitute a concerted action.From the perspective of presumptive determination of the person acting in concert,the fund manager called the “fund controller” lacks a reliable basis from the company law,the trust law and the property law.Therefore,the fund is not in line with the presumption of the current concerted action by same manager,and the reason for combined calculation cannot be established from the perspective of the concerted person.The authorities issued two rules,stipulating that public offering funds don’t need to combine shares,and private offering funds need.Due to conflicts with the current shareholding combination rules and the rule is not announced,it’s confusing in applicability.Comparing extraterritorial legislation,the United States and the United Kingdom have successively established the concept of “beneficiary ownership” to determine who is the holder of equity securities.The SEC’s grasp of stockholders is mainly based on voting rights and investment rights.The UK determines who is entitled to exercise or actually exercise significant influence or control over the trust investment activity.Japan uses complex identification and addition and elimination formulas to reveal combination.Both countries will require the “beneficiary owner” to jointlycalculate the shareholding and not exempt combination.Japan stipulates that if the investment trust property investment purpose is not for the purpose of seeking the stock issuer’s control,it is not necessary to combine the trust property holdings into the manager’s shareholding.In contrast to the institutional design of the United States and the United States and Japan,there are some gaps in the information disclosure system for stock holdings in China.The definition of “holding” has not been clearly defined,especially“indirect holders” lack explanation;the regulatory guidance indicate that combination rules of public offerings funds and private offering funds conflict with combination rules of Acquisition Procedure.Before drawing on the experience of other countries,we should first consider the adjustment direction of China’s share combination rules and the reality of the medium and long-term securities market.With the expansion of scale,the institutional investor team continues to increase,the securities market presents investment diversification.Countries generally agree with the independent value of the shareholding early warning disclosure system.As a transparency-enhancing system,early warning disclosure system focuses on protecting investors from the harm caused by information asymmetry.In addition to prompting investors to purchase intentions to a certain extent,it helps to reflect the market supply and demand relationship for shareholders to re-evaluate.Legal or regulatory authorities should not limit information within possible acquisition information.Transactions that have an impact on market pricing should be public.With a huge amount of funds,the fund exerts influence on listed companies,which is enough to shake the stock price.Therefore,not only the exercise of the voting rights of the fund is worthy of attention,but the transaction should also be monitored.Fund investment decisions and voting will have an important impact on the market,and it is equally important for the market to make pre-judgments.China’s shares combination rules do not mention investment decision-making power,and situation is existed that the investment decision-making power is separated from thevoting rights,the substantive investment decision-making power and the formal investment decision-making power are separated.China’s current mandatory combination rules(including public funds not combined and private funds combined)actually avoid investment concentration,but it cannot avoid the deliberate division of nominal holders,and indirectly control the listed companies.Drawing on the experience of institutional investors in the US securities market to profoundly change the governance structure of listed companies,China’s fund managers can also participate in corporate governance,and strengthen the research on the company’s future performance from within,which will help the return of value investment.Author suggests that the standardization can be gradually implemented in a three-step manner.The first step is to amend the legislative purpose of the early warning disclosure system.It is to provide the market with all the large amount of transaction information,revealing the relationship between supply and demand,not only to acquire information,increase transparency,and investors themselves judge the impact of information on investment.A cornerstone is consistent with the law enforcement philosophy in an administrative penalty decision issued by the Securities and Futures Commission in 2018.The mandatory combination rules proposed in the two regulatory guidance documents cannot reflect the true supply and demand relationship,and deviate from the institutional value,and are recommended to be abolished.The second step is to solve the definition of “shareholders” and propose to introduce the concept of beneficial ownership to the securities law.China’s current anti-money laundering identification rules have introduced the concept of beneficiary owners,and the fund is specifically set to confirm the holder of stocks through beneficial ownership.In addition to the nominal holders of stocks,stock investment decision makers and voting powers are included in the “holding” criteria.When the fund investment decision maker and the voting power controller are the administrators,the manager acts as the “holder” and combines the funds that meet the standard to calculate the shareholding.The third step should reshape the fund’s active management of its own tasks.The manager grasps the investment decision-making power and voting rights of the company,encourages participation in the governance of listed companies,and paves the way for value investment.After comprehensively comparing the elements of the disclosure rules,it is found that the disclosure thresholds set by countries are relatively uniform,and the disclosure period and transaction restrictions are quite different.From a holistic perspective,China’s early warning disclosure rules are too strict,transaction restrictions are extremely strict,affecting the enthusiasm for participation in the governance of listed companies and the fulfillment of the manager’s fiduciary duties.However,the US and Japanese legislation does not set a strict prohibition on transactions,and it has a special reporting system for qualified institutional investors based on whether it seeks corporate control.It differs from the average investor in triggering the threshold and disclosure content,and the disclosure content is set simple but sufficient to meet the market’s use of information.However exemption is not for free.For investors who violate the rules to seek control from listed companies or deliberately circumvent conventional forms,the law adds a reversal mechanism and severe penalties.For the steady development of China’s institutional investors and the backbone of the securities trading market,author suggests that the legislative department establishes different disclosure rules for institutional investors’ portfolios with a total shareholding of more than 5%: 1)Maintain the existing simple disclosure information for investments that do not seek control or management of the company,and cancel the transaction restrictions two days after the reporting period.(2)For the investment of the company’s control or management rights,disclose more critical information and maintain the trading restrictions two days after the reporting period.For institutional investors who seek control but circumvent conventional disclosure obligations,severe penalties are imposed,such as:(1)restricting the exercise of voting rights and prohibiting them from exercising the right to nominate directors,thereby preventing them from quickly obtaining management and control rights of the target company.(2)According to the seriousness of the consequences,it is forbidden to trade for a certain period of time or to declare a ban on the securities market.(3)If it is in accordance with the constituent elements of the crime of insider transaction,it is necessary to strictly apply the punishment.Compared with the administrative penalties of the current fines and warnings in China,it is more substantive to limit the business to deliberately evade.