Research On The Judicial Application Of Asset Managers' Prudent Investment Obligation

The promulgation of the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions in 2018 ushered in the era of unified regulation for various business forms of the asset management industry,and provided a basis for the integrated discussion of the judicial application of asset management disputes.The obligation of prudent investment by asset managers is in line with the transaction cost theory and the efficient market theory.This is because requiring asset managers to be "prudent" in investment can reduce the transaction cost of both parties involved in asset management business and complement each other with stabilizing the overall efficient market.The legal system basis of the obligation of prudent investment involves trust system and contract relationship.The legal system basis of various types of asset management business is trust system.Except for the agreed constraints arising from contracts,a fiduciary relationship exists between the asset manager and the entrusted investor,and the manager bears a fiduciary obligation,the duty of prudent investment of which is most directly related to investment management.Emphasizing the duty of prudent investment of the asset manager helps to protect the interests of investors and promote the sound development of asset management industry.But in China,the current regulatory requirements for prudent investment duty of asset managers are not systematic.Comprehensive laws and regulations are formulated in principle with similar expressions such as "diligence and responsibility",and specific behavior standards are scattered in legal documents of various levels.Because of the vagueness of the standard requirements,the judicial application standard in the cases where the asset manager violates prudent investment duty is also unclear.By sorting out the judicial cases relating to the prudent investment obligation of asset managers,we can find out three types of important disputes involved in asset management business disputes.The first issue is about the determination basis of prudent investment obligation of asset managers.Generally,the court determines whether the administrator should perform according to the agreement of the parties.When the agreed obligations are lower than or do not involve the obligations stipulated by laws and regulations,court will take the legal obligations as the basis for determination.However,due to the greater discretion of the asset manager on investment and the flexibility of the prudent investment obligation itself,it may be exempted by the "default rule".In the absence of corresponding provisions in the agreements and the statutes,it should be made clear that the principle of fault liability should be applied to judge whether the manager should bear liability,and the standard of "good faith manager" should be adopted as an alternative identification standard,that is,whether the manager’s conduct constitutes gross negligence shall be determined based on the level of care of the manager similar to its identity and professional background.The second issue is about the portfolio requirements of asset managers.Portfolio and risk diversification are inseparable,but there is no consensus on whether managers must fulfill their prudent investment obligations with respect to portfolio requirements.Some courts hold positive views,while others hold that it is only a recommendation.At present,China has not put forward explicit requirements on investment portfolio in regulations,but the relevant rules have undergone a series of changes in British and American case law.The existing "prudent investor rule" incorporates the portfolio theory as the focus of the overall review of whether the manager is "prudent" or not.The portfolio theory is suitable for the asset management industry.For the business on the secondary market with a wide investment scope,the requirements for the regulation of the investment portfolio shall apply to ex ante disclosure and interim supervision;for the business on the primary market with a narrow investment scope,the manager shall be required to provide special explanation for the business not applicable to the investment portfolio.The judicial review of the investment direction and scope of the manager should focus on the investment as a whole rather than a single investment project.The third issue is about the allocation of the burden of proof.Based on the general principle of "whoever asserts bears the burden of proof" for the allocation of burden of proof,as the plaintiff,the client will be in an obvious disadvantage of proof.Pursuant to the transfer of the burden of proof to the administrator in the Notice by the Supreme People’s Court of Issuing the Minutes of the National Courts’ Civil and Commercial Trial Work Conference,as the defendant,the administrator will bear enormous burden of proof throughout the entire process of the entrusted business,which is not conducive to the sound development of asset management industry.With respect to the dilemma of burden of proof,the CSRC shall provide necessary evidence to solve the problem that the Plaintiff cannot easily obtain evidence and judicial decisions respect the freedom of business judgment,so as to avoid adverse incentives for the administrator and achieve the purpose of adjusting the allocation of the burden of proof.The allocation of burden of proof shall be appropriately adjusted to "presumption first – the plaintiff proves – reasonable doubt – the defendant proves" by referring to the burden of proof in the business judgment rules.In a dispute regarding prudent investment,it should be first presumed that the business decisions are correct,and the burden of proof to rebut the presumption is on the plaintiff,and then on the asset manager to prove himself/herself innocent,in order to balance the burdens of proof of the plaintiff and the defendant in a dispute regarding prudent investment.