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Development and Improvement of the Securities Investor Protection System in China

Development and Improvement of the Securities Investor Protection System in China. Chen Gongyan July 31, 2008.

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Development and Improvement of the Securities Investor Protection System in China

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  1. Development and Improvement of the Securities Investor Protection System in China Chen Gongyan July 31, 2008

  2. On behalf of the Securities Investors’ Protection Fund of China (SIPF), I hereby extend my sincere gratitude and gracious welcome to the leaders and friends who have come all the way to attend the seminar!

  3. Development and Improvement of the Securities Investors Protection System in China 1. Establishment and development of the securities investors’ protection system in China 2. Several issues relevant to improvement of securities investors’ protection system of China

  4. Establishment and Development of SIPF With the approval of the State Council, SIPF was incorporated on August 30, 2005 and started formal operation on September 29 of the same year. SIPF has a registered capital of RMB6.3 billion. The Board of Directors, as the decision-making and administrative body, is composed of nine directors, including two members recommended by the Ministry of Finance, two members recommended by PBOC, four members recommended by China Securities Regulatory Commission (CSRC), and one independent director. Under the leadership of CSRC, SIPF participates in the risk management of securities companies, organizes the purchase of individual creditor’s right, and makes up the gap of customer settlement funds.

  5. Organizational Chart of SIPF:Before Restructuring(Emergency System) Chairman Vice Chairman Vice Chairman Independent Director Executive Director Executive Director Executive Director Executive Director Executive Director 独立董事 Logistics Department Asset Management Department Financial Department Clearing Department Audit Department Legal Affairs Department Information and Statistics Department

  6. Organizational Chart of SIPF:After Restructuring(Peacetime System) Chairman Vice Chairman Vice Chairman Executive Director Executive Director Executive Director Executive Director Executive Director Independent Director Logistics Department (Clearing Department and Audit Department) Investor Protection Department (Information and Statistics Department) Investor Survey Center Financial Department Asset Management Department (Legal Affairs Department) Investor Call Center

  7. Basic Functions of SIPF (I) Securities Investor Protection Department Review and disbursement of protection fund Special audit inspection Assessment on the protection of securities investors (in exploration)

  8. Review and Disbursement of Protection Fund As of June 30, 2008, SIPF had effected 169 fund disbursements, amounting to RMB21,423 million accumulatively. 48 disbursements were handled to make up the customer settlement fund gap of securities transactions, involving a total amount of RMB15,623 million. 121 disbursements were made to purchase the individual creditor’s rights, involving a total amount of RMB5.8 billion

  9. Special Audit Inspection As of June 30, 2008, SIPF completed the 47 audit inspection on 22 disposed securities companies, involving 41 accounting firms and law office times, and more than 400 person-times. 4,712 accounts were checked, involving RMB4,953 million It found 240 accounts that should not be included into the make-up scope due to erroneous qualitative classification, involving total balance of RMB77 million It found 701 accounts lacking adequate evidence for recognition of normal brokerage accounts, involving total balance of RMB443 million The two accounted for 10.49% of the total balance of accounts inspected 5,400 individual creditors were inspected, involving principle of RMB2,354 million It found 7 persons that should not be included into the purchase scope due to erroneous qualitative classification, involving principle of RMB4.9 million It found 953 persons requiring for further verification, involving principle of RMB533 million The two accounted for 22.85% of total principle inspected

  10. Basic Functions of SIPF (II) Asset Management Department Participation in the liquidation of bankrupt securities companies Value preservation and accretion of the protection fund • Creditor’s right compensation • Investment

  11. Participation in the Liquidation of Bankrupt Securities Companies As of June 30, 2008, among the 25 securities companies resorting to the protection fund, 23 had entered into the liquidation process The formal declaration involved total creditor’s right of RMB19,571 million, including principal of RMB19,083 million and interest of RMB488 million The preliminarily claim of creditor’s right was RMB6,518.4 million

  12. Participation in the Liquidation of Bankrupt Securities Companies (Cont’d) SIPF serves as a member of the Creditors Committee of 18 securities companies SIPF is the Chairman of the Creditors Committee of 15 securities companies

  13. Creditor’s Right Compensation As of June 30, 2008, four securities companies had gone through the formalities of bankrupt asset distribution • Investors of China Eagle Securities received compensation of RMB274,584,100 • Investors of China Southern Securities received cash compensation of RMB54,962,200, 8,474,964 shares of Harbin Aircraft Industrial Group and 32,625,414 shares of S Harbin Pharmaceutical Group • Investors of Kunlun Securities received cash compensation of RMB3,271,400 • Investors of Zhongke Securities received cash compensation of RMB64,759,500

  14. Creditors Right Reimbursement (Cont'd)

  15. Investment of Protection Fund The Management Measures of Securities Investor’s Protection Fund jointly released by CSRC, PBOC and MOF defined the following investment channels for the protection fund: Bank deposits Treasury bonds Bonds issued by the central bank (including central bank bills) Financial bonds issued by central-government-level financial institutions Other forms of fund utilization approved by the State Council; As of June 30, 2008, SIPF had completed 12 transactions of treasury bond investments, generating investment revenue of around RMB10.27 million

  16. Basic Functions of SIPF (III) Financial Department Raising of protection fund Disbursement of protection fund

  17. Statistics of Protection Fund Placement Unit: RMB100 mn

  18. Disbursement of Protection Fund Unit: RMB100 mn

  19. Basic Functions of SIPF (IV) Investor Survey Center Investor survey Information collection and processing Website construction

  20. Quarterly Survey on China’s Securities Investors As of June 30, 2008, SIPF had held three comprehensive surveys on the securities investors of China in cooperation of the Investor Education Office of CSRC, Securities Association of China (SAC), and etc. During the survey, 940,000 person times browsed the questionnaires on the website of SIPF (www.sipf.com.cn)

  21. Monthly Survey on Investor Confidence Index Irregular Survey on Hot Issues of Securities Market As of June 30, 2008, SIPF had made special surveys on the re-financing activities on the Growth Enterprise Board and by listed companies As of June 30, 2008, SIPF had successfully carried out three surveys on the confidence of domestic A-share personal investors, completed the compilation of investor confidence index, and prepared three issues of Investor Confidence Report SIPF will gradually release indicators such as Fund Manager Confidence Index, Securities Company Governance Index, Investor Protection Index, and etc.

  22. Information Collection and Processing Preparing statistical statements, including monthly reports and annual reports of the company Building and maintaining the network of securities investor survey Constructing the professional website of securities investor protection, i.e. www.sipf.com.cn

  23. Basic Functions of SIPF (V) Call Center (Legal Affairs Department) Accepting the investors’ inquiries and complaints Investor education Guidance for investors’ right protection

  24. The Call Center was put into trial operation on June 30, 2008, and started formal operation on July 18 Tier-three Call Response Mechanism Universal, general and public-good matters.These matters are directly replied by consultants of the Call Center according to the existing reply approach or with reference to the applicable laws, regulations and policies. Suggestions, complaints, and report of unlawful practice.These matters are answered by the “Securities Investor Protection Expert Panel”, or are referred to the competent authorities. Typical case.SIPF recommends lawyers to protect the investors’ rights on its behalf.

  25. Operation of the Call Center From June 30, 2008 to July 15, 2008, the column had received 58 messages from the investors, including 19 messages about business consulting, 3 messages about policy consulting, 29 messages relevant to praises, criticisms, advocacy and suggestions, and 7 messages relevant to complaint and report of unlawful practices, accounting for a share of 33%, 5%, 50% and 12% respectively. So far, the column has handled 56 messages.

  26. Co-Opening of the “Investor Voice” Column with CSRC From April 21, 2008 to June 30, 2008, the Column had received 1153 messages, and handled 1094 of them The messages fall into four categories: consulting, suggestions, complaint and report of illegal practices, and others • 79 of the 138 consulting messages have been replied directly • All of the 461 suggestions have been handled • All of the 257 complaints and reports of unlawful practices have been handled • All of the other 307 messages have been handled

  27. Three Issues Relevant to Improvement of Securities Investors’ Protection System of China Reimbursement policies Assistance for investors’ right protection Assessment on the protection of securities company investors

  28. (I) Reimbursement PoliciesCreditor’s Right Purchase Policy Policy regarding purchase of customers’ securities transaction settlement fund: to purchase the full amount of principals and interest being embezzled. Policy regarding purchase of individual creditor’s right:

  29. Distribution of Purchased Individual Creditor’s Rights

  30. Distribution of Purchased Individual Creditor’s Rights (1) According to the statistical analysis of the individual creditor’s right in the 19 liquidated securities companies, there are 22,790 accounts involved, including 883 accounts occurring before and 21,907 accounts after September 30. Seen from the perspective of account coverage, 80.19% of the accounts are covered if the ceiling of individual creditor’s right purchase is set at RMB100,000; and 91.87% of the accounts are covered if the ceiling is set at RMB 200,000.

  31. Distribution of Purchased Individual Creditor’s Rights (2) Seen from the perspective of amount coverage, the policy may cover 30.32%, 49.05% and 94.49% of the total accounts if the ceiling of individual creditor’s right purchase is set at RMB100,000, RMB200,000and RMB 2,000,000 respectively.

  32. Distribution of Customer Transaction Settlement Fund Accounts Made up (3) In the 124 business outlets of the five liquidated securities companies, SIPF selected the details data of 2,599,191 accounts of all brokerage business customers, and there were only 1,040,600 accounts left after the accounts with null and negative assets, negative asset balance or negative securities balance are eliminated. The analysis finds that: if the limit of brokerage account purchase is set at RMB10,000, around 70% of accounts may be covered; if the limit is set at RMB35,000, around 90% of accounts may be covered; and if the limit is set at RMB20,000, around 99% of the accounts may be covered.

  33. Features of Current Purchase Policy Current purchase policy provide adequate and effective protection for investors Extensive coverage Intensive protection Characteristics of Current Policy Difficulty in identifying the account status Complicated reimbursement procedures and prolonged reimbursement period Discrepancy with international practice

  34. Suggestions on Reimbursement Policies Conditions for Implementation of Reimbursement Policy The historical risks are basically mitigated, and great changes have taken place over the comprehensive governance of securities companies as compared to the situation before The customer asset protection system improves, and the third-party custody of customer assets is put into effect The securities market regulatory system improves The investors’ risk tolerance and awareness are strengthened • Adopt the limit compensation system on accounts • Accounts opened with the same securities company by the same investor shall be reimbursed on a consolidated basis; accounts opened with the same securities company by different investors who are subject to the de facto control of the same person shall be reimbursed on a consolidated basis • Set a ceiling for compensation of each account Option 1: An upper limit of RMB200,000, investors shall participate in the bankruptcy liquidation of securities companies for the part in excess of RMB200,000 Option 2: Maintain the policies prevailing after September 30, and make appropriate adjustment

  35. (II) Assistance for Investors’ Right Protection Current status in China According to the comprehensive survey on China’s securities investors, when being asked whether their interests are being infringed upon, most of the investors agreed that that interest infringement does exist, which mainly lies in nonstandard information disclosure (56.1%), manipulation of share prices (44.2%), governmental behavior deficiency (37.6%), and encroachment by substantial shareholders (31.3%) etc., while only 5.5% of the investors believe that their interests are not damaged.

  36. Conclusion:In the current period, the demands for protecting the interests of investors are pervasive; but the interest protection capability of investors is rather weak. Investors are more inclined to protect their rights through petition, which gives rise to a series of social problems. There lacks a professional institution assisting the interest protection behaviors of investors.

  37. SIPF Vision on Safeguarding Investors’ Right Compared to developed countries, China lacks of professional institutions and personnel to safeguard the investors’ rights, and it is commonly seen in China that investors fails to seek consulting assistance or make complaint. After the disposal of securities company risks, case of post-event compensation will become rarely seen. SIPF should properly expand its functions and guide the right protection of investors As a professional institution of investor protection, SIPF boasts adequate personnel, materials, financial strength, and information resources to guide the protection of investors’ right

  38. SIPF Vision on Safeguarding Investors’ Right (Cont’d) The Call Center and the expert panel take on the relevant work Assistance is provided in the following manners: Securities affair reconciliation: conduct reconciliation upon the entrustment of investors Promotion of securities arbitration Public-good litigation • File litigation in the name of SIPF through holding 1,000 shares in each listed company • File litigation upon the entrustment of investors

  39. (III) Assessment on Securities Investor Protection Stock Exchange Trading risks Institution Department Classified supervision of securities companies Depository & Settlement Company Clearing system risks SAC Special assessment on securities companies, etc. SIPF Investor protection assessment Currently, the Institution Department of CSRC, Securities Association of China (SAC), stock exchanges, securities depository and settlement company have imposed comprehensive supervision on different levels of the securities companies

  40. Strategic positioning of SIPF: to monitor the risks of securities companies from the perspective of investor protection The implementation is achieved on two levels: To assess the capability and status of the securities investor protection To compile the index of securities investor protection Purpose: to strengthen the guidance on investor protection and monitor the risks of securities companies

  41. Securities Investor Protection Assessment (Indicator system frame) • 42

  42. Thank You!

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