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Development and Improvement of the Securities Investor Protection System in China

Chen GongyanChen GongyanJuly 31, 2008July 31, 2008

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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!

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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

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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.

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Organizational Chart of SIPF: Before Restructuring (Emergency System)

Chairman

Vice Chairman

Vice Chairman

Executive Director

Executive Director

Executive Director

Executive Director

Executive Director

独立董事

Logistics

Dep

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Fin

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Dep

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Clearin

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epartm

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Au

dit D

epartm

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Legal A

ffairs D

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Inform

ation an

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Statistics

Dep

artmen

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Asset M

anagem

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Dep

artmen

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Independent Director

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Organizational Chart of SIPF: After Restructuring(Peacetime System)

Vice Chairman

Vice Chairman

Executive Director

Fin

ancial D

epartm

ent

Chairman

Executive Director

Independent Director

Logistics D

epartm

ent

(Clearin

g Dep

artmen

t an

d A

ud

it Dep

artmen

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vestor Protection

D

epartm

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(Legal A

ffairs D

epartm

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Investor C

all Cen

ter

(Inform

ation an

d S

tatistics D

epartm

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Investor S

urvey C

enter

Asset M

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Dep

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Executive Director

Executive Director

Executive Director

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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)

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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

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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

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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

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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

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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 0

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10

15

20

25

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Number of securitiescompanies

Companies SIPF servesas a member of the

Creditors Committee

Companies SIPF servesas chairman of the

Creditors Committee

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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

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Creditors Right Reimbursement (Cont'd)

Unit: RMB10,000

No.Company

Name

Verified creditor’s right Balance of preliminarily

claim

Cash compensation

Share compensationWithdra

walCompensation proportion

Remarks

Principal Interest Total Name Quantity

1China Eagle

Securities187,757.32 1,802.55

189,559.87

42,584.09 27,458.41 6,051.47 14.48%

2China

Southern Securities

150,000.00 5,796.29 155,79

6.29 　 5,496.22

HAIG 8,474,964

　

　

　

SHPG32,625,41

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1,010.00 651.96 1,661.

96 58.63

HAIG 90,406

　

Claim of creditor’s right

and compensation

assets on behalf of MOF

SHPG 348,032

3Kunlun

Securities22,548.59 28.29

22,576.88

3,632.03 327.14 　 　 52.63 　

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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

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Basic Functions of SIPF (III)

Financial Department

Raising of protection fund

Disbursement of protection fund

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Statistics of Protection Fund Placement

YearFrozen interest

Transaction commission

Contribution of Securities Companies

DonationCompensation

IncomeTotal

2006 13.27 3.47 - 0.026 - 16.76

2007 56.59 20.34 28.4 0.005 1.35 106.69

June 30, 2008

35.19 10.14 32.40 - 1.98 79.73

Total 105.05 33.95 60.80 0.031 3.33 203.18

Unit: RMB100 mn

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Disbursement of Protection FundUnit: RMB100 mn

　 2006 2007 June 30, 2008 Total

Onlending application

Security money 22.80 142.52 　 165.32

Individual creditor’s

right6.66 56.84 0.0004 63.50

Sub-total 29.46 199.36 0.0004 228.82

Disbursement of protection fund

Security money 19.00 132.50 4.73 156.23

Individual Creditor’s

right6.02 46.11 5.87 58.00

Sub-total 25.02 178.61 10.63 214.23

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Basic Functions of SIPF (IV)

Investor Survey Center

Investor survey

Information collection and processing

Website construction

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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)

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Monthly Survey on Investor Confidence Index

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.

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

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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

04/20/23 23

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Basic Functions of SIPF (V)

Call Center (Legal Affairs Department)

Accepting the investors’ inquiries and complaints

Investor education

Guidance for investors’ right protection

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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.

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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.

No. Type Amount PercentageQuestions

repliedRemarks

1 Business consulting 　 19 　 33% 19 　

2 Policy consulting 　 3 　 5% 2 　

3Praises, criticisms,

advocacy & suggestions　 29 　 50% 29 　

4Complaint and report of

unlawful practices　 7 　 12% 6 　

Total 58 100% 56

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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

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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

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(I) Reimbursement Policies Creditor’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:

Amount%, assets purchased

in embezzlement before 2004.09.30

%, assets purchased in embezzlement during 2004.10.01-2006.01.31

%, assets purchased in embezzlement

after 2006.01.31

Policy Discount Discount + Ceiling —

<= RM100,000 100% 100% —

RMB100,000 (exclusive) – RMB200,000

90% 90% —

RMB200,000 (exclusive) - RMB500,000

90% 80% —

RMB500,000 (exclusive) - RMB1,000,000

90% 70% —

RMB1,000,000 (exclusive) - RMB2,000,000 90% 60% —

RMB2,000,000 (exclusive) - RMB3,000,000

90% 50% —

> RMB3,000,000 90% Not purchase —

Maximum No ceiling <= RMB1.88 million None

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Principal range of individual creditor’s

right (RMB)

Accounts covered

Proportion of accounts covered

Individual creditor’s right covered (RMB)

Proportion of individual creditor’s

right covered

< RMB100,000 17568 80.19% 517162800 30.32%

RMB100,000- RMB200,000 2557 91.87% 319458004 49.05%

RMB200,000 - RMB500,000

1147 97.10% 302984865 66.82%

RMB500,000 - RMB1,000,000

321 98.57% 189552973 77.93%

RMB1,000,000 - RMB2,000,000 260 99.75% 282352260 94.49%

RMB2,000,000 - RMB3,000,000

40 99.94% 67736533 98.46%

> RMB3,000,000 14 100.00% 26320000 100.00%

Total 21907 1705567434

Distribution of Purchased Individual

Creditor’s Rights

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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.

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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.

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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.

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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

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Suggestions on Reimbursement Policies

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

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

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(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.

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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.

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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

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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

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(III) Assessment on Securities Investor Protection

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

SACSpecial assessment on securities companies, etc.

Stock ExchangeTrading risks

Depository & Settlement CompanyClearing system risks

SIPFInvestor protection assessment

Institution DepartmentClassified supervision of securities companies

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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

Securities Investor Protection Assessment (Indicator system frame)

No. Indicator Breakdown

1 Corporate governance

Relationship between company and shareholdersIncluding the qualification of shareholders and de facto controllers, shareholder contribution, shareholder’s right to know, and the independence of company from its controlling shareholders etc.

2 Internal control system

Compliance management rules establishmentIncluding the estimation of compliance officer, compliance inspection on company behavior, compliance inspection of employees, regular compliance inspection, compliance consulting and training, treatment of violations, anti-money laundering and information-retaking wall system etc.

Operational risk managementIncluding the qualification of practicing personnel, organizational structure and defense line of business, fire wall between the business lines, OTC transaction system, business ledger system, risk monitoring mechanism and internal audit inspection etc.

3 Information transparency

Communication with investorsIncluding the good faith obligation, understanding beforehand, information beforehand (disclosure of risks in brokerage, asset management and financing and bills business), capital account report, information inquiry, and product promotion etc.

Corporate information disclosure and filingIncluding equipment of professional personnel, announcement of basic information, statement audit, disclosure of annual financial report, and filing of supervisory information etc.

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Account management & customer asset custody

The customers of brokerage business, asset management, financing and bill business open account and have assets under custody etc.

5 Customer’s rights Investment scope of customer’s assets, the customers’ rights and obligations in asset management , financing and bill businesses

6 Investor education Investor education column, investor education mechanism

7 Customer complaint

Customer complaint handling mechanismIncluding disclosure of customer petition channels, establishment of a special department to take charge of the complaints

8 Prohibitions

Overall requirementsNot infringe upon the property right, selection right, fair trade right, right to know and other legal rights of the customers

The brokerage business shall not infringe upon the customer’s interests; prohibitions on promotion of asset management business, earnings commitment, acceptance of assets under custody, investment objects and account management; no determinative judgment shall be made or illegal interest be obtained in the process of investment consulting service; residual claim rights of customers on financing and bill business etc.

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Thank You!