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Practice and Exploration of the SIPF. Basic Information of the SIPF Basic Functions of the SIPF : Risk Disposal of Securities Companies Basic Functions of the SIPF : Fund Raising and Management - PowerPoint PPT Presentation
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Practice and Exploration of the SIPFPractice and Exploration of the SIPF
2
I. Basic Information of the SIPF
II. Basic Functions of the SIPF: Risk Disposal of Securities Companies
III. Basic Functions of the SIPF: Fund Raising and Management
IV. Extended Functions of the SIPF: Establishment of a Normal Investor Protection Mechanism in Combination of Monitoring, Evaluation and Service
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Basic Information of the SIPF
(1) Background of Its Establishment
• Two major risks have occurred on China securities market since 2000.
• The first risk: During nearly four years (from June 14, 2001 to June 6, 2005), the Shanghai Stock Exchange (SSE) Composite Index fell to 998.23 points from 2245.44 points, down 55.5%.
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Figure 1-1: Jan. 2001—Jul. 2005Shanghai Composite Index Run Chart
998. 23 2005 6 6（ 年 月 日）
1783. 01 2004 4 7（ 年 月 日）
2245. 44 2001 6 14（ 年 月 日）
1664. 93 2008 10 28（ 年 月 日）
3478. 012009 8 4（ 年 月 日）
6124. 04 2007 10 16（ 年 月 日）
2639. 76(2009 9 1 )年 月 日
1307. 40(2003 11 13 )年 月 日900
1400
1900
2400
2900
3400
3900
4400
4900
5400
5900
6400
20011
年月
20017
年月
20021
年月
20027
年月
20031
年月
20037
年月
20041
年月
20047
年月
20051
年月
20057
年月
20061
年月
20067
年月
20071
年月
20077
年月
20081
年月
20087
年月
20091
年月
20097
年月
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Figure 1-2: Features of the First Risk
The customers’ capital were invested to self-run or industrial sectors, thus to push industry risks to the edge of break-out
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• In 2003, 84 out of all the 133 securities companies had significant liquidity difficulties. Notably, risks collectively broke out in 34 ones.
• Because they were not permitted to conduct margin trading business, securities companies had little access to external financing in a legal way. Against this background, securities companies began to misappropriate clients’ funds for business activities, and even for the employee's salary expenses. At that time, there was a gap of RMB64 billion in customer trading settlement fund in the whole industry; the asset under illegal management reached RMB185.3 billion, including RMB13.4 billion of the misappropriated agent clients’ bond.
• Because of the continued slump on the market, securities companies
suffered losses for consecutive years and it was hard for them to make ends meet. Clients’ funds were hard to retrieve because securities companies misappropriated them for investing in self-operated or industrial areas for long. The crisis could break out at any moment in the whole sector.
• Clients suffered serious losses owing to the continued market downturn.
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Figure 1-3: Mode of Risk in Securities Company
Settlement fund for securities trading of customer
Bond buy-back fund of customer
Abnormal fund of customer’s financing businessDaily payment
Industrial investment
Self-run securities business
Securities company
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In the above context, the State Council agreed to set up a protection fund company to strengthen risk management of securities companies.
China Securities Investor Protection Fund Corporation (SIPF) was established with a registered capital of RMB6.3 billion on August 30, 2005 and officially started business on September 29 of the same year. The SIPF is a non-profit institution.
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(2) Internal Governance
• The board of directors, the decision-making organ of the SIPF, takes charge of its operation and management. It has nine directors, including one independent director. Specifically, the CSRC, the Ministry of Finance, and the People's Bank will appoint two directors respectively; the Securities Industry Association, the China Securities Registration and Settlement Company, the Shanghai Stock Exchange as well as the Shenzhen Stock Exchange will in turn appoint two directors; and the Ministry of Finance negotiating with the People's Bank recommends one independent director. The board of directors is responsible for the decision-making on important matters.
• When it was initially founded, the SIPF’s main function was to dispose of risks for securities companies, and the design of its internal organizational structure was centered on risk disposal.
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Figure 1-4: Organizational Chart of the SIPF – Before Restructuring
Vice Chairman
Vice Chairman
Executive Director
Fin
ancia
l Dep
artm
ent
Chairman
Executive Director
Independent Director
Gen
eral Office
Clea
ring D
epa
rtmen
t
Leg
al Affairs
Dep
artm
ent
Info
rmatio
n an
d
Statistics D
epa
rtmen
t
Asset M
anag
eme
nt
Dep
artm
ent
Executive Director
Executive Director
Executive Director
Au
dit D
epartm
ent
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(3) External Supervision
• The CSRC should be responsible for regulating the operation of the fund company and supervising the raising, management and use of the funds.
• The Ministry of Finance should be responsible for the state-owned assets management and financial supervision.
• The People’s Bank of China should be responsible for confirming, supervising and examining the use of re-loans.
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Since the second half of 2003, the CSRC has been organizing the risk disposal of securities companies for nearly five years under the leadership of the State Council and with the support of the Ministry of Finance, the People's Bank and the judicial organizations.
As of the end of 2009, the SIPF used the State-owned funds to close down 26 high-risk securities companies and restructure 10 securities companies with liquidity problems. It also disposed of five securities companies in a market-oriented way.
In restructuring securities companies, the State-owned investment in the form of equity capital reached RMB18.21 billion and that in liquidity capital reached RMB2.76 billion. In closing down securities companies, the State-owned investment in the form of acquisition and direct investment from the State and the SIPF reached RMB35.88 billion.
II. Basic Functions of the SIPF: Risk Disposal of Securities Companies
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Make Plan
Disposal Mechanism
Accounting Nature Identification
Compensation Policy
Bankruptcy Procedure
Bankruptcy Liquidation
Administrative Clearing
Bankruptcy Liquidation
China’s Risk Disposal Procedure of Securities Companies
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CSRC
Meeting
PBOCMOF
Ministry of Public
Security
People’s Government
Fund use plan made by SIPF as an appendix
State Council
Make Plan
Risk Disposal Plan
Draft
Submit
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Disposal Mechanism
State Council
Receiver Group
Administrative Clearing Group
Working Group
Audit Team
Judicial Protection Measure （ “ Three Interrupts” ）
Five Group’s Linkage
Special Case Group
CSRCApproved
Organize
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Account Nature IdentificationAccount Classification
2. Account
Accounts claimed by customers (depends on accounts classification)
Accounts unclaimed by customers (inactive accounts are about 2.8 million)
1. Account
Bankruptcy liquidation (exceeding RMB100 billion) Institution
Non-brokerage account
Compensate in full amount (more than 9 million accounts)
Brokerage account
Personal
Brokerage account
Non-brokerage account
Buy at discount (more than 60,000 persons)
Personal debt
Institutional debt in personal name
Bankruptcy liquidation
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Liquidation group
Working group
(Review aforesaid
classification)
Securities Company Risk Disposal Office of CSRC
Interdepartmental meeting
Settle dispute preliminarily
Led by SIPF to resolve all the disputes under existing provisions
Ministerial meeting
Five-level Demonstration
Account Nature Identification
To study disputes beyond existing
policy, and publish new systems.
(Classify all accounts)
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Compensation Policy
1. The assets and fund in a customer account are the property of relevant customer.
2. The fund of a pooled wealth management product involving multiple customers will be distributed pro rata to these customers.
3. Protection fund:
A. Fill the fund gap in a brokerage account in full amount.
B. As to the part of the securities appropriated in the brokerage account, compensate personal accounts in full amount (in cash or securities), but does not compensate institutional accounts. C. Personal claims
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Bankruptcy Procedure
Administration verification
Group
Transactions are transferred to a securities company under normal operation
Account Clearing Basically
Ensure Intermediate People’s Court
Submit application
Receiver
Creditors’ Committee
Designate
Set up
Declare the Bankruptcy
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Bankruptcy Liquidation
(I) Participants in bankruptcy liquidation:
(II) The proprietary assets of the disposed securities company and the assets that
can’t be identified to be customer assets can’t be used for investor compensation,
but enter the bankruptcy liquidation.
1. Institutional non-brokerage accounts,
2. Institutional debts in the name of individuals
3. SIPF (with the compensation fund as common claim)
4. The other claims not in SIPF’s coverage
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Table 2-1: Capital Used for the Risk Disposal of Securities Companies
Type No.
Amount Invested (RMB100 mn)
Equity Capital Capital for liquidity support or acquisition capital
Restructuri
ng
State restructuring 10 182 27.6
Market restructuring 17
Sub-total 27 182.1 27.6
Closing D
own
Direct investment from the State①
2 - 137.2
Capital from the SIPF 24 - 222.4
Market closure (not using the State capital)
5
Sub-total 31 0 359.6
Total 59 182.1 387.2
① It includes RMB900 million of local governments’ investment.
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• For the 26 securities companies that closed down by using State-owned funds, the SIPF should appropriate RMB12.1 billion to acquire individual creditor's rights, and RMB26.37 billion (including RMB570 million dormant account funds) to fill up the gap of customers’ securities trading and settlement funds.
• RMB12.06 billion used for acquiring the individual creditors’ rights involves over 210,000 individual creditors, accounting for over 99% of the total acquisition amount.
• RMB25.57 billion was used to fill up the gap of customers’ securities trading and settlement funds, involving more than seven million regular brokerage accounts, accounting for over 99% of the total recoverable amount.
• RMB1.75 billion of customers’ securities trading and settlement funds, frozen or retained, was clawed back.
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In order to ensure the compliant and safe use of the State acquisition funds, until April 30th, 2010, the SIPF had organized and completed 92 audit inspections on 24 disposed securities companies. Staff from 64 accounting firms and law firms times had participated in those inspections for over 600 person times.
• In the process of clearing checked company accounts, the SIPF checked all the normal brokerage accounts with a balance of over RMB1 million and all the verified individual creditors’ accounts with a balance over RMB200,000 one by one.
• The SIPF also performed a spot check on key normal brokerage accounts with a balance of below RMB1 million and key individual creditors’ accounts with a balance of below RMB200,000.
• Findings include: (1) The balance and principal in amounts that should be excluded from the scope of the State acquisition funds totaled RMB83 million. (2) A total of RMB982 million needs further approval on having the qualification of being acquired. (3) RMB1.558 billion of planned acquistion funds has problem with the calculation of acquistion amount (some items needs to be adjusted).
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• As of April 30, 2010, all the 26 securities companies resorting to the protection fund had entered into the liquidation process. At present, the 26 securities companies that closed down after using the State-owned acquisition funds have all entered into the judicial bankruptcy process. The SIPF serves as a member of the Creditors Committee of a total of 23 securities companies and serves as the Chairman of a total of 19 securities companies.
• The formal declaration involved creditor’s right of RMB25.0631 billion in total, including a principal of RMB24.4345 billion and an interest of RMB628.6 million.
• The preliminarily claim of creditor’s right was RMB5.7597 billion.
• As of April 30, 2010, a total of 16 securities companies had implemented bankruptcy property distribution, and they had been compensated for RMB1.6325 billion in cash, 8,474,964 shares of Hafei Shares, 32,625,414 shares of the Harbin Pharmaceutical, 7,559,899 shares of Liaoning Chengda, and 14,008,381 shares of Double-Crane Pharmaceutical. As some pre-declared creditor’s rights had not been converted into formal creditor’s rights, RMB299.1 million in cash was escrowed correspondingly. SIPF managed the compensation of creditor’s rights worthy of RMB2.2 million in cash, 90,406 shares in Hafei Aviation Industry Co., Ltd and 348,032 shares in Harbin Pharmaceutical Group on behalf of the Ministry of Finance.
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The First Effect of Risk Handling : Promoting the Improvement of Legal System
• Promoted the amending of the relevant provisions of the "Securities Law", the "Company Law", the "Criminal Law" and the "Bankruptcy Law".
• The “Regulation on the Supervision and Administration of Securities Companies” and the “Regulation on the Risk Disposal of Securities Companies” were formulated on the basis of risk disposal experience.
• The Supreme Court has consecutively held two nationwide symposiums about the trial of bankruptcy cases of securities companies. For the first time, the Supreme Court fully integrated the resolution of the financial sector risks into the judicial settlement channels, thus realizing an effective convergence of the administrative disposal of securities companies and judicial bankruptcy.
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The Second Effect of Risk Handling: the Goal of ‘Purchasing System with Money’ was Realized.
• The trusteeship of customers’ trading settlement capital by the third party was used in the treated securities companies with high risk.
• A new buy-back trading system for national debt was established, which specially adjusted the business procedure, made the respective responsibilities of customers, securities companies and registration settlement companies clear, set up a relative rule that could prevent the embezzlement of the customers’ national debt, and make the smooth conversion between old and new systems.
• For assets management, some new rules were set up, including the trusteeship of customers’ funds by the third party, sufficient appearance of investment risk to customers and the regular information disclosure.
• Comprehensive account clearance work to treated securities companies was carried out, and the system of true name used in account was initially set up.
• A new system including true name used in account, special seat and scale control in self-run business was used.
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• An operative relative policy system, organizing form and working rule were gradually formed, and supporting measures and effective system for withdrawing from securities company market were established.
The Fourth Effect of Risk Handling: A System Combining Classified Regulation and Supervision for Securities Company and Protecting Market-oriented Fund Collection was Realized.
• Making classified regulation and supervision to securities company
• Building a “unified standard, dynamic management and different charge” system for fund collection.
• Realizing the significant change from the postmortem risk handling for securities company to prior prevention and reduction of securities company’s risk .
The Third Effect of Risk Handling: A Withdrawing System from Securities Company Market was Set Up.
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The Fifth Effect of Risk Handling: Reset Industrial Reputation and Enhance Investors' Confidence
• In less than two and half years from June 6th, 2005 to October 16th, 2007, Shanghai Exchange Index ascend from 998.23 to 6124.04, which has broken the record in the history.
• This round of risk handling in securities companies, effectively neutralized industrial risks of securities companies, raised their awareness of operating in compliance with regulations and competency of resisting risks, so that Chinese securities market could be able to face the international financial crisis and create conditions for comprehensively advancing investor protection.
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III. Basic Functions of the SIPF: Fund Raising and Management
• Main capital sources of the SIPF are: (1) in case that risk funds reach the upper limit on Shanghai and Shenzhen Stock Exchanges, 20% of the transaction handling fees shall be brought into the SIPF (the Fund); (2) all the securities companies registered in China shall pay 0.5-5% of their operating income for the Fund; (3) when issuing stocks, convertible bonds and other securities, interest income of applying for subscribing frozen capital shall be brought into the Fund; (4) according to the law, the Fund can recover proceeds from certain responsible parties and get repayment income from the bankruptcy and liquidation of securities companies; (5) donations from domestic and foreign institutions, organizations and individuals; and (6) other legitimate incomes.
• In case of emergency, the SIPF can get special financing from the People's Bank of China, which offers re-loans, etc.
• Securities companies shall pay for the Fund by certain percents based on their ratings and classifications. High-risk and low-rating companies shall pay a higher proportion.
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Table 3-1: Type of Securities Company and Comparison of
Payment Proportion
Type of regulation and supervision Payment proportion （ % ）
A
AAA 0.5
AA 1.0
A 1.5
B
BBB 2.0
BB 2.5
B 3.0
C
CCC 3.5
CC 4.0
C 4.5
D D 5.0
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Table 3-2: Funds Raised of the SIPF
As of December 31, 2009
Unit: RMB100 mn
YearFrozen Interest
Transaction Commission
Contribution of Securities Companies
Donation
Compensation
IncomeTotal
2006 13.27 3.47 - 0.03 16.77
2007 56.59 20.34 28.40 0.01 1.34 106.68
2008 44.26 15.78 44.02 - 3.95 108.01
2009 13.49 28.52 40.81 0.04 5.90 88.76
Total 127.61 68.11 113.23 0.08 11.19 320.22
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• The second risk
• Over more than one year (from October 16, 2007 to October 28, 2008), the SSE Composite Index plunged to 1664.93 points from 6124.04 points, down 72.8%.
The market risk broke out in the context of the international financial crisis. Different from the last crisis, none of securities companies had liquidity risks, but clients suffered a larger loss.
Thus, during the course of this global financial crisis, it is not one of the main issues to dispose of securities companies’ risks. The biggest challenge is how to make investors get more in-depth understanding of stock market risks, enhance self-protection capacity, and make rational investments suited to their risk tolerance. The appropriate management of investors has become one of the important tasks of the SIPF in protecting investors.
• With the functions extended, the SIPF has adjusted its internal organizational structure.
IV. Extended Functions of the SIPF: Establishment of a Normal Investor Protection Mechanism in Combination of Monitoring, Evaluation and Service
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998. 23 2005 6 6（ 年 月 日）
1783. 01 2004 4 7（ 年 月 日）
2245. 44 2001 6 14（ 年 月 日）
1664. 93 2008 10 28（ 年 月 日）
3478. 012009 8 4（ 年 月 日）
6124. 04 2007 10 16（ 年 月 日）
2639. 76(2009 9 1 )年 月 日
1307. 40(2003 11 13 )年 月 日900
1400
1900
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4400
4900
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年月
20067
年月
20071
年月
20077
年月
20081
年月
20087
年月
20091
年月
20097
年月
Figure 4-1:
Curve of Shanghai Exchange Comprehensive Index (from July 2005 till September 2009)
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Table 4-1: Profitability of Securities Companies in 2007-2009
Year Net Profit
2007 1,282.55
2008 497.14
2009 964.85
Unit: RMB100 mn
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Figure 4-2: Organizational Chart of the SIPF – After Functions Extended
Vice Chairman
Vice Chairman
Executive Director
Fin
ancia
l Dep
artm
ent
Chairman
Executive Director
Independent Director
Gen
eral Office
Cu
stom
er Tran
saction
S
ettlemen
t Fu
nd
s’ C
on
trol C
enter
Leg
al Affairs
Dep
artm
ent
(Info
rmatio
n an
d S
tatistics D
epartm
ent)
Inve
stor S
urv
ey Cen
ter
Inve
stor E
du
catio
n an
d
Service C
ente
r
Executive Director
Executive Director
Executive Director
Asset M
anag
eme
nt
Dep
artm
ent
XB
RL
Ap
plicatio
n
Cen
ter
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Figure 4-3: Main Components of Normal Mechanism
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(1) Market Monitoring
• Confidence monitoring: To predict the market status ASAP and put forward countermeasures and suggestions by monitoring the change in investors’ confidence.
• Capital monitoring: To timely detect activities that break laws or rules and safeguard the legitimate rights and interests of investors by establishing the surveillance system of trading settlement funds on the securities markets and monitoring the change in market capital.
• Information monitoring: To participate in monitoring information of various types of business entities on the securities markets, and establish standard, rational and open information disclosure system by using XBRL technology.
• Public opinion monitoring: To extensively collect investors’ comments on securities companies and investor protection via investor survey, investor call system and Internet search.
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Market Monitoring: Monitoring the Change in Investors’ Confidence
• SIPF monthly formulated investor confidence index to supervise market change. The confidence of investors had been in relatively pessimism in 2008, especially in August, at the lowest level of 36.3. But after August, the index is generally climbing. Now it is going toward an optimistic trend this year.
• Confidence index is climbing after getting down to the bottom in August 2008. Shanghai exchange comprehensive index arrived at the bottom at the end of October 2008. Confidence index arrived at the bottom two months earlier than Shanghai exchange comprehensive index. The upward trend of confidence index fully reflects market trend, with obvious feature of going ahead.
• The advance reaction of market confidence index is beneficial to stay calm and stable when proposing a set of steps to rein the stock market, and avoid over-radical actions.
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Market Monitoring: Monitoring the Change in Investors’ Confidence
Figure 4-4: Comparison between Investor Confidence and SSE Composite Index Trends
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Market Monitoring: Monitoring the Change of Capital Flow in Market
• Under the united deployment of CSRC, SIPF has been building the surveillance and control system of customer’s capital in securities companies since last year. The system will support the regulation of securities, with an aim to supervise the capital flow in the market, to prevent customer’s capital from embezzlement, to timely disclose illegal actions of market dominance and practically protect legal interests and rights of investors.
• Necessity: deficiency shows in the operation of the entrusted system of the third party, especially the shortage of effective supervision on the customer’s capital in the whole market, so as unable to timely acquire the status of capital flow in the market.
• The development and operation of surveillance and control system involves related regulation organizations, security exchanges, registration settlement companies, entrusted banks, settlement banks, securities companies, funding companies, association of securities industry and SIPF, each of which shall separately perform relevant obligation without change in its established responsibilities on the basis of reasonable division of work.
• The system shall regard the accepted data from registration settlement companies, security exchanges and entrusted banks as the base, to compare the data delivered from securities companies, so as to find and prevent embezzlement and misappropriation.
• The system can supervise the risks in the securities market via surveillance and analysis of capital flow, to disclose illegal actions of market dominance and other vicious incidents, which is helpful to take actions in protecting legal interests and rights of investors.
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Figure 4-5: Illustration of Surveillance and Control System of Customer’s Capital
Shanghai and Shenzhen Security Exchange
Securities companies and other investment agents
Entrusted bank
Securities company N
Special deposit account for trading settlement capital of customers in securities companies
Capital administration account of customers
Capital account of customers
Capital delivery of legal person
Data of settlement
Registration settlement companies
Securities company N
Account of settlement provision and customer capital in securities companies
Capital flow between entrusted banking account of securities company and provision account of registration company
Capital flow of entrusted banking account in securities company
Capital flow and balance of specific deposit account and administration account for customer’s transaction and settlement
Customer’s capital information
Data of change of customer’s transaction settlement
Regulatory organizationAssociation of securities industry
Risk warning
Day-end transaction data
Strengthen market supervision: supervise change in market capital
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Market Monitoring: Participate in the Monitoring of Information of Market Agents
• Financial crisis shows that deficiency in highly transparent mechanism of information disclosure and lack of effective regulation, shall lead to huge risks that are hard to foreseeable to various investors participated in capital market, including general investors.
• CSRC is to liaison with related organizations to set up a comprehensive
standard data system of interactive disclosure of information based on XBRL technique. It aims at establishing a comprehensive system of standard data report and delivery in China, to further increase the transparency and efficiency of disclosing capital market information, without changing the current framework based on all rights and responsibilities and XBRL-based technical support.
• SIPF is in the progress of developing XBRL-based data application system. The system will provide investors with more convenient, standard and comprehensive platform of information browsing, which is beneficial to raise the judgment of investors about the market and increase the level of reasonable investment.
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(2) Investor Services
• Chinese capital market is now in rapid development. The market feature of “brand-new and transit” determines the relatively uncertainty of current capital market in market environment and investor psychology. Besides, the market is lack of an internal regulation system.
• Thus, to set up a comprehensive investor-oriented service system is a necessary choice to foster qualified investors and promote stable development of the market.
44
Strengthen investor-oriented serviceConcerning the characteristics of Chinese investors in securities market, to strengthen investor-oriented service is of utmost necessity. SIPF displays its own advantage in devotion to build up a multi-leveled and multi-faceted investor-oriented service system comprising of investor survey, investor education, and investor call response, so as to protect the legal interests and rights of small and medium-sized investors.
Figure 4-6: Protection and Services System of Investors
45
Investor Services: Investor Survey
Chinese securities investors show seven characteristics, according to SIPF’s investor survey.
• Age structure: the investors are mostly comprised of the youth and the middle-aged
• Education background: nearly 85% of investors are graduated from college or above
• Career distribution: breadwinners account for the majority of the investors
• Income distribution: employees with middle income account for the majority of the investors
• Region distribution: less than 5% of investors live in the countryside or rural areas
• Time to start up investment in securities: since 2007, the newly-added investors account for nearly forty percentage.
• Stock assets: 85% of investors invest less than 300,000 yuan in stocks.
46
Fig 4-7: Age Structure Fig 4-9: Vocational Background
Fig 4-8: Educational Level Fig 4-10: Income Level
47
Fig 4-11: Regional Distribution
Fig 4-12: Time of Stock Market Entrance
Fig 4-13: Distribution of Investors’ Stock Assets
48
Investor Services: Investor Call
• The SIPF has attached keen attention to responding to investor calls in the financial crisis and set up a sound call response mechanism.
• Investor calls are mainly handled at the website of the SIPF (www.SIPF.com.cn).
• From July 2008 to April 30, 2009, the call center had received 15,387 messages from the investors, including 3283 messages about business consulting and policy consulting, 3858 messages about suggestions, 8186 messages relevant to criticisms, complaint and report of unlawful practices, and 60 other messages, accounting for 21.34%, 25.08%, 53.20% and 0.38% respectively.
49
Investor Services – Response to Investor CallFig 4-14: Call
Response Process
Inquiry and Inquiry and complaint for complaint for fund businessfund business
Inquiry and Inquiry and complaint for complaint for
accounting accounting informationinformation
Telephone, online Telephone, online message and message and email of SIPFemail of SIPF
OtherOther
InvestorInvestor
InvestorInvestor
Response Response availableavailable
Response Response unavailableunavailable
Transferred to Transferred to securities securities operation operation
institutionsinstitutions
Transferred to Transferred to other departments other departments
or self-or self-disciplinary disciplinary
organizationsorganizations
Transferred to the Transferred to the Expert Board or Expert Board or
other departmentsother departments
Preparation Preparation of responseof response
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Investor Services: Investor Education • So far, over 80% of the securities investors in China have
conducted offsite transactions on the Internet or through telephone, while over 10% of the investors resort to the traditional way of onsite transaction and most of these investors are aged individual investors. Therefore, investor education should focus on the majority of investors that conduct offsite transactions while attaching attention to individual investors
• The SIPF attaches great importance to public education of
investors: It launched five investor education projects in 2009: (1) to prepare a set of "Investors Guide", (2) to carry out an education project of securities companies’ sales departments, (3) to film a public education television series, (4) to develop a software of investor education, and (5) to organize a Securities Investor Protection Forum.
51
Investor Services: Insufficient
• First, there is a gap between the authority of investor service and actual needs and the absence of a real investor representation mechanism makes it difficult to improve the efficiency and effect of investor protection;
• Second, as most of the disputes on securities investment are settled through court judgment and it is difficult to protect the rights of investors through negotiation and arbitration;
• Third, medium and small-size investors are in need of an authoritative and impartial channel and guidance to protect their rights as there is no valid law governing the protection and legal assistance for investors and the responsibilities, contents and forms of legal assistance are not specified.
52
(3) Assessment of Investor Protection
• Assessing the investor protection of market participants, understanding the level of securities market investor protection and degree of the investors’ satisfaction and exposing the conducts of market participants to public assessment are of great importance to improving the initiative and quality of market participants’ protection of investors. Therefore, appropriate assessment and disclosure of the market participants’ investor protection is an important part of the investor protection mechanism.
• The securities investor protection assessment system of SIPF is designed to assess the protection of listed company and securities company investors’ legal rights in a professional and systematic manner and form a market-based guiding and disciplinary mechanism for the market participants’ protection of investors in addition to the supervision of regulatory bodies and industrial discipline of self-disciplinary organizations for the purpose of protecting the investors’ legal rights through disciplining the conducts of market participants.
• Based on the securities investor protection indicator system, the securities investor protection assessment system of SIPF functions to assess the protection of listed company and securities company investors’ legal rights.
53
Assessment of Listed Company Investor Protection: Indicator System
As listed companies are the cornerstone of the securities market, the protection of listed company investors is of top priority in the protection of securities investors.
SIPF has set up an assessment system: based on the investors’ right of information, right of investment returns and the right of decision-making participation, the Listed Company Investor Protection Assessment System involves three tier-one indicators, 12 tier-two indicator and 40 tier-three specific indicators covering the governance structure, information disclosure and business activities of listed companies, through which, SIPF has acquired the weights of the above-mentioned indicators (See Fig 4-15).
54
Fig 4-15: Investor Protection Indicator and Weight
54
Qu
antitative A
ssessmen
t Indicators for L
isted
Com
pany Investor Protection
Protection of participation in
decision-making,
28%
Protection of information right, 42%
Protection of return on
investment, 30%
Tier-one indicatorsTier-one indicators
Institutional construction, 28 ％
Shareholders’ exercise of rights in shareholders meeting, 22%
Construction and implementation of board of directors functions, 18%
Construction and implementation of a supervisory and incentive mechanism by the management, 10%
Construction and implementation of board of directors functions, 22%
Disclosure of financial reports, 32%
Disclosure of material events, 31%
Disclosure of important governance information, 22%
Disclosure of other information, 15%
Value creation, 40%
Interest transfer, 29%
Profit distribution, 31%
Tier-two indicators
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Assessment of Listed Company Investor Protection: Rating Standards
The listed company investor protection assessment system of SIPF classifies the protection of listed company investors into four grades:
Grade A: investor protection score ≥80;
Grade B: 80 > investor protection score ≥60; Grade C: 60> investor protection score ≥40;
Grade D: investor protection score <40 or it is subject to the first ST or penalty in the current year or it is suspended from trading permanently.
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Assessment of Listed Company Investor Protection: Characteristics
• Based on the Listed Company Investor Protection Assessment System, SIPF has assessed the protection of listed company investors in the following aspects:
Protection of listed company investors in different years from 2003 to 2008 (see Table 4-2, Table 4-3 and Fig 4-16).
Protection of listed company investors in different industries from 2003 to 2008 (see Table 4-4).
The protection of most listed company investors is at a medium level.
The protection of listed company investors remains to be improved.
There is extensive room for the improvement of listed company investor protection.
The protection of listed company investors varies greatly in different industries.
The investors’ right of information is well protected in the disclosure of listed company information.
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Table 4-2: Protection Index and Rating of Listed Companies' Investors in 2003-2008
No. of No. of SamplesSamples
Protection Protection
indexindex
Weight in total samples (%)Weight in total samples (%)
A B C D
2008 1625 63.89 0 75.20 16.86 7.94
2007 1550 62.17 0 70.39 20.06 9.55
2006 1434 59.47 0 59.20 30.20 10.60
2005 1380 57.97 0 50.29 39.49 10.22
2004 1377 54.41 0 16.05 74.87 9.08
2003 1286 52.60 0 7.08 81.26 11.66
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Table 4-3: Changes in the Protection Status of Listed Companies’ Investors in 2003-2008
Investor Investor Protection IndexProtection Index
Governance Governance Structure Structure Protection Protection
IndexIndex
Information Information Disclosure Disclosure Protection Protection
Index Index
Operating Operating Activities Activities Protection Protection
Index Index
2008 63.89 55.25 75.50 55.69
2007 62.17 53.69 72.67 55.37
2006 59.47 49.61 69.17 55.10
2005 57.97 45.15 68.39 55.35
2004 54.41 42.21 61.30 56.15
2003 52.60 40.72 58.17 55.87
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Fig 4-16: Changes in the Investor Protection Indicator of Listed Companies from 2003 to 2008
52. 60
54. 41
57. 97
59. 47
62. 17
63. 89
50
55
60
65
2003 2004 2005 2006 2007 2008
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Table 4-4: Protection Status of Listed Companies’ Investors in 2003-2008 by Sector
Sector code Sector Name No. of Samples Evaluation Index
1 I Financials 95 64.20
2 B Mining 174 61.283 F Transportation 361 60.624 D Utilities 365 59.555 C5 Electronics 315 59.466 C7 Machinery 1383 59.257 H Wholesale & Retail 532 59.238 C6 Metals & Non-metals 772 59.219 J Real Estate 334 59.1710 C4 Petrochemicals 933 58.86
11 C0 Food & Beverage 356 58.6712 C8 Pharmaceuticals 556 58.4913 E Construction 185 58.3714 K Social Services 252 58.3615 C99 Other Manufacturing 100 58.2416 L Media 61 58.1917 C2 Timber & Furnishings 23 58.0318 C1 Textiles & Apparel 394 57.8719 G Information & Technology 548 57.5420 C3 Paper & Printing 179 57.4321 A Agriculture 208 55.9222 M Conglomerates 526 55.51
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Assessment of Securities Investor Protection:
Indicator System
• As the major participants of the securities market, the performance of securities companies’ protection of investors has a direct impact on investors’ asset security and market confidence.
• SIPF assesses the protection of securities investors in the following manner: to assess the securities companies’ intentions, capabilities, measures and effect of investor protection concerning the investors’ right of asset security, fair trade, investment information, free choice, investment litigation and bankruptcy compensation through the tree-shaped indicator system (see Fig 4-17) composed of four tier-one indicators, 17 tier-two indicators and 45 tier-three indicators.
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Fig 4-17: Securities Investor Protection and Weight Assessment Indicator System
Basic rights of investors
Asset security Free choice Litigation Information Fair trade Bankruptcy
compensation
Asset trade securityAccount securityAsset regulation
Trade security
Investor education, service and right protectionClassified customer management
Investor education
Investor information service
Information disclosureCompleteness of disclosureTimeliness of disclosureAccounting information qualityTransparency of disclosure
Internal control and corporate governance
Financial assessment of internal controlSoundness of internal controlEffectiveness of internal controlCorporate governance
Other internal control matters
Securities Investor Protection Assessment Indicators
Customer service innovation
Complaint handling mechanism
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Assessment on Protection Status of Securities Companies’ Investors: Rating Standard
• In accordance with the assessment system of the protection statuses of securities companies’ investors, the SIPF dividends protection statuses of securities companies’ investors into four-grade ratings, namely:
Grade A: investor protection score ≥ 80;
Grade B: 80>investor protection score≥60;
Grade C: 60≥investor protection score ≥ 70;
Grade D: investor protection score≤60.
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Assessment on Securities Investor Protection Status: Features
• Most of securities investor protection is in good condition.
• Evaluation results of securities investor protection status was significantly lower than the rate results of classified supervision of securities companies in the same period, indicating that there is still large room for improvement in investor protection.
• The evaluation of securities investor protection status takes the legitimate rights and interests of investors as the core, while the evaluation of supervisory classification takes net capital of securities companies as the core. Given the difference in their focus, the findings of securities investor protection assessment based on the legal rights of investors are not necessarily the same with the findings of classified supervision assessment based on the net capital of securities companies.
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Table 4-5: Comparison of Securities Company Investor Protection Assessment and Separate Supervision in 2008
Type （ Grade ） A Type （ Grade ） B Type （ Grade ） C Type （ Grade ） D
No. Proportion No. Proportion No. Proportion No. Proportion
Investor protection
11 10.60% 70 67.30% 19 18.30% 4 3.80%
Separatesupervision
30 28.60% 58 55.20% 17 16.20%
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(4) International Cooperation
• The rapid spread of global financial crisis has proved the necessity of establishing an international cooperation mechanism for investor protection. China ranks the third in the world by the scale of securities market after years of rapid development and it is considering the establishment of an international board. The scale, liquidity and globalization level of market call for the strengthening of international cooperation for investor protection.
• SIPF has been dedicated to setting up an international cooperation mechanism for investor protection in the past two years. Currently, international cooperation for investor protection is mainly carried out in the following three aspects:
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Set up an information reporting mechanism and
information communicating platform
• Establish an English website of China’s securities investor protection
• Facilitate the global investors’ understanding of China’s capital market
Provide consulting services for overseas investors
through interactive communication
• Set up a mailbox to handle business inquiries of overseas investors
• Be responsible for daily maintenance of the relevant columns on the website of China Securities Regulatory Commission
Promote the establishment
of an international forum
for investor protection
• Learn about the experience of various countries in the legal system of investor protection, risk prediction, investor education and services
• Expand the scope of cooperation
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• Since its inception in 2005, the SIPF has successfully organized three international symposiums as follows. On January 28-29, 2008, the SIPF held the Expert Conference on the Securities Investor Protection Fund System in Beijing. On July 31, 2008, the SIPF held the International Conference on the Development and Improvement of China Securities Investor Protection System in Hohhot, Inner Mongolia. On November 2-3, 2009, the SIPF held the International Forum on the Securities Investor Protection in the Context of Financial Crisis.
• The SIPF signed the Memorandum of Understanding on Securities Investor Protection Cooperation with the Securities Investor Protection Corporation (SIPC) and the Canadian Investor Protection Fund (CIPF) and established a long-term cooperation system.
• On November 3, 2009, the SIPF launched its English version website.
• On February 23, 2010, in the SIPF office building, Chairman Chen met the delegation of International Organization of Securities Commissions (IOSCO) led by Ms. Jane Diplock, the Chairperson of the IOSCO Executive Committee, expressed the willing to apply for the IOSCO affiliate membership and proactively push forward the establishment of an international forum for investor protection organizations and strengthen the investor protection development among different countries or regions within the IOSCO framework.
•
• From June 8 to 17,2010, at the invitations of SIPC and CIPF, SIPF paid an official visit to U.S.A and Canada, to attended the “2010 International Compensation Funds Meeting” in Montreal and participated in the “SIPC Modernization Task Force” in Washington, D.C.
• At present, SIPF proactively seeks to establish and consolidate the multilateral collaborative relationship with other international investor protection organizations, promote friendship, integrate common views and achieve common development through drawing upon experiences and making up deficiencies in a mutual way. SIPF strives to make the Chinese capital market better known by the overseas fellows and investors, and strengthen the influence and discourse power of China in the field of international investor protection.
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