Chapter 21 Standing on the sidelines of the "Fund Law"

In October 2003, the "Securities Investment Fund Law of the People's Republic of China" was promulgated.The promulgation of the law made the market speculation subside one after another, replaced by applause.Are these judgments reliable?What issues are worthy of deliberation in the Fund Law? ◎Reporter: Professor Chen, the market responded enthusiastically to the promulgation of the "Securities Investment Fund Law of the People's Republic of China". People generally believe that this law provides legal protection for the normal and orderly development of China's fund industry.What do you think of this law?

Chen Zhiwu: I do not agree with the introduction of this Fund Law.On the one hand, I hope China has a better rule of law, on the other hand, I think China has too many laws.At present, it is not a question of how many laws there are, but whether the laws can be effectively implemented or whether the laws themselves are reasonable. From the perspective of law and economics, a country may fall into one of three situations: first, there is no law, everyone does what they want to do, and both bad and good people show their talents; second, there is a law, But it is not implemented very much, or it is implemented very casually and randomly, with great uncertainty; third, there is a law that is strictly enforced and standardized, and the social order is running well.

As far as the first situation is concerned, it is the least ideal, everyone can violate the rules, and the form of social order operation depends entirely on individual ability and strength; in the third situation, the social order operates well, and various behaviors have laws to follow , people take the law seriously, and society develops in an orderly manner.The second situation is exactly in between, which is the most ideal state of law for the unruly, because this kind of law binds the hands and feet of the really law-abiding people, and only they take the law seriously. However, those who do not abide by the law can stand outside the law and enjoy various privileges.Because even though everyone knows that there is a law, it is not being implemented. Is it being implemented fairly?If it is difficult and arbitrary to execute, people will choose to behave accordingly.If you comply, you will not get any benefits, and if you do not comply, the probability of being discovered is very small, or you can use some means to override the law.Or, even if caught, the responsibility is not much.China currently belongs to the second situation.

The promulgation of the "Securities Investment Fund Law" is against such a background.Its promulgation just means one more law, but what about one more law?On the contrary, it puts more constraints on the healthy development of the fund industry and sets more thresholds for those without privileges to enter.Because the fund industry is very new, I think considering the development of the industry, it is best not to introduce this law.In fact, as far as I know, some people who participated in the drafting and deliberation of the law may not have much understanding of fund management and securities trading, and they themselves may not know what problems may arise in this industry and what should be restricted , which ones should be let go, and so on.Such legislation is simply terrible.

◎Reporter: Then, when do you think the "Fund Law" of our country should be promulgated more appropriate? Chen Zhiwu: First of all, I want to emphasize that it does not mean that without the "Fund Law", the fund industry would be lawless.On the contrary, the existing "Securities Law", "Contract Law", "General Principles of Civil Law", and "Criminal Law" are all sufficient to regulate the new fund industry, but the new "Fund Law" tends to conflict with existing laws. When an industry should introduce laws or what laws should be introduced, there are generally two possible situations: First, an industry has matured business, but there is no law until now, and many problems have arisen, but there is no way to restrain them.In this case, the laws introduced are more to constrain and overcome the damage to the industry caused by violations.In this way, everyone has a clear understanding of the behavior and form of the problem, and the laws introduced should limit the degree of harm and set the appropriate scope and degree of punishment.This kind of law puts more emphasis on binding clauses; second, for a new industry, both legislators and the industry may not have a corresponding understanding of the problems involved.If laws are to be promulgated, legislators should mainly pass legislation to facilitate the development of this new industry and give them more room for development, which is encouraging.In other words, to give them more "green lights" and encourage their development is to restrict the power of the administrative supervision department through legislation, so that the new industry will not be tied up by the supervision department.In this way, legislation can be passed to reduce the constraints of the executive branch.

The fund industry is just a new industry. It should adapt to the second situation above and adopt a legislative approach to encourage the development of the industry. However, judging from the current situation, it is not ideal. When Chinese legislators talk about legislation, they habitually think of "restrictive" provisions, and these provisions are usually not intended to restrict the power of the administrative department, but instead increase one-sidedly. What's the point of expanding the power of the administrative department and minimizing the room for the development of new industries?This "Securities Investment Fund Law" is the same. It still focuses on restricting practitioners and expanding the power of administrative supervision departments. This is not conducive to the development of the fund industry and violates the original intention of the legislation.

◎Reporter: Professor Chen, do you think our scholars cannot learn from foreign situations to formulate their own Fund Law? Chen Zhiwu: my country is different from Britain and the United States.A country has its own special form, which cannot be achieved simply by copying it.For example, people thought that as long as there are institutional investors, they can promote corporate governance in China.However, take the Yinguangsha incident as an example.Some fund companies, such as China Economic Development Corporation, hold a lot of shares in Yinguangxia. Logically, if there is a problem with Yinguangxia, the fund should take the initiative to sue Yinguangxia, but China Economic Development Corporation and these fund companies did not do so.And even when lawyers go to these funds, the funds are still reluctant.If it were in the United States, the fund manager would definitely go to Yinguangsha and take the initiative to file a lawsuit.Why is this happening?The reason is that the fund companies in our country are generally directly or indirectly controlled by the state and belong to the planned economy. The managers of the fund companies are appointed by the government or companies controlled by the government.In the end, the shareholders of Yinguangsha had to sue, and when it came to the court, the court system was full of obstacles.Under such circumstances, the more laws are promulgated, the lower the status of the law in people's minds, and it restricts the development opportunities of those who abide by the rules and encourages the profit margins of those who are privileged.

◎Reporter: The truth is that before and after the introduction of the "Fund Law", the media applauded and believed that the introduction of the law limited the chances of lawbreakers to commit crimes.How do you feel about this situation? Chen Zhiwu: This situation can only reflect the good wishes of the academic circle, the industry and the media.This kind of desire is often not realistic, and the result must be the opposite.The law makers idealize the executors too much.However, these executors are precisely not abstract institutions without self-interest, but run by some non-abstract people with self-interest.Good wishes often go against reality itself, and can only be defeated in front of reality and human nature.For example, after the Zhou Zhengyi incident, the "Central Bank Document No. 121" was issued.At that time, many people also applauded, thinking that this would stop the corrupt people from taking advantage of the loopholes.But in fact quite the opposite.On the contrary, this document blocked the way for people of ordinary background to get rich.Because those who want to block people like Zhou Zhengyi through documents are too naive.

Because regardless of the constraints imposed by documents on real estate development loans, Zhou Zhengyi and the like can just bypass the constraints of documents through other channels and get more real benefits.But ordinary people can't do this.In this way, the result of the promulgation of the document is to block the opportunities for ordinary people to get rich, but to give more "rent-seeking" opportunities for executive officials.Another example is the psychology of "hating the rich".Many people called for restricting the consumption behavior of high-end consumers, such as prohibiting living in luxury houses and driving luxury cars.But in fact, one should be aware of the reality behind this desire.Because everyone in society has different abilities, as long as the money is earned through legitimate means, they should be allowed to spend according to their own preferences.Restricting the willingness of the rich to consume also restricts their own abilities and their motivation to continue to make a fortune and start a business.High consumption motivates them to work hard and brings job opportunities to more people.

Since the Ming and Qing Dynasties, there has been basically nothing new in China that was not led or monopolized by the government, but precisely since the Ming Dynasty, China has fallen further and further behind the West.I am very worried about the prospect of the fledgling fund industry. ◎Reporter: So, does it mean that the promulgation of a law must go through full certification before it can be decided? Chen Zhiwu: That's right.As far as the regulation of hedge funds in the United States is concerned.In the past few decades, there have always been many people who feel that a law should be introduced to restrict it, so legislators held many hearings, but during each hearing, everyone fully weighed the pros and cons, and finally felt that no regulation is better than regulation better.So it was decided not to legislate regulation.

◎Reporter: Do you mean that our "Fund Law" should be legislated from the perspective of encouraging the development of the fund industry? Chen Zhiwu: Yes.As mentioned above, in the face of the new fund industry, legislation should help and support the development of the industry, with as few restrictive clauses as possible, more encouraging and open clauses, and more clauses restricting administrative control power.Laws should be more about protecting people's right to start a business and protecting them from unreasonable interference by administrative controls.In other words, just because the fund industry is very new and problems may arise, the law should encourage more people to enter this industry, so that those who are qualified to enter this industry are protected by law.But the actual "Fund Law" is far from the case.Instead of being more encouraged, many people are more restricted. For example, Article 13: the establishment of a fund management company shall meet the following conditions and be approved by the securities regulatory authority of the State Council: (2) the registered capital shall not be less than 100 million yuan, and must be paid-in monetary capital; Shareholders have good business performance and good social reputation engaged in securities business, securities investment consulting, trust asset management or other financial asset management, have no illegal records in the past three years, and have a registered capital of not less than 300 million yuan. Chen Zhiwu: First of all, what is "good business performance and good social reputation"?From the point of view of desire, it is correct to say so, but how to judge such a vague regulation?From the perspective of law and economics, any provision added to the law must take into account the social cost of implementation.If the cost is high, consider the ratio of the pros and cons of including the clause.What is "good social reputation"?Such a subjective thing is only suitable to be included in religious scriptures. It is a moral dogma and should not be a legal clause.What are the social costs of doing so?Secondly, the registered capital is required to be no less than 100 million yuan, and the registered capital of major shareholders is no less than 300 million yuan. Such a requirement also seems unnecessary.The original intention of the legislators is to hope that the company has sufficient strength to guarantee the interests of investors, but the reality is that everyone falsifies in order to meet the conditions. Take the "Company Law" as an example. In order to achieve the registered capital, many people do not hesitate to borrow cash or use other means to deceive the regulatory authorities. After the capital verification and registration are completed, the money may immediately become imaginary, and even the net debt will not exist. It can be seen.The result of this rule is that everyone is forced to fake in order to start a business.On the one hand, we call on companies and individuals to be honest. Let me ask, how should companies that rely on fraudulent registration be honest?To make matters worse, legislators should have been very aware of the game people play with registered capital, should have known that the registered capital requirement is completely meaningless, but they still can't let go of the idea.In addition, what is the purpose of the registered capital quota?Does it mean that only rich people have the right to start a company and get rich, and people without money, even if you are very capable, can't get involved in business?Why can't our laws give those who have no money but the ability to get rich a chance?Here, by the way, the registered capital of a US limited liability company is zero. For example, Article 17: The selection or reappointment of managers and other senior management personnel of a fund manager shall be reported to the securities regulatory agency of the State Council for review in accordance with the qualifications stipulated in this Law and other relevant laws and administrative regulations. Chen Zhiwu: Since the fund industry is a commercial activity, why must the selection and appointment of managers and other senior executives be reviewed by the securities regulatory authority?At most, you only need to report for the record.How can it be said that administrative officials know better than those fund shareholders who are more qualified for the job?For example, the shareholders of Zhang San's company know who is more qualified to be the manager, because their choice of manager is related to their vital interests.Zhang Sankai fund management company, if he values ​​the company's future, he knows better than anyone who is most beneficial to the company.These issues should not be considered by securities regulators.Many people may think that in this way, with the supervision of securities regulatory agencies, the rights and interests of investors in China are expected to be protected.These are all from the terms themselves, which is far from the case.This, in turn, gives regulators more opportunities for rent-seeking.The consequence is that what fund managers consider is not how to seek benefits for their own shareholders, but how to operate various audit matters.If the open-end fund does not choose a good fund manager, investors can always vote with their feet, which is much more effective than administrative intervention. For example, Paragraph 4 of Article 59: "Fund properties shall not be used to buy or sell other fund shares, unless otherwise stipulated by the State Council." Chen Zhiwu: This is actually the "fund of funds" that everyone is discussing. Why should it be banned?What is the motivation for this constraint clause?I personally cannot understand, because no one talks about possible problems in the operation of the "fund of funds".In the United States, there are more than 10,000 "open-end funds" and "hedge funds", but ordinary people cannot judge which one is better for themselves.For example, Zhang San himself has 1 million, but he doesn't know how to choose these funds.Of course, he can make a portfolio of 10 securities funds by himself, but Zhang San has no experience or professional training, so he doesn't know how to evaluate fund performance.But if he has this need, he can find a fund manager to help him sort out a suitable "fund of fund" portfolio, and then use the money from the "fund of fund" to buy and sell other funds.In consideration of the development of the fund industry, the idea of ​​legislation should be to encourage. Since there may be such a demand in the market, why not let people in the industry try it first?What is the purpose of our legislation?So, can securities investment funds buy other funds?Of course it should be possible. For example, Article 75: The general meeting of fund share holders shall be held only if the holders representing more than 50% of the fund shares participate; However, the conversion of the fund operation mode, the replacement of the fund manager or fund custodian, and the early termination of the fund contract shall be approved by two-thirds of the voting rights held by the fund share holders participating in the general meeting. The above passed. Chen Zhiwu: On the level of simple feelings, everyone will think that this regulation is very reasonable, but the actual result is not necessarily so.For example, one kind of situation is "the meeting can only be held when the holders representing more than 18% of the fund shares participate", and the other is "the meeting can only be held when the holders of more than 80% of the fund shares participate". % ratio is more conducive to protecting investors.But what about the facts?Also give the example of Zhang San.Suppose Zhang San is the general manager of a fund.But many people think that Zhang San is terrible and not qualified for the position of general manager.So how to dismiss Zhang San? The "Fund Law" stipulates that a general meeting of fund share holders can only be held if 50% of the fund share holders participate.The 50% attend the meeting, you can choose two ways, one is through communication, and the other is to attend the meeting directly.As far as Zhang San is concerned, he very much hopes that the meeting will be canceled due to lack of quorum. In fact, since many fund holders are scattered in various industries across the country, and many of them hold small shares.If they want to rush to one place from all over the country to hold a meeting, holders with relatively small fund shares will definitely not want to spend human and financial resources to attend the meeting, which will make it impossible to hold the fund meeting.As a result, Zhang San successfully retained his position as a fund manager, but still managed the funds of thousands of clients poorly.Because among investors, there are active investors and passive investors. Active investors are very concerned about the operation and profitability of their funds, while passive investors are indifferent.The result of indifference is that activist investors want to call meetings to oust bad fund managers but cannot.I think, instead of this, it is better to simply set the ratio to "the meeting can only be held when 100% of the fund share holders should attend", which seems to protect investors the most, but actually makes your fund share holder meeting It will never work. For example, Article 101: The specific management measures for fund management companies or other institutions approved by the State Council to raise funds from specific objects or accept property entrustment from specific objects to engage in securities investment activities shall be separately formulated by the State Council in accordance with the principles of this Law. Chen Zhiwu: I think this issue should not be dealt with at all.Taking Zhang San's company as an example, if Li Si is willing to give out 200 million yuan for Zhang San to manage, then Zhang San took the 200 million yuan from Li Si, is it a fundraising from a specific object?Everyone has the right to sign a contract and carry out transactions. Why does Zhang San's company help Li Si manage investment with Li Si's consent, and still need approval from the securities regulatory agency?Where is the minimum right of an individual to earn a living?Strictly speaking, a family can also be regarded as a private equity fund, because the property of the wife and children may be entrusted to the husband for investment management, so does this kind of entrustment between the husband and wife also belong to "raising funds from specific objects?" "Woolen cloth?In this case, should the government also regulate it?Taking a step back, if three friends entrust Zhang San to speculate in stocks, it can also be said to be a private equity relationship.So, as a normal economic subject, where are your rights?It can be seen from this that the law should draw a space for the freedom of contract and freedom of transaction that private individuals and the people are entitled to enjoy. In this space, no administrative department has the right to intervene.Don't think of government intervention and regulation when you mention finance. We can also analyze other provisions of the "Fund Law", but the basic tendency is the same, which is to limit the power space of fund operators and expand the scope of power of administrative supervision departments.Although the intention of this law is good to help and promote the development of the fund industry, the actual law will restrict the development of this new industry and limit people's innovation space.