Laws of the People's Republic of China

Circular of China Securities Regulatory Commission on Relevant Issues Concerning the Drawing of Risk Reserves by Fund Management Companies

Zheng Jian Ji Jin Zi [2006] No. 154

All fund management companies and fund custody banks:

With a view to intensifying the risk prevention capacities of fund management companies, promoting the steady operation and development of companies, enhancing the confidence of the holders of fund shares and protecting the interests of the holders of fund shares, we hereby, according to the Law on Securities Investment Funds and the Measures on the Administration of Securities Investment Fund Management Companies (Zheng Jian Hui Ling No. 22), give our circular as follows on the relevant matters concerning the drawing of risk reserves by fund management companies:

I.

The fund management company shall draw risk reserves from fund management fees revenues every month, with the proportion of the drawn risk reserves not lower than 5% of the fund management fees revenues. When the risk reserve balance reaches 1% of the net fund assets, risk reserves do not need to be drawn any more.

Where the balance of risk reserves after use is lower than 1% of the net fund assets, the fund management company shall continue to draw risk reserves until the proportion reaches 1% of the net fund assets.

II.

Risk reserves shall be used to compensate for the losses caused by the fund management company to fund assets or to the holders of fund shares due to its violation of any law or rule or fund contract, or due to technical malfunction, operational error and etc., and be used for other purposes as prescribed by the CSRC. If the risk reserves are not enough for compensating the foresaid losses, the fund management company shall use other funds it owns to make the compensation.

III.

The fund management company shall select a fund custody bank (hereinafter referred to as special-account custody bank) among those who are the fund custody banks for the funds under its management to open a special account for risk reserves, so as to deposit and pay risk reserves, and shall report it to the CSRC within 2 working days as of opening the foresaid account.

IV.

The fund management company shall establish rules on risk reserve management, formulate the procedures for drawing, transferring, utilizing and paying risk reserves, and shall, upon the approval of the board of directors, report them to the CSRC for archival filing.

V.

The fund management company shall inform the relevant fund custody banks of the special account for risk reserves and of the procedures for drawing and transferring risk reserves. The relevant fund custody banks shall, when paying overhead expenses to the fund management company every month, transfer the risk reserves it has drawn into each company's special account for risk reserves. And the special-account custody bank may not charge any custody fee for the risk reserves.

VI.

Risk reserves shall be subject to the management of the fund management company, and may be invested in high-liquidity but low-risk assets such as national debts and etc. The interest income and investment profits or losses brought by risk reserves shall be included into risk reserves for management.

VII.

Where the risk reserves are sealed up, detained, frozen or compulsorily enforced by the people's court according to law, the fund management company and the special-account custody bank shall immediately report it to the CSRC. If the utilization of any risk reserves is affected or the risk reserves are reduced accordingly, the fund management company shall complement the amount within 5 working days.

VIII.

Where a fund management company needs to pay any risk reserve, it shall notify the relevant fund custody bank that shall review the risk reserves, while the special-account custody bank shall cope with the matter, and the fund management company shall, within 2 working days after using the risk reserves, report the relevant information to the CSRC in written form, and make clear statement in the supervision and audit report.

IX.

The special-account risk reserve custody bank shall supervise the fund management company's drawing, managing and using risk reserves, guarantee the safety of the deposit of the risk reserves and guarantee that the legal procedures are abided by when using the reserves.

X.

The fund management company and the special-account custody bank shall, before January 20 each year, submit to the CSRC a special report on drawing, managing and using the risk reserves during the last year.

XI.

When a fund management company is dissolved, liquidated or terminated, the balance of risk reserves shall be dealt with as assets of the fund management company.

XII.

As to the fund management companies that fail to accord with the provisions in their drawing or using risk reserves, the CSRC may take corresponding supervision and administration measures.

XIII.

The present Circular shall come into force as of the day of its promulgation. The fund management companies that have drawn risk reserves before the present Circular comes into force shall, according to the present Circular, regulate the management of that part of funds.

China Securities Regulatory Commission

August 14, 2006