On the Organizational Forms of Investment Fund

--------Richard Song

In many countries, mutual funds and other forms of investment funds are quite common. In China, however, investment funds are rather new, and their development is presently outpacing the creation of any laws or regulations to govern them.

An investment fund serves as an institutional investor which collects funds by issuing securities and primarily invests in the securities market. Based on their form of organization, investment funds can be classified into two types: investment companies and investment trusts. Also, based on whether it issues securities which can be bought back, an investment fund can also be classified as an open-ended investment fund or a closed-end investment fund.

The organizational form of an investment company is different from that of a general business company because the investment company has its own custodian responsible for the assets. The parties to an investment trust include the management company, which is responsible for the management of assets, the trustee, which is responsible as the custodian of assets and the beneficiaries, namely, the public investors who subscribe to the securities being issued by the investment trust.

China does not currently have its own trust law to provide the legal basis for sound development of investment funds. The Company Law of the P.R.C. does not meet the requirements for the development of investment companies, since it does not make provisions for the capacity of directors and managers, nor does it provide that a company should retain a custodian to protect its assets, which is a generally accepted practice in the investment company business. In addition, it is currently not possible to establish an open-ended investment company under the Company Law of the P.R.C.

As investment in China continues to grow, more and more vehicles for investment are being introduced. Still, China's legal development has a ways to go toward the legally sound development of investment funds.