Practice and Exploration of the SIPF

1
Practice and Exploration of the SIPF

2

• Basic Information of the SIPF
• Basic Functions of the SIPF Risk Disposal of
  Securities Companies
• 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

3
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.

4
Figure 1-1 Jan. 2001Jul. 2005 Shanghai
Composite Index Run Chart
5
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
6

• 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.

7
Figure 1-3 Mode of Risk in Securities Company
Self-run securities business
Settlement fund for securities trading of customer
Securities company
Bond buy-back fund of customer
Industrial investment
Abnormal fund of customers financing business
Daily payment
8

• 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.

9
(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 SIPFs main
  function was to dispose of risks for securities
  companies, and the design of its internal
  organizational structure was centered on risk
  disposal.

10
Figure 1-4 Organizational Chart of the SIPF
Before Restructuring
Chairman
Vice Chairman
Vice Chairman
Executive Director
Executive Director
Executive Director
Executive Director
Executive Director
Independent Director
Financial Department
General Office
Clearing Department
Legal Affairs Department
Information and Statistics Department
Asset Management Department
Audit Department
11

• (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 Peoples Bank of China should be responsible
  for confirming, supervising and examining the use
  of re-loans.

12
II. Basic Functions of the SIPF Risk Disposal
of Securities Companies

• 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.

13
Chinas Risk Disposal Procedure of Securities
Companies
Disposal Mechanism
Accounting Nature Identification
Administrative Clearing
Compensation Policy
Bankruptcy Procedure
Bankruptcy Liquidation
Bankruptcy Liquidation
14
Make Plan
Draft
Fund use plan made by SIPF as an appendix
Risk Disposal Plan
Submit
15
Disposal Mechanism
Approved
CSRC
Organize
Receiver Group
Working Group
Administrative Clearing Group
Audit Team
Judicial Protection Measure( Three Interrupts )
16
Account Nature Identification
Account Classification
Bankruptcy liquidation (exceeding RMB100 billion)
Non-brokerage account
Institution
Compensate in full amount (more than 9 million
accounts)
Brokerage account
1. Account
Brokerage account
Personal debt
Personal
Buy at discount (more than 60,000 persons)
Non-brokerage account
Institutional debt in personal name
Bankruptcy liquidation
Accounts claimed by customers (depends on
accounts classification)
2. Account
Accounts unclaimed by customers (inactive
accounts are about 2.8 million)
17
Account Nature Identification
Five-level Demonstration
To study disputes beyond existing policy, and
publish new systems.
Ministerial meeting
Led by SIPF to resolve all the disputes under
existing provisions
Interdepartmental meeting
Settle dispute preliminarily
Securities Company Risk Disposal Office of CSRC
(Review aforesaid classification)
(Classify all accounts)
Working group
Liquidation group
18
Compensation Policy

1. The assets and fund in a customer account are the
   property of relevant customer.

1. 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
19
Bankruptcy Procedure
Transactions are transferred to a securities
company under normal operation
Administration verification Group
Intermediate Peoples Court
Ensure
Submit application
Account Clearing Basically
Designate
Receiver
Declare the Bankruptcy
Set up
Creditors Committee
20
Bankruptcy Liquidation
(I) Participants in 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 SIPFs coverage
(II) The proprietary assets of the disposed
securities company and the assets that
cant be identified to
be customer assets cant be used for investor
compensation, but enter the bankruptcy
liquidation.
21
Table 2-1 Capital Used for the Risk Disposal of
Securities Companies
Type Type No. Amount Invested (RMB100 mn) Amount Invested (RMB100 mn)
Type Type No. Equity Capital Capital for liquidity support or acquisition capital
Restructuring State restructuring 10 182 27.6
Restructuring Market restructuring 17
Restructuring Sub-total 27 182.1 27.6
Closing Down Direct investment from the State? 2 - 137.2
Closing Down Capital from the SIPF 24 - 222.4
Closing Down Market closure (not using the State capital) 5
Closing Down Sub-total 31 0 359.6
Total Total 59 182.1 387.2
? It includes RMB900 million of local
governments investment.
22

• 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.

23

• 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).

24

• 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 creditors 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 creditors 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 creditors
  rights had not been converted into formal
  creditors rights, RMB299.1 million in cash was
  escrowed correspondingly. SIPF managed the
  compensation of creditors 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.

25
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.

26
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.

27
The Third Effect of Risk Handling A Withdrawing
System from Securities Company Market was Set Up.

• 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
  companys risk .

28
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.

29

• 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.

30
Table 3-1 Type of Securities Company and
Comparison of Payment Proportion
Type of regulation and supervision Type of regulation and supervision Payment proportion()
A AAA 0.5
A AA 1.0
A A 1.5
B BBB 2.0
B BB 2.5
B B 3.0
C CCC 3.5
C CC 4.0
C C 4.5
D D 5.0
31
Table 3-2 Funds Raised of the SIPF
As of December 31, 2009
Unit RMB100 mn
Year Frozen Interest Transaction Commission Contribution of Securities Companies Donation Compensation Income Total
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
32
IV. Extended Functions of the SIPF Establishment
of a Normal Investor Protection Mechanism in
Combination of Monitoring, Evaluation and Service

• 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.

33
Figure 4-1 Curve of Shanghai Exchange
Comprehensive Index (from July 2005 till
September 2009)
34
Table 4-1 Profitability of Securities Companies
in 2007-2009
Unit RMB100 mn
Year Net Profit
2007 1,282.55
2008 497.14
2009 964.85
35
Figure 4-2 Organizational Chart of the SIPF
After Functions Extended
Chairman
Vice Chairman
Vice Chairman
Executive Director
Executive Director
Executive Director
Executive Director
Executive Director
Independent Director
Financial Department
General Office
Customer Transaction Settlement Funds Control
Center
Legal Affairs Department
(Information and Statistics Department) Investor
Survey Center
Investor Education and Service Center
Asset Management Department
XBRL Application Center
36
Figure 4-3 Main Components of Normal Mechanism
37
(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.

38
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.

39
Market Monitoring Monitoring the Change in
Investors Confidence
Figure 4-4 Comparison between Investor
Confidence and SSE Composite Index Trends
40
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 customers 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 customers 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 customers 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.

41
Strengthen market supervision supervise change
in market capital
Figure 4-5 Illustration of Surveillance and
Control System of Customers Capital
Securities companies and other investment agents
Shanghai and Shenzhen Security Exchange
Capital account of customers
Day-end transaction data
Customers capital information
Surveillance and control system
Capital delivery of legal person
Data of settlement
Capital flow and balance of specific deposit
account and administration account for customers
transaction and settlement
Data of change of customers transaction
settlement
Registration settlement companies
Entrusted bank
Securities company N
Securities company N
Risk warning
Capital administration account of customers
Account of settlement provision and customer
capital in securities companies
Special deposit account for trading settlement
capital of customers in securities companies
Regulatory organization Association of securities
industry
Capital flow between entrusted banking account of
securities company and provision account of
registration company
Capital flow of entrusted banking account in
securities company
42
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.

43
(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
Concerning 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.
Strengthen investor-oriented service
Figure 4-6 Protection and Services System of
Investors
45

• Investor Services Investor Survey
• Chinese securities investors show seven
  characteristics, according to SIPFs 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.

45
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 4-13 Distribution of Investors Stock Assets
Fig 4-12 Time of Stock Market Entrance
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 Call
Fig 4-14 Call Response Process
Investor
Inquiry and complaint for fund business
Inquiry and complaint for accounting information
Telephone, online message and email of SIPF
Other
Transferred to the Expert Board or other
departments
?????? ????
Transferred to other departments or
self-disciplinary organizations
Response available
Response unavailable
Preparation of response
Transferred to securities operation institutions
Investor
50
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
Institutional construction, 28
Shareholders exercise of rights in shareholders
meeting, 22
Protection of participation in decision-making, 28

Construction and implementation of board of
directors functions, 22
Construction and implementation of board of
directors functions, 18
Construction and implementation of a supervisory
and incentive mechanism by the management, 10
Disclosure of important governance information,
22
Protection of information right, 42
Disclosure of financial reports, 32
Disclosure of material events, 31
Disclosure of other information, 15
Protection of return on investment, 30
Value creation, 40
Interest transfer, 29
Profit distribution, 31
Tier-one indicators
Tier-two indicators
54
55
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 gt investor protection score 60
• Grade C 60gt investor protection score 40
• Grade D investor protection score lt40 or it is
  subject to the first ST or penalty in the current
  year or it is suspended from trading permanently.

56
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.

57
Table 4-2 Protection Index and Rating of Listed
Companies' Investors in 2003-2008
No. of Samples Protection index Weight in total samples () Weight in total samples () Weight in total samples () Weight in total samples ()
No. of Samples Protection index 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
58
Table 4-3 Changes in the Protection Status of
Listed Companies Investors in 2003-2008
Investor Protection Index Governance Structure Protection Index Information Disclosure Protection Index Operating Activities Protection 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
59
Fig 4-16 Changes in the Investor Protection
Indicator of Listed Companies from 2003 to 2008
60
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 61.28
3 F Transportation 361 60.62
4 D Utilities 365 59.55
5 C5 Electronics 315 59.46
6 C7 Machinery 1383 59.25
7 H Wholesale Retail 532 59.23
8 C6 Metals Non-metals 772 59.21
9 J Real Estate 334 59.17
10 C4 Petrochemicals 933 58.86
11 C0 Food Beverage 356 58.67
12 C8 Pharmaceuticals 556 58.49
13 E Construction 185 58.37
14 K Social Services 252 58.36
15 C99 Other Manufacturing 100 58.24
16 L Media 61 58.19
17 C2 Timber Furnishings 23 58.03
18 C1 Textiles Apparel 394 57.87
19 G Information Technology 548 57.54
20 C3 Paper Printing 179 57.43
21 A Agriculture 208 55.92
22 M Conglomerates 526 55.51
61
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.

62
Fig 4-17 Securities Investor Protection and
Weight Assessment Indicator System
Basic rights of investors
Bankruptcy compensation
Asset security
Free choice
Litigation
Information
Fair trade
Internal control and corporate governance Financia
l assessment of internal control Soundness of
internal control Effectiveness of internal
control Corporate governance Other internal
control matters
Investor education, service and right
protection Classified customer management Investor
education Investor information service
Information disclosure Completeness of
disclosure Timeliness of disclosure Accounting
information quality Transparency of disclosure
Asset trade security Account security Asset
regulation Trade security
Complaint handling mechanism
Customer service innovation
Securities Investor Protection Assessment
Indicators
63
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 80gtinvestor protection score60
• Grade C 60investor protection score 70
• Grade D investor protection score60.

64
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.

65
Table 4-5 Comparison of Securities Company
Investor Protection Assessment and Separate
Supervision in 2008
Type(Grade)A Type(Grade)A Type(Grade)B Type(Grade)B Type(Grade)C Type(Grade)C Type(Grade)D 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
Separate supervision 30 28.60 58 55.20 17 16.20
66
(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

67
Set up an information reporting mechanism and
information communicating platform

• Establish an English website of Chinas
  securities investor protection
• Facilitate the global investors understanding of
  Chinas 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

• 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

Promote the establishment of an international
forum for investor protection
67
68

• 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.

69

• 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.

70
Thank You!
70