On the risk prevention and control of private funds from the perspective of the fiduciary duty of fund managers
Author: Li Yong (School of law, Southeast University, people's Procuratorate of Jianye District, Nanjing)
Source: Procuratorial daily, March 30, 2020. Slightly abridged when it was published. Refer to the original text.
Financial risk prevention and control is an important part of the three major battles. The risks in the field of private funds should be highly concerned. Private funds may be the high incidence of new financial crimes in the post P2P era. As Louis Roth, an American securities law scholar, said, "the regulation of fund managers is the key to fund regulation.". The act of raising funds without supervision over fund managers is like a runaway wild horse. The fiduciary duty of the fund manager is to supervise the "bull nose" of the fund manager. The fund is a kind of collective investment which is managed by the fund manager through the sale of fund units and investors' funds. The essence of the fund legal relationship is the trust legal relationship, with the fiduciary obligation as the core. Generally speaking, the fiduciary duty includes the duty of loyalty and the duty of care. The fiduciary duty includes two rules: one is to avoid the conflict of interest, that is, the trustee should avoid the conflict between his personal interest and the trustee's duty; the other is the non-profit rule, that is, the trustee should not make use of his trustee's position for profit. The duty of care requires the fund manager to be professional, prudent and diligent in decision-making. The Interim Measures for the supervision and administration of private investment funds (hereinafter referred to as the "measures") stipulates that fund managers shall perform their duties in good faith, prudence and diligence. To some extent, this provision adopts the theory of fiduciary duty. From the perspective of risk prevention and control, how to implement the fiduciary obligations of fund managers, the author believes that there are two paths worthy of attention: one is external legal regulation; the other is internal compliance plan.
1、 External legal regulation
1. Establish strict access threshold. According to the provisions of the measures, there is no administrative examination and approval for the establishment of private fund management institutions and the issuance of private funds, and the registration and filing system of the fund industry association is implemented. In theory, it is in line with the market principle that there is no administrative examination and approval. In theory, the investors of private funds are qualified investors, with economic strength and risk tolerance, and with the awareness of taking risks on their own. The fund managers abide by the obligation of faith, identify qualified investors, and invest with prudence. Such a high-income group's "minority" investment project, the risk is reasonably controllable. However, for a country with a very immature financial consumption culture, this is too idealistic. In fact, under the background of explosive growth, some fund companies "push" investors through salespeople, and even look for the "qualified" investors from the vegetable market. On the other hand, the qualification of fund managers can be obtained through not too difficult and not too strict online examination. Some practitioners have become fund managers in a state of incomprehension, and their fiduciary obligations have not been really fulfilled.
Therefore, in the case of immature financial consumption culture and imperfect financial management system, the establishment of private fund management institutions, the issuance of private funds and the qualification of fund managers need more strict access mechanism. Strict access threshold is a necessary tuition and price to cultivate rational financial consumption culture.
2. Establish a class regulation system of orderly connection of execution. From the perspective of illegal fund-raising cases in the field of private fund, some private fund management companies have many violations in the early stage of operation, such as "roadshow" and "cocktail party" to propagandize to non-specific objects in disguise, and the leaflet page is directly marked with specific private products, but the administrative punishment is either absent or light, until the final collapse, offering criminal means to attack. The phenomenon is that the front-end supervision means are weak and the back-end criminal means are uprooted. The crimes in the field of finance are basically administrative crimes, and the dispute between the subordination and independence of administrative crimes. The author thinks that the administrative crime has the subordination in the constitutive elements, that is, in the conformity of the constitutive elements, it belongs to the prepositive provisions of the administrative law; but in the criminal illegality, it has the independence, that is, whether the substantive illegality of using criminal law needs to be judged independently, and there is a class relationship between them. Under the framework of this class relationship, first of all, we need to improve the administrative laws and regulations, allocate strict administrative punishment measures to the fiduciary obligations of fund managers, strengthen the administrative punishment of the front-end, and achieve early detection and early disposal. The cancellation of the cancellation and the clearance of the clearance. Secondly, the punishment of the last second class of criminal means should be reasonably and moderately used. The ideal state should be that administrative punishment is active and criminal punishment is passive.
There are two situations to be prevented in the construction of the hierarchical regulation system of orderly connection of execution:
First, the real private fund is only operated irregularly and flawed. Due to market risk and investment failure, there is a shortage of funds. We should give priority to administrative punishment measures, instead of directly using the criminal means of crime of illegally absorbing public deposits and crime of fund-raising fraud to "uproot".
Second, the criminal means are not well used. Breach of the manager's fiduciary duty is essentially a breach of trust. In fact, the punishment scope of the crime of breach of trust in German and Japanese criminal law is very wide.
There are two typical accusations for the breach of trust of fund managers in China:
The first is the crime of trading with unpublished information, which mainly aims at the behavior of "rat warehouse". In essence, the "mouse position" is a preemptive transaction by the fund trustee, which seriously violates the prohibition rules of interest conflicts and the priority rules of the interests of fund unitholders, and is a violation of the fiduciary duty.
The second is the crime of using the entrusted property in breach of trust, that is, the financial institution violates the obligation of trust and uses the client's funds or other entrusted or trusted property without authorization. The serious act is also the act of breach of trust in essence. The above-mentioned two charges involve more behaviors in the field of private fund, especially the latter. But these two charges are rarely used in practice, especially the crime of using entrusted property in breach of trust has a trend of "zombie". One of the reasons is the misunderstanding of whether private fund management company belongs to the financial institution in criminal law. According to article 185-1 of the criminal law, the main body of the crime of using entrusted property in breach of trust is commercial banks, futures brokerage companies and other financial institutions. In practice, it is generally considered that private fund management companies do not belong to financial institutions on the basis of "financial institution coding standard" issued by the people's Bank of China. In my opinion, financial institutions in the sense of article 185 of the criminal law certainly include private fund management companies, which can also be seen from the perspective of the system interpretation of the crime of trading with unpublished information stipulated in paragraph 4 of Article 180 of the criminal law: "stock exchanges Fund management companies, commercial banks, insurance companies and other financial institutions ". What's more, the people's Bank of China issued the measures for the administration of large sum transactions and suspicious transactions reports of financial institutions, and the CSRC issued the measures for the administration of corporate bond issuance and transactions, which also listed fund management companies as financial institutions. In fact, the crime of breach of trust is essentially a property crime. This interpretation of the financial institutions in article 185 is in line with the nature of the crime of breach of trust, and is also conducive to preventing such crimes from being alienated as illegal fund-raising crimes.
2、 Internal compliance plan
As mentioned before, the fiduciary duty of the fund manager takes the duty of loyalty and duty of care as the core, in which the duty of loyalty has certain rigidity, requiring the fund manager to put the interests of investors above their own interests; however, the duty of care has certain flexibility, which requires the ability and professionalism of the manager, to some extent, depends on internal control and internal consciousness. Effective compliance plans are needed for the effective performance of the manager's fiduciary obligations.
The "compliance plan" originated in the United States, refers to the internal self-management and risk prevention and control mechanism implemented by enterprises to prevent and detect illegal and criminal acts, and the system design that the state has given enterprises with effective compliance plans a lighter, mitigated or even exempted criminal responsibility when committing a crime. The core idea of the compliance plan is to promote the self-discipline and supervision of enterprises, through the prevention in advance, criminal proceedings and sentencing, as well as the punishment afterwards and the recovery of damage consequences. American scholars define compliance program as an organizational system aimed at comprehensively discovering and preventing corporate crime. There are two goals: one is to prevent the company's internal misconduct; the other is to provide a method of internal supervision and reporting of misconduct. Prosecutors play an important role in the evaluation and supervision of the effectiveness of the compliance plan. The compliance plan makes prosecutors change from focusing on punishment after the event to prevention before the event, and develop a significant role in changing the corporate governance structure. As an important consideration of sentencing guidelines, compliance plan has become a statutory leniency penalty, even a decisive factor for non prosecution and suspension of prosecution. At present, the compliance plan has been popular all over the world, becoming the "best way of business" for enterprises, especially multinational enterprises.
In the financial sector, including funds, the compliance plan is particularly urgent and an important measure to prevent and control financial risks. The state of New York, U.S.A. regulates private equity investment funds, and grants the power of "substantial verification" to the state attorney general. The private equity fund manager needs to report to the state attorney general information related to his business history, criminal record and education background in the last five years, as well as information related to himself or his partners, senior executives, directors or other executives. In 2016, China's Fund Industry Association issued the guidelines on internal control of private investment fund managers, trying to guide private fund managers to establish compliance plans and implement their fiduciary obligations, but the content is too empty and the legal incentives are insufficient. At the legislative level, the compliance plan should be mandatory and incentive, and conditional non prosecution can be considered in the legislation; at the practical level, enterprises should be promoted to actively explore an effective and complete compliance plan system in combination with the characteristics of the industry.
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