Analysis of the group's "capital pool" management model, legal risks, tax-related cases and coping strategies

1. The concept of "capital pool" of the group

Article 23 of the General Principles of Enterprise Finance stipulates that an enterprise group may implement centralized and unified management of internal funds on the premise of complying with the relevant laws and administrative regulations of the state on financial management. The centralized fund management model is also in line with Article 13 of the Opinions of the State Council on Actively and Prudently Reducing the Leverage Ratio of Enterprises, which encourages enterprises to strengthen centralized management of funds, supports qualified enterprises to set up financial companies, strengthens internal financing, and improves the efficiency of enterprise capital use.

The group's "capital pool", also known as cash pool and cash pool, refers to the centralized and unified management of scattered funds at all levels within the group headquarters with the help of the Internet technology of commercial banks or other financial institutions based on the control of its subordinate member units, and completes the circulation of funds in the system through fund collection, balance adjustment, capital valuation, fund clearing, etc., so as to improve the efficiency of capital use and reduce the financing cost of enterprises. The capital pool business is widely found in the financial industry, and the earliest centralized fund management model developed by the financial companies of multinational companies and international banks lies in the collection of funds.

2. Classification of the group's capital pool management model

(1) According to the different entities of capital collection, it can be divided into settlement center and financial company model

The settlement center is an internal functional department under the group, which does not have legal personality, and in practice, the settlement center manages the capital pool in the form of internal banking with the help of online banking and other technical means. According to the agreement signed between the Group and the bank on the "capital pool" business, the Group and its subsidiaries included in the management of the "capital pool" shall open accounts with the cooperative bank in a unified manner, and adopt the management mode of two lines of income and expenditure.

The financial company is developed on the basis of the internal settlement center, the difference is that the financial company is a non-bank financial institution, is a special subsidiary of the group with legal personality, with settlement, loan, foreign exchange, guarantee, investment consulting and other functions. According to the Implementation Measures of the China Banking and Insurance Regulatory Commission for Administrative Licensing of Non-bank Financial Institutions (Decree No. 6 of 2020 of the China Banking and Insurance Regulatory Commission), a group finance company is required to obtain a financial license before opening a business. In operation, the financial company also adopts a management model of two lines of revenue and expenditure.

(2) According to the different forms of fund aggregation, it can be divided into physical capital pools and virtual capital pools

Entity capital pool is a more commonly used method of fund aggregation, which refers to the physical concentration of funds in the collection account of member units and group headquarters through the physical allocation and downward allocation of funds, specifically refers to the bank according to the preset fund collection conditions of the enterprise, the funds in the sub-account of the capital pool, timed and real-time aggregation into the group master account, and at the same time according to the preset interest rate of the enterprise for the internal valuation and interest settlement of the collected funds. Under this model, the actual transfer of funds from the sub-account of the capital pool, regardless of whether the funds are transferred from the sub-account to the main account or from the master account to the sub-account, the transfer record will be displayed on the bank statement of the enterprise. According to the preset collection conditions of the enterprise, the actual balance of the sub-accounts of each member unit is the preset amount or zero on the basis of the master account.

The virtual capital pool is also called the linkage capital pool, which does not transfer funds in the physical sense, it is the bank according to the fund pool agreement, each income of the sub-account of the fund pool is collected to the main account in real time, and each expenditure is transferred from the master account to the sub-account, and then paid in the name of the sub-account, but the bank can not show the transfer of funds between the accounts participating in the fund pool arrangement in the bank statement or online banking. Under this model, the actual balance of the sub-account is zero, and the actual funds are aggregated in the group master account.

3. Legal risks of the group's capital pool

The capital pool management model can effectively revitalize the group's stock of scattered funds, improve the group's overall capital utilization rate and liquidity, and at the same time minimize the group's net capital position, reduce the group's external financing quota and save interest costs. However, in essence, the capital pool management model reflects the centralized control of the funds of the subordinate member units by the parent company of the group, which naturally conflicts with the property independence of the legal entity protected by the Company Law, and the separation of ownership and use rights in the flow of funds also affects the reasonable trust of creditors and small and medium-sized shareholders in the maintenance of the company's capital, thus leading to relevant legal risks.

(1) The legal risks of the party where the funds are collected

(1) The risk that the capital pool management model will become a channel for the controlling shareholder's funds to be occupied

Yongmei Holding Finance Company Capital Pool Case: According to the (2021) No. 44 Administrative Penalty Decision of the China Securities Regulatory Commission (Yongcheng Coal and Power Holding Group Co., Ltd., Qiang Daimin and other 7 responsible entities) issued by the China Securities Regulatory Commission on June 17, 2021, since 2007, according to the capital collection requirements of the parent company Henan Nenghua, the funds of Yongmei Holdings have been automatically collected into the bank account opened by the financial company established by Henan Nenghua, which is different from Yongmei Holdings' own cash in hand. Bank deposits and other monetary funds that can be withdrawn at any time, and the collected funds are responsible for the centralized dispatch of funds by Henan Nenghua Finance Company, and Yongmei Holdings can only be used after approval. Since the collected funds were dispatched by Henan Nenghua Finance Company, the above-mentioned funds have in fact been used for other projects by Henan Nenghua. According to Article 12 of the Accounting Standards for Business Enterprises - Basic Standards and Article 9 of the Accounting Standards for Business Enterprises No. 30 - Presentation of Financial Statements, the funds dispatched by Henan Nenghua Finance Company belonged to the creditor's rights of Yongmei Holdings, and were reported as monetary funds by it, resulting in an inflated monetary fund of 86.119 billion yuan from 2018 to 2020 at the consolidated statement level.

Kangde Xin Virtual Capital Pooling Case: According to the (2021) No. 57 Administrative Penalty Decision of the China Securities Regulatory Commission (Kangde New Composite Materials Group Co., Ltd. and Zhong Yu) issued by the China Securities Regulatory Commission on September 22, 2020, between 2015 and 2018, Kangde Group, the parent company of Kangde Xin, signed a Cash Management Business Cooperation Agreement with Bank of Beijing, stipulating that the funds in the sub-accounts of Kangde Xin and its three subsidiaries within the scope of the consolidated financial statements of Bank of Beijing were real-time and The full amount is collected into the master account of Kangde Group Bank of Beijing. The total bank deposit balance of the sub-account of Bank of Beijing disclosed in Kangdexin's financial reports from 2015 to 2018 was 33.228 billion yuan, but the actual balance at the end of each year was 0, which adopted the virtual capital pool management model. Under this model, each fund of the member unit is collected and transferred to the parent account in real time after it arrives, and the balance of the sub-account of the member unit is always zero. According to <银行函证及回函工作操作指引>the account balance classification standards for the fund collection account in the bank deposit in Article 3 of the Instructions for Filling in the Bank Confirmation Letter Item in the Annex of the Notice of the General Office of the Ministry of Finance and the General Office of the China Banking and Insurance Regulatory Commission on Printing and Distributing (Cai Ban Hui [2020] No. 21), the balance of monetary funds shown in Kangde's new financial statements is not essentially the "actual balance" of the account, that is, the real deposit balance of the account at a certain point in time (including the amount of funds that have been transferred to the account at that point in time), but " Accrued balance (or available balance)" is the balance of funds that can be used in the account as agreed in the cash management agreement, including the amount of funds that have been allocated to the account at that point in time. Listing the accrued balance as a monetary fund balance is essentially a financial fraud that exploits a loophole in the management of virtual pools.

As a modern capital management model, capital pool management itself has the advantage of optimizing the allocation of corporate funds, but when the subsidiary becomes the capital reservoir of the group's external financing, it is logical that it is used by the controlling shareholder as a natural channel for embezzling the subsidiary's funds. For listed subsidiaries, concealing the actual use of the collected and transferred funds is restricted, and creating the illusion of monetary funds being abundant through accounting loopholes in the management of capital pools, they will suffer double losses due to penalties imposed by the regulatory authorities.

(2) The risk of being included in the substantive merger and bankruptcy liquidation due to the loss of property independence

Example: (2020) Hu 03 Po No. 9-6 Substantive Merger Bankruptcy Liquidation Case

CEFC China has set up CEFC Finance, a capital pool, as a centralized fund management platform for relevant enterprises of the "CEFC system" to manage the capital transfer of various "CEFC system" enterprises in a unified manner. Based on Deloitte's special inspection of the assets, liabilities and capital transactions of the 11 respondent enterprises of the "CEFC system", the court submitted daily capital statements and monthly capital plans to CEFC China from each respondent enterprise; It was determined that the respondent enterprises had seriously lost the independence of legal person property in terms of managing the funds of each respondent enterprise and arranging the fund settlement path in a unified manner, and there was a large amount of current account balance between the respondent enterprises, and there was a large amount of mutual insurance, which exceeded the normal scope of related party transactions.

(2) The legal risks of the party collecting the funds

(1) The risk of being found to be commingled with property

Example: (2018) Yue Min Shen No. 13100

The parent company of the Provincial Construction Real Estate Company, the Provincial Construction Engineering Group, collects and manages the funds of the group's subordinate units through the establishment of a financial settlement center. The court held that although the act of collecting the operating income of the Provincial Construction Real Estate Company through the collection of funds and paying various expenses on its behalf did not violate the provisions of laws and administrative regulations, it actually led to the confusion of the assets of the two companies, and it failed to provide evidence to prove that the property of the subsidiary Provincial Construction Real Estate Company was completely independent, and at the same time, on the grounds that there was a management relationship between the two parties, the Provincial Construction Engineering Group was liable for supplementary repayment.

(2) The risk of being determined to have withdrawn capital contributions

Example: (2020) Jin Min Zhong No. 6 case

CD Engineering Company is a one-person limited liability company, and in accordance with the internal regulations of the parent company ZT Ninth Bureau, it is necessary to collect funds to the parent company for adjustment management. ZT No.9 Bureau will collect the registered capital of CD Engineering Company back to its own account on the day of payment, and transfer the registered capital to other subordinate branches to form current receivables. The court held that CD Engineering failed to provide evidence to prove the legal relationship on which the aforesaid receivables were formed, and although the act of collecting funds could be reflected in the accounts, it violated the principle of true capital, seriously affected the adequacy of CD Engineering's assets, reduced its ability to repay its debts, and caused damage to the rights and interests of creditors, and finally complied with the Provisions of the Supreme People's Court <中华人民共和国公司法>on Several Issues Concerning the Application (III) The provisions of Article 12 determine that the parent company, ZT No. 9 Bureau, shall bear supplementary liability to the creditor within the scope of the interest on the transferred capital.

It should be noted here that this article only reminds the group of possible legal risks in the management of the capital pool, rather than a comprehensive analysis of the legal risks identified as property or financial mixing, and the withdrawal of capital contributions. In fact, in judicial practice, not all group companies involved in the capital pool business will be required to bear the liability for repayment, and the above risks can still be resolved if the management of the capital pool is sufficiently standardized.

4. Cases of tax-related risks in the "capital pool" business of group enterprises

The use of "capital pool" for capital operation is a common capital allocation strategy used by group enterprises. Through the establishment of a "capital pool", the group company can enhance its control over its subsidiaries and affiliates. The so-called "capital pool" is a space for storing funds like a reservoir formed by the group enterprises that pool the funds of the member enterprises and affiliated enterprises within the group and cooperate with the bank. In this way, the group enterprise can use idle funds to improve financial returns, and subsidiaries and related parties can often obtain liquidity at a cost much lower than the market interest rate. In this process, the tax-related risks involving free lending between companies within the group are easy to be overlooked.

Specific cases

When the Luoyang Municipal Taxation Bureau of the State Administration of Taxation conducted a risk scan of the relevant enterprises in the jurisdiction that had been losing money for a long time and used normal bills, it found that there were suspicious points in the capital transactions between a group enterprise A and its two subsidiaries, Company M and Company N, and Company B, an affiliate of enterprise A. Company A is a leading enterprise in the local manufacturing industry and a high-tech enterprise, with a wide range of business scope. After comparing the financial statements, the tax department found that the two companies M and N and their affiliated company B had serious book losses, and the financing from financial institutions was very small, and the asset-liability ratio of the three companies exceeded 130%, and Company N had even lost its share capital.

After an in-depth investigation, the tax cadres found that enterprise A carried out capital operation by setting up a "capital pool". The specific mode of operation is as follows: enterprise A collects the funds of its subsidiaries and affiliated enterprises into the headquarters account for market operation and the purchase of wealth management products, and at the same time, by virtue of goodwill, issues commercial bills to affiliated enterprises through a number of banks. Relevant enterprises are discounted with bills for daily operations, so as to achieve the purpose of meeting the daily operating capital needs with lower financing costs. Before the maturity of a batch of commercial bills, enterprise A continues to issue new commercial bills and requires the drawee company to discount and repay the previous bills. In this way, it not only satisfies the purpose of enterprise A to concentrate funds to increase revenue, but also reduces the daily financing cost of affiliated enterprises. In the five years from May 2019 to May 2023, Company A successively issued a total of 6.138 billion yuan of commercial bills to Company M, Company N and Company B, but after cross-comparison with the tax information declared by the enterprise, it was found that the enterprise with this part of the current funds did not declare and pay taxes in full and in a timely manner.

risk analysis

The tax authorities conducted an analysis of the tax risks between enterprise A and its member companies.

In terms of VAT, according to Article 3 of the CS [2019] No. 20), from February 1, 2019 to December 31, 2020, the gratuitous lending of funds between units within an enterprise group (including enterprise groups) is exempt from VAT. Later, the Ministry of Finance and the State Administration of Taxation jointly issued an announcement to extend the implementation period of the policy to December 31, 2027. Therefore, the gratuitous borrowing of funds between Company M and Company N is not subject to VAT. However, for the affiliated enterprise Company B, which is not a unit within the enterprise group, according to the relevant provisions of the "Cai Shui [2016] No. 36), the free lending of funds between affiliated enterprises shall be regarded as the provision of loan services for VAT purposes. In this case, Company A and Company B are affiliated enterprises of each other, and whether Company B injects capital into the "capital pool" of Company A, or whether Company A provides free funds to Company B, it should be regarded as providing loan services, and shall pay VAT at the rate of 6%, as well as taxes such as urban construction tax and education surcharge.

In terms of enterprise income tax, according to Article 41 of the Enterprise Income Tax Law, if the business dealings between an enterprise and its related parties do not comply with the arm's length principle and reduce the taxable income or income of the enterprise or its related parties, the tax authorities have the right to adjust it in accordance with reasonable methods. In other words, when an affiliated enterprise borrows funds for free, the fund provider shall be deemed to have provided loan services to the borrower in accordance with the arm's length principle, and the interest income shall be calculated according to the interest rate of the same type of loan in the same period and shall be taxed in accordance with the law. The borrower's qualified interest expenses can be used as costs and expenses to be charged before enterprise income tax. At the same time, the Tax Administration Law stipulates that if the interest paid or received by the financing funds between a taxpayer and its affiliated enterprises exceeds or falls above or below the amount that can be agreed upon between the enterprises without an affiliated relationship, or the interest rate exceeds or is lower than the normal interest rate of the same type of business, the tax authorities may adjust the tax payable.

In this case, the interest income between its affiliates was not actually paid, and the income was not recognized and taxed according to the interest rate of the same type of loan in the same period. At the same time, enterprise A is a high-tech enterprise and the actual tax burden is low, and after further calculation, there is still a 9.8% tax difference between the enterprise income tax burden of company M and N after deducting the enterprise income tax burden other than making up for losses, and the enterprise income tax burden of enterprise A is still 9.8%, and no interest is actually paid to each other, so the tax authorities adjust the interest tax basis and taxable income of the relevant enterprise capital transactions. At the same time, the income from the purchase of wealth management by enterprise A through the idle funds in the "capital pool" should also be included in the taxable income.

In the end, under the guidance of the tax department, Company A paid 38.7287 million yuan of value-added tax and surcharge, enterprise income tax, stamp duty and other taxes and late fees, and Company B paid 4.849 million yuan of value-added tax and its surcharge, enterprise income tax, stamp duty and other taxes and late fees.

5. Strategies for responding to legal risks

As a management tool for group enterprises to achieve rigid and centralized funds, the capital pool management model meets the requirements of modern production, and the enterprise group can choose the appropriate capital pool management mode according to the needs of strategic development. In view of the above-mentioned legal risks, the author proposes the following countermeasures for the application of the capital pool management model to group enterprises:

(1) Regulate the establishment of capital pools

According to Article 68 of the Code of Corporate Governance for Listed Companies and relevant provisions, listed companies should be independent, separate from their controlling shareholders and actual controllers in terms of personnel, assets, finance, institutions and business, and independently account for and assume responsibilities and risks. Therefore, in order to avoid the capital of the listed company being occupied and affecting its operational independence, the listed company shall not join the capital pool business of its controlling shareholder as the capital collector. On the contrary, when a listed company carries out capital pool business, it should use the account of the subsidiary within the scope of the consolidated statement as a sub-account, and the funds shall be collected in the parent account of the listed company, and the listed company shall realize the unified management of funds within the group.

(2) Accurate and appropriate accounting treatment and information disclosure

Each member of the group's capital pool shall accurately list the balance of the account in accordance with the relevant rules of the Accounting Standards for Business Enterprises, and the items with different properties and functions shall be presented separately in the financial statements, and shall not misdisclose the substance of the relevant related party transactions by taking advantage of the concealment of the capital pool business. According to the Notice on Regulating the Business Dealings between Listed Companies and Financial Companies of Enterprise Groups (Zheng Jian Fa [2022] No. 48) issued by the China Banking and Insurance Regulatory Commission (CSRC) on May 30, 2022, accounting firms, sponsors and independent financial advisers should conduct special inspections on the related party transactions of listed companies involving financial companies on an annual basis and disclose them simultaneously with the annual report. Of course, only accurate financial processing can ensure the accuracy of information disclosure.

According to the provisions of the Ministry of Finance's Interpretation No. 15 of the Accounting Standards for Business Enterprises on the presentation of centralized management of funds, if an enterprise implements centralized and unified management of the funds of the parent company and its member units through the internal settlement center and the finance company, the collection and borrowing of the accounts of the member units directly and the parent company group shall be listed in the item of "other receivables/payables"; In addition to the correct presentation in accordance with the above-mentioned interpretation rules, the fact that the enterprise implements centralized management of funds, other receivables and payables, and the specific circumstances of the restriction of monetary funds should also be disclosed in the notes to the financial statements submitted to the outside world. When verifying the relevant information of the enterprise's solvency, the intermediary should also pay attention to confirming whether the relevant entity has signed a fund collection agreement with the bank, whether it has set up a special way to display the account balance, etc.

(3) Strengthen the internal financial control of the group enterprises to prevent excessive domination

Each member unit of the group enterprise shall carry out financial management in accordance with the relevant provisions of the accounting standards, make reasonable use of the information technology means of the capital pool system to independently account and keep accounts separately, and ensure that the account books are separated, the transaction vouchers are complete, and the account balance is legally listed. At the same time, the capital pool system can store the whole process records of capital flow, approval, operation, etc., and have the function of traceability, and monitor the excessive domination behavior of the group enterprise. By strengthening the internal financial control of the group enterprises, it avoids the situation that shareholders occupy without compensation, the accounts are unclear, and the income cannot be distinguished due to the excessive control of the controlling shareholder, and ensure that the management of the group's capital pool essentially meets the requirements of maintaining the independent expression of intent and independent property of each member unit, so as to avoid the group company being required to bear the risk of repayment of relevant debts due to being identified as a mixture of assets.

(4) Clearly define in writing the legal nature of the fund pool management model

In view of the particularity of the possession and ownership of monetary funds, each member of the group enterprise shall sign a capital pool business agreement with cooperative banks and other financial institutions as a legal basis for carrying out capital pool management, and the agreement should clearly emphasize that the fund management behavior is a package of services for banks and other financial institutions to provide capital solutions for the group enterprise, and clarify the ownership of funds after allocation, transfer and transfer. This is not only related to the correct listing of accounting subjects, but also hides huge tax risks.

At the same time, the group enterprise also needs to formulate the relevant centralized fund management system through legal decision-making procedures, and if it needs to establish a financial company, it should obtain the relevant financial license in accordance with the law. Ensure in writing that the management of the group's capital pool formally meets the requirements of maintaining independent expressions of intent and independent assets of each member unit.

The China Securities Regulatory Commission and the AMAC punished 3 private equity fund managers for [carrying out capital pool business]!

(2021-June 2023)

From 2021 to June 2023, local securities regulatory bureaus and AMAC websites published administrative supervision measures, administrative penalties and disciplinary decisions issued by private fund managers for violations (hereinafter collectively referred to as "penalty cases", and administrative supervision measures, administrative penalties and disciplinary actions are collectively referred to as "punishments"). According to statistics, three private equity institutions, including Zhejiang Aoxhuang Asset Management Co., Ltd. and Chengdu Ruihua Innovation Private Equity Fund Management Co., Ltd., were fined by the China Securities Regulatory Bureau and the AMAC for carrying out capital pool business.

According to the relevant regulatory provisions of private funds, private fund managers are not allowed to carry out capital pooling business, otherwise they may be penalized.

1. Provisions on the prohibition of carrying out capital pool business

The first paragraph of Article 4 of the CSRC stipulates that: "Private fund managers and institutions engaged in private fund custody business (hereinafter referred to as private fund custodians) shall perform their duties and perform the obligations of good faith, prudence and diligence in the management and use of private fund assets, and institutions engaged in private fund sales business (hereinafter referred to as private fund sales agencies) and other private equity service institutions engaged in private fund service activities." ”

Article 9, Paragraph 1, Item 3 of the Several Provisions on Strengthening the Supervision of Private Investment Funds issued by the China Securities Regulatory Commission stipulates that: "Article 9 Private fund managers and their employees engaged in private fund business shall not engage in the following acts: (3) Carrying out or participating in capital pool business with the characteristics of rolling issuance, collective operation, term mismatch, separate pricing, etc.";

2. Penalty provisions for carrying out capital pool business

Article 33 of the CSRC's Interim Measures for the Supervision and Administration of Private Investment Funds stipulates that: "If a private fund manager, a private fund custodian, a private fund sales agency and other private placement service institutions and their employees violate laws, administrative regulations and the provisions of these Measures, the China Securities Regulatory Commission and its dispatched agencies may take administrative regulatory measures such as ordering corrections, conducting regulatory talks, issuing warning letters, and publicly reprimanding them." ”

Article 13 of the Several Provisions on Strengthening the Supervision of Private Investment Funds issued by the China Securities Regulatory Commission stipulates that "the China Securities Regulatory Commission and its dispatched agencies shall strictly supervise the private fund business activities of private fund managers, private fund custodians, private fund sales agencies and other private fund service institutions and their employees in accordance with the law, and severely crack down on all kinds of violations of laws and regulations." For those who violate these provisions, the China Securities Regulatory Commission and its dispatched agencies may, in accordance with the provisions of the "Private Placement Measures", take administrative supervision measures, market entry ban measures, impose administrative penalties, and record them in the credit information database of China's capital market; Where the Securities Investment Fund Law and other laws and administrative regulations provide otherwise, it shall be handled in accordance with those provisions. The AMAC has carried out the registration of private fund managers and the filing of private funds in accordance with the law, and strengthened self-discipline management and risk monitoring. For those who violate these provisions, the AMAC may deal with them in accordance with laws and regulations. ”

Article 29 of AMAC's Measures for the Administration of Members of the Asset Management Association of China stipulates that: "The Association may, depending on the severity of the circumstances, impose disciplinary measures or disciplinary sanctions on members or practitioners who violate laws and regulations and the normative documents granted by the China Securities Regulatory Commission to the Association for the implementation of self-discipline management or the self-discipline rules of the Association." If a member or practitioner violates the above provisions and needs to impose administrative supervision measures or administrative penalties on him, he or she shall be transferred to the China Securities Regulatory Commission and other relevant authorities for handling. ”

Article 6 of AMAC's Implementation Measures for Self-Discipline Management and Disciplinary Measures of the Asset Management Association of China stipulates that: "The self-discipline management measures implemented on institutions include: (1) conversation reminders, that is, the Association requires the non-compliant institutions to accept inquiries, explanations and explanations from the Association on the relevant violations at a specified time and place, and remind them to correct the violations in a timely manner. (2) Written warning, i.e., the Association informs the violating institution of the facts of the violation and the self-discipline management measures in writing, and gives it a warning and admonishment, urging it to correct the violation. (3) Requiring correction within a specified time limit, i.e., the Association requires the non-compliant institution to correct the violation within the prescribed time limit and submit a written rectification report to the Association; (4) Requesting an increase in the number of internal compliance inspections, i.e., the Association requires the non-compliant institution to conduct internal compliance inspections and report on the self-inspection within a certain time limit at the required frequency or number of times, so as to urge it to effectively strengthen compliance construction and raise compliance awareness; (5) Other self-discipline management measures stipulated by the Association. Article 8 stipulates that: "The disciplinary measures to be imposed on the institution include: (1) warning, that is, the Association gives warnings and criticisms to the offending institution on its official website or through other public means; (3) Public condemnation, i.e., the Association reprimands the offending institution on the official website or other media designated by the Association; (4) Restricting relevant business activities, i.e., the Association temporarily does not accept or handle the relevant business of the offending institution within a certain period of time, or requires the offending institution's products under management not to increase the scale of fundraising, Investors shall not make new investments, except for those that are self-regulatory measures in accordance with relevant provisions; (5) revocation of registration, i.e., the Association shall revoke the registration of private fund managers or fund service institutions of the violating institutions; (6) Cancellation of membership, i.e., the Association shall cancel the membership of the violating institution; (7) Other disciplinary measures prescribed by the Association. ”

3. Brief analysis

1. Identification of carrying out capital pool business

According to the first paragraph of Article 4 of the Interim Measures for the Supervision and Administration of Private Investment Funds issued by the China Securities Regulatory Commission and the third paragraph of Article 9 of the Several Provisions on Strengthening the Supervision of Private Investment Funds, private fund managers shall not carry out or participate in capital pool business with characteristics such as rolling issuance, collective operation, term mismatch, and separate pricing.

Judging from the existing penalty cases, the main circumstances that have been identified as carrying out capital pool business are (in order to retain the original intent, the expressions in the penalty cases shall prevail) :(1) "carrying out capital pool business with the characteristics of rolling issuance, collective operation, term mismatch, separate pricing, etc;(2) "individual funds carrying out capital pool business with the characteristics of rolling issuance, collective operation, term mismatch, separate pricing, etc., and the income of the private fund is not linked to the assets, returns, risks and other circumstances of the investment project" ;(3)" Some private equity funds are directly used to pay the principal and income of the early investors after they enter the fund-raising account; some private equity funds are invested in other private equity funds managed by the company, and the pricing of the relevant transactions lacks a reasonable basis, and the funds are ultimately used to pay the principal and income of the early investors of the relevant funds; and some private equity funds do not conduct a reasonable valuation when they are open for subscription, redemption or rolling issuance, and are priced separately from the actual rate of return of the corresponding underlying assets".

2. Penalties for carrying out capital pool business

According to Article 33 of the CSRC's Interim Measures for the Supervision and Administration of Private Investment Funds, the specific administrative supervision measures taken by the CSRC and its dispatched agencies for private fund managers to carry out or participate in the capital pool business include: (1) ordering corrections, (2) regulatory talks, (3) issuing warning letters, (4) public reprimands, and (5) other administrative regulatory measures stipulated by the CSRC.

According to Article 13 of the Several Provisions on Strengthening the Supervision of Private Investment Funds issued by the China Securities Regulatory Commission, if a private fund manager conducts or participates in the capital pool business, the China Securities Regulatory Commission and its dispatched agencies may take administrative supervision measures, market entry ban measures, impose administrative penalties, and record them in the China Capital Market Integrity Information Database.

In accordance with Articles 6 and 8 of AMAC's Implementation Measures for Self-Discipline Management and Disciplinary Measures of the Asset Management Association of China, the self-discipline management measures implemented by AMAC against private fund managers in carrying out capital pool business include: (1) conversation reminders, (2) written warnings, (3) rectification within a time limit, (4) increased number of internal compliance inspections, and (5) other self-discipline management measures prescribed by AMAC. AMAC's disciplinary measures against the organization include: (1) warning, (2) industry reprimand, (3) public reprimand, (4) restriction of relevant business activities, (5) revocation of registration, (6) cancellation of membership, and (7) other disciplinary measures prescribed by the association.

Judging from the existing penalty cases, the CSRC generally takes administrative supervision measures such as issuing warning letters to private fund managers for violations in carrying out capital pool business, and individual cases are recorded in the integrity file of the securities and futures market;

3. Penalties in new regulations such as the Regulations on the Supervision and Administration of Private Investment Funds

Paragraph 3 of Article 3 of the Regulations on the Supervision and Administration of Private Investment Funds, issued by the State Council on July 3, 2023 and officially implemented on September 1, 2023, stipulates that "private fund managers shall abide by laws and administrative regulations, fulfill their duties, and perform the obligations of honesty, trustworthiness, prudence and diligence in the management and use of private fund assets, private fund custodians in custody of private fund assets, and private fund service institutions engaged in private fund service business." The first paragraph of Article 58 stipulates: "Where a private fund manager, a private fund custodian, a private fund service institution and its employees violate these Regulations or the relevant provisions of the securities regulatory authority of the State Council, and the circumstances are serious, the securities regulatory authority under the State Council may prohibit the relevant responsible persons from entering the securities and futures market." "If the conduct of capital pool business involves the failure to prudently and diligently manage and use the assets of private funds, it may fall within the scope of supervision under this article.

The Measures for the Registration and Filing of Private Investment Funds, issued by AMAC on 24 February 2023 and implemented on 1 May 2023, also provide penalties for violations in the conduct of capital pool business. Article 70 stipulates that: "If a private fund manager commits any of the following acts, the Association may take self-discipline management or disciplinary measures such as a written warning, a request for correction within a time limit, a public reprimand, a suspension of filing, restrictions on relevant business activities, and the revocation of the registration of a private fund manager...... (5) Carrying out or participating in capital pool business with characteristics such as rolling issuance, collective operation, term mismatch, and separate pricing......; For the directly responsible managers and other responsible personnel, the Association may take self-discipline management or disciplinary measures such as written warnings, warnings, public reprimands, prohibition from engaging in relevant business, inclusion in blacklists, and cancellation of fund qualifications. Where individual employees have the conduct provided for in the preceding paragraph, the Association may employ the aforementioned self-discipline management or disciplinary measures against them. ”

According to the Measures for the Registration and Filing of Private Investment Funds, self-discipline management or disciplinary measures such as written warnings, requests for corrections within a time limit, public reprimands, suspension of filing, restriction of relevant business activities, and revocation of registration of private fund managers may be taken against managers who conduct or participate in capital pool business; Self-discipline management or disciplinary measures such as revocation of fund qualifications.

4. Penalty cases

The following cases have been penalized for carrying out capital pooling business:

1. Zhejiang Austron Asset Management Co., Ltd

Name: Decision on issuing a warning letter to Zhejiang Aochuangasset Management Co., Ltd

Facts of violation: Your company has the following behaviors in the course of carrying out private equity fund business...... 3. Carry out capital pool business with the characteristics of rolling issuance, collective operation, term mismatch, and separate pricing.

Prohibitive provisions: Article 4 of the Interim Measures for the Supervision and Administration of Private Investment Funds.

Penalty provisions: Article 33 of the Interim Measures for the Supervision and Administration of Private Investment Funds.

Penalty result: Take supervision and management measures of issuing a warning letter, and record it in the integrity file of the securities and futures market.

2. Chengdu Ruihua Innovation Private Equity Fund Management Co., Ltd

Document number: Sichuan Securities Regulatory Bureau [2023] No. 13

Facts of violation: 7. Your company's individual funds carry out capital pool business with the characteristics of rolling issuance, collective operation, maturity mismatch, separate pricing, etc., and the income of the private equity fund is not linked to the assets, income, and risks of the investment project. This act violates the provisions of Article 9, Paragraph 1 of the Several Provisions.

Prohibitive provisions: Article 9, Paragraph 1 of the Several Provisions on Strengthening the Supervision of Private Investment Funds.

Penalty provisions: Article 13 of the Several Provisions on Strengthening the Supervision of Private Investment Funds.

Penalty result: Administrative supervision measures such as issuing a warning letter were taken.

3. Nagarjuna Capital Management Co., Ltd

Document number: AMAC Sanction [2021] No. 55, AMAC Review [2021] No. 2

Facts of violations: Third, the funds of the follow-up investors of some private equity funds are directly used to pay the principal and income of the investors in the early stage after entering the fund-raising account; some private equity funds are invested in other private equity funds managed by the company, and the pricing of the relevant transactions lacks a reasonable basis, and the funds are ultimately used to pay the principal and income of the investors in the early stage of the relevant funds; and some private equity funds do not carry out reasonable valuation when they are open for subscription, redemption or rolling issuance, and are priced separately from the actual rate of return of the corresponding underlying assets.

Prohibitive provisions: Article 4 of the Interim Measures for the Supervision and Administration of Private Investment Funds and Article 37, Paragraph 1 of the Measures for the Administration of Members of the Asset Management Association of China.

Penalties: Article 111, Paragraph 3 of the Fund Law, Article 29 of the Interim Measures for the Supervision and Administration of Private Investment Funds, Article 4 of the Measures for the Administration of Members of the Asset Management Association of China, and Article 5 of the Measures for the Implementation of Disciplinary Actions (for Trial Implementation).

Penalty result: Cancellation of membership and suspension of acceptance of private fund filing.

Sort out issues related to financial products in the capital pool

1. The concept and main characteristics of capital pool wealth management products

The so-called capital pool wealth management products refer to the wealth management products that financial institutions continue to raise funds through rolling issuance and sale of wealth management products, form a "capital pool" of funds raised by multiple wealth management products of different types and different maturities, and carry out collective operation of multiple project assets.

The characteristics of capital pool products are mainly rolling issuance, collective operation, separate pricing, and maturity mismatch. At the same time, in order to ensure the smooth sale of the pool products, the seller generally promises that the financial institutions or other third parties will pay the principal and interest of the pool products rigidly.

Rolling issuance refers to the raising of funds in installments and batches through the issuance of products in installments or open subscription. The purpose of rolling issuance is often to "borrow the new to repay the old" and/or "roll investment". Collective operation means that all raised funds, regardless of the source of funds and the time of raising, are put into the pool for unified management and unified accounting, and the relationship between the capital side and the asset side is not one-to-one. Separate pricing means that the price of funds under the product is not determined according to the actual rate of return of the corresponding project assets, but according to the pre-agreed interest rate. Term mismatch refers to the investment of short-term funds in long-term assets, on the one hand, setting short-term products to raise short-term funds from investors, and on the other hand, allocating longer-term assets to seek higher capital returns.

Second, the main regulatory policies of capital pool wealth management products

For the capital pool of wealth management products, the current main regulatory policies are as follows: Notice of the China Banking Regulatory Commission on Printing and Distributing the Speech of Secretary of the Commission for Discipline Inspection of Wang Huaqing at the Symposium on the Supervision of Wealth Management Business of Commercial Banks (Yin Jian Fa [2011] No. 76), Notice of the General Office of the State Council on Issues Concerning Strengthening the Supervision of Shadow Banking (Guo Ban Fa [2013] No. 107), and Notice on Matters Concerning the Regulation of Targeted Asset Management Business between Securities Companies and Banks (Zhong Zheng Xie Fa [2013] No. 124); Notice on Further Strengthening the Risk Management of Fund Management Companies and Subsidiaries Engaged in Asset Management Business for Specific Customers (Hu Zheng Jian Ji Jin Zi [2014] No. 28), Guiding Opinions of the General Office of the China Banking Regulatory Commission on Risk Supervision of Trust Companies (Yin Jian Ban Fa [2014] No. 99), Interim Provisions on the Operation and Administration of Private Asset Management Business of Securities and Futures Operating Institutions (CSRC Announcement [2016] No. 13), and Measures for the Supervision and Administration of Wealth Management Business of Commercial Banks (Decree No. 6 [2018] of the China Banking and Insurance Regulatory Commission) and Notice of the General Office of the China Banking and Insurance Regulatory Commission on Printing and Distributing the Implementation Rules for Portfolio Insurance Asset Management Products (Yin Bao Jian Ban Fa [2020] No. 85).

On April 27, 2018, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission and the State Administration of Foreign Exchange issued the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions (Yin Fa [2018] No. 106, hereinafter referred to as the "New Regulations"), which stipulates that "financial institutions shall separately manage, establish and account separately for the funds of each asset management product, and shall not carry out or participate in the capital pool business with the characteristics of rolling issuance, collective operation and separate pricing." Article 29 of the New Asset Management Regulations also stipulates that "in order to continue the unexpired assets invested in the stock products and maintain the necessary liquidity and market stability, financial institutions may issue old products to dock, but they shall strictly control the overall scale of the stock products, and reduce and decrease in an orderly manner to prevent a cliff effect at the end of the transition period." "On July 31, 2020, the People's Bank of China issued a notice on "Optimizing the Transitional Period of the New Asset Management Regulations and Guiding the Smooth Transformation of the Asset Management Business", deciding to extend the transition period of the new asset management regulations to the end of 2021.

According to the aforesaid provisions, financial institutions may also conditionally sell cash pool products before the end of the transition period of the new asset management regulations for the continuation of the unexpired assets invested in the existing products, but the sale of cash pool wealth management products will cease after the transition period of the new asset management regulations at the end of 2021.

3. Specific types of business violations

Wealth management product cash pooling business with one or more of the following characteristics may be subject to penalties for violations.

The first is the term mismatch, that is, the rolling issuance or opening of wealth management products on a regular or irregular basis (such as 3 months and 6 months), and the funds are invested in the target (such as trust plan, asset management plan, limited partnership share, etc.) with a relatively long duration (such as 3 years and 10 years), and there is a mismatch between the investor's investment period and the duration of the investment target and the agreed exit period, and the source of funds and the project investment direction cannot be corresponded to one by one. Theoretically, for rolling issuance to raise short-term funds to invest in long-term investment projects ("long-term and short-term"), if the investment of each fund can ensure that the funds correspond to the project one-to-one, it can not be regarded as a capital pool. However, in the current regulatory environment, any "long-term and short-term" maturity mismatch may be identified as a violation, in addition to ensuring that the funds correspond to the project one-to-one, special attention must also be paid to the principal and income paid in the previous period should be entirely from the financing party's repayment of principal and interest or the cash flow generated by the investment, rather than the participation funds of investors in the later period.

The second is the mixed operation, that is, the mixed operation of different wealth management products, mutual funds and assets cannot be clearly corresponded, or multiple wealth management products are combined to prepare a balance sheet or valuation statement, and no separate accounts are established for accounting.

The third is separate pricing, that is, wealth management products are not reasonably valued when they are open for participation, exit or rolling issuance, and are priced separately from the actual rate of return and net value of the corresponding assets. However, for asset management plan products that invest in standardized securities, if a fair valuation can be carried out, and investors participate and exit according to the net value, and the exit funds do not receive any principal and income guarantees, it is not a separate pricing.

In the CMBC Asset Management Co., Ltd. cash pool case, the three asset management plans of CMBC were found to constitute a violation of the fund pool of wealth management products due to separate pricing and mixed operation. The main grounds for determining the non-compliance of the asset management plan of CMBC are: first, the income of the client agreed in the asset management contract is calculated in a manner similar to the interest on deposits, which has nothing to do with the valuation of the special plan and the actual situation of the corresponding assets (separate pricing);

IV. Analysis of Typical Cases

(2021) Jing 0101 Min Chu No. 15769 case

(1) Important facts of the case

During the trial, Dai submitted a list of MS Trust Company's products and key recommended projects of China MS Trust (March 8 to March 12, 2021...... Liquidity support letter stamped with the seal of FH Holding (no original, the computer shows the seal in red)...... The content of the liquidity support letter is: Dear investors, thank you for investing in the ...... of the ......"China MS Trust Zhongmin Yongtai No. 1 Accumulative Capital Trust Plan" issued and managed by MS Trust Company. Recently, due to the impact of multiple negative public opinions, investors have concentrated redemption of the above-mentioned trust projects, resulting in tight liquidity. In order to properly resolve this issue and fulfill its responsibilities as a major shareholder, the Company promises to investors as follows: The Company has quickly started the disposal of relevant assets, and according to the current progress of asset disposal, it is expected that the key time nodes for asset realization will be July 2021, October 2021 and December 2021 respectively. The Company will unconditionally and indefinitely provide liquidity support to the above-mentioned trust projects with the received asset realization proceeds until the above-mentioned trust projects resume normal operation to protect the rights and interests of investors. In addition to the above-mentioned projects, the company will provide liquidity support for the fund pool projects managed by MS Trust issuance and management in the event of a similar situation.

The "Opinion on the Investigation of Reporting of Banking and Insurance Illegal Acts" stated that, after verification, Yongtai No. 1 met the characteristics of non-standard capital pool business, and MS Trust Company violated the "Guiding Opinions of the General Office of the China Banking Regulatory Commission on Risk Supervision of Trust Companies" (Yin Jian Ban Fa [2014] No. 99) that "trust companies shall not carry out non-standardized wealth management fund pools and other businesses with shadow banking characteristics". Our bureau has ordered MS Trust Company to clean up the non-standard capital pool business within a time limit, and further regulatory measures will be taken in accordance with the law. With regard to the issue of MS Trust Company's suspected self-financing, after verification, according to the pledge registration materials you provided, MS Trust Company has violated the issue of bonds issued by shareholders through the trust plan and the use of trust funds for the company's shareholders by bypassing non-related parties, and the verification believes that MS Trust Company has violated Article 27 of the Administrative Measures for Trust Companies' Collective Capital Trust Plans (Decree No. 1 of 2009 of the China Banking Regulatory Commission), which states that "trust companies shall comply with the following provisions when managing trust plans...... (3) The trust funds shall not be directly or indirectly used to the shareholders of the trust company and its affiliates". Our bureau has ordered MS Trust to rectify and hold accountable, and further regulatory measures will be taken in accordance with the law.

(2) Summary of the trial

The trust company involved in the case did not clean up the capital pool business in accordance with the requirements of the new asset management regulations, but instead expanded the scale of the capital pool business, which not only violated the rigid requirements of the regulatory authorities, but also increased the investment risk of the trust property, making it impossible for the settlor to subscribe to the trust unit based on its trust in the trustee and the purpose of using the trust funds could not be realized, violating the principle of effective management by the trustee, and should compensate the investor for losses.

(3) Commentary

Trust companies still expand their capital pooling business during the transitional period of the New Asset Management Regulations, which violates the principle of effective management by trustees.

Paragraph 1 of Article 15 of the New Regulations prohibits the business of capital pooling, which stipulates that "financial institutions shall separately manage, establish and account for the funds of each asset management product, and shall not carry out or participate in the capital pool business with the characteristics of rolling issuance, collective operation and separate pricing." ”

In this case, the trust product made multiple investments in other trust products managed by the trust company, and the other trust products were reinvested in the trust company to manage other trust products. In addition, there are situations where the trust products involved in the case are mutually invested with other trust products managed by the trust company. In this regard, the court held that: "This kind of asset management product, which takes trust purchase trust as the main form of investment, through the establishment of an open-ended collective capital trust plan, the rolling issuance of trust units, and the adoption of multi-layer nested investment, enables different trust plans established and managed by it to trade with each other in a circular manner, has typical characteristics of capital pool business." "Regulators are on the same page.

On 31 July 2020, the regulators extended the transition period to the end of 2021 with a case-by-case approach. The New Asset Management Regulations stipulate that "in order to continue the unexpired assets invested in the stock products and maintain the necessary liquidity and market stability, financial institutions may issue old products to dock, but they shall strictly control the overall scale of the stock products, and reduce them in an orderly manner to prevent a cliff effect at the end of the transition period." The product involved in the case was purchased on December 22, 2020, but the court did not find that the product involved in the case was "the docking of old products issued by financial institutions", but found that the trust company failed to clean up the capital pool business in accordance with regulatory requirements, and found that the trust company was expanding the scale of the capital pool business, which not only violated the rigid requirements of the regulatory authorities, but also increased the investment risk of the trust property, and found that the trust company violated the principle of effective management by the trustee.

Liquidity support for FH Holdings

With regard to the liquidity support provided by the indirect shareholders of the trustee, after confirming the authenticity of the liquidity support letter in light of the circumstances of its trial of other cases, the court held that "from the content of the liquidity support letter, FH Holding Company promised to provide liquidity support to investors in specific products unconditionally and indefinitely, which is more in line with the intention of debt accession." ”

The court's determination is somewhat general. Debt accession generally requires the existence of the main debt as a precondition, and the assumption of the obligation is quite independent. From the way in which the obligations contained in the letter are assumed, the assumption of the obligations of FH Holding Company is independent. For the recognition of the main debt, the relationship between the trustee and the settlor is usually not regarded as a debt in trust investment. In (2018) Hu 74 Min Chu No. 1003, the Shanghai Financial Court held that "in the trust contract relationship...... The settlor bears the risk of trust investment, and there is no debtor who is liable to the settlor for the 'investment principal of trust products', and the trust company's payment of the trust principal and trust income after the maturity of the trust is not the main debt to protect the investment principal, but the return of the trust property. As a result, the principal debt does not exist and the security cannot be relied upon. ”

In this case, the court determined that the nature of liquidity support was debt accession, and the author believes that the consideration of this determination may be: since the product in question is actually a new fund pool product during the transition period of the New Asset Management Regulations, which is a product that violates regulatory requirements, in this case, the court treats the investment as a kind of loan.

(4) Details

Referee's opinion

The Beijing Dongcheng Court held that, in accordance with the relevant laws and regulations, trust refers to the act of entrusting the settlor's property rights to the trustee based on his trust in the trustee, and the trustee will manage or dispose of it in his own name for the benefit of the beneficiary or for specific purposes according to the settlor's wishes. In this case, the purpose of the settlor's investment trust plan is to hand over its assets to the trustee for investment and operation, so as to realize asset appreciation, and the settlor should prejudge its investment behavior and bear the investment risks. However, the premise of the buyer's own responsibility should be the seller's responsibility. If the trust company is in accordance with the trust contract, for the benefit of the trustor, the management, disposal and use of the trust property shall be dutiful, then the investment risk of the trustor shall be borne by the trustor, but the trust company shall also bear the liability for compensation if it fails to perform its duties due diligence when performing the obligations of the trustee and causes losses to the investor. Therefore, the focus of the dispute in this case is whether Minsheng Trust Company, as the trustee, has fulfilled its fiduciary obligations, whether it should compensate Dai Weiqi for the loss of property, and whether Oceanwide Holdings Company should bear joint and several liability.

Whether Minsheng Trust Company has fulfilled its fiduciary obligations

The trust contract is an important part of the contract between the settlor and the trustee, and all parties should fully exercise their rights and perform their obligations. According to the trust contract, Minsheng Trust Company, as the trustee, shall invest in accordance with the investment direction agreed in the contract, fully consider the investment restrictions, and fulfill the statutory and agreed information disclosure obligations, which is the fiduciary obligation of the trust company as the trustee.

First of all, for the management of trust property, Minsheng Trust Company did not adhere to the principles of honesty, credit, prudence and effectiveness.

First, during the trial of this case, Dai Weixuan submitted a list of products of Minsheng Trust Company and key recommended projects of China Minsheng Trust. Although Minsheng Trust Company did not recognize the evidence, the content of it was indeed a trust plan established and managed by Minsheng Trust itself, and Dai Weiqi, as a natural person, did not have the ability to fully grasp the specific name, investment scope, investment capital requirements and term of a large number of trust products of Minsheng Trust Company. Money market funds, etc., the investment scope matched the investment scope agreed in the trust contract, and Dai Weiqi asserted that the evidence was provided by the sales agency when he purchased the trust products, and this court accepted it on the basis of the facts of the case. Although the investment scope of the trust contract stipulates that it can be invested in other investment varieties permitted by laws, regulations and regulatory authorities, including but not limited to: public funds, asset management plans, trust plans and other financial products issued by fund companies, subsidiaries of fund management companies, securities companies, trust companies and other financial institutions, with money market instruments and standardized fixed income products as the main investment direction. However, based on the historical investment target table of China Minsheng Yongtai No. 1 submitted by Minsheng Trust Company in this case, the investment was all trust plans, and Minsheng Trust Company failed to provide further evidence to prove that the trust plans it invested in were actually invested in money market instruments and standardized fixed income products, and it could not be determined that Minsheng Trust Company's management and use of trust property met the requirements of the trust purpose.

Second, on April 27, 2018, the People's Bank of China, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission and the State Administration of Foreign Exchange jointly issued the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions (hereinafter referred to as the "New Asset Management Regulations") under the "Yin Fa [2018] No. 106". Pooling business that integrates operation and separates pricing characteristics. Article 22 stipulates that asset management products may invest in another layer of asset management products, but the invested asset management products shall not be reinvested in asset management products other than public securities investment funds. The transaction records of the special trust account obtained by this court ex officio show that Minsheng Trust Company has made multiple investments in the Yongfeng No. 2 Trust Plan established and managed by Minsheng Trust Company, and the Yongfeng No. 2 Trust Plan has re-invested in the HSBC No. 3, HSBC No. 2, HSBC No. 4, HSBC No. 5, Tianfeng No. 3 and Tianfeng No. 8 trust plans established and managed by Minsheng Trust Company, and there is a situation of mutual investment between CMC Yongtai No. 1 and Huitian No. 1 Trust Plan. Although the act of investing in other trust plans by setting up a trust plan does not violate regulatory requirements, the trust plan invested by Minsheng Trust Company has once again invested in other trust plans. This kind of asset management product with trust purchase trust as the main form of investment, through the establishment of an open-ended collective capital trust plan, the rolling issuance of trust units, and the adoption of multi-layer nested investment methods, so that different trust plans established and managed by it can be traded in a circular manner, has the typical characteristics of capital pool business. Although the CMC Yongtai No. 1 Trust Plan was established before the issuance of the New Asset Management Regulations, the trust contract between Minsheng Trust Company and Dai Weiqi was concluded in 2020, and Minsheng Trust Company, as a financial institution, should adjust its investment strategy in strict accordance with the above regulations. In addition, according to the 2014 Guiding Opinions of the General Office of the China Banking Regulatory Commission on the Risk Supervision of Trust Companies, "trust companies shall not carry out non-standardized wealth management capital pools and other businesses with shadow banking characteristics." "Minsheng Trust Company did not clean up the capital pool business in accordance with the above requirements, but instead expanded the scale of the capital pool business, which not only violated the above-mentioned rigid requirements of the regulatory authorities, but also increased the investment risk of the trust property, making the settlor subscribe for the trust unit based on the trust of the trustee, and the purpose of using the trust funds could not be realized, which violated the principle of effective management of the trustee.

Second, with regard to information disclosure, the insufficient information disclosed by Minsheng Trust Company infringed on investors' right to know.

First, the trust contract clearly stipulates the matters and time of information disclosure, and although the "Management Report of the First Quarter of 2021 of China Minsheng Trust and China Minsheng Yongtai No. 1 Collective Capital Trust Plan" issued by Minsheng Trust Company is dated March 31, 2021, Minsheng Trust Company clearly recognized in the written opinion of the separate case that the time of issuance of the above-mentioned quarterly management report was May 2021, and the disclosure time of the quarterly management report was significantly later than the date of payment.

Second, the management report only stated the overall use of funds of the entire trust plan, and could not fully disclose the use of funds of each trust unit; The investment of the fund company and the fund from the asset management plan of the subsidiary, etc., and whether the investment scope meets the investment restrictions required by the contract and the regulatory authorities.

Third, the disclosed information shows that "the underlying financier of the China Minsheng Trust-Zhixin No. 270 Equity Income Right Investment Collective Fund Trust Plan held by Zhongyuan Securities-Desheng No. 1 Collective Asset Management Plan did not pay the repurchase premium in the fourth quarter of 2020 and the first quarter of 2021." "Combined with the flow of the trust account involved in the case identified by this court, on December 23, 2020, Zhongyuan Securities Desheng No. 1 collective asset management account transferred 30,266,617.37 yuan to the trust account, with the remark that ZZZZZ Zhongyuan Securities Desheng No. 1_ dividends, and on the same day, Minsheng Trust Company transferred ******** to its own fund account. 04 yuan, Minsheng Trust Company did not truthfully disclose the return of the investment in the trust plan to the investors, which damaged the right to know of the purchasers of each trust unit.

Finally, in view of the contract, Minsheng Trust Company has breached the contract and should bear the liability for breach of contract. After the expiration of the closure period, Minsheng Trust Company shall, in accordance with the contract, provide the settlor with the net value of the trust unit to determine the profit or loss of the trust unit, or inform the settlor that the products currently invested meet the circumstances of refusal to redeem as agreed in the contract. In this case, Minsheng Trust Company asserted that in accordance with the trust contract, the trustee could suspend the acceptance of the settlor's redemption application, but due to the liquidity risk of the trust plan and the fact that a large number of investors demanded payment, Minsheng Trust Company was unable to meet all the investors' redemption applications, so it rejected the investors' redemption applications. Although the trust contract stipulates that the trustee may suspend the acceptance of redemption applications if it complies with the contract, Minsheng Trust Company has not submitted evidence to prove that the current trust plan is in line with the suspension of redemption, and it only does not specify the reasons, status quo and measures of the investment products for the existence of liquidity risks on the grounds that there is a liquidity risk, and cannot prove that its suspension of redemption is in accordance with the contract. Minsheng Trust Company's failure to submit evidence to prove that its refusal to redeem was in accordance with the contract constituted a breach of contract.

Source: Beijing Li'an Consulting. The content of this article is for general information purposes only and is not intended as formal auditor, accounting, tax or other advice, and we cannot guarantee that such information will remain accurate in the future. No person should act on the basis of the information contained herein without having due regard to the relevant circumstances and obtaining appropriate professional advice. The articles reproduced in this issue are for academic exchange purposes only. The original copyright of the article or material belongs to the original author or original copyright owner, and we respect copyright protection. If you have any questions, please contact us, thank you!