This means that investors could be compensated for their financial losses caused by mistakes or misconduct of fund managers or custodian banks, including false information disclosure, said Li Yining, head of the drafting panel of the fund law led by the Financial and Economic Committee of the National People's Congress (NPC), China's highest legislative body.

"Such terms would exert more pressure on fund managers to act more professionally and to follow standards,'' Li said yesterday at a seminar in Beijing.

Moreover, the money used for compensation should come from assets owned by the violators themselves instead of from the entrusted funds, said Li.

If the clauses are formally written into the law, it will plug the legal gap, ensuring civil compensation in case of irregularities in fund management and custody.

In the existing Securities Law, they face only administrative punishment, including fines that should be paid to the country, when irregular operations or the dissemination of fake information is discovered, said Li.

"But that is certainly not enough for investors, whose interests are dependent upon the upright behavior of the fund managers,'' said Li.

Irregular trading by domestic fund managers, such as the cases disclosed by the media and market regulators recently, is pushing law makers to add more clauses to protect investors' interests in the latest draft of the Investment Fund Law.

The draft stipulates that fund managers should organize general meetings of investors regularly to make important investment decisions, and senior executives of the fund managers, trustees or custodians should not take posts in different companies within the circle at the same time.

The draft, which has been revised for the fourth time, will be submitted to the Standing Committee of the NPC in June. The review will take months and the law could formally come out as early as next year, said Wang Lianzhou, also head of the drafting panel, who joined Li in the seminar.

The law will also be applicable to Sino-foreign joint venture fund management companies, which will be allowed into the Chinese market when China joins the World Trade Organization.

It will also cover privately-collected funds, which could boost the development of venture investment funds and set standards for the business, said Wang.

China's fund industry is facing more innovations. The first open-ended fund is expected to be launched by the Hua'an Fund Management Co soon.

(China Daily 04/04/2001)