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May 3, 1993
TO: INTERNATIONAL MEMBERS NO. 12-93
SEC RULES COMMITTEE NO. 42-93
RE: SEC STAFF NO-ACTION LETTERS REGARDING CUSTODY OF FUND
ASSETS IN CHINA
__________________________________________________________
The SEC's Division of Investment Management has issued two
no-action letters concerning the ability of a U.S. fund to
maintain custody of Chinese securities in compliance with Section
17(f) of the Investment Company Act of 1940 and rule 17f-5. In
Jardine Fleming China Region Fund, Inc. (pub. avail. Apr. 26,
1993) and Custody of B Shares Trading on the Shenzhen and
Shanghai Securities Exchanges (pub. avail. Apr. 26, 1993), the
staff stated that it would not recommend enforcement action to
the Commission if certain U.S. funds maintain custody of "B
shares" in the book-entry systems established by the Shenzhen and
Shanghai stock exchanges.
In December, 1991, companies in the Peoples' Republic of
China were authorized to issue B shares, a special class of
securities that can be purchased only by foreign investors. B
shares are traded on the Shenzhen and Shanghai stock exchanges.
B shares are uncertificated; ownership is reflected by book-
entry. In Shenzhen, the book-entry system is operated by three
Shenzhen banks on behalf of the Shenzhen Securities Registrars
Co., Ltd. In Shanghai, the system is operated by the exchange
itself.
In Jardine, the staff stated that a fund, through its
global custodian, could hold B shares listed on the Shenzhen
exchange on the books of the three Shenzhen banks that operate
the book-entry system in Shenzhen. The staff's position was
based in part on the fact that 1) each of the three banks was
either a foreign branch of a U.S. bank with shareholders' equity
in excess of $100 million or a branch of a foreign bank with
shareholders' equity in excess of $200 million, and 2) each of
the three banks acts as the sole registration institution for a
particular issue of B shares, maintains a computerized book-entry
system, and issues a share registration receipt with respect to
each trade.
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The staff also stated that the fund could, through its
global custodian, hold B shares listed on the Shanghai exchange
in an account in the book-entry system of the Shanghai exchange.
The staff's position was based in part on representations that
the Shanghai exchange is the central book-entry depository and
sole clearing agent, transfer agent and registrar of all B shares
traded on that exchange.
Custody of B Shares involved a no-action request from ten
financial institutions that act as custodians or subcustodians
for U.S.-registered funds. The staff stated that any U.S.-
registered fund could maintain custody of B shares in the manner
described in Jardine, through the facilities of one or more of
the ten named financial institutions.
Copies of the letters are attached.
Angela C. Goelzer
Associate Counsel - International
Attachment