An investment made a decade ago in a private fund continues to bring regret to an investor, Mr. Zhu. He stated that, attracted by the reputable brand of the custodian China Merchants Securities Co., Ltd. (CMSC), they invested in the Changfu Kongfang Equity Investment Private Fund No. 1. However, after the fund's contracted seven-year term expired, its current status remains completely unclear.

Investigations reveal that the fund's manager, Changfu Huiyin Investment Fund Management (Beijing) Co., Ltd., had its private fund manager registration cancelled by the Asset Management Association of China in December 2023. Since the fund's inception, the manager and custodian China Merchants Securities have collectively charged over 30 million yuan in management and custody fees. Investors like Mr. Zhu express that while investment losses are understandable, the fundamental issue is the lack of information regarding the fund's current operational or liquidation status, leaving them in the dark about their capital.

Investor Plight: A Decade-Long Wait for Clarity

The Changfu No. 1 Fund was established in September 2016 with a paid-in capital of 205.9 million yuan from 125 qualified investors. Investors, including Mr. Zhu, signed the fund contract with the manager and custodian China Merchants Securities, which also served as the fund service provider for share registration and valuation. Mr. Zhu invested 1.01 million yuan, receiving only about 90,000 yuan in cash dividends in 2021. After the fund's term expired in 2023, the manager's website became inaccessible, and contact with the management team was lost.

Starting in December 2024, Mr. Zhu contacted custodian China Merchants Securities and filed complaints with regulators. He eventually obtained a semi-annual report for 2024 from the custodian but received no clear answers regarding the fund's operational status or liquidation plans from the contacts provided. The investors' core demand is not a guaranteed return but access to truthful, complete operational information and a clear plan for the fund's subsequent liquidation and exit.

According to the semi-annual report, as of June 30, 2024, the fund's total assets were approximately 200.73 million yuan, with a net asset value of about 192.44 million yuan. The fund had accumulated over 30 million yuan in management, custody, and service fees. Its investments were directed into three projects, all of which remained unexited by the reporting period.

Custodian's Response: Limited Information Available

The core reason for the fund's impasse is the manager's incapacity. The former legal representative and actual controller of Changfu Huiyin, Zhang Baoguo, was sentenced to life imprisonment in November 2023 for fundraising fraud related to another company. Shortly after, the manager's registration was cancelled.

The fund contract stipulates the custodian's core duties, including safeguarding fund assets and overseeing the manager's operations. Whether China Merchants Securities fulfilled its custodial obligations has become a central point of contention.

In response to inquiries, China Merchants Securities stated that, as the custodian and not a party to the manager's case, it has no channel to obtain more information about the manager's latest status. It noted that the fund's underlying assets are products managed and custodied by other institutions, and as the upper-layer custodian, it cannot access more detailed information. The company added that due to confidentiality requirements for private funds, such information cannot be publicly disclosed.

China Merchants Securities stated it has fulfilled its review duties and, to protect investor interests following the manager's controller being under judicial investigation, has engaged a professional legal team to assist with the fund's subsequent liquidation process. It acknowledged that exiting the fund depends on the disposal of underlying assets by the lower-layer managers and custodians, and it will continue to follow up on this progress.

The company also addressed broader industry challenges, noting that rapid past growth led to issues like manager "disconnection" or incapacity. It emphasized the need for all parties to work together through legal procedures, such as changing the manager or convening investor meetings, to resolve governance deadlocks. It mentioned that new regulations aim to address these issues and stated the company will strictly implement them and cooperate with investor demands.

However, investors claim that China Merchants Securities never proactively informed them of major risks like the manager's registration cancellation or the controller's criminal conviction. They only received the semi-annual report after initiating complaints. Investors question the value of custody if basic rights to information cannot be guaranteed after a manager fails, highlighting a perceived industry issue of "custody without proper oversight."

Industry Experts Call for Systemic Reforms

Industry professionals indicate that the Changfu No. 1 Fund case is not isolated. As many "incapacitated" private fund managers have had their registrations cancelled, numerous funds have been left without management, disclosure, or liquidation, leaving investors struggling to protect their rights.

Experts point out that the private fund industry, with assets exceeding 20 trillion yuan, is a crucial part of China's capital market. Investor trust is vital for its healthy development. This incident exposes deep-seated institutional and practical challenges in protecting investor rights after a manager becomes uncontactable or is deregistered, necessitating precise policy measures.

First, there is a need to clarify custodians' "active duty" responsibilities. Regulatory rules should be revised to explicitly define custodians' obligations to act proactively when a manager is uncontactable or violates regulations, including convening investor meetings and supervising fund operations. Custodians should bear supplementary disclosure responsibilities when managers cannot function, with strengthened regulatory accountability and penalties for inadequate performance.

Second, establishing a temporary manager system could help break liquidation deadlocks. If a new manager cannot be appointed within a certain period after a manager's disconnection or deregistration, relevant associations could appoint qualified law firms, accounting firms, or other professional institutions as temporary managers to handle asset cleanup, custody, liquidation, and disposal, with remuneration prioritized from the fund assets.

Third, strengthening pre-event and ongoing supervision is crucial to prevent risks at the source. Standards for private fund manager registration should be raised, with enhanced scrutiny of actual controllers and senior management. Regular on-site inspections and off-site monitoring mechanisms should be established, along with improved risk warning systems to take timely regulatory action against institutions showing abnormal operational signs.

Regarding these industry challenges and investor protection post-manager incapacity, inquiries sent to the relevant association's public email had not received a reply at the time of reporting. Notably, recent guidelines on strengthening supervision and preventing risks in the private fund industry emphasize comprehensive oversight, aiming to build a regulatory system primarily based on administrative supervision supplemented by self-regulation. They also call for promoting judicial documents on handling crimes related to private funds and establishing rules for manager supervision, information disclosure, fundraising, and mandatory custody.