SEC Division of Investment Management staff letter: Custody of B Shares Trading on the Shenzhen and Shanghai Securities Exchanges

APR 2 ò 1993
Our Ref. No. 92-S11-CC

custody of B Shares

Trading on the
Shenzhen and Shanghai

RESPONSE OF THE OFFICE OF CHIEF COUNSEL Securi ties Exchanges

DIVISION OF INVESTMENT MAAGEMENT File No. 132-3

Your letters of August 31, 1992 and March 10, 1993, request

our assurance that we would not recommend enforcement action to

the Commiss ion under section 17 (f) of the Investment Company Act

of 1940 ("1940 Act") and Rule 17f-S thereunder if registered

investment companies maintain custody of "B" shares listed on the

Shenzhen Stock Exchange ("Shenzhen Exchange") and the Shanghai

Securities Exchange ("Shanghai Exchange") through the facilities

of one or more of ten financial institutions 1/ that act as

custodians or subcustodians for the assets of registered

investment companies. ~I

In Jardine Fleming China Region Fund, Inc. ("Fund") (pub.

avail. Apr. 26, 1993), the staff assured the Fund that it would

II Bankers Trust Company, The Bank of New York, Boston Safe

Deposit and Trust Company, Chase Manhattan Bank NA, Chemical

Bank, citibank NA, Hongkong and Shanghai Banking Corporation

Limi ted, Morgan Guaranty Trust Company of New York, Standard

Chartered Bank, and State Street Bank and Trust Company.

~I Section 17(f) of the 1940 Act provides that every registered

management investment company shall maintain its securities

and similar investments in the custody of (1) a bank meeting

certain requirements, (2) a member of a national securities

exchange, (3) the company itself, in accordance with

Commission rules, or (4) a system for the central handling

of securities pursuant to which all securities of any

particular class or series of any issuer deposited wi thin

the system are treated as fungible and may be transferred or

pledged by bookkeeping entry without physical delivery of

such securities, in accordance with Commission rules. Rule

17f-S provides an exemption from Section 17(f) to allow a

registered management investment company to deposit foreign

securities in the custody of an "eligible foreign custodian." Rule 17f-S(c) (2) (i) defines the term "eligible foreign custodian" to include "a banking institution or

trust company, incorporated or organized under the laws of a

country other than the United States, that is regulated as

such by that country's government or an agency thereof and

that has shareholders' equity in excess of $2 00, 000, 000. "

Rule 17f-5(c)
(2)(iii) defines the term "eligible foreign

custodian" to include "a securities depository or clearing

agency, incorporated or organized under the laws of a

country other than the United States, which operates the

central system for handling of securities or equivalent

book-entries in that country."

not recommend enforcement action to the Commission under Section

17(f) or Rule 17f-S(c) (2) (i) if the Fund, through its global

custodian, held "B" shares listed on the Shenzhen Exchange on the

books of a Shenzhen branch of aU. S. bank and on the books of

Shenzhen branches of foreign banks (together, "Agent Banks").

Our position was based, in part, on the Fund's representations

that 1) each of the Agent Banks is either a foreign branch of a

U. S. bank that has shareholders' equity in excess of

$100,000,000, or a branch of a foreign bank that has

shareholders' equity in excess of $200 million; and 2) each of

the Agent 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 in

connection with each trade.
The staff also assured the Fund that it would not recommend enforcement action to the Commission under Rule 17f-5(c) (2) (iii) if the Fund, through its global custodian, held liB" shares listed

on the Shanghai Exchange in an account in the book-entry system

of the Shanghai Exchange. Our position was based, in part, on

the Fund's 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. 1.1
Accordingly, on the basis of our response to the Fund and on

the facts and representations in your letters, but without

necessarily agreeing with your legal argumentsL we would not

recommend enforcement action to the Commission if registered

investment companies maintain custody of "B" shares listed on the

Shenzhen Exchange and the Shangha i Exchange through the

facil i ties of one or more of the ten financial institutions named

in your letter that act as custodians or subcustodians for the

assets of registered investment companies, in the manner

described in the staff's letter to the Fund.

This enforcement position is further based on your

representation that each of the ten financial institutions agrees

that if it is the custodian for a registered investment company,

it will forward a "B" shares confirmation request received from

that company to the appropriate subcustodian, and if it is a

subcustodian for a registered investment company, it will forward

such a request received from the primary custodian (or from a

higher-tier subcustodian) to either the appropriate next-tier

1./ In Hong Kong Securities Clearing Co. Ltd. (pub. avail. Sept.

8, 1992), the staff granted no-action relief under Rule 17f 5(c) (2) (iii) to an entity that operated the only central system for the handling of book-entry securities traded on

the Hong Kong Stock Exchange.

• 2

subcustodian or to the appropriate "B" shares book-entry system.

This position is based on the facts and representations in

your letter; any different facts or representations may require a

different conclusion. This letter expresses the Division's

position on enforcement action only and does not purport to

express any legal conclusions on the issues presented.

p Senior Counsel

• 3

BAKER & MÇKE~zlE

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ArJ (LA G- I CJ L/ (:
SECTON
RULE i'(-Ç - s:
PUBLIC L-( l' I 0, ~ VIA MESSENGER A VAILABIl _ LG. (. :-_ Gene r.. Goh lke

Associate Direct:)~
Division of Investrrent !'~è. ~ a 9 e:7.e:-:.
Secur i ties anè Exchange CC:7..-:,issic:-.
450 Fifth Street, N. K.

Kashington, D.C. 205";9

Robert B. Carrell
Senior Special Counsel

Di vision of Investment ~anage~e~t

Securities and Exchange CC7.~lss:e~

450 Fifth Street, N.w.

Kashington, D.C. 20549

Re: Custody Pursuant to Investment Company Act

Rule 17f-S of B Shares Trading on the Shenzhen

and Shanghai stock Exchanges/Supplement to

No-Action Request dated Auqust 31, 1992

Dear Messrs. Gohlke and Carroll:
This is in response to our recent telephone conversations

concerning Baker & McKenz ie's pending no-action letter request

regarding the application of Investment Company Act Rule 17f-S te

custody of B shares trading on the Shenzhen and Shanghai stock

exchanges in the People's Republic of China. In those

conversations, you have indicated that, in the context of a

Commission inspection of a registered fund which held B shares, the

staff might wish to review documents conf irming the fund's B shares

posi tion. Accordingly, you asked that I supplement the no-action

request with information concerning this issue.

BAKER &. ~lÇKE~ZlE
Gene A. Gohlke
Robert B. Carroll
Division of Investment

Management

As you are aware, Rule 17f-S provides that investment company

assets may be held in custody pursuant to the rule only if a

majority of the investment company's directors have approved a

wri tten contract which requires, among other things, that - "(D) Adequate records will be maintained identifying the assets as belonging to the company;

II (E) The company's independent public accountants will be gi ven access to those records or coni irmation of the contents of those records ¡and i' (F) The company ~ill receive periodic reports ~ith respect

to the safekeeping of the company's assets, including, but not 1 ir.,i ted to, not i fica t i on of any transfer to or fro;: the cor.ipany's account." Rule 17f-5(a) (1) (iii) (D)-(F). Our no-action reques~ does not seek rel ief from, or modif ication of, these requirements. Accordingly, if our request is granteà,

these requirements will remain fully applicable to any custoày

agreement under which our clients hold B shares for the account of

a reg istered investment company.

We believe that these provisions should largely satisfy the

staff's concerns regaràing its ability to obtain confirmation, in

the context of an inspection, of a fund's B shares position. The

staff would routinely have access to the periodic reports which

such a fund had received from its custodian regarding the fund's B

shares. Moreover, if the staff wished to obtain and revie~ a

specific confirmation of a fund's B shares position as of a given

date, it could request that the fund instruct its accountants to

obtain such a confirmation, as contemplated by Rule 17f 5(a) (1) (iii) (E). B shares custodians and subcustodians will necessarily base their records, confirmations, and periodic reports

on the data supplied to them by the B shares clearing banks which,

as set forth in our no-action request, reconcile their records to

those of the Registrars Co. (in Shenzhen) or of the exchange itself

(in Shangha i) .

B.-lR &. ~j:çKE~ZIE

Gene A. Gohlke

Robert B. Carroll

Division of Investment

Management

You have, however, also asked that, as an element of their no-

action request, our clients represent to the staff that, if so

instructed by aU. S. -registered investment company for which they

act as custodian or subcustodian, they would apply to the relevant

B shares book entry system for confirmation of that fund's B shares

position. As explained in our August 31 letter, in Shenzhen this

system consists of the three registration banks and the Registrars

Company ¡ in Shanghai, the exchange itself maintains the book entry system. Our clients have each individually authorized us to respond to the staff's concern by representing that, where one of

them is the U. S. custodian for a fund , it will forward a B shares

conf irmation request recei ved fr~m that fund to the appropriate sUbcustodian¡ ~here one of them is a subcustodian, it will for~ard

such a request received from the primary custodian (or from a

higher-t ier subcustodia:-) to either the appropriate next-tier subcustodian or to the õppropriate B shares book entry syste~.:
Please contact Daniel L. Goelzer or Simon Zornoza of Baker &

McKenzie (Washington) at 202/452-7013 if you have further questio~s

concerning this matter. As I know you are aware, there is great

interest in B shares investment among registered funds, and ~e look for~ard to final actic~ on our no-action request as soor. as possible. Sincerely i ~~~~'o~z~)) 5\ Our August 3 i, 1992 no-action request was submi tted o~ behalf of the ten financial institutions listed therein. In a given case, one or more of these institutions may act as custodia~

or subcustodian for a particular registered investment company.

Our clients make no representation concerning the procedures and

practices of the Shenzhen or Shanghai book entry systems for

responding to conf irmation requests.
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BAKER & l\IÇKE~ZIE

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Z _0= : August 31, 1992
ICA section 17 (f)
ICA Rule 17f-5
DELIVERED BY HAND

Division of Investment Management

Secur i ties and Exchange Commi ss ion

450 Fifth street, N.W.

Washington, D.C. 20549

Re: Custody of B Shares Trading on the

Shenzhen and Shangha i Securities Exchanqes

Ladies and Gentlemen:

We are counsel to the following ten financial institutions

that act as custodians or subcustodians for the assets of

registered investment companies:

Bankers Trust Company

The Bank of New York

Boston Safe Deposit and Trust Company

Chase Manhattan Bank NA

Chemical Bank

ci tibank NA

Hongkong and Shanghai Banking Corporation Limited

Morgan Guaranty Trust Company of New York

Standard Chartered Bank

State Street Bank and Trust Company

On behalf of these institutions, we request the assurance of the

Staff of the Division of Investment Management that it will not

recommend enforcement action under section 17 (f) of the Investment

Company Act Df 1940 against any registered investment company that

maintains cùstody of B shares traded on the Shenzhen or Shanghai

securi ties exchanges through the facilities of one or more of our

clients. As set forth belm.,', we believe that the book-entry

systems establ ished for each of these exchanges as the excl usi ve

B.-\KER o. ~ll\E::ZIE

Off ice of the Chief Counsel

Di vision of Investment Management

Securities and Exchange Commission

method of share ownership are consistent with the requirements of

Rule 1 7f-S. We ask that the Staff concur in this conclusion.

As you are aware, trading commenced earlier this year in so-

called liB shares" on the Shenzhen Securities Exchange and the

Shanghai Securities Exchange in the People's Republic of China

("PRC") . B shares are avai lable for purchase by non-Chinese

investors, and there is considerable interest on the part of

certain u.S. investment companies in acquiring these securities.

Currently, however, most registered funds have refrained from

making such purchases because of uncertainty concerning the custody

requirements appl icable to B shares. We do not believe that the

Commission's custody rules were intended to operate as a prohibi tion against investment company purchases of particular secur i ties, much less to prohibit the purchase of all securities publ icly traded in a particular country. Yet, in the case of the

PRC, there is a risk that U. S. custody requirements could be

interpreted to have this effect. Unlike the situation in which an

investment company has the theoretical ability to opt out of a

depos i tory or book -entry system and cause its custodian to take possession of the fund's securities, participation in the Shenzhen

and Shanghai book-entry systems is the only means of ownership

available to foreign investors acquiring B shares.

We believe that U. S. investment companies that purchase B

shares through the facilities of our clients will be fully

protected against the risks with which Section 17(f) and Rule 17f-5

are concerned, and that the custody requirements should not,

therefore, pose an obstacle to investment company B share

purchases. Our analysis is set out below.

I. operation of the PRe Securities Markets!

In December, 1991, companies in the PRC were authorized to

issue B shares, a special class of securities that can only be

purchased by and traded among foreign investors. The Shenzhen

Securities Exchange and the Shanghai Securities Exchange, which

The factual material set forth in this letter is based on

published information concerning the operations of the Shenzhen and

Shanghai markets, descriptions received from certain of our

cl ients, and the experience of knowledgeable persons in our Hong

Kong and Shanghai offices. However, practices in the Shenzhen and

the Shanghai markets are evolving. In the event that we learn

addi tional information during the pendency of this request, we will of course inform the Staff.

:B_-\KER 6. ~l'KE:\zi:E

Di vision of Investment Management

Securities and Exchange Commission

handle primarily non-B share transactions involving domestic

investors, also provide a trading market for B shares. Each

issuer's shares may trade on only one of these two exchanges. B

shares are denominated in Renminbi2 and are uncertificated¡ that

is, ownership of B shares is reflected by book-entry in a system

maintained, in Shenzhen, by three "registration banks" on behalf of

the Shenzhen Securities Registrars Co., Ltd. (the "Registrars Co.") and, in Shanghai, by the exchange itself. 3 A. Legal Framework4

The People's Bank of China (the "PBOC"), the central bank of

the PRC, is the government agency charged with overall regulation

of the securities markets. The PBOC has delegated day-to-day

supervision and management of share issuance and trading to its

local branches. In addition to national supervision, the Shenzhen

and Shanghai markets operate under an array of measures promulgated

by the municipal authorities in their respective cities. These

measures were adopted either jointly with, or with the approval of,

the PBOC. The PBOC branches have, in turn, issued rules to

implement the municipal measures, and the securities exchanges have

adopted corresponding operating rules. In Shenzhen, the Registrars

Co. also has adopted rules of operation (with the approval of the

PBOC-Shenzhen) .
The municipal ordinances in question provide, among other

things, for the establishment of an exchange in each of the two

cities for the trading of B shares, subject to the approval of the

Al though shares are pr iced in Renminbi on both exchanges, B share settlement occurs in Hong Kong dollars in Shenzhen and in

U.S. dollars in Shanghai. The Securities Trading Automated

Quotation system (STAQ), operated by Reuters, displays B shares quotations. STAQ converts Renminbi prices to Hong Kong dollars before disseminating quotations. 3 The Registrars Co. (in Shenzhen) and the exchange (in Shangha i) perform functions comparable to those of a transfer agent. 4 English versions of the key measures and rules applicable

to the Shenzhen and Shanghai markets have been published by Baker

& McKenzie in a booklet entitled Selected Securities Requlations of

the People's Republic of China (hereinafter "SSR"). A copy of this

booklet is attached. Relevant provisions of these measures and

rules are cited herein.

l:L\J:EH &: ~1"KE::ZIE
Office of the Chipf Counsel

Di vision of Investment Management

Securi ties and Exchange Commission

PBOC. The measures designate the PBOC branches as being the "Authority in Charge" and regulate:

organization of the exchanges, including their

management and membership;

types of entities that may issue B shares and the

approval process for such issuances;

condi tions required for listing B shares on the

exchanges and the approval process for listing;

qualifications of local brokers eligible to execute

transactions in B shares;

qualifications of foreign brokers to place trades

with local brokers; clearing and settlement procedures and the appointment of clearing banks; share transfer and registration procedures. The local resolution, violations. measures foreign also dea 1 with such matters as dispute exchange, tax liability, and penalties for Of signif icance to this request, the legal framework established jointly by the PBOC and municipal authorities requires that B share custody strictly conform to the rules of each exchange. In particular, there is no opportunity to take physical custody of shares or to otherwise opt out of the mandatory book entry system.5 B shares listed on a given exchange must trade solely on that exchange. 6 The application of these laws to B share ownership and trading is discussed in detai 1 below. 5 See Articles 3 and 7, Provisional Rules of Shenzhen

Municipali ty for Registration of Special Renminbi-Denominated

Shares (SSR at 55). Article 30, Detailed Implementing Rules for

the Measure of Shanghai Municipality for Administration of Special

Renminbi-Denominated Shares (SSR at 22).

6 Article 16, Provisional Measures of Shenzhen Municipali ty

for Administration of Special Renminbi-Denominated Shares (SSR at 47). Article 18, Measures of Shanghai Municipality for Administration of Special Renminbi-Denominated Shares (SSR at i 7) .

B.,\l~ER &. ~l'-i~E::ZIE

Division of Investment Management

Secur i ties and Exchange Commission

B. The Shenzhen Securities Exchange

In order to execute B share transactions on the Shenzhen Secur i ties Exchange, investors must route their orders through one of a limited number of international brokers approved by the PBOC Shenzhen.7 These international brokers, which are primarily located in Hong Kong, are not members of the Exchange and must, in

turn, place client orders through local brokers. Each foreign

broker must have executed detailed agency agreements with the

var ious loca 1 brokers, and these agreements must be approved by the PBOC-Shenzhen.8 Clear ing, settlement, and share ownership registration are

accomplished through one of three banks (referred to herein as the

"reg istrat ion banks"). The registration banks, which were selected by the Exchange subj ect to the approval of the PBOC-Shenzhen, 9 are:

(i) standard Chartered Bank (Shenzhen Branch); (ii) Hongkong and

Shanghai Banking Corporation Ltd. (Shenzhen Branch); and (iii)

Ci tibank NA (Shenzhen Branch). All trades for a given issuer are cleared through one, and only one, of the three registration banks.10 The relevant bank opens a share registration account in

the name of each investor, and this account is assigned a unique

., See Article 15, Provisional Measures of Shenzhen Municipali ty for Administration of Special Renminbi-Denominated Shares (SSR at 47); Articles 4 and 13, Detailed Implementing Rules for the Provisional Measures of Shenzhen Municipality for Administration of Specia 1 Renminbi -Denominated Shares (SSR at 50, 52). There are currently 13 approved foreign brokers. See Article 47, Provisional Measures of Shenzhen

Municipality for Administration of the Issue and Trading of Shares

(SSR at 37); Article 9, Provisional Measures of Shenzhen

Municipality for Administration of Special Renminbi-Denominated

Shares (SSR at 47); Articles 2 and 14, Detai led Implementing Rules

for the Provisional Measures of Shenzhen Municipality for

Administration of Special Renminbi-Denominated Shares (SSR at 50,

52); and Article 11, Operating Rules of the Shenzhen Securities

Exchange for Trading and Clearing of B Shares (SSR at 60).

9 See Article 20, Detailed Implementing Rules for the

Provisional Measures of Shenzhen Municipality for Administration of

Special Renminbi-Denominated Shares (SSR at 53).

10 Article 5(5), Operating Rules of the Shenzhen Securities

Exchange for Trading and Clearing of B Shares (SSR at 59).

:SAnER &. ~1' l:E::ZIE
Off ice of the Chief Counsel

Division of Investment Management

Securities and Exchange Commission

number. Where the investor acts through an intermediary, such as

its custodian or subcustodian, the account will include the name of

the intermediary. ii
The registration banks maintain the computerized book-entry

system reflecting the ownership of B shares. 12 The registration

banks process securities transactions by effecting debit and credit

entr ies to participants' stock accounts held at the banks, and by

corresponding entries in the share registration account. The

registration bank responsible for a given transaction also issues

a share registration receipt in connection with the trade.13 This

document is a statement of account which evidences the fact that

specific B shares have been registered in the name of the investor,

but is not itself negotiable and does not confer rights in the

underlying security. 1~

All trades are reported da i ly by the registration banks to the Registrars Co., the official share registrar for B shares traded on

the Shenzhen Securities Exchange. 15 However, the Registrars Co.,

a state-owned corporation, has largely delegated its registry

functions to the registration banks. 16 The Registrars Co., like

the registration banks, maintains its own computerized share

ownership records for B shares traded on the Exchange. The

ii See Articles 6 and 8, Provisional Rules of the Shenzhen

Municipali ty for Registration of Special Renminbi-Denominated

Shares (SSR at 55).
12 Id. at Article 3, (SSR at 55).
13 Id. at Articles 3 and 4 i (SSR at 55).
14 Id. at Article 5, (SSR at 55).
15 See Article 67, Provisional Measures of Shenzhen

Municipali ty for Administration of the Issue and Trading of Shares

(SSR at 39); Article 18, Provisional Measures of Shenzhen

Municipal i ty for Administration of Special Renminbi-Denominated

Shares (SSR at 47); and Article 2, Provisional Rules of the

Shenzhen Municipality for Registration of Special Renminbi-

Denominated Shares (SSR at 55).

16 The Registrars Co. 's authority to delegate its functions appears in Article 2 i, Detailed Implementing Rules for the

Provisional Measures of Shenzhen Municipality for Administration of

Specia 1 Renminbi-Denominated Shares (SSR at 53).

B_-:KER &: ~1"i:E::ZlI=

Division of Investment Management

Securities and Exchange Commission

function of the Registrars Co. is limited, however, to providing a

back-up for the records of the registration banks. After the

registration banks electronically report share transfers to the

Registrars Co. , it cross-checks the information against trade

reports received from the Exchange. 17 If discrepancies are

discovered, the Registrars Co. contacts the relevant registration bank to resolve the problem. Once the accounts tally, the Registrars Co. and the registration bank sign the cross-checked

accounts which then become the official record of ownership. The

Registrars Co., through the registration banks, also performs the

functions of a dividend paying agent for the issuer companies,

wi thholds the appropriate taxes, and forwards shareholder

communications. i'
C. The Shangha i Securities Exchange

Each investor in B shares on the Shanghai Securities Exchange

has an account with the Exchange. 19 An intermediary, such as an

investment company's custodian or subcustodian, may open such an

account in its own name for the account of its investor client,

e.g. XYZ Bank alc ABC Fund. The investor's (or its intermediary'S)

account with the Exchange must be opened through a PBOC-Shanghai

approved foreign broker. 20 Trades are initiated through one of the

foreign brokers, which in turn effects the trade through a PBOC " approved local broker.-I ( 1- Ar-ticle 17, Provisional Rules of Shenzhen Municipality

for Registration of Special Renminbi-Denominated Shares (SSR at

57) .
n Id. at Articles 19-21 (SSR at 57).

19 See Articles 25 and 26, Detailed Implementing Rules for

the Measures of Shanghai Municipality for Administration of Special

Renminbi -Denominated Shares (SSR at 22).

20 See id. Articles 12-15 (SSR at 21).

21 See Article 41, Measures of Shanghai Municipality for

Administration of the Trading of Securities (SSR at 9) ; Article 21, Measures of Shanghai Municipality for Administration of Special

Renminbi-Denominated Shares (SSR at 18); Article 8, Detailed

Implementing Rules for the Measures of Shanghai Municipality for

Administration of Special Renminbi-Denominated Shares (SSR at 20) ;

and Article 7, Supplementary Operating Rules for the Trading Market

(Specia 1 Renminbi -Denominated Shares) of the Shanghai Securities

B_-\EEH c: ~l"EE:'ziE

Di v ision of Investment Management Securities and Exchange Commission

Both the local and foreign brokers send clearing and

settlement instructions to an entity authorized to act as a

clearing bank.22 The only authorized clearing bank is Citibank

N.A. 's Shanghai Branch ("Citibank Shanghai"). citibank Shanghai

matches trades, and debits and credits the accounts which the local

and foreign brokers maintain with it. On the settlement date,

ci tibank Shangha i confirms the net settlement amount of each local

broker to the Bank of Communications of China ("BCC"), a state-

owned institution. Ci tibank Shanghai will then debit and credit

the account maintained by the BCC and the local brokers. BCC

reports to the Exchange the pr imary settlement between the local broker and the Exchange. Specif ical ly, settlement occurs in the fol low ing manner:
Cash. Cash clearing for B share transactions takes place at two levels -- (1) between the buying and selling local

brokers and (2) between these local brokers and the foreign brokers representing the buyer and the seller. 23 ci tibank Shanghai handles the clearance of cash accounts between the

foreign and local brokers. BCC handles clearance as between

the local brokers. The purchaser transfers funds to its

foreign broker's clear ing account at ci tibank Shanghai via ci tibank' s New York Branch. Both the foreign and local brokers send cash clearing and settlement instructions to Ci tibank Shanghai. ci tibank Shanghai matches the

instructions, debits and credits the cash accounts which the

foreign and local brokers maintain wi th it, and transfers the

sale proceeds to the local broker's account at the BCC. On

the settlement date, the BCC clears accounts between the

buying and selling local brokers and transfers payment to

Citibank Shanghai, for the account of the seller's foreign

broker.
Securi ties. BCC reports the settlement to the Exchange. The Exchange makes the appropriate securities account Exchange (SSR at 26).

22 Article 4 0, Detai led Implementing Rules for the Measures

of Shanghai Municipality for Administration of Special Renminbi-

Denominated Shares (SSR at 24).

23 The first-level and second-level clearance procedures are

set forth in Articles 34-39, Detailed Implementing Rules for the

Measures of Shanghai Municipality for Administration of Special

Renminbi -Denominated Shares (SSR at 23).

B_-\l~ER &. :\l'EE:\ZII:

Off ice of the Chief Counse 1

Di vision of Investment Management

Securi ties and Exchange Commission

transfers and credits the securities to the purchaser's

account. Shares are registered either in the name of the

investor or its intermediary, as described above, by the

Exchange's computer at the close of business on the settlement

date. The Exchange also generates a confirmation which is

sent to the foreign broker for delivery to the investor or its

intermediary.
As noted above, the Shan~hai Securities Exchange acts as its

own registrar for B shares. 4 The Exchange also handles all

di vidends and shareholder communications. 25 To assist investors' intermediar ies (i. e. custodians) in performing their tasks, the Shanghai Securities Exchange recently commenced issuing "B Share

Custodian Services Confirmation Letters" to banks acting in a

custodian capacity. 26 The letter entitles the custodian to receive

a copy of the Exchange's transaction report on the trade date and

the confirmation of registration following settlement. It also

permi ts the custodian to access the Exchange's computer (strictly

for informational purposes only) to monitor the flow of securities

in and out of the investor's account.

II. Custody Requirements Under the Investment Company Act

A. Section 17(f)
Section 17 (f) of the Investment Company Act of 1940 requires

that registered investment companies maintain their portfolio

securi ties in the custody of ei ther aU. S. bank (with aggregate

capital in excess of $500,000), a member of a national securities

exchange, or in self-custOdy. The Commission has, by rule,

24 The Exchange's registrar functions are referred to id. at Article 47, (SSR at 24) ¡ and Articles 16 and 17 of the Supplementary Operating Rules for the Trading Market (Special

Renminbi-Denominated Shares) of the Shanghai Securities Exchange

(SSR at 27).

25 Dividend payments are made by an issuing company to the

Exchange, which channels payment via the local and foreign brokers'

accounts to the investor or its intermediary. The Exchange

simi larly transmits corporate communications via the brokers.

26 See Article 47, Detailed Implementing Rules for the

Measures of Shanghai Municipality for Administration of Special

Renminbi -Denominated Shares (SSR at 24). Article 47 refers to

these documents as liB share deposit certificates."

BAKER &: ~rKE::ZIE
Off ice of the Chief Counsel

Di vision of Investment Management

Securi ties and Exchange Commission

Page 1 a
expanded the category of custodians in various respects. In

particular, Rule 17f-5 creates an exemption from Section 17 (f) to

permi t investment companies to maintain their foreign securities

and related cash and cash equivalents in the custody of an eligible

foreign custodian, as defined in the rule, subject to various conditions. As relevant here, Rule 17f-5 defines an eligible foreign custodian to include - (1) a foreign bank that is regulated as such in

the foreign country and which has in excess of

$200 million in shareholders' equity; or

(2) a foreign securities depository or clearing

agency which operates the central system for

handling of securities or equivalent book-

entries in that country.

B. Custodians in Certif icateless Environments

Section 17(f) and Rule 17f-5 generally contemplate that

investment company portfolio securities will exist in the form of

physical certificates, and that the holder of such a certificate is

a custodian. However, with the increasing use of pure book-entry

systems and the corresponding dematerialization of securities in

the United States and other parts of the world, the question arises

as to who must be viewed as the custodian of a certificateless

securi ty, and who must therefore comply with Section 17 (f) or one of the exemp~i ve rules thereunder. The Commission has not squarely

considered this question, and the Staff has touched upon it only in

the domestic context, through various no-action requests under Rule

1 7 f - 4 . 27

27 Investment Company Act Rule 17f-4 authorizes an

investment company or its custodian, in accordance with certain

procedures set forth therein, to deposit securities owned by the

fund in a clearing agency which is registered under Section 17A of

the Securities Exchange Act of 1934 and which acts as a securities depository. Rule 17f-4(a) defines a securities depository as a system for the central handling of securities where all deposited

securi ties of any particular class are treated as fungible and may

be transferred or pledged by bookkeeping entry. In proposing Rule

1 7f-4, the Commission distinguished investment company

participation in such a depository from investment company

ownership of securities issued only in book-entry form, and

indicated that such ownership was outside of the scope of proposed

Rule 1 7f-4. See Use of Depository Systems by Reqistered Management

HA.nER 6: ~lE:E="ZIE

Di v ision of Investment Management Securi ties and Exchange Commission

Thus, in Institutional Equity Fund (Feb. 27, 1984), an

investment company's bank custodian wished to maintain stock index

options owned by the fund at the Options Clearing Corporation

("OCC"). The stock index options were uncertif icated and ownership

was reflected in the records of the OCC, a registered clearing

agency. The fund argued that the OCC should be treated as a securi ties depository for the purposes of Rule 17f-4 to permit it to act as custodian. The Staff granted the no-action relief, wi thout expressing any views as to the fund's legal conclusions.

Similarly, in American Pension Investors Trust (Feb. 1, 1991) and

FundVest (Nov. 21, 1984), the Staff also granted no-action relief

in situations where the investment company's custodian maintained

shares in the bOOk-entry systems maintained by the issuer's

transfer agents. The appl icants argued that the transfer agents

were the functional equivalent of a depository under Rule 1 7f-4.

It might be concluded from these letters that book-entry

systems, whether maintained by a clearing agency or a transfer agent, are the "custodians" of the uncertificated securities reflected on their records for Section 17 (f) purposes. As far as

we are aware, however, the Staff has not considered this issue in

the context of any non-U. S., government-mandated, certi f icateless system, such as the one established in the PRC. Similarly, neither the Commission nor the Staff appear to have addressed the

application of Rule 17f-5 to such a system.2~ The issue is

Companies, Investment Company Act Release No. 10053 at note 2

(Dec. 8, 1977), 42 Fed. Reg. 63272, 63273 (1977).

Rule 17f-5 contains no definition of the phrase "secur i ties depository." Thus, it is unclear whether the reference in Rule 17f-5(c) (2) (iii) to a "securities depository" includes a

book-entry issuance system of the sort described in Release No.

10053.
28 In proposing Rule 1 7f-5, the Commission stated that the

type of securities depository intended to be covered by the rule

included the Canadian Depository for Securities, Ltd. , the

Frankfurter Kassenverein, and SICOVAM. See Exemption for Custody

of Securities by Foreign Banks and Foreign Securities Deoosi tories,

Investment Company Act Release No. 12354 at note 51 (Apr. 5, 1982), 47 Fed. Reg. 16341, 16346 (1982). Of these three depositories, only SICOVAM operates a fully scripless system. However, in 1984,

the reference to these depositories was omitted from the amended proposing release and from the adopting release. Al though it is therefore not clear whether the Commission regarded SICOVAM as a

B_-\KER & )'lE.E:\zii:

Off ice of the Chief Counsel

Di vision of Investment Management

Securities and Exchange Commission

particularly troublesome because, as the no-action letters

discussed above demonstrate, domestic book-entry systems can bring

themselves within the ambit of Rule 17f-4, as long as they

consti tute the central system for the particular security involved.

An identical book-entry system, when transplanted to a foreign

jurisdiction, however, would not qualify as an eligible foreign

custodian under Rule 17f-5 unless it satisfied the standards for

the central system for the country involved.

C. Foreign "Central Systems" as Custodians

As noted above, under Rule 17f-5, the term "eligible foreign

custodian" includes a depository or clearing agency which operates

"the central system for handling securities or equivalent book-

entries in that country." In order to qualify as the central

system, it is not necessary that the system handle all or even most

of the securities traded in the country in question, ~ nor is it

necessary that the system be the only depository in that country.

However, where more than one depository handles the same secur i ties, the Commission has required that the various deposi tories be sufficiently integrated so as to constitute a

single central system. In making this" integration" determination,

the staff has looked for common operating procedures, compatible

computer systems, the capacity of component entities to hold

secur i ties for each other, and even common ownership where

appropriate.30 custodian when it adopted Rule 1 7f-5, SICOVAM would in any event

presumably be an "eligible foreign custodian" under the rule

because it operates the central system in France. However, in

1985, one of the other two depositories named in Release No. 12354,

the Frankfurter Kassenverein, was the subject of an exemptive

application filed by State Street Bank and Trust Company. In

granting the exemptive order, the Commission made no reference to

its original characterization of the Kassenverein as an eligible foreign custodian. See infra note 3 o. 29 See,~, The Central Depositorv (PTE) Ltd. SEC No-

Action Letter (Mar. 27, 1990) (the central depository in Singapore

handled only securities traded on the Stock Exchange of Singapore

Dealing and Automated Quotations system).
30 In 1985, the Commission issued an order permitting the

Frankfurter Kassenverein, one of seven regional depositories in

Germany, to act as a securities depository under Rule 1 7f-5. State

Street Bank and Trust Company, Investment Company Act Release No.

BAKER 6. ~YKE::ZIE

Division of Investment Management

Securi ties and Exchange Commission

In contrast, where there is more than one facility in a

particular country, but the various facilities do not handle the

same securities, the Staff has not required integration as a

condition to qualification of the facility as "the central system." Thus, in S.D. IndevaL. S.A. de C.V. (Oct. 19, 1990), the Staff accepted that Indeval operates the central system for handling

securities traded on the Mexican Stock Exchange, while also

recognizing that the Mexican Central Bank handles certain Mexican

Government securities not cleared by Indeval. Obviously, where a

number of depositories exist in a country, each handling the same or partial ly the same secur i ties, 3J the integration requirement is an appropriate safeguard. However, where two facilities, handle whol ly different securities, integration in the sense employed in

Investment Company Insti tute'è would be meaningless.
III. Discussion

A. Overview of Issues

The application of Section 17(f) and Rule 17f-5 to the book-

entry systems operated in the Shenzhen and Shanghai markets raises

14698 (Aug. 28, 1985). Based on this order, the Staff subsequently

articulated standards by which to determine whether multiple

deposi tor ies in the same country are suff iciently integrated to be

considered as operating the central system in that country.

Investment Cómpany Institute, SEC No-Action Letter (Nov. 4, 1987).

In particulay, the Staff noted that the seven German depositories,

although independent, operated under the same procedural

guidelines, held securities for each other to reduce the need for

physical transfers, and were closely linked by computer. The

integration test was later also applied to the various Dutch

depositories, where the several entities comprising the central

system shared computer systems, operating procedures, and common

ownership. KAS-Associatie, N. V., SEC No-Action Letter (May 15,
1989) .
31 See,~, Reserve Bank of Australia, SEe No-Action

Letter (request denied) (May 8, 1991), in which the Staff appeared

to be concerned that the Reserve Bank might be independently

performing 9verlapping depository functions with Austraclear

without the requisite level of integration. Austraclear had

previously been the recipient of no-action relief (SEC No-Action

Letter (Jan. 17, 1990).

3è Supra note 3 o.

BAKEI~ &. \l'EE:"ZIL

Off iCQ of the Chief Counsel

Division of Investment Management

Securi ties and Exchange Commission

several issues. We believe, however, that an investment company

which holds B shares through the facilities of its u.s. custodian,

or through an institution which is an eligible foreign custodian as

defined in Rule 1 7f-5, satisfies the requirements of the Section and the Rule. In particular -

1. Gi ven that B shares have no physical existence

and that ownership is reflected solely through

book-entries, the book-entry system need not

itself be regarded as a custodian. Whi le we

recogni ze that, in the domestic context, the

Staff has impl ici tly treated book-entry systems for dematerialized securities as deposi tories and therefore custodians, the

Shenzhen and Shanghai systems can be

distinguished from those situations and need

not be viewed as custodians.

2. Al ternati vely, the Shenzhen and Shanghai book-

entry systems may act as investment company

custodians by virtue of the fact that both

systems are operated in fact by branches of

banks which each individually qualify either

as a u.S. bank under Section 17(f) or as an

eligible foreign custodian under Rule 17f 5(c) (2) (i). Since the book-entry function in Shenzhen is operated by banks which

individually are eligible to serve as

investment company custodians, we believe that

the shares handled through this system are, as

a practical matter, in the custody of an

enti ty which satisf ies the Commission's

custody requirements. Similarly, in Shanghai,

ci tibank is the sole nexus between foreign

investors and the share registrar.

3. If the book-entry system in each market must

be deemed a custodian and if it is not an

eligible foreign custodian notwithstanding the

eligibili ty of the banks which perform the

essential functions, the Shenzhen and Shanghai systems nonetheless qualify as el igible foreign custodians under the "central system"

element of Rule 1 7f-5. The key fact is that

each is the sole bOOk-entry system for the

securi ties it handles.

B_-\KER &. ~l-KE:\ZIE

Di vision of Investment Management

Secur i ties and Exchange Commission

Each of these al ternati ve approaches to no-action relief is

outlined in more detail below.

B. Analysis

1. The Nominal Owners as Custodians

In the type of book-entry system employed in the PRC, an

argument can be made that the first-tier custodian of the B shares

is the entity whose name appears as share owner in the book-entry

system, not the system itself. Provided this entity is the fund's

u. s. custodian or one of its foreign sUbcustodians, 33 and the

entity is a qualified u.s. bank or an eligible foreign custodian,

the requirements of Section 17 (f) or Rule 17f-5 would be met.

Thus, the book-entry systems in Shenzhen and Shanghai would not

need to be ana lyzed as custodians under Section 17 (f) and Rule 17f-5. First, the book-entry systems established in Shenzhen and

Shanghai are not "custodians" in the literal sense of the word. No

share certificates are physically deposited, since none exist. The

systems are therefore unlike depositories in which share

certificates are immobilized and subsequent share transactions are

ref lected only as book-entr ies on the depository's records. ~

While we recognize that the Staff has implicitly treated the

transfer agents of certain domestic uncertificated securities as

custodians for Rule 17f-4 purposes, 35 neither the Commission nor

the Staff has had occasion to consider whether the same

interpretation should apply to a government-mandated foreign book-

entry system for uncertif icated securities. Where the investment

33 Of course, a security held by a u.s. investment company

may have several custodians. For example, a depository's records

may reflect that the security is owned by a depository participant¡

the participant's records, in turn, may show that it is held for

the account of a local bank ¡ and the bank's records may indicate

that it is held for the customers of the mutual fund's prime u.s.

custodian. Each of these entities would be viewed as in custody of

the security in question and would be required to satisfy Section

17 (f) or one of the rules thereunder.

~ Such a depository is, of course, a custodian of the securities it holds.

35 See American Pension Investors Trust and FundVest, supra

page 11.

B_-\KER &: :\ll.E::ZIE

Di vision of Investment Management

Secur i ties and Exchange Commission

company enj oys the protection resulting from the fact that the

nominal owner of its securities is an eligible foreign custodian

acting in compliance with Rule 1 7f-5, we believe that no added

purpose is served by concluding that the foreign book-entry system

is also a custodian.

Second, the objectives of the custody requirements are satisfied by treating the nominal owner as the first-tier custodian. The purpose of Section 17 (f) is to protect investment

company assets from loss or defalcation. ~ In the case of physical

share certificates, these assets are at the risk of the entity

which holds or has access to the certificates. In a book-entry

system in which no such certificates exist, there is no risk of

physical loss. Rather, the primary risk is that the entity in

whose name the secur i ty is held may, by virtue of its nominal

ownership, expose the security to loss, such as by subjecting it to

the claims of the nominal owner's creditors. This suggests that

the nominal owner should be treated as the first-tier custodian

subject to the requirements of Section 17(f) or Rule 17f-5, and

that the entity which maintains the share ownership records need not be so treated. Finally, in determining what entity is a custodian of B

shares, we believe that it is significant that the nominal owner

will be issued an instrument which can be viewed as a partial

surrogate for a physical certificate. In Shenzhen, the "share

registration receipt" issued by the registration bank, while not

i tself negot~able, constitutes a statement of account and serves as

evidence of the fact that the holder has B shares registered in its

name.37 In the event that any dispute might arise between the

investment company's custodian and registration bank (or the

Reg istrars Co.) concerning whether the custodian owns shares on

36 It is relevant to note that the Commission historically

has viewed Section 17 (f) as designed to protect the assets of

investment companies against theft and misappropriation by the fund

or its affiliated persons, not by third parties appointed to handle

certain fund activities. 7 SEC Annual Report 15 (1940); 10 SEC

Annual Report 169 (1944). The legislative history of the Act is to

the same effect. See Hearings on S. 3580 before the Senate

Committee on, Banking and Currency, 76th Cong., 2d Sess., Part I at 57-70, 264 (1940); Senate Report on S. 4108 at 6. 37 See Articles 3-5, Provisional Rules of Shenzhen Municipality for Registration of Special Renminbi -Denominated Shares (SSR at 55).

BAEER i. ~l'KE::ZIE

Di vision of Investment Management

Securi ties and Exchange Commission

behalf of its client, the custodian's possession of the share receipt could be used to establish such ownership. Accordingly, it is the holder of that receipt, not the issuer thereof, that is most

logically viewed as a custodian. Similarly, in Shanghai, the

Confirmation Letter issued by the Exchange performs a comparable

function.38
2. The Registration Banks as Custodians

An al ternati ve approach to analyzing B share custody issues would be to focus on the role of the registration banks in Shenzhen

and the clearing bank -- ci tibank -- in Shanghai. Since the book-

entry system for each exchange is comprised of, or is dependent

upon, banks which are qualified to serve as investment company

custodians under either Section i 7 (f) or Rule 1 7f-5, the B shares maintained on the books of these facilities are necessarily in the

hands of a qualifying custodian. It would be anomalous to conclude

that the book-entry system is ineligible, even though its key

component banks are eligible; the whole cannot be less than the sum

of its parts. 34

~ Shenzhen

As explained in detail above, in Shenzhen, transactions in B

shares may only occur through a specif ied registration bank. That

3' See supra note 26 and accompanying text.
By way of comparison, the Canadian securities authorities

have determined that domestic, foreign, and transnational "book￾based" (or book-entry) systems are not "custodians" or "sub￾custodians" subject to the custody provisions of Canadian National

Policy No. 39 applicable to Canadian mutual funds. The Policy

expressly cites as examples of such systems the Canadian Depository

for Securities Ltd. and the Depository Trust Company. See Section

7.01 (9), Canadian National Policy No. 39, issued by the Canadian

Securi ties Administrators , effective Jan. 1, 1988.

39 We recognize, of course, that it is conceivable that, in the future , additional registration banks (in Shenzhen) or clearing

banks (in Shanghai) could be appointed which are not qualified to

act as custodians for u.S. mutual funds under Section 17(f) or Rule

17f-5. Given the stringent criteria for such banks, this is, as a

practical matter, unlikely. Should it occur, however, the

consequence would merely be that u. S. mutual funds could not

utilize the facilities of the ineligible banks.

B.-:EER & :\l-l.E:\ZIE
Off ice of the Chief Counsel

Di vision of Investment" Management

Securi ties and Exchange Commission

bank issues a statement or "receipt" with respect to the transaction, which evidences the share holding. The registration

bank also maintains share ownership records. The role of the

Registrars Co. is limited and primarily formal¡ as is authorized in

its governing ordinance, the Registrars Co. has largely delegated

its functions to the registration banks. Given that these banks

qualify as custodians, we believe that the Shenzhen book-entry

system which they operate likewise qualifies.

The Staff took an analogous approach in KAS40 and in Reserve

Bank of New Zea land. 41 In those letters, the Staff considered the

eligibility of depository facilities both under the foreign bank defini tion of eligible foreign custodian and under the central system def ini tion. In both cases, it was determined that the entities qualified as "central systems" even though they did not

have the requisite level of shareholders ' equity to qualify as

foreign banks. We believe that, in the reverse situation, where

the component banks of the book-entry system qualify as custodians

under either Section 17(f) or Rule 17f-5, the Staff's approach

should be identical. That is, each registration bank might be

viewed as a depository for the B shares it handles. Since these

banks are eligible to act as custodians, the Commission's custody

requirements are satisf ied.
~ Shanqhai

Similar reasoning also supports the conclusion that the

Shanghai book entry system constitutes an eligible custodian

because of Ci tibank Shanghai's role in the administration of that system. Admi ttedly, Ci tibank Shanghai does not play the predominant role in the Shanghai system that the registration banks

play in Shenzhen. In particular, unlike the situation in Shenzhen,

the share registrar -- the Shanghai Exchange itself -- has not

delegated its functions to Ci tibank Shanghai. Moreover, in

Shanghai, the Bank of Communications of China -- which does not

appear to be an eligible foreign custodian as defined in Rule 17f-5

is also a participant in the cash clearing system and in

communicating information concerning transactions to the Shanghai

Securi ties Exchange. We believe, however, that these distinctions

are not fatal to concluding that, as in Shenzhen, the essential

component of the book entry system is an eligible foreign

custodian.
40 Supra note 3 o.
41 SEC No-Action Letters (May 25 and Nov. 15, 1990).

BA,KER &: ~l-KE:\zir:
Off ice of the Chief Counsel

Di vision of Investment Management

Securi ties and Exchange Commission

As described above, the Shanghai B share registration records

are derived solely and automatically from the clearing information

furnished to the Exchange by BCC. BCC, in turn, derives its

information concerning B share transactions from ci tibank Shanghai.

As a practical matter, Citibank Shanghai controls the input to the

registration records; the share registrar merely records

information it receives from Ci tibank Shanghai through BCC. Since

there are no physical certificates in the custody of any of the

participants, the relevant issue from the stand-point of

safeguarding an investment company investor's shares is the

reliability of this information. Section 17 (f) reflects a

determination that investment companies may rely on U. S. banks,

such as Ci tibank Shanghai, to safe-guard their assets. ci tibank

Shanghai's el igibil i ty as a custodian should suffice to establish the el ig ibi 1 i ty of the Shangha i system.
3. The Share Registry Systems as Custodians

Third, we believe that each exchange and its bOOk-entry system

is "central" for the securities it handles wi thin the meaning of

Rule i 7f-5. The PRC securities markets are different from many

others in that a particular securities issue trades only on one

exchange.42 Accordingly, the book-entry systems for Shenzhen and

Shanghai operate independently of each other without the need for

any inter-system transfers of securities. Each bOOk-entry system

can, therefore, be characterized as operating the central

indeed, the sole -- system for its exchange; for all B shares

traded on trat exchange; and for all trading in those B shares throughout the PRC. Under these circumstances, we believe that each bOOk-entry system satisfies the central system definition in

Ru 1 e 17 f - 5 (c) (2) (i) .

As discussed above, this approach is consistent with the

Staff's position in S.D. Indeval, S.A. de C.V.43 Indeval did not

operate the only central system in Mexico, since the Mexican

central bank also operated a system for certain Mexican Government

securities. Nonetheless, the Staff agreed that Indeval satisfied

the Rule 17f-5 central system requirement because it was the

central system for the securities it handled, which were different

from the securities handled by the Mexican central bank.

Similarly, in the PRC, Shenzhen and Shanghai are each the sole and

exclusive share registry systems for their markets and the B shares

42 See supra note 6 and accompanying text.

43 Supra page 13.

BA.KER i: :\ll:E:'ziE

Di vision of Investment Management

Securi ties and Exchange Commission

Page 2 a
traded therein. Unlike the situation in Reserve Bank of

Australia, ~ there is no overlap in the securities handled between

Shenzhen and Shanghai. For these reasons, both Shenzhen and

Shanghai are the central system in the sense relevant to their

respecti ve markets, 45 since a book-entry system need not handle all securi ties traded in a particular country, but need only be the exclusive system that handles particular securities.

For these reasons, we believe it is unnecessary to establish

that Shenzhen and Shanghai constitute an integrated system. Since

there is no possibility of any transfer of funds or securities between the two systems, integration would serve no function. Indeed, we are hard-pressed to understand how two self-contained

systems of this nature could be integrated. Both systems are, as , descr ibed above, subj ect to the oversight and control of the PRC Government through the PBOC. The PBOC has already established

certain common policies and procedures for both systems, such as

T+3 settlement, 46 and continuously monitors their activities.

Under the circumstances, further "integration" is unnecessary.

iv. Conclusion

For the reasons stated above, we request that the Staff confirm that it will not recommend enforcement action under Section

i 7 (f) of the Investment Company Act of 1940 against any registered investment company that, in reliance upon Section 17 (f) and Rule i 7f-5 thereunder, maintains assets through the custody facilities 4- Supra note 32. 45 This approach is consistent with the analogous domestic

requirements under Rule 1 7f-4. We note that, prior to the adoption

of Rule 1 7f-5, Rule 17f-4 was used as a bench mark for determining the acceptability of a foreign depository and the proposed custody /

arrangements. See, ~, State Street Bank and Trust Company SEC

No-Action Letter (Jan. 12, 1984). We note that this is also the

test established in Section 17A of the Securities Exchange Act of

1934, which is incorporated by reference into Rule 1 7f-4, and the test established for qualifying pension plans which maintain assets

overseas under ERISA Regulation 4 04b-1.
46 See Article 24, Detailed Implementing Rules for the

Measures of Shanghai Municipality for Administration of Special

Renminbi-Denominated Shares (SSR at 23) ¡ . Article 60, Operating Rules of the Shenzhen Securities Exchange for Trading and Clearing

of B Shares (SSR at 66).

BAKER &. ~l-i~E:'ZIE
Off ice of the Chief Counsel

Di vision of Investment Management

Securities and Exchange Commission

of one or more of our clients in the book-entry systems of the

Shenzhen and Shanghai securities markets. In the event that the

Staff is not inclined to grant the relief requested herein, I would

respectfully request the opportunity to meet with you prior to any

final determination.

For the convenience of the Staff, seven copies of this letter

are enclosed. If you require further information, or wish to

discuss this request, please feel free to contact me, or Simon

Zornoza of this off ice, at (202) 452-7000.

Sincerely, ~'i ji,' ( G i
Daniel L. Goelzer ) ~ /Û!VJL L. ~ i¿ t') Enclosure:
Selected Securities Requlations of the Peoples Republic of

China
I: \DATA \DLO\PUBL \41576,1