Laws and Regulations
Circular of the Scheme of Comprehensive Governance of Securities Companies Issued by the CSRC and Forwarded by the State Council
(July 29, 2005 G.B.F. [2005] No.43)
To the people’s governments of all provinces, autonomous regions and municipalities under the Central Government, and all the ministries and commissions and their subordinate agencies of the State Council:
The “Scheme of Comprehensive Governance of Securities Companies” (the “Scheme”) drafted by the China Securities Regulatory Commission (CSRC) has been approved by the State Council. It is now forwarded to you and expected to be duly implemented.
The securities company is an important intermediary in the securities market and plays an important role in the cultivation and development of the securities market. However, due to the weaknesses as found in the relevant system and mechanism, securities companies have encountered more and more conflicts and problems in the course of their rapid development. In the recent years, along with the strengthening of the structural adjustment and reform enforcement over the securities market, the problems existing in the securities market have gradually become obvious and risks have burst out intensively, so that the operation and development of the securities market have met great difficulties, which need to be promptly addressed comprehensively through proper measures.
The work of comprehensive governance of securities companies is characterized by its high sensitivity and large coverage, and is vital to the healthy development of the securities market and the social stability. All the regions and departments should, according to the requirements of the “Scheme”, take the responsibilities to do the work with a uniform understanding, full confidence, high attention and close cooperation. We should undertake to implement the “Opinions of the State Council on Promoting the Reform, Opening and Stable Growth of Capital Market” (G.F. [2004] No.3), further strengthen the regulations on the securities companies, actively push the reform of various fundamental systems, address the risks of securities companies steadily and surely, promote the reorganization of securities companies, take effective measures to resolve the liquidity problems of securities companies, and support and lead securities companies to innovate, develop and improve themselves. We should stress the laws and disciplines and reinforce the strength to crack down the illegal activities and recover the assets involved in the criminal cases. We should enhance the media and publicity work, and explain to the public carefully to create a favorable environment for the comprehensive governance of securities companies.
The local people's governments at various levels should take the responsibilities to maintain the social stability, know well the risk situations of the securities companies in administrative regions, and formulate an emergency scheme; should do the work of discriminating the individual creditor’s rights and raising the purchase funds of the bankrupt and closed-down securities companies and properly solve the sensitive problems including the individual debts under the name of the institution in administrative regions in time; and should take measures in time to eliminate the unstable factors which may cause the group events or the malignant cases.
Work Scheme on Comprehensive Governance of Securities Companies
As an important intermediary in the securities market, the securities company has grown in exploration and reform and played an important role in the cultivation and development of the securities market for more than ten years. In the recent years, along with the strengthening of the structural adjustment and reform power of the market, problems related to the securities companies have become obvious and the corresponding risks have burst out intensively, so the operation and development of the securities market have encountered many difficulties. The causes for the problems in the securities market are very complicated. There are not only the environment factors of the market, but also the internal factors including the imperfect system and unsound mechanism. Along with the establishment and improvement of the fundamental systems, the further strengthening of various regulatory measures as well as the rational return of the stock market, the progressive differentiation of the securities companies has been growing and the industry risks released greatly, so that the time and condition for basically solving the problems of securities companies have been matured. In order to carry out the comprehensive governance of securities companies with a uniform understanding and clear objects and requirements, the work scheme is hereby formulated as follows:
I. Basic thoughts, principles and objectives:
1. Basic thoughts of the comprehensive governance are: seizing the great opportunity of the smooth operation of macro-economy, deepening the reform of the securities market, and carrying out the work of risk handling,, daily regulation and industry development reinforcement at the same time with the aim of strengthening prevention, improving the system, establishing the mechanism and cracking down illegal activities, and basically eliminating current risks in 2 years by way of combination of prevention and management, and mainly through prevention, to establish a new mechanism to prevent the new risks effectively and to lay a solid foundation for the standardized, sustainable and stable development of the securities market.
2. Basic principles of the comprehensive governance: first of all, to carry out the work in multi-aspects and handle the work by classification; to push the risk elimination and system establishment simultaneously, combine the reinforcement of industry regulation and the encouragement of innovative development together and connect the current work with the long-term objective closely; to deal promptly with the companies with high risks so as to eliminate the risks and hidden troubles thoroughly, to support the standardized development of the good companies and take measures to help the companies which are likely to carry out rectification; second, to take the once-for-all solutions with the emphasis on solving the problems from the very root; to speed up, in the course of risk disposal, the establishment and promotion of the third party depositing system for the clients’ transaction settlement funds, reform the system of transaction and settlement of the treasury bonds repurchase, self-operation of securities and assets management business, and establish and improve the system of the information disclosure of securities companies; to make the entry to the market strict, strengthen the continuous supervision over the securities companies, their shareholders and senior management and punish the people who break the relevant laws and regulations; to improve the risk-warning mechanism with the early discovery, disclosure and handling of various kinds of risks; third, to ensure the stability with an overall consideration; while establishing and implementing the measures of comprehensive governance of securities companies, we should not only make decisions cautiously and plan deployment carefully, but also pay attention to the timing and rhythm to ensure the stability of the industry, market and society; forth, to do the administrative work according to law and improve the mechanism; relevant laws and regulations should be formulated and amended to improve the basic system of operation and regulation of securities companies; reorganization mechanism of marketization of securities companies should be exploited to improve the ability of eliminating risks of the industry itself; the external restriction should be reinforced by taking measures including survival of the fittest and investigation of responsibilities, and the securities companies should be pushed to establish their internal restriction mechanism.
3. Short-term objectives of the comprehensive governance: by the end of 2005, the risk situations about the securities companies should be known well, the clearing work of the concealed accounts should have been generally completed and the financial information should be disclosed by the good-quality companies and standardized companies; the increase and appropriation of the clients’ transaction settlement funds should be eliminated, the independent depositing of the clients’ transaction settlement funds should be realized and all the qualified companies should implement the third party depositing; the systems for transaction settlement of treasury bonds repurchase, assets management and proprietary securities business management should be implemented; with the premise of maintaining the stability of the market and society, some high-risk-encountered companies which have exposed risks, are hopeless to save themselves or severely break the regulations should be closed in time and the diversified reorganization modes should be created; measures should be taken to solve the difficulties of and to help the companies which have the clear background known to the public, are likely to carry out the rectification to overcome the difficulties; the effective cooperation mechanism of securities supervision institutions and the police and judicial authority should be established to form a strict market discipline and to punish and restrain the actions breaking the laws and regulations.
4. Long-term objectives of the comprehensive governance: by the end of 2007, the public disclosure system should have been implemented completely by securities companies and the reported information should have been authentic, correct and complete; clients’ assets should be safe and complete, the companies’ operation risks should be isolated from social risks and the third party depositing system for the clients’ transaction settlement funds should be implemented; the thought of compliance operation according to laws should be built up to make the operation behaviors standardized; the abilities of internal control and risk management should be by and large enhanced, problems left over from history should be solved basically, the market innovation should be carried out in an orderly manner, the profit-making mode should be improved distinctly, the financial situation should be good on the whole, and the great risks and hidden troubles of industry should be eliminated; the number and structure of companies should be rational, the market position should be clear and definite, the mechanism of survival of the fittest should be in the main formed, the opening-up of the industry should be promoted stably and the situation of international competition should be set up primarily; the market innovation and the intermediary function of securities companies should be strengthened to give full play to the support and promotion of the securities market’s sustainable and healthy development; relevant laws and regulations should be made relatively more accomplished; the mechanism for cooperation between the securities regulatory institutions and the public security and judicial authorities should be improved further, the resources and measures of supervision should be sufficient and the level of regulation should be increased to find out and deal with the law-breaking activities in time; and the responsibilities in all parts of the operation and supervision system for securities companies should be clarified and the accountability system implemented effectively.
II. Arrangement of Main Work:
1. Striving to finish the work of knowing the real conditions of companies well, confirming the rectification measures and fulfilling the responsibilities.
(1) The policy of “true information and rectification with responsibilities clarified and time provided” should be made known to the securities companies, the operation and financial situations and risk situations of the securities companies should be investigated one by one before the end of October 2005 through various kinds of regulatory measures and on the basis of the self-examination of companies and the verification by the CSRC; the securities companies should formulate the rectification plans, bring forward the rectification measures, make sure of the term, schedule and responsible person, and solve the existing problems and risks. For the companies which tell the truth and have set up the feasible rectification plans, a period of half a year to one year should be given for rectification according to the specific circumstances and the relevant business can be carried out under proper restrictions; for the companies which have finished the rectification plans on schedule and have eliminated risks effectively, their standardized development should be supported; the companies and the relevant responsible persons practicing falsification, failing in the rectification or continuing to break regulations should be penalized in time.
(2) The market discipline should be stricter. For the companies which cannot meet the minimum regulatory requirements and carry out ineffective rectification, delisting should be carried out towards them according to the supervisory rules; for the companies which fail to or refuse to tell the truth in the rectification, carry out the rectification or meet new problems, penalties should be implemented as soon as any of such companies is spotted; behaviors that have impaired the interests of the country and the general public including falsification and risk transfer in the process of eliminating the left-over problems should be cracked down; as to the problems including fake shareholders, false contribution and illegal seizure of companies’ assets found out in the special rectification, if such law-breaking behaviors cannot be corrected within the specified term and the contributions cannot be compensated for, they shall be punished according to law; those suspected of criminal acts should be transferred to the police. In the process of the risk handling, the punishment of and the strike towards illegal activities should be strengthened to increase the deterrent power on the illegal activities. From now on, any of the rule-breaking behaviors should be punished and disclosed to the public as soon as they are found.
(3) The high-risk-encountered companies should be properly dealt with in time. The control and handling measures should be taken towards those companies which are troubled with grave risks and urgent issues. In the process, significant group events and malignant cases should be prevented with great efforts to maintain the stability; the principle of combining risk disposal, administrative inspection and criminal investigation and carrying out the business verification, assets settlement and responsibilities judgment simultaneously should be further adhered to so as to enhance the ability and level of punishing and cracking down the illegal activities and reduce the cost of risk disposal.
2. Strengthening the reform of fundamental systems.
(1) The third party depositing system for the clients’ transaction settlement funds should be improved and implemented in several steps. The third party depositing should be carried out toward the companies involved in the newly-increased appropriation or using public capital. Other companies should implement the independent depositing strictly according to the spirit of the “Notice of Further Strengthening Supervision on Clients’ Transaction Settlement Funds” of CSRC. Before the end of 2005, the independent depositing of the clients’ transaction settlement funds should be realized, and some of the companies should proceed to the third-party depositing and management.
(2) The systems for transaction settlement of treasury bonds repurchase should be reformed. The “Detailed Rules for Implementation of Registration and Custody of Bonds and Settlement Business” should be promulgated with proper opportunity to make clear of the relationship among the customers, securities companies and the depository and clearing corporation and the responsibilities of the aforesaid three parties in the process of bonds repurchase, clear regulations should be made for the procedures for the pledge of treasury bonds and the entrust contracts among the customers; the disposal regulations of the breach of contract of collateralized repurchase, delivery and collection; as to the company which has already had the liabilities of the treasury bonds, it is required to provide a guarantee or its proprietary securities should be transferred under force by the depository and clearing corporation. The detailed rules for implementation will be effective on the companies without holding the customers’ treasury bonds firstly and implemented in batches, and will be applicable for all the companies to the end of 2005.
(3) The management system for assets management business should be reformed. The customers’ assets should be handed over to the third party for preservation and management; the entrance level for the single entrust capital of the targeted assets management business should be raised; the securities companies are required to submit their securities accounts of assets management business to the Shanghai Stock Exchange, the Shenzhen Stock Exchange and the depository and clearing corporation for records; the securities companies are required to strengthen the examination and verification of account opening to ensure that the name of the client matches the truth; the securities companies are prohibited to accept the commissions made by individuals under the name of institutions and vice versa or do the targeted assets management business for the individuals which breaks the regulations.
(4) Strive hard to draft and amend the relevant laws and regulations. The “Rules on Supervision over Securities Companies” and the “Rules on Risk Disposal of Securities Companies” should be formulated to provide a regulation guarantee for the supervision and increase the initiative and effect of work; the “Rules on Supervision over Securities Companies” is expected to be published before the end of 2005 and implemented from May 2006 onwards; the “Rules on Risk Disposal of Securities Companies” will be promulgated and implemented in this year. The “Securities Law”, the “Company Law”, the “Bankruptcy Law” and the “Criminal Law” should be amended to improve the legal system for supervision over securities companies and realize the legalization and standardization of the operation and regulation of securities companies.
3. Strengthening further the force of the regulatory work.
(1) Implementing the classified regulation completely to form an effective day-to-day supervision mechanism. The index system for risk control which takes the net capital as the core and the classification standards should be improved quickly. The securities companies should be supervised according to the classification based on the index of risk degree, internal control level, financial strength, etc. License management and scale control should be implemented towards the businesses including broker, underwriting, self-operation, assets management and financial consultant. More attention should be paid to the appraisal and examination of companies in 2005 while the regulations of net capitals and system for risk control index of securities companies should be published before June 2006. The implementation of regulatory system should be pushed to reinforce the regulation on securities companies and maintain the normal order of the market so that the securities companies can develop in a standardized and healthy way.
(2) Improving the internal and external supervision and control mechanism for proprietary businesses. The system for special position of proprietary business and the requirement of account report should be implemented further to increase the ability of first-line real-time monitor of the stock exchange and to find out and halt the behavior of “controlling the market” of the securities companies. Relevant regulations on the management of proprietary business of securities companies should be promulgated before the end of August 2005 to perfect the system for internal control and external regulation of the proprietary business.
(3) Strengthening the regulation on the senior management and standardize the behaviors of senior management and shareholders. The “Measures on Governance of Senior of Securities Companies” should be implemented to carry out the system of beforehand verification, professional test, promise of position-taking, continuous record, penalties on law-breaking acts, annual examination and auditing over dismission, with the main principle of responsibility investigation. A compulsory training and professional test should be carried out towards all the present senior managerial staff and the would-be senior managerial staff, who are required to meet the standards within a given time, otherwise, will be dismissed. The behaviors of the shareholders should be regulated further according to the “Rules on Governance of Securities Companies (Trial Version)”; the measures of issuing special opinion letters by the intermediary, hearing by regulatory institutions, inquiring relevant credit system, etc. should be taken in the entry course for the process of quality verification and credit investigation.
(4) Pushing securities companies to actively establish a modern enterprise system. The measures of examination and verification and day-to-day regulation should be used comprehensively to urge securities companies to implement the laws and regulations including the “Company Law”, the “Rules on Governance of Securities Companies (Trial Version)” and the “Guidance of Internal Control of Securities Companies”, improve the management structure, strengthen the internal control, standardize the relationship between shareholders and companies and between companies and directors, supervisors and senior management, ensure that shareholders, directors and supervisors can exercise the rights to information, decision-making and supervision correctly and effectively, make clear the credit responsibilities of the shareholders, directors and supervisors towards the companies and customers, and establish and perfect the constrain mechanism for internal incentives in order to realize the sufficient capital, strict internal control, safe operation, quality service and good efficiency.
4. Promoting the integration of industry resources and supporting the standardized development of quality companies.
The securities companies which have good qualities and the ability of sustainable development should be encouraged and supported to proceed to standardized developments, acquisition and merger should be carried out in the industry and the demonstration function of the industry cadres should be to guide the mechanism for industry change and to improve the operation mode; the business, professional staff and customer recourses peeled off from the high-risk-encountered companies should be merged into quality companies by way of administrative guidance and marketization allocation, the companies which have bad risk-resisting capacities and futures of operation and development should be supported and guided to carry out the consolidation and reorganization. Before the end of 2006, the approval of establishing new securities company and operational institutions should be halted except for the case which is really helpful to eliminate risks and consolidate industry.
III. Supporting measures:
1. Establishing a special working group on the comprehensive governance of securities companies. The group is led by the CSRC and the People's Bank and composed by the Ministry of Public Security, the Ministry of Finance, the China Banking Regulatory Commission (CBRC), the High Court and the Legislative Affairs Office; other related departments may also take part in the problem-solving if necessary. The main responsibilities of the working group include: research on significant problems in the comprehensive governance of securities companies, solutions to important matters, and multi-department coordination. The office of the working group will be set in the CSRC.
2. Setting up the protection funds for securities investors. In order to protect the legal rights of the investors, the protection funds for securities investors should be set up according to the principle of gaining them from the market and then dedicating them to it. The solely state-owned securities investor protection fund company should be established for the raising, management and use of the funds. The CSRC should be responsible for regulating the operation of the fund company and supervising the raising, management and use of the funds; the Ministry of Finance should be responsible for the state-owned assets management and financial supervision; the People’s Bank should be responsible for confirming, supervising and examining the use of re-loans.
3. Encouraging the local government and the relevant departments to carry out the reorganization of the securities companies. The reorganization should be in conformity with the laws, regulations and other relevant regulatory rules. Applying methods include purchase of assets of securities companies and capital injects to securities companies by the reorganization party. The reorganized securities companies should meet the standard to keep a sustainable compliance operation. Supports should be provided to those whose reorganizations are led and whose capital resource are guaranteed by the local people’s governments and relevant departments, and specific measures should be put forward jointly by the People's Bank, Ministry of Finance and the CSRC.
4. Widening the financing channels for securities companies to solve the liquidity problems of securities companies and support innovative development of good securities companies. Good securities companies should be entitled as general borrowers, who are allowed to finance by compliance means. Securities companies are allowed to borrow loans from shareholders, or convert debts of institutions to subordinated debts after an agreement has been reached with the creditors of the institutions. The long-term subordinated debts which are able to solve the liquidity problems can be counted into the net capital of companies at a certain percentage upon verification and approval by the CSRC.
5. Maintaining the normal operation of securities companies and the stability of society with no effort spared. First, the local people’s governments should take effective measures to do the work including debts discrimination and fund-raising according to the state regulations, solve problems of individual debts under the name of the institution, and virtually keep the normal operation of securities companies and the stability of society. Second, the CSRC along with the People's Bank, Ministry of Finance, and the related local government departments, etc. should carry out in time the risk disposal funds in time and solve the specific problems in risk disposal to prevent any conflict aggravation caused by procrastination of decision, which will influence the social stability. Third, the CSRC, the CBRC and the People's Bank are in charge of urging the securities companies and commercial banks to strictly implement the relevant regulations on independent depositing of clients’ transaction settlement funds, and correcting any pledge against the rules or any activities of drawing the clients’ transaction settlement funds in order to prevent the solicitation of risks of securities companies’ transaction settlement and payment which will have an influence upon the stability of the society.
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