This month, we introduce a new regular newsletter feature: Mainland China briefing. The feature will highlight selected PRC legal and regulatory developments of interest to the investment management world.
This month’s briefing was written by Yang Shen. Yang is a registered foreign lawyer in our Hong Kong office and is a native Mandarin speaker. She re-joined Deacons in June 2016 after spending 1.5 years with one of Asia’s largest hedge funds as Legal Counsel and Chief Compliance Officer. Yang was with Deacons’ Financial Services Group from 2010 – 2015 and prior to that, she was an internal counsel in the Legal Department of the China Securities Regulatory Commission (CSRC) in Beijing.
The first Stock Connect market misconduct case
On 10 March 2017, the CSRC issued administrative penalties against a number of individuals for market manipulation. The CSRC found that these individuals manipulated the stock prices of a Shanghai-listed stock by a range of illegal techniques including manipulating opening and closing prices, self-trading, and withdrawing orders. In these two cases, the individuals involved made profits of approximately 250 million RMB, and the CSRC issued penalties totalling 1.2 billion RMB. The penalties issued appear to be a record for fines imposed by the CSRC on individuals. One of these cases was the first to involve trading through the China-Hong Kong Stock Connect scheme, and the offenders placed trades in both China and Hong Kong. The CSRC investigated the case, with evidence supplied by the SFC. The case demonstrates the regulators’ investigative cooperation on a cross-border basis.
CSRC enforcement trends
The CSRC has been taking an increasingly strict stance towards offenders that conducted egregious acts, as reflected in the high penalties in the latest cases. In February 2017, the CSRC announced that it intends to issue penalties totalling 3.48 billion RMB, against a couple of companies and individuals in a case it has been investigating, and intends to ban 11 individuals from re-entering into the industry for life. These penalties, once officially issued, will be the highest issued by the CSRC thus far.
In February 2017, the CSRC issued a newsletter on enforcement actions undertaken in 2016. Please refer to the chart below for categories of cases filed by the CSRC in 2016 in comparison to 2015. Amongst these cases, insider dealing, failing to comply with disclosure obligations and market manipulation have been the focused areas of regulatory actions. Foreign investors (although running operations outside of the PRC) that trade through QFII, RQFII, or Stock Connect should periodically review their compliance systems to test if they are sufficient for complying with PRC disclosure of interests rules, and familiarise themselves with the relevant securities laws and trading rules in the PRC.
CSRC suitability obligations
In December 2016, the CSRC issued Administrative Measures on Investor Suitability for Securities and Futures Products. The Measures impose a suitability obligation on the institutions selling financial products (either through public offering or private placement) or providing relevant services to investors. Financial products covered include securities, securities investment funds, private equity funds, venture capital funds, futures and other derivatives. The Measures do not apply to foreign securities or funds.