Name: Regulations on the Supervision and Administration of Securities Companies (《证券公司监督管理条例》, the “Regulations”)
Issuing authority: The State Council of the PRC
Effective date: 01 June 2008
Subject: Securities companies
The State Council has issued the Regulations to implement the relevant provisions of the PRC Securities Law and to further strengthen the supervision and administration of securities companies in light of identified market irregularities such as misappropriation of client assets, “off the book” operations, ineffective internal controls or corporate governance and breach of duty by senior management of securities companies. The Regulations aim to enhance the supervisory regime of securities companies with detailed provisions on various aspects of the operations of securities companies, including provisions for a client asset custody system, new requirements on corporate governance structure of securities companies, senior management personnel supervision, the submission of trading and other information by securities companies and investigative powers of the CSRC to require information from securities companies and their personnel, shareholders and controllers and other related entities.
Highlights
- The Regulations set out certain market entry conditions for securities companies. For example, an in-kind capital contribution to the registered capital of a securities company is now permitted but must not exceed 30% of the total registered capital of the company. In addition, the Regulations extend the application of qualification requirements on shareholders holding a 5% or greater interest to persons in actual control of such shareholders. This extension is arguably not consistent with the provisions of the PRC Securities Law.
- The Regulations expressly prohibit the shareholders of a securities company from agreeing to any voting arrangement which is disproportionate to their shareholdings in violation of State requirements.
- The Regulations further improve the corporate governance structure of securities companies by requiring that a securities company may have independent director(s) and must have a board secretary and a compliance officer, the latter two being senior management personnel of the company. If a securities company engages in two or more of the following areas of business: (i) securities brokerage, (ii) securities asset management, (iii) margin financing and securities lending and (iv) securities underwriting and sponsoring, its board of directors is required to establish a remuneration and nomination committee, an audit committee and a risk control committee. The first two committees must be chaired by independent directors. It is noted that the Regulations fall short of requiring independent directors of a securities company to make up at least one-third of the board. Such a requirement was contained in a previously circulated draft of the Regulations.
- The Regulations clarify the conduct of business rules and risk control measures with respect to the following business areas: securities brokerage, margin financing and securities lending, proprietary securities trading and securities asset management. In particular, where two or more securities companies are controlled by the same entity or individual or have controlling relationship between them, such securities companies are prohibited from conducting the same areas of securities business unless otherwise permitted by the CSRC.
- To segregate client assets from proprietary assets, the Regulations require a dedicated trading account to be opened by a securities company for its proprietary securities trading business and details of such an account are to be filed with the stock exchange. The Regulations also detail third-party custody arrangements for a brokerage and asset management business. Custodian banks, asset custodians and the China Securities Depository and Clearing Corporation Limited are subject to obligations to supervise the movement of client funds and securities and to regularly report in relation thereto to the CSRC.
- A one-year grace period commencing from the effective date of the Regulations is provided to securities companies to rectify any non-compliance regarding the custody of client settlement funds.
- The Regulations provide that a securities company may borrow subordinated debts from its shareholder or other entities upon CSRC approval. The detailed rules regulating such borrowing are to be formulated by the CSRC.
Please contact Zili Shao ( zili.shao@linklaters.com tel: +86 21 2891 1868) or Fang Jian ( jian.fang@linklaters.com tel: +86 21 2891 1858) if you would like further details.
