Name: Regulations Concerning the Management of Risks of Securities Companies (《证券公司风险处置条例》, the “Regulations”)
Issuing authority: The State Council of the PRC
Effective date: 23 April 2008
Subject: Administration of securities companies
Having accumulated extensive experience in handling high-risk securities companies, the State Council has now issued the long awaited Regulations to provide guidance on the management of risks of securities companies. The Regulations further implement and develop the principles in the Securities Law and the Enterprise Bankruptcy Law in relation to the restructuring and bankruptcy of securities companies, with the aim to mitigate the impact of risks associated with securities companies on social stability.
Highlights
- The Regulations provide for five risk management measures: suspension of business, receivership, administrative takeover, administrative reorganisation and termination.
- If the CSRC discovers that there are significant underlying risks in a securities company, the CSRC may dispatch on-site inspectors to investigate the securities company with powers to monitor and supervise management and operational activities, such as utilisation of funds, disposal of assets, allocation of staff and execution of agreements. The on-site inspectors have power to report such activities to the local authorities.
- If a securities company fails to rectify any non-compliance with the risk control indicators within the time specified under the law, the CSRC may suspend (in whole or in part) the operations of the securities company. During the suspension period, which may not last more than 3 months, the securities company may entrust its securities business to another securities company approved by the CSRC or transfer its clients to another securities company. If the securities company fails to do so within the time specified by the CSRC, the CSRC will transfer the securities’ company’s clients to another securities company on its behalf.
- A securities company may undergo receivership or in serious cases, administrative takeover if there exists any of the circumstances set out in the Regulations, including management disorder, misappropriation of client funds without the ability to rectify and material financial problems due to non-compliance with risk indicators. A receivership would involve the establishment of a receivership committee which exercises operation and management rights over client-related business, such as brokerage business. In contrast, in an administrative take-over, the committee set up for this purpose will exercise management rights over the whole company.
- A securities company with significant risks may apply to the CSRC to undertake administrative reorganisation, which is conditional on the provincial government’s support and the availability of true and complete financial data. A securities company undergoing administrative reorganisation may carry out reorganisation activities such as capital injection, reorganisation of equity rights, debt restructuring, assets restructuring and mergers.
- The CSRC may terminate a securities company if (i) there exists significant illegal operations and material operational risks, (ii) the securities company cannot repay its debts when due and its assets are insufficient to repay all of its debts, or it is clearly insolvent and (iii) the securities investor protection fund is required to be used. The CSRC is also required to terminate the securities company if the other risk management measures fail to bring the securities company back into normal operations and either condition (ii) or (iii) is satisfied.
- The Regulations have introduced the concept of administrative liquidation in view of the impact on the public that a termination of a financial institution may have. Following the CSRC’s decision to terminate a securities company, the CSRC must establish an administrative liquidation committee comprising professional institutions chosen by the CSRC. The committee must perform the duties of the legal representative of the securities company. Its responsibilities must include managing the securities company’s properties, verifying assets and liabilities and assisting the securities investor protection fund with the compensation of investors.
- Depending on the circumstances, application may be made to the court by various interested parties to wind up the securities company, or to commence debt restructuring, following the completion of the administrative liquidation.
- Directors, supervisors and senior management of a securities company are principally responsible for the securities company undergoing the procedures prescribed in the Regulations. Sanctions include suspension of qualifications, revocation of professional qualification, being banned from the securities market and fines. The controlling shareholder or the actual controller of the securities company procuring the improper activities of the directors, supervisors and senior management will also be subject to the sanctions.
- Reference must be made to the Regulations in the management of risks of futures companies.
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.
