Avoiding securities violations as law tightens

In the past decade, there has been an increase in the incidence of illegal and criminal cases in the securities industry in China. Regulatory and judicial authorities have been increasingly strict in investigating and punishing securities crime cases, especially since the implementation of the Amendment to the Criminal Law (11).

Substantial modifications have been made to most aspects of securities crimes including charges, statutory penalties and accountability. This has significantly increased both the severity and breadth of punishment, providing a solid legal basis for stricter regulation of the capital market.

The joint issuance of the Opinions on Strictly Cracking Down on Illegal Activities in the Securities Market by the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council further demonstrates subsequent regulatory and judicial trends in the securities market in legal practice, reaffirming the country’s zero-tolerance stance towards illegal activities in this sector.

Regulatory policies

Regulatory policies have become stricter, primarily reflected in three aspects.

First, there is collaborative supervision that involves establishing a regulatory co-ordination mechanism to achieve comprehensive co-operation between administrative law enforcement and criminal justice. This includes the deployment of public security and procuratorate personnel to the China Securities Regulatory Commission, sharing case information, consulting case clues together, and co-ordinating to form a mechanism of collaborative law enforcement and justice.

Second, enforcement is now more stringent and expedited. For major cases such as fraudulent issuance, false statements, market manipulation and breach of trust damaging the interests of listed companies, a stricter and swifter pace of case handling has been established. This involves accelerating the transfer of cases between law enforcement agencies and judicial organs, increasing the accountability of relevant controlling shareholders, actual controllers, and directors and supervisors, and strictly controlling the application of probation.

Third, there is an emphasis on long-term consistency. The opinions explicitly state that strict regulatory measures in the capital markets will continue at least until 2025. During this period, efforts will be made to continually optimise the efficient and smooth connection between administrative law enforcement and criminal justice, and increase the cost of securities violations. It can be seen that, in the coming years, regulation will maintain a high-pressure trend, forming a new normal of strong regulation.

For enterprises, the core of strict supervision lies in collaborative co-operation between administrative law enforcement and criminal justice. This means that when there are risks related to securities disclosure, both administrative law enforcement and criminal justice will intervene simultaneously, and violations will directly face criminal justice scrutiny.

Legal risks

According to the opinions, judicial regulatory resources will be comprehensively allocated in the primary market, secondary market and listed company governance fields in regulatory practices.

On the one hand, judicial regulation and administrative supervision of common securities crimes such as false statements, insider trading, market manipulation and “rat trading” will remain highly intensive.

On the other hand, there will also be increased frequency and severity of supervision and punishment for behaviours such as breach of trust damaging the interests of listed companies, fraudulent issuance, intermediary agencies providing false certification documents, and off-exchange margin trading.

It is worth noting that, in addition to the administrative and criminal responsibilities of the enterprises themselves, related controlling shareholders, actual controllers, directors and supervisors also face the risk of holding the liability.

Prevention and control

For relevant companies, controlling shareholders, actual controllers, directors and supervisors under the current trend of collaborative law enforcement, attention should be paid to the following points.

Preventive measures. The risk control requirements for listed companies in securities issuance, information disclosure and trading activities are the most basic obligations stipulated by the Securities Law. From a multidimensional perspective, these administrative obligations and criminal responsibilities can be transformed.

That is, when the administrative obligations meet the transformation conditions, criminal accountability will be triggered. Therefore, in existing risk control plans, listed companies should fully integrate criminal compliance elements and accurately identify criminal risks in their risk identification and assessment.

The most practical operation is to increase criminal review standards in risk identification and assessment. For example, in the description and disclosure of significant events during securities issuance or after listing, the disclosure scheme should be fully evaluated to determine if it meets criminal compliance requirements and whether there are criminal risks of being misinterpreted as fraudulent or irregular.

If high-level criminal risks are identified through risk identification and assessment, it is necessary to undertake appropriate and lawful amendments to actions such as securities issuance, information disclosure and other behaviours to avoid criminal risks.

Meanwhile, in the allocation of corporate governance and compliance duties, attention should be paid to building corresponding risk prevention plans for controlling shareholders, actual controllers, directors and supervisors.

Post-compliance rectification. For listed companies, compliance with securities laws is a fundamental legal obligation outlined in the Securities Law. Therefore, listed companies are well-versed in compliance and have a deeper understanding compared to other business types. They possess the advantage of designing and implementing compliance programmes. Consequently, in the event of securities-related crimes, they can seek criminal compliance rectification from prosecutorial authorities during crisis management.

This involves formulating compliance plans, rectifying criminal involvement in business operations, improving internal governance structures, and establishing risk prevention mechanisms to secure favourable outcomes such as avoiding arrest or prosecution, or receiving lenient penalties.

Ye Liming is a senior partner at Hylands Law Firm