Guided by the gatekeeper theory in China’s capital market, the Securities Law underwent revisions in 2005, holding all securities service institutions fully jointly liable for misrepresentations made by securities issuers.
The 2019 amendment to the Securities Law further clarified – in articles 85 and 163 – that all securities service institutions are presumed to be at fault for misrepresentations made by issuers, and must share joint and several liabilities with the issuer for compensation when unable to prove they are not at fault.
Duty of care liability
In accordance with the Securities Law, the China Securities Regulatory Commission (CSRC) has introduced a series of regulatory rules to ensure securities service institutions fulfil diligence duty.
These rules include the Measures for Administration of Sponsoring Business for Securities Issuing and Listing, and its revised version in 2023, which outline the initial scope of responsibilities and boundaries of liability for securities intermediaries’ duty of care.
On 17 February 2023, the CSRC issued rules relating to the comprehensive implementation of the registration system for the issuance of shares, extending the registration system to the entire market and all types of public offerings of shares, ushering in a new era of comprehensive registration in China’s capital market.
Article 8 of the Measures for the Administration of Initial Public Offering Stock Registration and article 7 of the Administrative Measures for the Registration of Securities Issuance by Listed Companies further specify the special and general duties of care of securities service institutions.
The CSRC has consistently stressed in various administrative regulations, departmental rules, regulatory reports and responses to media inquiries that securities intermediaries act as the gatekeepers of the capital market and should fulfil this role diligently.
Based on this role of securities service institutions as gatekeepers in the industry, the CSRC laws and regulations outline the duties of care and legal liabilities as follows:
- Required to exercise a special duty of care and assume corresponding legal liabilities for business matters related to their specific profession;
- Also fulfil a general duty of care and bear relevant legal liabilities for other business matters; and
- Generally expected to reasonably rely on the professional opinions of other securities intermediaries. However, they are also obliged to investigate and review cases involving significant anomalies, major inconsistencies, substantial discrepancies and other specific situations. In instances where they do not quote the professional opinions of other intermediaries, they are held liable in accordance with the law for the content.
In 2022, the Supreme People’s Court issued and implemented Several Provisions on the Trial of Civil Tort Compensation Cases for Misrepresentation in the Securities Market. These provisions remove the requirement for civil compensation to be preceded by a criminal judgment and administrative penalty, and clarify criteria for determining the significance of securities misrepresentations, restricting the fault of securities service institutions to intentional actions or negligence.
Additionally, the provisions established distinct criteria for determining the absence of fault among different securities service institutions, while differentiating between special duty of care and general duty of care.
Through various civil cases involving misrepresentation infringement in the securities market, the court’s judgments have shed light on key concepts outlined in the provisions for misrepresentation.
In summary, administrative and regulatory regulations primarily focus on the standardisation and compliance of securities service institutions’ fulfilment of their duty of care. On the other hand, judicial interpretations have focused on the materiality, establishment of transactional causation, and fault of statements provided by a securities servicer institution’s duty of care.
Therefore, if a securities service institution fails to conduct necessary verification and validation procedures – especially business matters requiring general duty of care, or specific business matters under special duty of care – or there are flaws in their verification process, it becomes subject to regulatory measures from an administrative and regulatory perspective, for their fault is general or even minor negligence.
However, from a judicial interpretation perspective, these failures may not be considered material as outlined in the provisions on misrepresentation, or the causality of the transaction may not be established. In some cases, there may be no fault at all, leading to a court ruling where the securities service institutions are not held accountable for civil liability.
The author understands that the standards for judging the duty of care of securities service institutions differ between administrative and regulatory regulations and judicial interpretations, especially in the context of the comprehensive registration system.
Nonetheless, securities service institutions must adhere to the above-mentioned provisions to fulfil their responsibilities effectively, and also adhere to legal regulations and self-regulatory rules while offering professional services to issuers, fulfilling their legal obligations.
Simultaneously, regulatory authorities should comprehensively amend and streamline the regulatory framework for securities service institutions, aligning it with the principles of a comprehensive registration system.
This will prevent the transfer to the gatekeepers of issuer responsibilities and the risk of investors’ inability to be compensated through the setting of harsh legal liabilities, imposing excessive risks on securities service institutions.
Additionally, it is crucial to establish reasonable and well-defined responsibilities for various entities involved in securities business activities, including intermediaries, issuers and investors.
This approach ensures that each party fulfils its duties, assumes obligations reasonably, fairly shares risks, and bears responsibilities in accordance with their level of fault. This constructs an open, fair, just and resilient capital market, ultimately fostering standardised growth of the securities service industry.
Wang Fan is an executive partner at Guantao Law Firm. She can be contacted at +86 139 9191 2639 or by e-mail at firstname.lastname@example.org.