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In strict accordance with the decisions and plans of the CPC Central Committee and the State Council on cracking down on illegal securities activities with the full rigour of the law in 2022. We conscientiously put into place the principles of “system building, non-intervention, and zero tolerance” and the urges to revere the market, revere the rule of law, hold high professionalism, stay alert to risks, and obtain support from various parties, while adhering to law-based governance and regulation of the market. With the remediation task assigned by the central inspection team in mind, and for the purposes of promoting high-quality development of listed companies, guarding the access to issuance and listing and forestalling risks in key areas, we earnestly performed our duties as a frontline regulator, and took solid actions in implementing disciplinary measures. We imposed punishment on violations of laws and regulations on the SZSE market according to law and held market entities strictly liable. Those actions effectively maintained the market order and protected investors’ legitimate rights and interests, further promoting the high-quality development of the capital market.
Disciplinary Actions in Four Dimensions
Throughout 2022, SZSE issued 265 decisions of disciplinary punishment on offending entities, up about 17% year on year, and imposed 143 punishments upon securities issuers and 908 punishments on the responsible persons, up about 7% year on year. SZSE clearly conveyed the “zero tolerance” philosophy and effectively upheld the principles of fairness, justice and openness of the capital market and promoted a sound market environment.
In terms of regulation fields, SZSE realized “broad coverage”. On the regulation of listed companies, SZSE issued a total of 256 decisions of disciplinary punishment, up nearly 27% year on year, the highest number over the past five years, with 137 listed companies punished and 895 disciplinary actions imposed on responsible persons of the listed companies. On issuance review and regulation, SZSE issued a total of six decisions of disciplinary punishment and imposed punishment on three issuers, with two disciplinary actions initiated on responsible persons such as controlling shareholders and four on sponsor representatives. In addition, four sponsors have received a writing warning from SZSE, with 14 writing warnings issued to sponsor representatives and organizers of independent financial advisers. In bond regulation, SZSE issued a total of three decisions of disciplinary punishment and imposed punishment on bond issuers three times and responsible persons seven times.
In terms of violation types, violations concerning information disclosure and standard operation accounted for the largest portion. In terms of distribution of types of violations, SZSE imposed punishment on 137 violations of information disclosure regulations, 129 violations of standard operation requirements, 68 violations of securities trading rules, and 16 violations of the requirement that intermediaries shall fully fulfill their responsibilities. The proportion of violations of information disclosure regulations and that of violations of standard operation requirements were the highest, about 39% and 37% respectively. Specifically, the violations concerning information disclosure included financial fraud, violations of regulations on information disclosure of important matters, violations of regulations on information disclosure of earnings preannouncements, etc. The violations concerning standard operation were mainly capital occupancy, illegal guarantee and violations of performance commitments.
In terms of objects of punishment, SZSE kept a close watch on “critical parties”. On the one hand, SZSE continued to intensify efforts to crack down on rule-breaking directors, supervisors and senior management members, and controlling shareholders, de facto controllers and their related parties. SZSE imposed 572 disciplinary actions on directors, supervisors and senior management members, and 213 disciplinary actions on controlling shareholders, de facto controllers and their related parties, up 8% and 39% respectively. Those two parties receiving the most punishment. On the other hand, SZSE strengthened regulation of intermediaries who act as “gatekeepers”. Two disciplinary actions were initiated against intermediaries and 33 against practitioners. The number of practitioners punished exceeded the sum over the past three years, of which accountants accounted for 60% and sponsor representatives about 29%.
In terms of types of punishment, SZSE took both “forceful” and “considerate” measures. On the one hand, the number of public censure and public identification that someone is unfit for director, supervisor or senior management of a listed company (hereinafter referred to as “public identification”) increased sharply, which are applicable to vicious violations and “chief criminals”. Besides, the punishment for the forgoing violation were also intensified. SZSE issued 107 decisions of public censure, up about 58% year on year, and denounced responsible persons 397 times, up about 49% year on year. SZSE gave public identification to 36 directors, supervisors, senior management members, de factor controllers, etc., up about 89% year on year. On the other hand, adhering to “combining punishment with leniency”, SZSE reasonably distinguished liabilities and treated secondarily responsible persons and “chief criminals” differently. Meanwhile, SZSE gave lesser punishment to those who actively made remediation and promptly defused adverse impact.
Targeting Certain Violations
With a focus on vicious violations by listed companies such as financial fraud, occupancy and guarantee and the key areas of issuance and listing review under the registration-based IPO system, SZSE gave full play to the role of the capital market as the “front” in regulation to strengthen market discipline and clean the market ecosystem.
SZSE cracked down on the “cancers” of financial fraud with “zero tolerance”. Vicious violations such as financial fraud can severely damage the legitimate rights and interests of small and medium investors. They are “cancers” of the securities market and must be addressed with strong actions and severe punishment. SZSE has always maintained high accountability pressure. Throughout 2022, SZSE dealt with a total of 18 financial fraud cases which involved ST BBL, DONLY, NEW POWER, etc., up 80% year on year. SZSE punished 77 responsible persons involved in those cases with public censure and 17 with public identification. All those indicated intensified efforts in crackdown and improvement in deterrent effect. For example, ST BBL, whose violations involved huge amounts of money, committed financial fraud for eight years straight. All its directors, supervisors and senior management concerned were punished with public censure, and five primarily responsible persons with public identification forbidden to take on their previous jobs for five years or all their lives. Regarding the financial frauds conducted by acquisition targets of listed companies that has increased in recent years, SZSE punished DONLY, ST TIANSHAN BIO and their directors, supervisors and senior management, target companies that committed fraud and responsible counterparties with public censure.
SZSE effectively addressed illegal fund occupancy and guarantee. Throughout 2022, SZSE dealt with 36 fund occupancy cases and 28 illegal guarantee cases, for which a total of 48 and 320 punishments were implemented respectively upon the listed companies and responsible persons involved. Among them, 25 companies repaid the funds they occupied and released guarantee before the punishment and 10 companies completed partial settlement, a remediation rate of about 73%, indicating sound effect in the rectification of illegal occupancy and guarantee. In line with the principles of “law-based regulation and classified treatment”, SZSE imposed lenient punishment or lessened the punishment on some 20 cases including RZGF and DAYBRIGHT in which the occupied funds were promptly repaid and the guarantee released. Regarding some listed companies and relevant parties who repeatedly occupied funds and refused to make remediation or whose violations involved huge amounts of funds or long-term continuous occupancy, SZSE gave them public censure and imposed the punishment of public identification on “chief criminals”.
SZSE took a combination of measures to strictly guard the access to issuance and listing. In 2022, SZSE firmly rejected 16 companies that did not meet the issuance and listing conditions or the information disclosure requirements and conducted field supervision of 52 projects such as IPOs. Regarding the violations by issuers such as major omissions or inaccuracy in the information disclosure of prospectuses and documents from procedures like the reply to review inquiries, SZSE circulated a notice of criticism on three stock issuers, two responsible controlling shareholders and de facto controllers, and four sponsor representatives. Those actions effectively prevented “sick” companies entering the stock market and maintained the high-quality operation of the IPO-based registration system of the ChiNext. On the one hand, SZSE strengthened review inquiry. For example, during review inquiry SZSE found that Xinyong Biochemical left out relevant information of the new wholly-owned subsidiary of the issuer in its prospectus and that there were many inaccurate information disclosures and inconsistencies in its application. SZSE circulated a notice of criticism on the company. On the other hand, SZSE conducted field supervision. Through field supervision, SZSE found that Zhenmei was inaccurate in product cost accounting and failed to disclose relevant risks posed by internal control defects. SZSE then promptly circulated a notice of criticism.
Strengthening Internal Remedial Shield through Hearings and Reexaminations
SZSE has always been adhering to strengthening regulation and improving remedial channels at the same time. Being people-oriented on the capital market, SZSE has improved the dual internal remedial channels of hearings and reexaminations, and guided market entities to fully present and defend themselves, making “procedural justice” a tangible action.
SZSE gave full play to the in-process remedial role of hearings to improve the transparency of decision-making. Throughout 2022, SZSE held a total of 36 hearings on disciplinary punishment, up about 64% year on year, and listened to the defenses by 15 listed companies and 96 responsible persons, up about 79% year on year. In view of the impact of the pandemic, SZSE promptly held video hearings to make it more convenient for market entities to participate and improve their initiative. Guiding the parties involved to voice and argue their opinions not only fully ensured market entities’ rights to know, participate and oversee and mitigated backlashes but also further helped find out the truth and the focuses of the case, improving the transparency and credibility in the decision-making process of disciplinary punishment.
SZSE made full and good use of the ex post remedial mechanism of reexaminations to strengthen fairness and justice. In 2022, SZSE completed the deliberation of 15 reexamination cases on disciplinary punishment, up 150% year on year. The cases were mainly about vicious violations such as financial fraud, occupancy and guarantee issues. Such cases often have huge market impact, and the punishment on relevant parties are often severe. To effectively protect the legitimate rights and interests of the parties involved and ensure the objectiveness and fairness of punishment, if the parties involved raise an objection, SZSE listens to their opinions through the appeal review committee mainly comprised of members outside SZSE, and reexamines the case fact, applicable rules, severity of punishment, etc. to make sure the results are well-grounded. Meanwhile, SZSE further explains regulatory logician and standards to the parties involved to make sure they are convinced by reasoning. The deliberation results show that some directors, supervisors and senior management failed to have a correct understanding of their duties and often raised an objection on the ground that they didn’t take part in or had no knowledge of the violations. Through reexaminations, SZSE not only reexamined the standardability and preciseness of disciplinary punishment, but also reeducated the parties involved on duty performance and understanding of rules. The functions and role of the reexamination mechanism were brought into full play.
Law cannot take effect itself. SZSE will, under the unified leadership of CSRC, continue to give play to the warning, education and guidance roles of disciplinary punishment to urge market entities to learn from past mistakes so as to avoid future ones. We will guide market entities to focus on their main businesses and truly establish the compliance awareness of holding in awe the market and the rule of law. We will work to form a sound market ecosystem in which relevant parties fully perform their duties and market constraints are effective, to accumulate energy with high-quality regulation and better serve the high-quality development of the capital market.
