.jpg)
On November 24, 2020, the Shanghai Stock Exchange (SSE) issued the Guidelines No. 3 for the Application of Self-Regulation Rules for Listed Companies – Categorized Regulation of Information Disclosure (the “Guidelines” for short), which is another improvement and optimization made by the SSE on the regulatory modes following the direct channel for information disclosure, the industry-based regulation of information disclosure and the "inquisitive" regulation, on the basis of summarizing the practical experience in regulation and taking the initiative to meet market demands. Attaching importance to categorized regulation, the SSE will thoroughly implement the Opinions on Further Improving the Quality of Listed Companies (the “Opinions” for short) issued by the State Council, earnestly follow the principle of "building the system, non-intervention, and zero tolerance", and fully fulfill the responsibilities for front-line regulation and self-discipline management in accordance with the unified deployments of the China Securities Regulatory Commission (CSRC), so as to continuously improve the effectiveness of regulation. In this regard, an SSE official in charge of company regulation has answered relevant questions.
Q1: Can you brief us on the origin and main content of the Guidelines issued this time?
A: Recently, the State Council issued the Opinions, which require us to strengthen the whole-process prudential regulation, advance proper regulation, categorized regulation, professional regulation and continuous regulation, and constantly improve regulatory efficiency, and call for stock exchanges to fully fulfill the responsibilities for front-line regulation and self-discipline management. In order to effectively implement the requirements of the State Council's Opinions, the SSE earlier formulated the Three-Year Action Plan for Advancing the Improvement of the SSE-listed Companies. As a work arrangement in the plan, the release of the Guidelines mainly aims to improve the regulatory modes and approaches in accordance with the deployment of the CSRC, so as to better perform the duties in front-line regulation and service.
Categorized regulation is put forward to address the proposition of how to balance regulation and development, as well as regulation and service. The Guidelines summarize the practice of categorized regulation in information disclosure at the exchange level, and upgrade it to an open institutional arrangement, so as to guide the work in front-line self-regulation and improve the effectiveness of regulation. Centering around "achieving effectiveness by streamlining and refining regulation”, the Guidelines provide for different measures after distinguishing the circumstances. In terms of specific methods, it is necessary to concentrate regulatory resources, keep a close eye on a small number of key companies and issues, make regulation more relevant and effective, and avoid taking an indiscriminate approach. In addition, we will continue to attach importance to both regulation and service, and make more efforts in improving the services for most companies that are honest and dedicated to their main businesses, so as to provide support for these companies to leverage the capital market to transform and upgrade, make them better and stronger, and enhance their quality.
Q2: What is the background of the SSE's current implementation of categorized regulation for information disclosure?
A: In the past two years, the economic situation at home and abroad has become more complicated, and China's economy has shifted from high-speed growth to high-quality development. Some companies are in the face of difficulties. More resources are needed to meet the country’s requirements for the “stability on the six fronts (ensuring stability in employment, financial operations, foreign trade, foreign investment, domestic investment, and expectations)” and the “security in the six aspects (ensuring security in job, basic living needs, operations of market entities, food and energy security, stable industrial and supply chains, and the normal functioning of primary-level governments)”, and provide effective support and service for the listed companies to leverage the capital market to get out of difficulties and grow better and stronger. However, at the same time, problems such as financial fraud, capital occupation and illegal guarantees have emerged in a small number of companies, which has caused strong reaction and high expectations for strict law-based regulation among the investors in the market. To this end, we will stick to our main task of regulation, and show “zero tolerance” to major violations, so as to effectively regulate those that should be regulated. On the other hand, we will also follow the concept of “non-intervention”, and further reduce control to free up more resources to support and serve the development of listed companies, so as to boost the improvement of the quality of listed companies.
In this context, categorized regulation has become a particularly important methodology. The Guidelines were drafted and formulated mainly at the level of the SSE’s front-line regulation of information disclosure. To implement the CSRC’s arrangements for categorized regulation, on the one hand, we will make effective efforts in the main duty of regulation, closely monitor and strictly regulate the companies with major violations and the market irregularities, and safeguard the legitimate rights and interests of investors and the market order for healthy development. On the other hand, we will actively respond to the reasonable demands of the listed companies, and provide more support and create more conditions for the development of the listed companies in terms of information disclosure and market services. In general, the Guidelines mainly answer in a systemic way the questions about the content and methodology of the SSE’s current work in front-line regulation and service. Disclosing the basic models and methods of categorized regulation through "building the system" will help clarify the responsibilities and boundaries of regulation, provide the market with clear expectations for regulation, and establish a new profile of the SSE in front-line self-regulation of information disclosure under the new circumstances.
Q3: What is the relationship between the categorized regulation and the SSE’s previous transformations of regulation?
A: This time the Guidelines are formulated in order to strengthen and advance categorized regulation at the institutional level, as well as carry forward and develop the previous concept and structure of regulation on the basis of reviewing and summarizing the existing experience in regulation. Since 2013, in regulating listed companies, the SSE has continued to push forward and achieve a number of important transformations such as the direct channel for information disclosure, the industry-based regulation of information disclosure and the “inquisitive” regulation. Specifically, in the direct channel for information disclosure the boundary between ex ante regulation and in-process and ex post regulation has been clarified, in the industry-based regulation the pattern and mindset of regulation have been adjusted based on the industry categories of the companies, and in the “inquisitive” regulation it is required that the inquiries should be made by focusing on the companies with problems and the typical violations. These regulatory explorations and practices have unfolded the overall layout of the front-line regulation, improved the effectiveness of regulation, and also embodied the concept and spirit of categorized regulation.
In the past two years, in the face of the new situations in the market, we have kept a close eye on the high-risk companies and major risk issues such as financial fraud, capital occupation and illegal guarantees, formed the handling principles such as rapid response and distinction of responsibilities, clarified the scope of regulatory focus according to different companies and matters, and specified the content and focal points of “streamlining regulation”, thus making the key points and methods of regulation clearer. In terms of market services, we have sorted out the service items characterized by high market demand and mature operation, defined the content and mechanism of service, continued to carry out service in relief of private enterprises and reform of state-owned enterprises, etc., optimized corresponding mechanisms, and deepened our understanding of the content and concept of service. These efforts have generated some experience and results, providing the conditions and foundation for the institutional summarization.
4. Q4: What are the key companies and items for regulation stipulated in the Guidelines?
A: The Guidelines make differentiated arrangements for regulation by focusing on the "two distinctions" in companies and items and highlighting the key points for regulation. We will identify the key companies for regulation based on the quality of information disclosure, the level of regulated operation and the severity of risk, and determine the key items for regulation based on the impact of the disclosure items on the investors’ interests, prices of securities and market order, so as to clarify the scope of “streamlining regulation”. For the companies and items that are included in the scope of regulatory focus, we will pay close attention to the disclosure of relevant information, implement ex ante review as appropriate, and suspend the business of direct channel for information disclosure and carry out on-site inspections based on the risk circumstances. For the companies and items that are not included in the scope of regulatory focus, we will simplify the requirements for information disclosure in accordance with laws and rules, implement the ex post review, and make effective efforts to provide service and support for the regular information disclosure and business handling.
In terms of the key companies, four types of companies are included in the scope, and their items of information disclosure are given special attention. The companies mainly include those with the risk warnings imposed on their stocks, those with the annual evaluation of information disclosure at D, those with the disclaimer of opinion or adverse opinion issued to their annual reports, and those with disclaimer of opinion or adverse opinion issued to their annual internal control. As the companies are characterized by concentrated risks and are small in number, they have always been the focus of the market and the regulation, and the focused regulation imposed on them is in line with market expectations and actual conditions.
In terms of the key items, according to the impact on investors' interests, prices of securities and market order, eight types of items for focused regulation are specified. Strict regulation of the matters that touch the "bottom line" of the market is the consensus in the market and what we should do in front-line regulation of information disclosure. The items mainly include: false records, misleading statements or major omissions in the disclosure of financial information or major events; misappropriation of the interests of the listed company through occupation of non-operating capital, illegal guarantees, related transactions and other means; abuse of information disclosure to hype up concepts and affect the prices of the company’s stocks and their derivatives or the investment decisions of investors; the planning of asset transactions that may cause large-scale impairment to goodwill or have major uncertainties in the realization of the promises for performance; arbitrary change of accounting policies, adjustment of accounting estimates, or misuse of accounting standards for improper accounting handling; the major risks where the shares directly or indirectly held by the controlling shareholder, the largest shareholder, or the ultimate controller are pledged or frozen in a high proportion; and major deficiencies in internal governance when the directors, supervisors and senior executives are slack in performing their duties, when the shareholders’ meeting, the board of directors, the board of supervisors and the executive management are unable to operate normally, or when the company is unable to fulfill its obligation of information disclosure in a normal manner.
Q5: What work arrangements will the SSE make in terms of providing services for companies?
A: Thoroughly reflecting the concept of integrating regulation in service, the Guidelines adhere to the focus on both regulation and service, emphasize the aim of improving the quality of listed companies, provide support for the companies to improve the effectiveness of information disclosure, facilitate financing, stimulate market vitality, and optimize the market ecosystem, so as to foster a better market environment for the development of listed companies. Specific arrangements are as follows:
First of all, the full coverage of service targets will be achieved. We will support all SSE-listed companies in carrying out activities in the capital market according to laws and rules. In addition, according to the actual conditions and needs of the companies, we will provide targeted services. For the companies that have their information disclosure rated at A or B in the annual evaluation for the most recent year, we will support them by simplifying the requirements for information disclosure based on actual conditions, and they can apply for the CSRC’s channel of rapid review for refinancing, mergers and acquisitions and reorganizations according to the rules. For the companies that have their information disclosure rated at C or D in the annual evaluation for the most recent year, we will provide targeted services, and focus on guiding and supporting them in compliant operation, resolving risks and improving the quality of information disclosure.
Secondly, the services will be enriched. We will, according to laws and rules, provide support for the listed companies in specific businesses such as policy consultation, market training, mergers and acquisitions and reorganizations, refinancing, equity incentives and innovative products, facilitate the listed companies’ efforts in actively carrying out investor relationship management and deepening market communication, and push the listed companies to improve the quality of industry information disclosure and strengthen their exchanges with the companies in the same industry.
Thirdly, the service mechanism will be improved. The department of the SSE in charge of regulating listed companies has established a smooth channel for communication with listed companies and actively carried out exchanges with the listed companies on a regular basis. Since the beginning of this year, in order to further improve the work, according to the actual situations, we have also set up the work mechanisms such as responsibility of the first contact, time-limited response, and handing by two staff members. Judging from the actual operation, these efforts have facilitated communication and built consensus. The Guidelines also upgrade these mechanisms to specific rules.
Q6: How will the SSE normalize its regulatory conduct in carrying out categorized regulation?
A: Effective categorized regulation requires a standardized operational mechanism for regulation, unified standards for regulation, and a team of company regulators that are accountable, competent, service-oriented and rule-abiding. To this end, the Guidelines clarify the standards for regulatory conduct in a dedicated chapter, so as to achieve the balance between initiative and normalization in regulation. Besides, one of the goals of carrying out categorized regulation is to establish mutual regulatory trust and form a strong synergy for improving the quality of listed companies by normalizing regulatory conduct.
In terms of mechanisms and standards, the Guidelines require that the principle of openness, fairness and justice be followed. We will regulate the information disclosure of listed companies in accordance with laws and rules, adopt unified standards for regulation, and disclose relevant information to the market in a timely manner. The Guidelines clarify the principle of prudential regulation, and require strict compliance with the prescribed procedures and notification of the regulatory basis. We will implement the industry-based regulation of information disclosure, and set up industry-based regulatory groups to take the responsibility of information disclosure regulation and provide services such as daily consultation and business handling. In terms of performance of duties, the regulatory staff of the SSE are required to be loyal to their duties, diligent and responsible, to strictly abide by the requirements for integrity and self-discipline, and to establish healthy "close" and "clean" relationships with the listed companies in actual work, so as to not only adhere to the principles but also fully demonstrate the warmth of front-line regulation.
After the Guidelines are issued and implemented, the SSE will make effective efforts in the implementation, earnestly listen to the opinions of all parties concerned, continuously improve the modes and mechanisms of categorized regulation, and take practical action to work with all parties in the market, especially the listed companies, to boost the improvement of quality of the SSE-listed companies.
