Today, the Shanghai Stock Exchange (SSE) officially issued the "Notice on Strengthening the Management of Key Monitored Accounts" (the "Notice" for short). According to the "Notice", the SSE will regularly or irregularly send to all members of the SSE market a list of the "Key Monitored Accounts", mainly those involving frequent unusual transactions, severely unusual transactions, apparently suspected manipulations and other violations that harm the fair trading order in the market, and urge the members to specifically intensify the transaction compliance management of the listed accounts. According to the sources, it is an important move taken by the SSE to effectively fulfill the statutory responsibilities for the front-line regulation and accelerate the transformation to the "member-regulation-centered" mode of trading regulation, on the basis of the unified work arrangement of the China Securities Regulatory Commission (CSRC). In addition, it is also a basic institutional arrangement for urging the members to vigorously assume the responsibility for management of the clients' transactions and directing the members to effectively coordinate the regulation of the unusual transactions.
According to an SSE official, the improvements of the management system for the key monitored accounts are mainly for the following three purposes:
The first is to intensify the front-line regulation of unusual transactions and highlight the in-process regulation. In recent years, the SSE has continued to step up the real-time monitoring and self-regulation for abnormal trading activities. Since 2017, the regulatory measures such as written warnings and suspension of trading have been imposed on related accounts more than 5,300 times, and 18 investors have been restricted from trading for 1 to 3 months as the disciplinary sanctions. As a result, the tendency toward the unusual transaction and other violations has been curbed to some extent.
However, some accounts have been "incorrigible" and frequently involved in the unusual transactions. Of the accounts that were subject to regulatory measures in 2017, 25% were "recurring offenders" that had had the self-regulatory measures taken repeatedly over a period of one year due to abnormal trading practices. In addition, a small number of market participants abused their advantages in funds, shareholding and other aspects to gain improper profits by inducing the small and medium-sized investors to blindly following the unusual transactions. The violations were serious and even obviously suspected of market manipulation, having a severely negative impact on the normal trading order in the market.
In order to further highlight the above-mentioned regulatory priorities, based on the regulatory measure of "being included in the key monitored accounts" in the SSE's "Measures for Implementation of Disciplinary Sanctions and Regulatory Actions", the "Notice" aims to improve the regulatory effectiveness through the joint regulation pattern characterized by efficient real-time monitoring, effective in-process regulation and well-implemented member management for the key accounts. According to the principle for the regulation, the "Notice" specifies the criteria, subjects and scope for applying the requirement of "being included in the key monitored accounts", mainly covering the accounts whose unusual transactions are serious to some extent, including those subject to the regulatory measure of written warning twice in 3 months, those subject to the regulatory measure of temporary trading suspension for the account, those subject to the disciplinary sanction of restricted trading for the account, the serious unusual transactions or the unusual transactions obviously suspected of market manipulation through the abuse of the advantages in funds, shareholding, information, technology or other aspects, and other cases.
This year's regulatory statistics and data show that the number of the investors put under key supervision is about 200 per month on average, involving more than 60 members, and each member's targets for client transaction compliance management have been more concentrated. It indicates that in order to avoid the drawbacks of "netting-like" aimless regulation, the "Notice" is issued to enhance the pertinence and effectiveness for the members to manage the clients with unusual transactions through the "precision guidance" approach.
The second is to detail the requirements for the members' client management and intensify the investigation of responsibilities for improper management. Since 2017, the SSE has given full play to the advantage of the membership-based exchange and energetically pushed the members to assume the "first-barrier" responsibility for compliance transactions. For example, the trading regulatory concepts have been promoted and the requirements for client management have been explained through the meetings of the special committees of the board of directors, the special forums for the members, the special compliance training sessions for the members and other means. In addition, the supervision of the members has been tightened by integrating on-site inspections and off-site inspections, so as to enhance the members' active awareness and practice of managing the clients' unusual transactions.
Judging from the actual situation, there are still some members who have failed to effectively fulfill the responsibilities for managing the clients' transactions. A small number of members and sales offices have seen the unusual transactions of the accounts happen intensively from time to time. Another example is that at some member sales offices, a small number of clients have had the self-regulatory measures taken repeatedly in a short period of time but refused to cooperate.
For this reason, under the existing framework of business rules such as the "Rules for Member Management", the "Notice" has detailed the requirements for the active management among the members who have had clients included in the list of key monitored accounts, so as to adapt to the changes in the regulatory situation. For example, the members shall promptly inform the clients that they have been included in the list of key supervised accounts, and organize the training in compliance trading as required; the members shall sign a supplementary agreement with the clients stipulating that if the clients are found to continue to engage in serious unusual trading activities or suspected violations, the member may refuse to accept their orders or terminate the client-agent relationship for securities transactions with them. Meanwhile, the members shall set relevant monitoring indicators and warning parameters in the real-time monitoring systems, and promptly take the measures for client management such as warnings, refusing to accept orders and terminating the client-agent relationship. In addition, the "Notice" also requires the members to submit feedback on the transactions of the accounts under key monitoring, the inspection reports and the evaluation of management effectiveness in the forms such as special reports, quarterly reports, monthly reports and interim reports, so as to create regulatory coordination and benign interactions.
At the same time, the "Notice" further emphasizes the self-discipline measures for dereliction of duty and other misconducts by the members in managing the clients' usual transactions. The "Notice" stipulates that if the management responsibilities are not fulfilled as required, the member and its related personnel will be subject to one or combined regulatory measures such as oral warnings, written warnings, regulatory talks, suspension of acceptance or handling of related businesses, or disciplinary actions such as circulating a notice of criticism, publicly condemning, suspending or restricting trading right.
The third is to unify the management requirements for the members and effectively prevent regulatory arbitrage. Some members reported at the forums and training sessions that due to asymmetric regulatory information and inconsistent management requirements, some clients evaded regulation by opening new accounts, changing designation and other means. In order to prevent the illegal regulatory arbitrage conducted by investors, the SSE will send to all members a unified and complete list of all accounts under key monitoring in the whole SSE market, so as to ensure that all members share the regulatory information about relevant accounts in a timely manner. At the same time, the "Notice" specially adds more stringent requirements for the membership management system in terms of the holders of key monitored accounts opening new securities accounts or applying for changing designation. The requirements include that (1) The holders of key monitored accounts shall apply for opening a new securities account or re-designation of transaction at the counter; (2) The members shall conduct a cautious assessment of the relevant applications, and require the written commitments to compliance trading from the clients whose application for opening of accounts or designated transaction has been approved, with the assessment document signed by the compliance chief to be retained; (3) The member shall promptly report the relevant client's situation in the next month following the opening of the new account or re-designation of transaction.
In addition, the escalated regulatory measures have been specifically formulated for the accounts with unusual transactions following the opening of the new account or re-designation of transaction. Within 6 months following the opening of the new account or re-designation of transaction, for the accounts subject to the regulatory measures due to unusual transactions, the chiefs of the member in charge of compliance and risk control as well as the brokerage business will be summoned to conversations for warning, and the relevant responsible personnel will be required to participate in training in compliance trading if necessary. Within 6 months following the opening of the new account or re-designation of transaction, for the accounts subject to the regulatory measures or disciplinary actions twice or more due to unusual transactions, the regulatory measures or disciplinary actions will be imposed on the relevant member and its responsible personnel, and the on-site inspections for relevant members will be carried out if necessary.
To allow two months for the members' technical preparation, the SSE will formally send the list of key monitored accounts to all its members starting in July 2018. Going forward, based on the issuance of the "Notice", the SSE will organize the implementation of the regulatory requirements, vigorously carry out the training in transaction management among the members, comprehensively include the members' implementation of the requirements in the "Notice" in the on-site inspections of the members, and urge the members to perform the responsibility for transaction management in a timely manner, so as to jointly maintain the stable and healthy development of the securities market.
