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In 2019, in the journey of sweeping reforms of the capital market, SZSE stayed true to its founding mission. It implemented fully the guiding principles of the Party’s 19th National Congress, the Fourth Plenary Session of the 19th CPC Central Committee and the Central Economic Work Conference, and adhered to the work requirements of “the four awes (stand in awe of the market, rule of law, professionalism and risks) and one joint force (The capital market’s development needs all the efforts made by all sides)” by the China Securities Regulatory Commission (CSRC). With the core goals of the pursuit of standardization, stable regulation, secured rights and interests and risk prevention, disciplinary actions are important measures for SZSE to timely target the illegal actions in securities market. SZSE strengthened its regulatory functions, enhanced its regulations, and continued to promote the sound development of the capital market.
Overview of Disciplinary Actions
SZSE issued 215 disciplinary action decisions in 2019, up 39.61% from 154 in 2018. Among them, 197 decisions were issued to listed companies and persons liable, 9 decisions to bond issuers and persons liable, and 9 decisions to SZSE members.
With the increasing number and complexity of disciplinary cases and based on regulatory experience summarized, the disciplinary actions of SZSE characterized as follows:
First, SZSE continued to implement strict regulation based on laws and regulations. In 2019, SZSE further improved its self-discipline system and commenced the revision of rules such as the Guidelines for the Standard Operation of Listed Companies. While guiding listed companies to continue to disclose information and strengthen the building of corporate governance, SZSE also enriched the regulatory basis for the “rules-based” disciplinary actions.
Second, SZSE focused on targeted oversight over the “key few”. For illegal cases of listed companies dominated by key entities such as the controlling shareholders, de facto controllers and chairmen of the board, SZSE improved its rules of confirmation of responsibility, emphasized on the distinction between personal and corporate behaviors and highlighted the accountability of decision-makers and key persons in charge for illegal actions. It avoided one-size-fits-all regulations and continued to pursue more just and fairer disciplinary actions.
Third, SZSE further expanded the punishment spectrum. SZSE incorporated main market players such as listed companies, bond issuers and members into the regulatory spectrum in accordance with laws and regulations. What’s more, for the first time, it suspended the stock pledge and repo transactions of 9 members who violated the rules in the stock pledge transactions for 3 to 9 months to guard against potential pledge risks and achieve the “full coverage” of regulations.
Fourth, SZSE still took listed companies and persons liable in charge as regulatory focuses. In 2019, SZSE took disciplinary actions against 112 listed companies and 693 persons liable, an increase of 31.76% and 13.42% respectively over last year. Among them, SESE denounced 39 listed companies and 203 persons liable. It promoted standardization by punishment and sought momentum from regulation to improve the quality of listed companies.
Fifth, SZSE adopted richer disciplinary actions. In addition to conventional notices of criticism, SZSE also increased the adoption of disciplinary actions such as denouncement, publicly determined as unsuitable to relevant positions and suspension of trading authority. In 2019, a total of 13 directors, supervisors and senior management members who committed serious violations were publicly determined as unsuitable to relevant positions, and members of SZSE were punished by suspending trading authority for the first time. Through the proper use of qualification penalties such as public determination, SZSE raised the cost of violations by main market players and strengthened the intensity of disciplinary actions.
Disciplinary Action on Typical Incompliant Behaviors
Most of the 215 disciplinary action decisions were issued on behaviors of incompliant information disclosure and violation of regulatory operation, which accounted for about 45.23% and 35.69% respectively. SZSE stepped up its regulatory efforts to combat illegal behaviors of listed companies such as fund occupation, illegal guarantee, incompliant disclosure of major issues and unfulfilled commitment.
First, fund embezzlement. In 2019, the controlling shareholders and de facto controllers of some listed companies had liquidity problems and thus there were frequent illegal behaviors such as fund embezzlement. Some major shareholders and de facto controllers took advantage of their controlling positions to realize the purpose of fund occupation by means of bank funds transfer, advanced payment by listed companies, fictitious transaction and "third party" transit. With disciplinary actions, SZSE focused on cracking down on such illegal behaviors that caused serious infringement upon the rights and interests of listed companies and investors, and urged the “key few” to hold discipline in awe and respect and hold the bottom line. In 2019, SZSE punished a total of 28 cases of fund embezzlement, of which 16 listed companies were denounced and 12 persons liable were publicly determined as unsuitable to relevant positions.
Second, illegal guarantee. In such cases, the internal governance functions of some listed companies seriously failed. Controlling shareholders and de facto controllers misappropriated official seals, without performing the review procedures of listed companies or fulfilling the obligation of information disclosure, and signed guarantee agreements in the name of the company. These seriously harmed the interests of listed companies. In order to prevent and fend off such violations, SZSE persisted in "targeted crackdown" and focused on oversight over the “key few”. We took disciplinary actions against a total of 35 cases involving illegal guarantee. Among them, 110 main persons liable were publicly denounced, and other uninformed persons liable who actively took measures to eliminate bad influence were given a mitigated punishment or were exempt from the punishment.
Third, illegal disclosure of major events. The information disclosure by listed companies is fundamental to investors to exercise their rights to be informed and make investment decisions. SZSE always adheres to the investor needs-oriented disclosure to strengthen the regulation of the effectiveness of listed companies’ information disclosure. Since 2019, some listed companies maliciously concealed, made use of hot spots and speculated on concept stocks in their announcements. Such behaviors had aroused questions from investors and public media, affected stock prices and trading volumes, imposing a nasty effect on the market. SZSE held such parties accountable without delay and seriously handled a total of 33 cases of illegal disclosure of major events. We guided listed companies to improve their quality of information disclosure and provide true, accurate and complete information.
Fourth, unfulfilled commitment. Publicly made commitments, such as those on restructuring performance and shareholding increase, are not only the agreement between the promisee and the listed company, but also an important link relevant to the actual effect of listed companies’ M&A, restructuring and operation. They often have an important impact on investors’ decisions and transactions. When some persons concerned made performance commitments or shareholding increase plans, the imprudent assessment on their performance abilities may mislead investors. To protect the legitimate rights and interests of investors and strengthen the regulation over restructuring efficiency, SZSE urged market players to act in good faith through disciplinary actions and dealt with a total of 34 cases of unfulfilled commitment throughout the year. Among them, 11 cases involved unfulfilled performance compensation commitment, and 16 cases involved unfulfilled shareholding increase plans.
Fifth, illegal information disclosure on performance forecast and preliminary earnings estimate. Annual performance may have a significant impact on a company’s share price and investor decisions. In 2019, there were large net profit differences between some listed companies’ disclosure of their earnings forecasts and preliminary earnings estimate and the audited net profit in their annual reports. What’s more, some of them even made material changes in their earnings forecast reports. To this end, SZSE has strictly applied rules and punished listed companies and persons liable in 48 such cases in 2019.
The 215 disciplinary action decisions issued by SZSE in 2019 are both a warning to market violators and an answer to safeguard the legitimate rights and interests of investors and promote the stable and sound development of the market. The year 2020 is the 30th year of “planting its feet firm upon the ground” for China’s capital market. Under the leadership of CSRC, SZSE will study and implement the new Securities Law, lay a solid ground of self-discipline system and improve disciplinary action procedures. We will also go after more targeted, transparent and credit disciplinary actions, and spare no effort to make a more standardized, transparent, open, vibrant and resilient capital market.
