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Targeted Regulation, Combining Punishment With Leniency: Shanghai Stock Exchange Solicits Opinions On Disciplinary Action Standards For Listed Companies

Date 14/09/2020

On September 4, the Shanghai Stock Exchange (SSE) issued the Standards of Shanghai Stock Exchange for the Implementation of Disciplinary Actions for Listed Companies (Draft for Comment) (the Implementation Standards for short) to solicit opinions from the market.

Disciplinary actions serve as an important means of regulation of listed companies on an exchange. After years of practice, the standardization of disciplinary actions has been steadily improved. In recent years, the economic conditions at home and abroad have become increasingly complex, the status of the capital market in the national economy has been more and more important, and listed companies are the key entities in the 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)”; with the effective information disclosure further highlighted in the implementation of the new Securities Law, the increasingly improved registration-based IPO system providing broader space for deepening the reform of the capital market, and the major changes taking place in the current market situation and legal environment, disciplinary actions need to be more targeted and open. Under the new circumstances, in response to the abovementioned changes, the regulatory orientation and the handling standards have been improved and adjusted continuously in the disciplinary action work.

When formulating the Implementation Standards, the SSE has closely followed the work policy of "building the system, non-intervention, and zero tolerance" made by the China Securities Regulatory Commission (CSRC). To focus on the main line of "building the system", the SSE has summarized and put forward punishment standards for typical violations, merged requirements into specific business rules, and consolidated the supply of rules and systems for supervision of information disclosure. To implement the concept of "non-intervention", the SSE has published and solicited opinions on the implementation standards, so as to further improve the transparency of regulation and form a sound mechanism for predictability in the market. To carry out the requirement for “zero tolerance”, the SSE has focused on the substantial violations that arouse strong concerns in the market, seriously damage the interests of small and medium-sized investors and disrupt the market order, and stepped up the crackdown on vicious violations such as financial fraud, capital appropriation, and illegal guarantees, so as to deter others, tighten the market discipline and purify the market ecology. In addition, with the aim of better implementing the classified regulation and targeted regulation, the Implementation Standards of the SSE has, based on the new Securities Law, collectively responded to the concerns of the market participants such as distinguishing the responsibilities of the listed company and the controlling shareholders, actual controllers, and directors, supervisors and senior executives, differentiating the internal responsibilities among the directors, supervisors and senior executives, and the consideration of “thorough” corrective measures taken by the listed companies , paid close attention to the "critical minority", and strived to make the self-regulatory enforcement more effective.

Implementing the targeted regulation and formulating the standards with the basic principle of “combining punishment and leniency”.

With the aim of classified regulation and targeted regulation and with “combining punishment and leniency” as the basic guiding principle, the Implementation Standards focuses on the detailed division of responsibilities to make self-regulation more relevant. The Implementation Standards makes targeted and differentiated arrangements in distinguishing different types of cases, different cases of the same type, and different responsible entities in the same case, and grasps the appropriate degrees in the punishment while intensifying the regulatory deterrence. In recent years, the violations have been complicated in form for a variety of reasons, as some offenders took action deliberately and some made “careless mistakes”. The Implementation Standards aims to achieve the regulatory effect of learning from the past mistakes to avoid future ones and “curing the sickness to save the patient”, identifies reasons for violations, fully considers the actual circumstances and development needs of listed companies, and seeks truth from facts to distinguish between responsibilities, so that the disciplinary sanctions can achieve the effect of punishment while reducing unnecessary impact on the listed companies. In terms of accountability, oriented toward improving the quality of listed companies, the Implementation Standards reserves the room for the companies that have improved in all aspects, undergone "thorough changes", and that have certain operating capabilities to come out of difficulties and transform.

Distinguishing the types of cases, and strictly dealing with substantial violations that are serious in nature and vicious in impact.

In accordance with the requirement for "achieving effectiveness by streamlining and refining administration”, the Implementation Standards distinguishes different types of violation cases and differs in liability standards and punishment levels considering the nature and characteristics of the violations. For cases of mere flaws in the form of information disclosure or negligence in daily work that have not caused significant losses to the company and have aroused little market concern, the handling will mainly aim at warning and education with light punishment. Conversely, for the serious and vicious violations such as financial fraud, capital appropriation, illegal guarantees and major violations in mergers, acquisitions and reorganization that cause strong reaction in market, damage the interests of small and medium-sized investors, disrupt the market order and touch the red line of regulation, the Implementation Standards strictly implements the work requirement of the Financial Stability and Development Committee under the State Council and the CSRC for “zero tolerance”, clarifies the standards for the punishments at higher levels such as public condemnation, and severely punishes those who take main responsibilities.

Distinguishing the circumstances of each case, and taking different measures fully considering rectification, subjective fault, etc.

Based on the regulatory practices, the Implementation Standards formulates differentiated punishments that are severe or light after comprehensively considering the specific subjective and objective circumstances such as the amount and proportion concerning the case, the actual losses, the market impact, the rectification and the subjective faults. The typical circumstances in a violation such as self-examination and self-correction, rapid rectification, recovery of losses and earnest disclosure in accordance with the provisions can be regarded as causes for adoption of light penalties, or mitigation or exemption of punishment; for the "careless mistakes" caused by the obvious negligence of the parties, their subjectivity will be taken as an important circumstance in consideration; the violations involving a huge amount of capital or a high proportion, causing actual losses to the company, or having strong negative impact on the market, or the violations characterized by deliberate implementation, refusal to make verifications after being discovered, or refusal to carry out corrections and failure in timely disclosure, will be strictly investigated and dealt with according to the rules. In terms of specific provisions, the Implementation Standards adopts a "general-specific" structure to stipulate the circumstances for consideration. The Chapter 2 "General Provisions" summarizes the common circumstances of adoption of severe and light penalties and mitigation and exemption of punishment, while the Chapter 3 “Specific Provisions” lists the circumstances of typical violation types for consideration one by one, so as to make the punishment standards easier to use and more operable.

Distinguishing different entities with responsibilities, and reasonably dividing and identifying the responsibilities among the listed company and the controlling shareholders, directors, supervisors and senior executives.

In the same case, the Implementation Standards reasonably identifies and divides the responsibilities among different entities based on the scope of authority, performance of duties, awareness and participation, and impact level of those liable, so that responsibilities and penalties are well matched, with particular emphasis on making more accurate distinction between the responsibilities of the listed company and those of the controlling shareholders, the actual controllers, directors, supervisors and senior executives. Article 11 of the Implementation Standards clearly requires that controlling shareholders and actual controllers should bear the major responsibilities for the violations mainly caused by their abusing the controlling position; if the listed company is truly not informed and has no obvious faults, and the directors, supervisors and senior executives have been diligent and responsible but are still not informed and are active in taking remedial measures after discovering the violation, consideration should be taken for light, mitigated or exemption of punishment. Article 12 of the Implementation Standards clearly defines the personal responsibilities of the company’s internal directors, supervisors and senior executives, including the direct responsibilities of directors, supervisors and senior executives generally, the management responsibilities of the chairman and the general manager, the responsibilities of the internal directors who directly participate in operation and management and those of the independent directors who do not hold regular positions in the company, and the responsibilities of the secretary of the board of directors responsible for information disclosure and those of other directors, supervisors and senior executives who directly participate in related violations.

Going forward, the SSE will continue to earnestly implement the guidelines of “building the system, non-intervention, and zero tolerance”, analyze and summarize the practices in disciplinary action, optimize the handling of cases, focus on targeted regulation and proper accountability, enhance the credibility of self-regulation, urge the listed companies to comply with regulations in governance, strengthen internal control and improve information disclosure, and push the quality of listed companies to higher levels.