A Comparative Study of Securities Laws

A Comparative Study of Securities Laws

Spring, 2017 University of Zagreb

ZHU Weiyi, Professor, China University of Political Science and Law

Content

I. Regulatory Regime

Chapter 1 Laws and Regulation

Chapter 2 Regulatory Framework

Chapter 3 Corporate Governance

II. Securities and Offering

Chapter 4. Definition of Security

Chapter 5 Offering

III. Asset Management

Chapter 6 Securities Investment Fund

Chapter 7 Asset Management

IV. Trading

Chapter 8 Securities Exchanges and Securities Venues

Chapter 9 Derivatives (Financial Futures)

Chapter 10 Insider Trading and Manipulation

Chapter 11 Mergers and Acquisitions

V. Securities Service Intermediaries

Chapter 12 Securities Companies

Chapter 13 Securities Service Intermediary Agencies

VI. Liabilities and Remedies

Chapter 14 Liabilities

Attached Materials

I. Regulatory Regime

Chapter 1

Laws and Regulations

A. Hierarchy of Law

In the hierarchy of law, the Chinese laws and regulations rank in the following order: Constitution, the laws adopted by the National People’s Congress,[1] the administrative regulations adopted by the State Council, [2]local decrees adopted by the local people’s congress, [3] and the administrative rules issued by various government ministries, commissions and agencies. [4]

Judicial explanations issued by the People’s Supreme Court are also of significant importance. From time to time, the People’s Supreme Court offers its explanations on the specific issues concerning the applications of laws and decrees.[5]

For securities regulation, the detailed rules are more important than the laws and ordinances which tend to be vague and general. The CSRC is responsible for issuing the bulk of rules and normative documents. The rules and normative documents are grouped into five categories: (1) companies and securities; (2) banking and insurance; (3) administrative section; (4) civil and commercial section; (5) criminal law section; and (6) miscellaneous section.

B. Companies Law and Securities Law

Securities: the Securities Law.[6]

Companies: the Company Law,[7] the People’s Supreme Court’s Provisions on the Issues Relating to the Application of the Company Law of the People’s Republic of China (I),[8] the People’s Supreme Court’s Provisions on the Issues Relating to the Application of the Company Law of the People’s Republic of China (II), [9] the People’s Supreme Court’s Provisions on the Issues Relating to the Application of the Company Law of the People’s Republic of China (III), [10] and the Administration Regulations of the registration of Companies.

Securities Investment Funds: the Securities Investment Fund Law[11], the Reply by the State Council to Issues Relating to Securities Investment Fund Management Companies.

Futures: the Administrative Regulation of Futures Trading,[12] the Administration Regulations of the Futures Trading, the People’s Supreme Court’s Provisions on the Issues Relating to the Adjudication of Disputes Involving Futures,[13]and the People’s Supreme Court’s Provisions on the Issues Relating to the Adjudication of Disputes Involving Futures (II).[14]

Trust: the Trust Law

C. Banking and Insurance

Banking: the Law of the People’s Bank of China,[15] the Commercial Bank Law,[16] the Banking Supervision and Administration Methods Law, [17] the Administration Regulations of Foreign Banks. [18]

Currency Control: the Foreign Currency Regulations, and the Administration Regulations of Reminbi.

Financial Institutes: The Interim Regulations of the Supervisory Board of Major State-owned Financial Institutes,[19] the Methods of Outlawing Illegal Financial Institutes and Illegal Financial Business Activities,[20] the Administration Regulations of the Financial Assets Management Company, the Penalty Methods of Illegal Financial Activities, the Regulations of Dissolving Financial Institutes.

Insurance: (1) the Insurance Law, the People’s Supreme Court’s Explanation on the Issues Relating to the Application of the Insurance Law of the People’s Republic of China, and (2) the Administration Regulations of the Foreign Insurance Companies.

Anti-Money Laundry: (1) the Anti-Money Laundry Law,(2) the People’s Supreme Court’s Judiciary Explanation on the Issues Relating to the Application of the Specific Laws in the Adjudication of Criminal Cases Such as Money Laundry.[21]

D. Administrative Law

The Administrative Licensing Law, the Administrative Review Law, Administrative Supervision Law, the State Secrecy Law, the Lawyers

E. Civil and Commercial Law

General: (1) General Principles of the Civil Law, (2) the People’s Supreme Court’s Opinion on Implementation of the General Principles of the Civil Law of the People’s Republic of China (for Trial Implementation)

Property: (1) the Property Law, (2) the Guarantee Law, (3) the People’s Supreme Court’s Explanation of Issues Relating to the Application of the Guarantee Law of the People’s Republic of China, and (4) the Tort Law.

Contracts: (1) the Contract Law, (2) the People’s Supreme Court’s Explanation of Issues Relating to the Implementation of the Contract Law of the People’s Republic of China (I), (3) the People’s Supreme Court’s Explanation of Issues Relating to the Implementation of the Contract Law of the People’s Republic of China (II), (4) the Supreme Court’s Provisions on Issues Relating to the Adjudication of Civil or Commercial Contractual Dispute Cases Involving Foreign Parties.

Commercial Paper: (1) the Commercial Paper Law, and (2) the Electronic Signature Law.

Civil Procedures: (1) the Civil Procedure Law, (2) the People’s Supreme Court’s Opinion on the Application of the Civil Procedure Law of the People’s Republic of China, (3) the People’s Supreme Court’s Explanation of Issues Relating to the Implementation Procedures for the Application of the Civil Procedures Law of the People’s Republic of China.

F. Criminal Law

Criminal Offences: (1) the Criminal Law, (2) the Supplementary Provisions Issued by the People’s Supreme Court and People’s Rrocutorate on the Determination of Offenses in the Implementation of the Criminal Law of the People’s Republic of China (III), (3) the Supplementary Provisions Issued by the People’s Supreme Court and People’s Rrocutorate on the Determination of Offenses in the Implementation of the Criminal Law of the People’s Republic of China (IV), (4) the Circular Issued by the People’s Procutorate and Ministry of Public Security on Issuing the Provisions on ‘the Criteria for Opening Investigation and Prosecuting Criminal Cases within Their Jurisdiction., (5) the Circular on Seizing and Freezing by the People’s Procutorate of Illegally Obtained Cash and Objects (6) the People’s Supreme Court’s Explanation of Issues Relating to the Adjudication of the Cases Involving Illegally-raised funds,

Criminal Procedures: (1) the Criminal Procedure Law, (2) the People’s Supreme Court’s Explanation on Issues Relating to the Implementation of the Criminal Procedure Law of the People’s Republic of China, (3) the Circular Issued by the People’s Supreme Court, the People’s Supreme Procutorate and the Ministry of Public Security of Issues Relating to the Applicable Criminal Procedures in the Criminal Cases Involving Securities and Futures Investigated by the Branch Directly under the Securities Crime Investigation Bureau of the Ministry of the Public Security.

G. Others

Accounting: (1) the Accounting Law, (2) the Law of the Certified Public

Accountants.

H. Administrative Rules and Normative Documents

(1) offering; (2)listed companies; (3) foreign shares and equity; (3) disclosure rules; (3) market transactions; (4) securities companies; (5) securities services intermediary; (6)funds; (7) Futures; (8) self-regulatory organizations.

Chapter 2 Regulatory Regime

For the regulatory scheme of the Chinese securities market, the State Council is the supreme body under which a large number of ministries, commissions and agencies police, separately or collectively, the securities market, acting in the name of the State Council. In fact, the Securities Law does not specify any government agency as the regulator of the securities market. Instead, article 7 of the Securities Law uses the term “securities regulatory authorities” for any government agencies which happen to intervene on any particular matter at a point of time.[22]

Chapter 2 Regulatory Regime

A. A Crowded Field

Under the Securities Law, the list of the regulators is open-ended, and in practice the regulatory regime is omnipresent and multi-tiered. At core is the collegium consisting of the People’s Bank of China (“POBC”), the China Banking Regulatory Commission (“CBRC”), the China Securities Regulatory Commission (“CSRC”) and the China Insurance Regulatory Commission (“CIRC”), and the State Administration of Foreign Exchange (“SAFE”), often collectively referred to as “one bank and four commissions” (The SAFE is a bureau administered by the POBC on behalf of the State Council). A vice premier in charge of financial matters is the front man acting on behalf of the Premier.[24] In terms of administrative hierarchy, the POBC is the first among equals; in fact, the CBRC, the CSRC and CIRC were departments within the POBC before spinning off to be independent government commissions. In actual policing work, however, the CSRC is the chief regulatory authority.

In addition to the collegium, other key regulatory authorities also intervene in the securities market on a regular basis. These authorities include: the Ministry of the Finance (“MOF”), the State-owned Assets Supervision and Administration Commission (“SASAC”) the National Commission of the Development and Reform (“NCDR”). Less important are peripheral regulators like the Ministry of Industry and Information (“MOII”), the Ministry of Public Security (“MOPS”), the Ministry of Environmental Protection (“MOEP”) and National Audit Office (“NAO”). They intervene in the securities market on a case-by-case basis.

Local governments are also to be reckoned, as they wield considerable regulatory powers over the securities market.

Regardless of their functions and status within the administrative hierarchy, all these “regulatory authorities” each have two departments involved in the securities market regulation: legal department and department of international affairs. Legal departments, among other things, handle administrative litigation cases and revise the rules and regulations drafted by other departments within their respective ministries. In addition, legal departments have the important function in law-making processes. The National People’s Congress make laws as a legislature, but law drafts are prepared by various ministries and then submitted by the State Council which turns over the drafts to the NPC. International department serves as a door keeper in matters related to foreign parties, government or private, when they want to contact the authority for cooperation or launch complaints.

In short, the securities market is a field crowded with regulators. Under the Securities Law, the securities market shall be subject to unified supervision and administration.[25] A problem typical of any large market, China’s securities market is fragmentized, accompanied by fragmentation of the regulatory regime. In addition to the CSRC, other government agencies regularly issue regulations, separately or jointly regarding securities market: the NDCR and CIRC regarding private equity funds,[26] the Ministry of Finance,[27] the State-owned Assets Supervision Administration Commission (“the SASAC”) regarding the listed companies partially owned by the State,[28] the Ministry of Commerce regarding transactions by listed companies involving foreign elements[29], and Ministry of Industry and Information (“the MOII”) and State Administration of Industry and Commerce (“the SAIC”) regarding the financial guaranty companies, [30]to name just a few examples.

Unhappy with this fragmentation and the related problems, some commentators have proposed various plans for reforms. One notion is that a Chinese Financial Regulatory Commission (“CFRC”) should be formed at the top of the regulatory hierarchy, with the CBRC, CSRC and CIRC juxtaposed below, respectively in charge of banks, securities and insurance companies. Parallel to the CFRC would be POBC which controls monetary policies and regulates the monetary market and foreign currency market.[31] But the leadership seems to have passed on the idea.

There is a caveat to the above delineation of the regulatory regime. On the administrative side, the State Council led by Premier makes major decisions regarding the securities market, but the standing committee of the political bureau headed by the Party’s Secretary-General remains the final arbiter of the financial matters. Institutionally, there is the Office of the Central Leading Group for Financial and Economic Affairs (“financial leading group”) which is directly answerable to the standing committee of political bureau and Secretary General of the Party. It is believed that the leading group operates somewhat like the White House National Economic Council, influencing decision-making by framing the options which leaders debate.[32] But since the financial leading group mostly operates behind scenes, disclosing little information, the real functions of the financial leading group is still most people’s guess.

B. CSRC: the Lead Regulator of the Collegium

The CBSC, the CSRC and the CIRC are “institutions directly under the State Council.” In August, 2013, a collegium was formed, consisting of the heads of the competent regulators, and with the mandate to coordinate their policies and actions so as to reduce problems resulting from their inconsistent policies and regulations. These regulators are: the POBC, the CBRC, the CSRC, the CIRC and SAFE. Among the heads of these regulators, the Governor of the POBC is the first among equals as the lead coordinator.[33]

1. The CSRC’s Mandate

The CSRC has a broad mandate to regulate stocks, bonds, futures and derivatives (or financial futures as formally referred to in laws and regulations). The CSRC also regulates the securities firms and accounting firms. One of the bigger regulators, the CSRC has 26 departments, and chief among them are General Office, Department of Public Offering Supervision, Supervision Department of Non-listed Public Companies, Department of Market Supervision, Department of Intermediary Supervision, Department of Listed Company Supervision of Investment Fund Supervision Future Supervision Enforcement Bureau, Department of Legal Affairs, Administrative Punishment Committee and Department of Accounting. In addition, the CSRC has 36 regional offices and two securities supervision offices in Shanghai and Shenzhen.

A. Departments

Dispatched discipline inspection office of the Central Commission of the Discipline Inspection of the Central Committee of the Communist Party of China (“CPC CCDI”) to CSRC The discipline inspection office used to be an internal department of the CSRC, and it was quietly transferred to the CCDI sometime in 2015.

The CSRC used have a department of innovation which was quietly abolished sometime in 2016.

2. Stock Exchanges and Future Exchanges

Shanghai Stock Exchanges and Shenzhen Stock Exchange, along Future Exchange and Shanghai Financial Futures Exchanges, have been supervised and controlled by the CSRC. On April 11, 2012, Both Gui Minjie and his predecessor at Shanghai Stock Exchange worked as deputy party secretary and vice chairman of the CSRC for years. Such backgrounds, Guo Shuqing claimed, showed that the Central Party Committee of the Party and the State Council cared deeply about SSE.[34]