To protect the legitimate rights and interests of investors is the responsibility and mission of China Securities Regulatory Commission (CSRC). In order to protect investors’ interests, CSRC has designed the organizational structure featuring ‘a body with two wings’, with a view to improve the institutional foundation of investor protection take various measures to protect public interest and carry out investor education, all of which have well recognized by the public.
General Secretary Xi Jinping, after the 18th CPC National Congress, gave a series of key instructions on capital market reform, development and stability. The Party Committee of CSRC attaches great importance to investor protection. Therefore, the correspondent interviewed the head of Investor Protection Bureau (IPB) under CSRC with a series of questions in mind: As the special entity for investor protection, how does the IPB fulfill its mission? And what protection is offered to investors, particularly medium and smallsized investors? (‘Q’ as the correspondent, and ‘A’ as the head of IPB)
Legal framework as the foundation of investor protection
Q: We learn that the legal framework serves as the foundation of investor protection, and China has seen progress in building such protection mechanism over the past years. Would you please share with us how to build such ‘foundation’ and carry out the protection for investors?
A: Along with the development of domestic capital market, investor protection mechanisms have gradually improved, to include laws, regulations and policies such as Securities Law, the Company Law, the Law on Securities Investment Fund, and the Criminal Law, and helps further strengthen the foundation of investor protection mechanism.
The Opinions of The General Office of the State Council on Further Enhancing the Protection of the Interests and Rights of Small and Medium-sized Investors in the Capital Market (‘the Opinions’) was released. The document is considered as the framework document for capital market investor protection, which, for the first time creates a comprehensive institutional foundation for the protection of the lawful rights and interests of investors, especially the small and medium-sized ones. The Opinions specifies the rights, obligations and duties of small and medium-sized investors, with a view to provide an overall scheme for investor protection through various dimensions including establishment of monitoring, guarantee and remedy mechanisms to protect the right to known, the right to participate and the right to yield, enhancement of conflict settlement and compensation mechanisms, improvement of the investor eligibility management system, and reinforcement of education for small and medium-sized investors.
We shall be actively involved in integrating investor protection into the amendment of the Securities Law. A chapter dedicated to investor protection was added in the second version of the amendment. Additions include standardizing the requirements for cash bonus and listed company’s distribution of cash dividend in accordance with its Articles of Association; enhancement of investor eligibility management, by demanding securities companies to sell securities and provide services in proportion to the investors’ risk tolerance; establish the mechanism of compensation in advance, elaborate ‘continuing information disclosure into an independent chapter, expand the scope of obligors of information disclosure , increase its contents, clarify the information disclosure modes, highlight the responsibilities of directors, supervisors and executives in information disclosure , enhance the authenticity, accuracy, completeness, clearness and accessibility of information disclosure, provide information disclosure in a simultaneous and equal manner; clarify the responsibility of CSRC in investor protection and systematic risk handling.
The Measures for Securities and Futures Investor Eligibility Management was introduced. The Measures is the first regulatory document dedicated to securities and futures investor protection in China, and the primary legal document that governs capital market investor eligibility management. It sticks to the principle of ‘knowing your client’. The core of the Measures is to focus on investor eligibility management of securities, funds, futures institutions, and, to reveal market risks to investors based on investor category and product rating, and to sell the right products to right investors.
Supervision as a key part of investor protection
Q: investor protection requirements have been introduced to market listing, market exit, M&A/restructuring, and debt issuance in recent years, and how the comprehensive capital market investor protection system was built?
A: Market regulation and IP are like the two sides of a coin, and they are inseparable. To firmly protect the lawful rights and interests of investors has always been the mission of CSRC. We incorporate investor protection in drafting rules and regulations as well as day-to-day monitoring to cover all the stages from market issuance to market exit.
Firstly, we incorporate investor protection requirements in major rules and regulations, including stock issuance reform, market exit, M&A/restructuring, corporate debt, and NEEQ system-building.
Secondly, we conduct a strict review over equity financing, to refine investment products for investors. Review efforts including strict examination and control of equity issuance, prevention of fraud listing and investor interest infringement. A specific investor protection mechanism has been introduced in the new equity issuance reform to establish the spot dilution return compensation and advance payment by sponsor institution.
Third, we protect the legitimate rights and interests of investors, e.g. the right to know, the right to participate and the right to yield. Measures include improvement of disclosure procedures, and enhancement of voting participation by small and mediumsized investors and optimization of investor return mechanism.
Fourth, we implement strict enforcement and draw the red line for investor protection . We adopt various measures, including integrity monitoring mechanism, stricter punishment on violation and incompliance, improvement of asset restructuring of listed companies, and share-holding reduction by certain shareholders, meanwhile also focusing on enhancement of inspection and enforcement, crackdown on market violation and incompliance, elimination of illegal securities, and streamlining the operation of exchanges.
Fifth, we educate investors on the investment risks based on the market dynamics and regulative focus. Special education has been jointly organized for PE investors; and programs like ‘Investor Protection: Understanding the Rules and Risks’ have been held; bonds investor education have been provided on a regular basis to enhance the awareness of risk prevention and legitimate rights protection.
Various measures for investor protection
Q: Over the years, CSRC has made a lot of effort to promote investor protection , especially conflict settlement, loss compensation, etc., and ensured the earnings of investors, particularly small and medium-sized investors. What do you think are the best practices that can be promoted widely?
A: Loss compensation for investors has indeed been a tough issue for the capital market for years. As market violation can violate the legitimate rights and interests of a wide variety of the participants,, CSRC in recent years demanded tougher punishment and focuses on the compensation provided to investors that suffer loss due to such incompliance, so that both administrative punishment to the violator and timely compensation to investors are guaranteed.
Firstly, we established a multi-pronged conflict settlement mechanism: The Notice on Establishment of Securities and Futures-related Conflict Settlement Mechanisms Pilot Project in Certain Areas of China was jointly released by the Supreme People’s Court and CSRC in 2016 to build and improve effective communication, coordination and interaction for building efficient and friendly conflict settlement mechanisms. Much innovation was initiated in areas of recognition of securities/futures pilot resolution mechanisms, judicial confirmation of the conflict resolution agreement, implementation of supervisory proceedings of the resolution agreement, establishment of exemplary case law mechanism and efficiency of online resolution. These measures have greatly promoted the efficiency and authority of securities/futures-related conflict resolution, providing fast, professional and diversified conflict resolution channels.
At present 8 pilot mediation entities have been recognized by the Supreme People’s Court and CSRC. 32 local mediation entities cover all the regulated jurisdictions and form a nationwide resolution network. It covers every aspect of the capital market, and resolves conflicts through justice, notarization, and arbitration, further enhancing the efficiency of conflict resolution. More innovation was explored, including the ‘one vs. many’ collective mediation approach, fast resolution of small claims, dispute resolution initiated by one party as well as remote dispute resolution. 2,857 cases were accepted by the aforesaid mediation organizations, among which 1,955 (82.7%) were successfully resolved, with a total amount of 500 million yuan.
Secondly, we explored advance payment mechanisms. In addition to legal measures, the violating parties were requested to set up designated funds to compensate the loss of investors, which proved to be highly successful. Ping An Securities in 2013, major shareholder of Hirisun in 2014 and Industrial Securities in 2017 all established designated funds to compensate the loss caused to investors by false statement. A total of 31,000 eligible investors were provided compensation of more than 500 million yuan.
Thirdly, we set up pilot programs providing litigation support. In 2016, China Securities Investor Services Center provided free legal service to small and mediumsized investors for the first time, helping them to file lawsuits. The Center assisted 6 investor protection legal cases including P2P Financial Information Service, Kangda New Materials, Shanghai Luxin Evotech, Amarsoft, Anshan Heavy Mining Machinery, and ST Holdings.
Fourthly, we established an exemplary case law mechanism for securities and futures-related conflicts: For securities/futures infringement cases with similar typical features, the litigation rulings of the previous cases can be cited as precedent, so as to build an exemplary case law mechanism. Therefore redundant works on similar cases can be streamlined, as similar solutions can be provided to similar cases.
Attach Equal Importance to both Investor Education and Protection
Q: The special investor structure in China means that it is vital to improve risk prevention awareness among small and mediumsized investors. We wonder how CSRC carries out investor education programs?
A: It is a big challenge for us to provide accessible, professional, efficient and not-for-profit educational services to over 100 million investors. CSRC has conducted various efforts to put investor education into practice.
Firstly, we established investor education centers. We focus on building education centers to further provide all-round in-depth investor education. In 2016, the first 13 state-level securities/futures education centers were officially established and authorized. The second group of investor education centers will be submitted for approval this year. So far we have completed review of the first group. In addition, 83 provincial-level investor education centers have been built in China.
Secondly, we incorporated investor education into national education curriculums. CSRC is coordinating to promote pilot programs in more than 20 provinces, municipals and autonomous regions such as Shanghai, Guangdong, Sichuan, Qingdao, Ningxia to include investor education into school curriculums, including primary/middle/high schools, institutions of higher education, and vocational schools. We designed finance textbooks for primary/middle schools, trained nearly 10 thousand teachers and staff, provided courses to millions of students and we have seen real results.
Thirdly, in addition to building education centers, we promoted risk awareness and self-protection ability among investors. We launched various programs, such as ‘Investor Protection: Understanding the Rules and Risks’, to help investors understand the laws/regulations of securities and futures through multi-layered all-round education through various channels.
Fourthly, we launched special investor education programs, such as those on private funds, with focusing on CSRC’s core work to enhance investors’ awareness for risk prevention and rights protection. We also organized special education campaigns for bonds investors, to elaborate on bonds market knowledge, relevant laws/regulations and provide risk reminders. This work is currently under way.
Spread the voice of China investor protection to the world
Q: Global cooperation is demanded for investor protection in the context of globalization of the capital market. How does CSRC advocate China’s investor protection work in the world?
A: CSRC has been attaching great importance to international exchanges on investor protection practices with global peers. It presents China’s propositions, sent its voice through attending such conferences as IOSCO C8 to promote the global influence of China’s investor protection practice.
Firstly, CSRC took the lead to draw up the global guidance for the protection of rights and interests of small and mediumsized investors. Given that individual investors are at a disadvantage in terms of information accessibility and professional expertise as well as the fact that increasing number of new products are being designed and listed, C8 finds it necessary to revise the investor protection rules to guide the IOSCO members’ work.. C8 discussed and approved CSRC’s proposal and project application, and built the first project team lead by China. Guidance documents are the highest level among all IOSCO documents. Being able to draw up the guidance indicates that China, for the first time, has the leading role in drafting international investor protection rules, which greatly improves CSRC’s influence and voice in global organizations.
Secondly, CSRC actively engages in the ‘World Investor Week’. The event is the first global investor education program initiated by C8, with more than 100 member countries and global organizations participating, including the World Bank and G20—. China was appointed as the APAC coordinator by C8, and Mandarin was established as one of the official languages of the event.
Thirdly, we present China’s investor education practice and experience in an all-round way. We have been invited to share China’s practices and experiences in building investor education centers and incorporating investor education programs into the national curriculums with other countries, and was well received. Delegates from Brazil and Hong Kong have expressed the intent for onsite study and exchange. In addition, we communicat frequently with delegates from other countries about investor eligibility, multi-pronged conflict settlements mechanism and internet finance. They provide feedback that they have been successful applying our practices and experience and wish to pursue further cooperation.
Three areas of focus in the next phase
Q: As the old saying goes, a good plan is success half done. We wonder in which additional areas will Investor Protection Bureau ‘roll up its sleeves and work with added energy’?
A: Investor Protection Bureau will follow the plans of the CSRC Party Committee to strengthen the party and IPB’s internal self-discipline, strictly implement regulatory ideals in accordance with the law, further improve fundamental investor protection mechanism, enhance investor education, provide better investor service and investor protection practices, and promote the sound development of capital market. Areas of focus include:
First, improve the multi-pronged conflict settlement mechanism. We will strive to build a state-level mediation organization and bring its role into full play. We will devise new mediation methods, and improve such mechanisms as small-claim accelerated compensation, litigation-mediation connection, arbitration-mediation connection and evidence-mediation connection. We will continue to explore the possibility of establishing the above-mentioned lawsuit pilot program and administrative mediation mechanism， while providing more support to litigation, enhance supporting initiatives and increase the scope of cases to be accepted, with a view to provide solid assistance and support to small and mediumsized investors seeking legal remedy. We will further strengthen the mechanism of compensation in advance and draw on past experiences, to improve the overall procedures and institutionalize the whole system.
Second, make financial services more inclusive, promote investor education, and improve investors’ risk prevention capability. We will step up efforts in building investor education centers, including state and provincial-level centers to provide accessible and professional education services. We will continue to incorporate investor education into national education pilot programs and into national curriculums. In addition, we will establish National Investor Protection Day, and make it a regular investor protection effort and communication mechanism.
Third, strengthen investor protection infrastructure. We plan to build a designated website for investors as soon as possible, and build an interactive online platform that integrates services including inquiry, education, exercise of rights, mediation etc. We will enhance the hotline 12386 to provide better services to investor filing complaints .