Today, the Shanghai Stock Exchange (SSE) officially issued the Guidelines of Shanghai Stock Exchange No. 2 for the Application of Self-Regulation Rules for Listed Companies - Standards for Implementation of Disciplinary Actions for Listed Companies (the Disciplinary Action Standards for short). Regarding the release of the Disciplinary Action Standards, an SSE official in charge of relevant businesses has answered related questions.
Q1: It is the first time that the SSE has publicly disclosed specific standards for disciplinary actions. What are the background and considerations for the formulation and disclosure of the standards?
A: Disciplinary action is a major means for exchanges to perform front-line regulatory duties, as well as an important part of the regulatory system for the capital market. Over the years, we have been working to make the disciplinary actions more standardized. The Disciplinary Action Standards has been issued mainly for the considerations in the following three aspects.
The first consideration is to advance the improvement of the quality of listed companies. Listed companies are the cornerstone of the capital market, and improving the quality of the listed companies has become an important goal of regulation at present. On October 9, the State Council issued the Opinions on Further Improving the Quality of Listed Companies, which make clear requirements and comprehensive arrangements for the listed companies to boost the regulated operation, improve the quality of information disclosure, solve noticeable problems and enhance the capacity for sustainable development and overall quality. The abovementioned requirements should also be met in the disciplinary action work by highlighting the key points in regulation and optimizing and adjusting the standards for disciplinary actions. The Disciplinary Action Standards have been issued so as to improve the rules for identifying violations, step up the enforcement of the disciplinary actions, and drive the improvement of the quality of listed companies and supply systems for propelling the stable and healthy development of the capital market from the perspective of the exchange as a front-line regulator.
The second consideration is to implement the requirements of the new securities law and strengthen the targeted regulation. The new securities law incorporates a special chapter of provisions on information disclosure, which significantly tightens the legal liability for illegal activities, attaches more importance to the effectiveness of information disclosure, and puts forward stricter requirements on the behaviors of directors, supervisors, senior executives and controlling shareholders. Correspondingly, it is necessary for the SSE to carry out effective adaptation and implementation in the self-regulatory and disciplinary actions for the listed companies. In accordance with the objectives of classified regulation and targeted regulation, the SSE will improve the disciplinary actions standards for the listed companies, keep a close eye on the responsibilities of the “critical few”, further consolidate the foundation for the self-regulatory system, and make more meticulous efforts in the disciplinary action work.
The third consideration is to further enhance the transparency of regulation and standardize the behaviors in performing the regulatory duties. The openness and transparency of regulation is necessary for improving the level of law-based supervision. It is an important task to improve regulatory transparency and enhance predictability in optimizing the self-regulatory work at present. By disclosing to the market the specific standards and circumstances for consideration for the disciplinary actions, the Disciplinary Action Standards will result in better operability and more definite market expectations, help standardize our own behaviors in performing regulatory duties and improve the level of law-based supervision.
Q2: Since last year, the China Securities Regulatory Commission (CSRC) has repeatedly stressed proper regulation, classified regulation, professional regulation and continuous regulation, as well as the improvement of the regulatory efficiency. Does the Disciplinary Action Standards take this into consideration and reflect it?
A: The Disciplinary Action Standards has been formulated by following the principle of "building the system, non-interference and zero tolerance", with the goal of more effectively implementing classified regulation and targeted regulation, focusing on detailing the division of responsibilities. Especially against current complex internal and external economic landscape where some listed companies have operating difficulties, the actual conditions and development needs of the listed companies have been taken into full consideration, and efforts have been made in seeking truth from facts to distinguish responsibilities for violations, as the regulatory deterrence will be demonstrated while unnecessary impacts on the listed companies will be avoided.
First, targeted regulation will be implemented with "combining punishment with leniency" as the basic principle for standard setting. The Disciplinary Action Standards take "combining punishment with leniency" as its guiding principle, strive to refine the distinction of responsibilities, and make differentiated arrangements in distinguishing different types of cases, different cases of the same type, and different responsible parties in the same case, so as to improve the pertinence of self-regulation. At the same time, with the actual conditions and development needs of the listed companies taken into full account, the Disciplinary Action Standards are oriented toward propelling the improvement of the quality of listed companies. In the course of responsibility investigation, room for maneuver is reserved for companies that have made overhauls, or “rebuilt themselves” and have certain operating capabilities so as to help them get out of difficulties or transit business. As a result, the disciplinary actions can achieve the intended effect as a punishment, while reducing the impact on the development of listed companies.
Second, the types of cases will be distinguished, and the substantive violations that are serious in nature and vicious in impact will be dealt with strictly. The Disciplinary Action Standards distinguish different types of violations, and adopt different liability standards and punishment levels, in accordance with the requirement for “achieving effectiveness by streamlining and refining administration”. For financial fraud, capital occupation, illegal guarantees, violations in major mergers and acquisitions and restructuring and other substantive violations that are serious in nature and vicious in impact, the work requirement for "zero tolerance" will be implemented strictly, the standards for disciplinary actions such as public condemnation at higher levels will be clarified, and severe penalties will be imposed on the main responsible persons. For the cases where the violation results from purely the flaws in the form of information disclosure or the negligence in daily work in nature, does not cause significant losses to the company, and has little impact on the market, lighter punishments will be adopted, mainly for the purpose of warning and reminding.
Third, the circumstances of individual cases will be distinguished, and differentiated actions will be taken after fully considering the rectification, intention and other factors. The Disciplinary Action Standards provide for different punishments by distinguishing the severity of violations and comprehensively considering the specific subjective and objective circumstances such as amounts and proportions involved in the case, actual losses, market impact, rectification, and subjective fault. 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.
Fourth, the parties with responsibilities will be distinguished, and the responsibilities of the listed company, controlling shareholders, and directors, supervisors, and senior executives will be divided and identified accordingly. Based on the scope of authority, performance of duties, and impact level of those liable, the Disciplinary Action Standards reasonably identify and divide the responsibilities among different parties, so that responsibilities and penalties are well matched. On the one hand, the accuracy will be improved in distinguishing the responsibilities of the listed company from those of controlling shareholders, actual controllers, directors, supervisors and senior executives, as the controlling shareholders and actual controllers should bear the main responsibilities for the violations dominated by them, and for the listed company or the directors, supervisors and senior executives that are indeed unaware, have no obvious faults and are active in taking remedial measures, light, mitigated or no punishments will be imposed. On the other hand, the personal responsibilities of a company's internal directors, supervisors and senior executives are clearly distinguished, 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 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 other directors, supervisors and senior executives who directly participate in related violations.
Q3: Can you brief us on the main contents of the Disciplinary Action Standards?
A: The Disciplinary Action Standards include four chapters: "General Principles", "General Provisions", "Specific Provisions" and "Supplementary Provisions". The main contents are as follows.
The basis for formulation is added and detailed in the “General Principles”, which also clarifies the parties for application and the types of disciplinary actions that can be imposed. The “General Provisions” stipulates the basic principles, circumstances for consideration, principles of responsibility division and other factors that should be followed and applied in the course of imposing the disciplinary actions, including the common circumstances to be considered for adoption of severe and light penalties and mitigation and exemption of punishment, the responsibility division after the “thorough transformation” and replacing the actual controller, the distinction of the responsibilities of the listed company and the controlling shareholder, actual controller, directors, supervisors and senior executives, the distinction of personal responsibilities of directors, supervisors and senior executives, and the application of public identification, the punitive liquidated damages and the principle for combined actions, etc. The “Specific Provisions” include five sections to stipulate specific disciplinary action standards, mainly covering three issues: information disclosure, regulated operation, and securities trading and disclosure of changes in equity. It also provides special provisions for the violations of securities service agencies, and sets miscellaneous provisions for violations to ensure the completeness and adequacy of the Disciplinary Action Standards. The “Supplementary Provisions” provide supplementary interpretations on the application and implementation of the Disciplinary Action Standards.
Q4: Before the Disciplinary Action Standards were officially released and implemented, the public opinions were solicited from the entire market. Can you brief us on the specific process of soliciting the opinions?
A: Taking into account the impact of the Disciplinary Action Standards on the listed companies and other relevant entities, the SSE solicited opinions on the Disciplinary Action Standards in the market from September 4 to 18, 2020, and held a forum for soliciting comments on September 3 to listen to the opinions and suggestions of 16 listed companies invited to the meeting. At the same time, through the official website and other channels, the SSE learned about the issues that the market was generally concerned about.
On the whole, feedback from the parties concerned is positive. It is generally believed that the Disciplinary Action Standards effectively reflect the requirements for classified regulation and targeted regulation, clarify the specific circumstances and disciplinary action standards for various violations, and provide the market with relatively clear expectations, which is of great significance for guiding and promoting the regulated operations of the companies, maintaining the order of the securities market and protecting the interests of investors.
Specifically, feedback is concentrated on the suggestions on further refining and quantifying the applicable standards, clarifying the circumstances for judgment, and making the “red lines” of violations more detailed and elaborate. After receiving the opinions, the SSE conducted adequate discussions and earnest analysis, and absorbed reasonable opinions and suggestions from all parties concerned in the market before further revising and improving the Disciplinary Action Standards.
Q5: After the Disciplinary Action Standards are officially released, what further measures will be taken for the implementation in the follow-up?
A: Under the guidance of the CSRC , the SSE will work with dispatched offices of the CSRC to continue to implement the guideline of “building the system, non-intervention, and zero tolerance”, and urge the listed companies to concentrate on main businesses, improve performance, be honest and comply with regulations, so as to improve the quality of listed companies.
First of all, the SSE will vigorously implement the requirements for "targeted regulation and proper accountability", give full play to the role of the front-line regulation in timely discovering, curbing and investigating the violations, and effectively implement the Disciplinary Action Standards. The SSE will timely and effectively deal with serious violation cases causing disruption of t market order and damage of investors interests, and seek truth from facts to hold relevant parties responsible, so as to enhance the credibility of self-regulation.
Secondly, the SSE will actively adapt to the regulatory situation and market reality, continue to sum up the experience in practice, and constantly optimize and improve the categorized disciplinary standards. When the conditions are ripe, the SSE will disclose to the public in a timely manner by means of Q&A on regulation, detailed rules for implementation, etc., so as to provide more regulatory interpretations and better meet the demand of the listed companies for systems in the high-quality development.
Thirdly, the SSE will, based on the interpretation and application of the Disciplinary Action Standards, make effective efforts in training and service, and communicating with and explaining to the parties, etc., strengthen promotion and guidance, help the market correctly understand the regulatory logic and handling standards of the disciplinary actions, highlight the role of pre-warning and prevention, enhance the regulated operations of the listed companies and the "critical few", and control and reduce violations at the source.
Fourthly, the SSE will continue to deepen the linkage and coordination between self-regulation and administrative supervision, and effectively intensify the front-line supervision of violations through efficient efforts in disciplinary action according to laws and rules, so as to form the regulatory synergy in the capital market, work together to improve the effectiveness of regulatory law enforcement, and effectually protect the legitimate rights and interests of investors.