2018.10.10 XIE, Qing (Natasha)、YANG, Yuxiaoxiao
On September 28, 2018, the China Securities Regulatory Commission (CSRC) announced that it is soliciting public comment on the Administrative Measures on the Representative Offices of Foreign Securities and Futures Exchanges in China (Consultation Paper) (“Consultation Paper” or “Measures”). The Consultation Paper if enacted will replace the Administrative Measures on the Representative Offices of Foreign Securities Exchanges in China issued by the CSRC on May 20, 2007 (“Old Measures”). Below we provide an overview of key amendments that may have implications for foreign exchanges’ activities in China and our comments and suggestions on the Consultation Paper.
The Consultation Paper applies to the establishment of and activities carried out by representative offices (“Representative Office Activities”) of all foreign securities exchanges, futures exchanges, securities or futures automatic quotation or electronic trading systems or any other foreign exchanges recognized by the CSRC. Representative Office Activities include activities such as liaison and research, but exclude any for-profit business activities.
Of note, in the draft statement released by the CSRC at the same time as the Consultation Paper, there is a reference to the National Financial Work Conference’s requirement that “all financial businesses shall be regulated”. The draft statement draws attention to foreign futures exchanges that have established offices or businesses in China along the lines of representative offices but have not been filed with the CSRC and hence their activities are currently beyond the reach of financial regulation. In order to extend its supervisory and regulatory coverage, the Consultation Paper expands the scope from only securities exchanges to include both securities and futures exchanges.
The Consultation Paper sets out the documents required and procedures for filing. A foreign exchange is required to submit filing materials to the local office of the CSRC where it is domiciled within five working days after the completion of Administration of Industry and Commerce (AIC) registration. Failure to submit the filing materials on time may result in a penalty. However, the Consultation Paper does not specify whether a representative office and its staff may carry out activities without filing, nor does it indicate the time limit for a local office of the CSRC to provide feedback on any supplementary materials that may be required, nor on the time limit for the completion of the review and publication of the filing.
We suggest that the Consultation Paper should explicitly stipulate that, prior to filing, a foreign exchange is not allowed to engage in liaison or market research activities in the name of representative office, though it should be allowed to conduct any relevant preparation work for the business; and that there should be specific time limits stipulated for the local CSRC office to provide its feedback and for review and publication of filing.
Articles 36 of the Old Measures stipulates that where a representative office organizes and holds large-scale promotion activities targeting enterprises without prior filing, the CSRC will impose penalties on such representative office in accordance with the law. The draft statement clarifies that the word “promotion” used in the Old Measures is ambiguous, and therefore replaces it with “marketing event”, which is defined to include training session, conference, or seminar targeting institutions or enterprises organized or held as a sponsor by a representative office or its staff. The Consultation Paper further requires a representative office to submit plans - including details such as time, location, agenda, meeting materials - for any proposed event which it organizes or holds as a sponsor to the local office of the CSRC where it is domiciled, and to undertake that it will strictly abide by the provisions of the Measures. Only if the local office of the CSRC does not raise any objections within five working days after the date of acceptance of filing, will the representative office be able to proceed with the marketing event.
In our view, the requirement to file marketing event activities reflects the intended spirit of prudential regulation of the financial sector and will serve to regulate the activities of representative offices and help to ensure compliance. However, in order to ensure efficiency in regulation and supervision and to reduce the operational costs and burden of compliance on foreign institutions, it is recommended to change “prior filing and no objections” to “post filing” and to exempt the filing requirements of small-scale marketing events, for example one-on-one meetings, or other meetings that target specific institutions or enterprises.
The Consultation Paper retains the following prohibited activities that were included in the Old Measures: a representative office and its staff shall not (i) engage in any operational activities directly or in a disguised form; (ii) conduct any advertising in any form; or (iii) enter into any agreement or contract with any legal person or individual which may generate income for the representative office or the foreign exchange, and adds that a representative office and its staff “shall not provide any direct-access trading services to any domestic institution or individual; shall not provide trading services to any domestic institution or individual through institutions such as the members of the foreign exchange in any form or other prohibited activities as stipulated in laws or regulations”.
According to Article 13 of the Administrative Regulation on the Registration of Resident Representative Office of Foreign Enterprises (“Regulation on Resident Representative Offices”) , a representative office shall not engage in any for-profit activities. For the avoidance of doubt, we would recommend the Consultation Paper should retain its consistency with the Regulation on Resident Representative Offices by replacing “operational activities” with “for-profit activities”, and should explicitly stipulate that market research and liaison activities are excluded from the definition of for-profit activities.
Article 14 and Article 15 of the Consultation Paper stipulate that jurisdiction should be exercised under different scenarios: (i) where a foreign exchange has established a representative office or engaged in the Representative Office Activities without AIC registration, the local office of the CSRC will notify the local AIC to handle such case in accordance with the law; (ii) where a foreign exchange has established a representative office and conducted activities of a representative office upon registration with AIC but failed to file with the local office of the CSRC where the representative office is domiciled or did not submit the filing materials on time, the CSRC or its local offices are entitled to impose punishment; (iii) where a representative office has filed with the local office of the CSRC, it or its staff illegally engage in any securities and futures businesses, the CSRC or its local offices are entitled to impose punishment; (iv) where a representative office has filed with the local office of the CSRC, it or its staff illegally engage in any for-profit activities outside the scope of securities and futures businesses, the local office of the CSRC will notify the local AIC or other relevant authorities to handle such case in accordance with the law.
Moreover, the Consultation Paper requires all foreign exchanges that have established an office or engaged in the Representative Office Activities to file with the relevant local offices of the CSRC within 180 days of enactment of the Measures. In light of the above, once the Measures are formally released, foreign exchanges may need to evaluate the business activities that may be conducted by various types of entities they have established in China and complete the filing of the representative office as required, or face punishment by the CSRC and/or registration authorities if they fail to abide by the Measures.
1. Promulgated by the State Council on 19 November, 2010 and amended on 18 July, 2013.