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The New Trend in Administrative Reconciliation under the New Securities Law

2020.02.06 WU, Man

Coming into force on March 1, 2020, the new Securities Law explicitly stipulates in Article 171 an administrative reconciliation mechanism for the China securities market. Pursuant to Article 171, the China Securities Regulatory Commission (CSRC) may, at its discretion and at any time throughout an administrative investigation, suspend such investigations, provided that the party under investigation has submitted a written application to the CSRC undertaking to (i) rectify the alleged violations within the time period approved by the CSRC, (ii) compensate for the losses incurred to the relevant investors, and (iii) recover the damages or eliminate the adverse consequences arising therefrom.

Despite the existing regulations issued by the CSRC in 2015, namely, the Implementing Measures for the Pilot Program of Administrative Reconciliation and the Provisional Measures on the Management of Administrative Reconciliation Consideration, it is the first time the administrative reconciliation mechanism has been stipulated in a law at the national level. From our observations, the new law provides a more solid legal basis for the implementation of administrative reconciliation in the securities market, and may have a profound impact on the future trend of market supervision and law enforcement.

In practice, following the first administrative reconciliation case publicized by the CSRC in April 2019, which was between the CSRC and nine applicants including Goldman Sachs (Asia), Beijing Gao Hua Securities and their respective related personnel, the CSRC publicized another administrative reconciliation case on its website on January 20, 2020, which was between the CSRC and five applicants including Citadel Shanghai Trading Ltd. and their respective related personnel. It can be observed from the two reconciliation cases that all relevant parties are required to pay a relatively high settlement payment for administrative reconciliation and take necessary measures to strengthen their internal control management. It is in this context that the CSRC decided to terminate the investigative and trial proceedings against the relevant applicants. 

As we have previously commented in the Client Briefing – CSRC Announces its First Case of Administrative Reconciliation circulated on April 29, 2019, once an administrative reconciliation agreement is reached, the relevant companies and individuals will not be subject to administrative penalties or market bans for the same activities, nor will their good faith records in the securities and futures market be adversely impacted. This would be welcome news for such companies and individuals, enabling them to continue their business operations, without losing their qualifications or having their reputations suffer. 

We believe the administrative reconciliation mechanism may be further promoted upon the implementation of the new Securities Law in light of the following: 

First, from the perspective of the regulatory authorities, administrative reconciliation can effectively save regulatory resources, improve the efficiency of law enforcement, and help resolve some complicated cases. Moreover, the administrative reconciliation payments collected can be used to compensate investors, thereby offering better protection for investors. 

Second, from the perspective of the institutions and individuals involved in the relevant cases, given that the new Securities Law imposes more severe penalties for relevant violations of laws and regulations in the securities market and that more cases involving violations in the securities market have been brought to judicial proceedings due to the interconnection between criminal and administrative proceedings in the recent two years, resolving the cases through administrative reconciliation may be a more desirable option for the relevant parties under investigation.

In the abovementioned two instances of reconciliation, it is noteworthy that the suspect activities occurred in 2015, meaning we can conclude that the CSRC took around four years to complete the investigation and then transfer to trial and reconciliation. Following the release of these two reconciliation cases, it remains to be seen if the CSRC would transform the pilot program of administrative reconciliation into a routine practice and how it will further amend the requirements and procedures to facilitate resolving more cases through administrative reconciliation.

We will continue to monitor the situation and keep our clients apprised of any important developments.

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