Recently, in the first recorded case of administrative reconciliation in China’s capital markets, the China Securities Regulatory Commission (CSRC) reached an administrative reconciliation agreement with nine applicants (“applicants”), which included Goldman Sachs (Asia), Beijing Gao Hua Securities, and various personnel related to the aforesaid two institutions.
The CSRC subsequently published its Announcement No.11 (2019) (the “Announcement”) on its website, providing details of the background, subject matter and other key information relating to the reconciliation agreement.
(1) The CSRC does not draw any conclusion on the determination of legality of the applicants’ activities. The Announcement briefly reports on the facts, namely: (i) during the period from October 8, 2013 to July 3, 2015, the proprietary traders of Goldman Sachs (Asia) conducted trading through its brokerage account opened with Beijing Gao Hua Securities, and simultaneously provided business guidance to the proprietary traders of Beijing Gao Hua Securities; (ii) Goldman Sachs and Beijing Gao Hua Securities engaged in relevant stocks and stock index futures trading in certain trading hours of four specific trading days from May to July 2015. The Announcement remains silent on whether these activities violated any applicable laws for securities and futures.
(2) The Announcement refers by name only to the institutions, while does not disclose the identities of the individuals who were involved, thereby minimizing any potential reputational impact to those individuals.
(3) The Announcement reports that the reconciliation amount is RMB 150 million and that the applicants have taken the necessary measures to improve their internal controls and will submit written reports to the CSRC on completion of rectification.
While the Announcement does not provide details on any improper behavior of the applicants, it does mention that there have been internal management control issues which therefore need to be rectified.
Pursuant to the Implementation Measures for the Pilot Program of Administrative Reconciliation (Order No. 114 of the CSRC, effective as of 2015), once a reconciliation agreement has been reached, the CSRC shall terminate its investigation into the suspicious activities of the applicants, and bring the proceedings against them to an end. The relevant institutions and individuals involved will no longer be held administratively liable or subject to market bans, nor will their record in the securities and futures markets be adversely affected.
For applicants, the opportunity to reach a reconciliation agreement provides significant advantages. It means they will be able to continue their business operations, keep any relevant qualifications, and protect their reputations, and it mitigates the risk of the CSRC transferring the case for criminal investigation.
The mindset of administrative enforcement in China can be characterized as “Efficient and Fair.” When faced with complicated cases with potentially high investigative and enforcement costs, administrative reconciliation offers the CSRC an alternative to administrative penalty, and provides the opportunity to optimize the use of limited administrative resources, to enforce the law more effectively, and to avoid any dispute arising from an administrative penalty.