Stepping up Regulation with Zero Tolerance for Violations– Overview of SZSE's Disciplinary Punishment in 2020

Date: 2021-01-13

In 2020, the new Securities Law was implemented, the registration-based IPO system reform with information disclosure at its core was steadily advanced, and higher requirements on stock exchanges in strengthening frontline supervision and fulfilling self-disciplinary regulation functions were proposed. SZSE earnestly practiced the principles of “system building, non-intervention, and zero tolerance”, and upheld the working requirements of “standing in awe of the market, rule of law, professionalism and risks and pooling the efforts of all sides to develop the capital market”. With disciplinary punishment as an important lever, SZSE strengthened in-process and ex post regulation. SZSE imposed serious punishment on market chaos and violations of laws and regulations, helped improve the quality of listed companies, and facilitated the deepening of the reform of the capital market in all respects.


On the whole, SZSE issued a total of 227 letters of decisions on disciplinary punishment throughout the year of 2020, 222 of which concern the regulation of listed companies and five are about regulation of bonds. In terms of corporate regulation, SZSE initiated punishments against listed companies for 120 times, responsible persons of intermediaries for 4 times, and other responsible persons for 706 times. In terms of bond regulation, SZSE punished bond issuers for 5 times and responsible persons for 10 times. Both the number and severity of punishments increased further from 2019, a continuation of the strict regulatory attitude and the fair and impartial market order.


Focusing on key areas and strictly guarding the bottom line of regulation


Adhering to the “dual wheel-driven” idea of being information disclosure-driven and corporate governance-driven, SZSE focused on typical violations that are highly concerned by the market and occur frequently such as “newsjacking” in information disclosure, occupation of funds, illegal guarantee and failure to fulfill performance commitments, and advanced in depth scientific regulation, classified regulation, professional regulation and continuous regulation. In the 227 letters of decision on disciplinary punishment, most of the violations are about information disclosure, standard operation and securities trading, which accounted for about 42%, 37% and 21% of the violations respectively.


Adopting early, detailed and strict regulation to prevent concept hype by using information disclosure. After the outbreak of the Covid-19 pandemic, some listed companies hyped hot concepts such as vaccines and facial masks via channels like information disclosure announcements and the Easy IR (an Internet-based interactive investor relations service), and they only disclosed partial business or cooperation related to the hot themes and failed to completely and accurately disclose the impact of relevant business on their performance, which resulted in abnormal fluctuations in stock prices and had bad influence on the market. Leveraging its advantage with flexible, efficient frontline regulation, SZSE quickly handled such violations, promptly sent out letters of inquiry, letters of attention, etc. to warn investors about market risks, and implemented disciplinary punishments against 12 information disclosure cases suspected of “concept hype and newsjacking”.


Implementing classified regulation to precisely detect and handle occupation of funds and illegal guarantee. Vicious violations such as occupation of funds and illegal guarantee can severely damage the legitimate rights and interests of listed companies and investors, and have always been focuses of regulation. In strict accordance with the requirements specified in the Opinions of the State Council on Further Improving the Quality of Listed Companies, SZSE adopted differentiated measures for different situations. On the one hand, SZSE classified the violations. It imposed lesser punishment at discretion against cases in which occupied funds were returned or guarantee liabilities were discharged. On the other hand, SZSE distinguished violators. It imposed strict punishment and adopted precise regulation measures against the “critical minority” such as controlling shareholder and de facto controller that organized and planed the violations. In 2020, SZSE initiated disciplinary punishments to 32 cases of occupation of funds and 27 cases of illegal guarantee.


Strengthening continuous regulation and focusing on failures to fulfill performance commitments after reorganization. Performance commitments are transaction counterparties’ public commitments and often have important influence on investors’ trading decisions. The new Securities Law has included public commitments in the scope of regulation. In recent years, the “sequelae” of high valuation, high goodwill and reorganizations with high commitments have become prominent, and a batch of cases concerning failure to fulfill performance commitments have emerged. To protect investors’ legitimate rights and interests and strengthen continuous regulation of M&As and restructurings, SZSE implemented disciplinary punishment against 23 cases of failure to fulfill performance commitments according to business rules.


Enhancing bond regulation and attaching importance to preventing bond market risks. In recent years, the Shenzhen bond market has expanded continuously. Based on the features of bond products and regulatory experience, SZSE focused on information disclosure, use of raised funds, financial accounting and other key aspects, and imposed disciplinary punishment on five cases of violation including bond issuers’ failure to release annual report on time, embezzlement of raised funds, failure to disclose subsidiaries’ application for bankruptcy reorganization in a timely manner, etc., giving play to its regulatory role and preventing bond credit risk.


Further defining intermediaries’ responsibilities and urging intermediaries to fully perform their duties. Regarding intermediaries’ failure to perform due diligence, SZSE acted proactively and imposed disciplinary punishment on four responsible persons of intermediaries by circulating a notice of criticism. In addition, in the issuance review field, SZSE issued, for the first time, written warnings to four sponsor representatives who violated the issuance review rules of the ChiNext Board, strengthening regulation of intermediaries under the registration-based IPO system and urging them to truly play their role as the “gatekeeper”.


Releasing the regulatory standards, consideration and effects to promote openness and transparency


Over the past year, SZSE adhered to two principles, specifically, “adopting strict regulation externally” and “promoting standardization” within SZSE. SZSE used the regulatory “mix” well and continued to advance the development of transparent, rule-of-law-based self-disciplinary regulation.


Intensifying regulation and showing “zero tolerance” for major violations. Regarding severe violations with bad influence on the market, SZSE resolutely implemented the “zero tolerance” requirements. SZSE imposed disciplinary punishments on 213 listed companies and the persons in charge by circulating a public criticism, and gave serious disciplinary punishment to 11 persons involved in extremely serious violations by openly identifying them as unfit to serve as a listed company’s director, supervisor or senior management member and restricting their job qualification for a certain period of time, in a bid to strengthen regulatory deterrence.


Making public the regulatory standards to clarify expectations to market entities. In June 2020, SZSE take initiative to make public the Implementation Standards for Disciplinary Actions of Listed Companies (Trial), which has given enumerative description of considerations of disciplinary punishment, criteria for determination of liabilities, cases with lesser punishment, etc. and specified common violations and punishment standards article by article, to set the regulatory “scale”, confirm the “red line” of violation, and further improve the transparency and refine self-disciplinary regulations.


Showing the consideration of regulation and consolidating internal remedy systems such as hearing and review. Hearing and review are important remedies for subjects of regulation to explain and defend themselves. In 2020, SZSE organized 21 hearings on disciplinary punishment and listened face to face to 50 parties to plead their cases, which improved transparency in the decision-making process. In the meantime, SZSE organized external review committee members to review 16 cases and stated reasons in detail in the review decisions, to protect market entities’ legitimate rights and interests and improve the public credibility of self-disciplinary regulation.


As long as laws and decrees are smoothly implemented, discipline will be naturally in place. Disciplinary punishment has always been an important lever of stock exchanges to implement self-disciplinary management and punish violations of laws and regulations. SZSE will continue to follow the market- and rule-of-law-based direction, uphold the idea of the registration-based IPO system with information disclosure at its core, and continuously intensify dedicated efforts to crack down on violations. We will continue to improve the efficiency and quality of frontline regulation, urge market entities to fulfill information disclosing obligations and raise the level of standard operation according to laws and regulations, promote high-quality development of listed companies, and create a sound rule-of-law environment for the building of a quality innovation capital center and world-class exchange.

In 2020, the new Securities Law was implemented, the registration-based IPO system reform with information disclosure at its core was steadily advanced, and higher requirements on stock exchanges in strengthening frontline supervision and fulfilling self-disciplinary regulation functions were proposed.