Trial Provisions for the Establishment of Subsidiaries by Securities Companies

Revised on October 11 2012. Latest revision can be found at: http://www.chinalawandpractice.com/Article/3114064/Trial-Provisions-for-the-Establishment-of-Subsidiaries-by-Securities-Companies-Revised.html

(Issued by the China Securities Regulatory Commission on December 28 2007 and effective as of January 1 2008.)

Zheng Jian Ji Gou Zi [2007] No.345

Article 1: These Provisions have been formulated pursuant to the Company Law, the Securities Law and other relevant laws and administrative regulations in order to meet the requirements of establishing securities company groups and the professional operations and management of securities companies, regulate the establishment by securities companies of subsidiaries and their relationships with such subsidiaries and promote the innovative development of securities companies and the opening of the securities industry to foreign investment.

Article 2: For the purposes of these Provisions, the term "subsidiary" means a securities company established in accordance with the Company Law and the Securities Law, engaging in one or more securities businesses approved by the China Securities Regulatory Commission (the CSRC) and controlled by a securities company.

Article 3: A securities company and a subsidiary thereof, or two subsidiaries controlled by one securities company may not engage in a business that would give rise to a conflict of interest between them or would have them competing against each other.

Article 4: With the approval of the CSRC, a securities company may establish a wholly-owned subsidiary or, alternatively, invest in and establish a subsidiary together with another investor that satisfies the conditions for being a shareholder of a securities company as specified in the Securities Law.

The other investor as specified in the preceding paragraph shall be conducive to enhancing the governance structure, improving the competitiveness and promoting the sustained compliant development of the subsidiary. If such investor is a financial institution, it shall have certain strengths in terms of technical cooperation, personnel training, management services or sales channels, etc.

Article 5: To establish a subsidiary, a securities company shall satisfy the following prudential conditions:

(1) its risk control indicators for the most recent 12 months have continuously been in compliance with prescribed standards, and its net assets during the previous year have not been less than Rmb1.2 billion;

(2) it has relatively strong operation and management capabilities; if the proposed subsidiary is to engage in securities brokerage, securities underwriting and sponsorship or securities asset management, the securities company's market share in such business during the previous year shall not be less than a medium level in the industry;

(3) it has a sound corporate governance structure, sound risk management system and internal control mechanisms that are able to effectively guard against risk transmission and conflicts of interest between it and its subsidiary; and

(4) other requirements of the CSRC.

Article 6: When applying to establish a subsidiary, a securities company shall submit the following documents to the CSRC:

(1) an application signed by the legal representative or authorized representative of the investor in the subsidiary;

(2) the contract between the investors for the establishment of the subsidiary or the resolution of the shareholders meeting or shareholders general meeting if the subsidiary is to be established by a single investor;

(3) a draft of the articles of association of the subsidiary;

(4) a feasibility study report that shall, at minimum, include the basic particulars of the investor(s); a description of the applicant's corporate governance structure, and risk management, internal control and compliance management systems and the arrangements to guard against risk transmission and conflicts of interest arising between the securities company and the subsidiary; a description of the subsidiary's organizational and management structure and scope of business, and its business development plan, etc.;

(5) a list of the investors and a description of their capital contribution amounts, capital contribution methods and capital contribution percentages, an asset appraisal report for any part of a capital contribution to be made in non-monetary property, a description of the affiliated relationship between the investors, audited reports for the most recent three years of the investors that will hold at least 5% of the equity and a chart of the equity structure of the subsidiary;

(6) supporting documentation evidencing the qualifications of the subsidiary's proposed chairman of the board, chairman of the supervisory board and senior management personnel for their positions;

(7) a description showing that the applicant has the qualifications for the relevant securities business that the subsidiary is to engage in and of its market share in the relevant securities business during the previous year;

(8) an undertaking issued by the applicant that it will not engage in the same type of business in which it would have a conflict of interest with or compete against the subsidiary and the arrangements with other investors to provide support for the sustained compliant development of the subsidiary;

(9) a description showing that the applicant's net capital during the previous year and its risk control indicators during the most recent 12 months have complied with the specified requirements and a description of the effect that the establishment of the subsidiary will have on such risk control indicators;

(10) a legal opinion issued by a law firm in China; and

(11) other documents as required by the CSRC.

Article 7: Subject to the approval of the CSRC, a subsidiary that satisfies the following prudential requirements may apply to expand its scope of business:

(1) it has been operating continuously for at least five years, has a good reputation and does not have a record of a major violation of laws or regulations during the most recent three years;

(2) its risk control indicators for the most recent 12 months have continuously been in compliance with the prescribed standards;

(3) it has the capacity for sustained profitability and relatively strong operation and management capabilities, and its market share in its main business during the previous year has not been less than the medium level in the industry;

(4) it has a sound corporate governance structure, risk management system and internal control mechanisms; and

(5) other requirements of the CSRC.

If a subsidiary satisfies the requirements set forth in this Article, its shareholder(s) may, alternatively, apply to establish another subsidiary to engage in the additional securities business.

Article 8: When applying to expand its scope of business, a subsidiary shall submit the following documents to the CSRC:

(1) an application form signed by its legal representative or authorized representative;

(2) the resolution of the shareholders' meeting or shareholders' general meeting on expanding the scope of business;

(3) a feasibility study report that shall, at minimum, include the basic particulars of the subsidiary, a description of the organizational and management structure for the new business and its business development plan, etc.;

(4) supporting documentation evidencing the qualifications for their positions of the senior management personnel who are to be responsible for the new business;

(5) a description of the state of the subsidiary's ongoing securities business operations, and its market share and profitability during the previous year;

(6) a description showing that its risk control indicators during the most recent 12 months have complied with the specified requirements;

(7) a description of its corporate governance structure, and risk management, internal control and compliance management systems, and the arrangements to guard against risk
transmission and conflicts of interest arising between the securities company and the subsidiary and between the subsidiary and other subsidiaries controlled by the same securities company after the expansion of the scope of business;

(8) an undertaking issued by the controlling shareholder that it will not engage in the same type of business in which it would have a conflict of interest with or compete against the subsidiary and the arrangements with other shareholders to provide support for the development of the new business of the subsidiary; and

(9) other documents as required by the CSRC.

Article 9: With the exception of wholly-owned subsidiaries, shareholders shall exercise their voting rights at shareholders' meetings or shareholders' general meetings of a subsidiary in proportion to their capital contributions or their shareholdings. The proportion of the members of the board of directors accounted for by the directors recommended by each shareholder and elected to the board shall correspond with the shareholders' respective capital contribution percentages or shareholding percentages.

A subsidiary and its shareholders may not agree upon matters contrary to the foregoing by way of an agreement or other arrangement.

Article 10: A subsidiary may not directly or indirectly hold equity or shares of, or in any another manner invest in, its controlling shareholder or another subsidiary controlled by the same securities company.

Article 11: A securities company may provide support and service for a subsidiary's compliance management, risk management, auditing, human resources management, information technology and operating services, etc., in accordance with relevant provisions or a contract.

Article 12: A securities company may not utilize its controlling position to harm the lawful rights and interests of a subsidiary, the other shareholders of the subsidiary or the subsidiary's customers.

Article 13: A subsidiary shall have a sound corporate governance structure and a sound risk management system, compliance management system and internal control mechanisms.

A reasonable and necessary separating wall system shall be established between a securities company and its subsidiary, and between subsidiaries controlled by the same securities company so as to prevent the possible occurrence of risk transmission and conflicts of interest.

Article 14: A securities company and its subsidiary shall each separately submit its annual reports, regulatory statements and relevant information to the CSRC, and, additionally, the securities company shall submit to the CSRC the aforementioned information calculated based on the consolidation of the financial and business data of its subsidiaries.

The net capital and risk control indicators calculated separately by a securities company and its subsidiary and calculated on the basis of consolidated data shall comply with CSRC requirements.

Article 15: The establishment, change, termination of business, business activities and regulation of subsidiaries shall comply with laws, administrative regulations and CSRC provisions.

Article 16: These Provisions shall apply to the acquiring by a securities company of control over another securities company by way of a transfer of, or subscription for, equity, or other such means.

If laws, administrative regulations, or rules provide for the control of a securities investment fund management company, futures company, securities investment consulting firm, financial consulting firm, direct investment firm or other such company by a securities company, such provisions shall apply. If such laws, administrative regulations, or rules are silent thereon, matters shall be handled mutatis mutandis in accordance herewith.

If a securities company has acquired control over another securities company through establishment or the transfer of, or subscription for, equity, or other such means prior to the implementation hereof, the requirements specified in Articles 3, 4 and 9 hereof shall be satisfied within two years from the implementation date hereof.

Article 17: For the purposes of these Provisions, market share shall be calculated based on the data published by the Securities Association of China and the stock exchanges.

For the purposes of these Provisions, the term "medium level in the industry" means that a securities company engaging in a certain securities business has a middle ranking based on the indicators for such business.

Article 18: These Provisions shall be effective as of January 1 2008.