Provisions for the Administration of the Equity of Securities Companies

(Promulgated by the China Securities Regulatory Commission on, and effective as of, July 5, 2019.)

 

Order of the CSRC No.156

 

 

Part One: General Provisions

Article 1:     These Provisions have been formulated pursuant to laws and administrative regulations such as the PRC Company Law, the PRC Securities Law (the Securities Law) and the Regulations for the Oversight of Securities Companies in order to strengthen the administration of the equity of securities companies, protect the lawful rights and interests of securities company shareholders, clients and other interested parties and promote the sustainable and healthy development of securities companies.

Article 2:     These Provisions shall apply to securities companies established in accordance with the law in the People's Republic of China.

Article 3:     The administration of the equity of securities companies shall comply with the principles of administration by class, excellent qualifications, clarity of rights and responsibilities, clear structure, orderly change and transparency.

Article 4:     The shareholders of a securities company shall comply with laws and regulations, the provisions of the China Securities Regulatory Commission (the CSRC) and the company's articles of association, adhere to the philosophy of long-term investment and exercise their shareholder rights and perform their shareholder obligations in accordance with the law.

A securities company shall strengthen its management of equity affairs, improve its corporate governance structure and bolster its risk management and internal control systems.

The CSRC and its agencies shall abide by the principle of prudent oversight and subject the equity of securities companies to penetrative oversight and oversight by grade in accordance with the law.

Article 5:     Based on their equity holding percentages and impact on securities companies' operations and management, shareholders of securities companies include the following four types:

(1)     "controlling shareholder" which means a shareholder that holds at least 50% of the equity of a securities company, or a shareholder that, although holding less than 50% of the equity of a securities company, nonetheless, has sufficient voting rights to have a material impact on the resolutions of the shareholders' meeting of the securities company;

(2)     "major shareholder" means a shareholder that holds at least 25% of the equity of a securities company or is the largest shareholder that holds at least 5% of the aforementioned equity;

(3)     a shareholder holding at least 5% of the equity of a securities company; and

(4)     a shareholder holding less than 5% of the equity of a securities company.

Article 6:     At the time of the establishment of a securities company, the CSRC will approve its registered capital and equity structure in accordance with provisions.

If a securities company increases its registered capital and a material adjustment in its equity structure arises as a result thereof, reduces its registered capital or a change in a shareholder holding at least 5% of its equity or its de facto controller occurs, it shall report the same to the CSRC for approval in accordance with the law.

If a securities company makes a change in its registered capital or equity that does not involve the circumstances set forth in the preceding paragraph, it shall, within five working days after carrying out an amendment of registration with the company registrar, carry out record filing with the CSRC agency of the place where it is located. The provisions of this paragraph shall not apply to a change in the equity of a securities company occurring on a stock exchange or National Equities Exchange and Quotations (NEEQ).

 

Part Two: Qualification Conditions

Article 7:     A shareholder holding less than 5% of the equity of a securities company shall satisfy the following conditions:

(1)     it itself and the organizations controlled by it having a good reputation, not having a record of a major violation of laws or regulations or of a major breach of good faith in the past three years; is not characterized by a situation where it was imposed criminal penalties in connection with the willful commission of a crime and less than three years have elapsed since the completion of such penalties; it is not being investigated or is not undergoing rectification due to suspicion of having committed a major violation of laws or regulations;

(2)     it is not characterized by such a situation that impacts the exercise of its shareholder rights and the performance of its shareholder obligations, such as not having actually commenced business for an extended period of time, being closed down, having gone bankrupt and undergoing liquidation, governance structure being defective and its internal controls having become ineffective; there is no security it has provided, litigation, arbitration or other material matter existing that could have a material impact on its existence as a going concern;

(3)     its equity structure is clear, level by level, down to the ultimate beneficial owners; in principle, a wealth management product may not form part of its equity structure, with the exception of circumstances recognized by the CSRC;

(4)     it itself and the organizations controlled by it may not be the object of major suspicion by the public or having given rise to a serious negative social effect that has yet to be eliminated due to an act of bad faith or a non-compliant act; it is not burdened by a material liability arising from the failure in the operations of an investee enterprise and less than three years have lapsed since the same happened; and

(5)     other conditions as specified by the CSRC based on the principle of prudent oversight.

The provisions of this Article shall not apply to shareholders who hold less than 5% of the shares of a securities company and acquired such shares through a stock exchange or NEEQ.

Article 8:     A shareholder that holds at least 5% of the equity of a securities company shall satisfy the following conditions:

(1)     the conditions set forth in Article 7 hereof;

(2)     not having net assets of less than 50% of its paid-in capital;

(3)     not having contingent liabilities equivalent to at least 50% of its net assets;

(4)     not having debts that have fallen due and that it is unable to pay back; and

(5)     having net assets of not less than Rmb50 million.

Article 9:     A major shareholder of a securities company shall satisfy the following conditions:

(1)     the conditions set forth in Article 8 hereof;

(2)     having net assets of not less than Rmb200 million, having a good financial position, having the capacity to be continuously profitable, its assets/liabilities and leverage level being appropriate and having a sustainable capital replenishment capacity consistent with the business operated by the securities company;

(3)     having compliant corporate governance, up-to-standard management capabilities and good risk management and control;

(4)     having experience in carrying on finance-related business that is consistent with the scope of business of the securities company and having the capacity to provide support for enhancing the securities company's overall competitiveness; and

(5)     with respect to a situation where the securities company is unable to operate normally due to a risk that could arise, having formulated a reasonable and effective risk handling contingency plan.

Article 10:     The controlling shareholder of a securities company shall satisfy the following conditions:

(1)     the conditions set forth in Article 9 hereof;

(2)     its acquisition of the equity interest in the securities company being consistent with its long-term strategy and being conducive to servicing the development of its main business;

(3)     having genuinely feasible plans and arrangements to improve the securities company's governance structure and spur its long-term development; and

(4)     having a clear self-constraint mechanism to maintain the independence of the securities company's operations and management, and prevent the transmission of risks and the diversion of improper gains.

Article 11:     Where the business engaged in by a securities company is highly leveraged and there are intersecting risks among multiple items of business, its major shareholder or controlling shareholder shall additionally satisfy the following conditions:

(1)     being continuously profitable during the last three years and not having any outstanding deficits; and

(2)     its long-term credit being at a high level during the last three years, and indicators such as size, income, profit and market share place it among the top in its industry during the last three years.

The controlling shareholder shall additionally satisfy the following conditions:

(1)     having gross assets of not less than Rmb50 billion and net assets of not less than Rmb20 billion; and

(2)     its core main business being pronounced and its main business having been continuously profitable during the last five years.

The provisions of this Article shall not apply in special circumstances recognized by the CSRC such as a securities company merger or a securities company going into receivership or trusteeship due to a material risk.

Article 12:     The percentages of the equity of a securities company held by shareholders with an affiliated relationship or a persons-acting-in-concert relationship shall be counted together; the shareholder among them with the largest equity percentage, or the shareholder with a controlling or leading position in the affiliated relationship or persons-acting-in-concert relationship shall satisfy the conditions for the type of shareholder to which the combined equity holding percentage corresponds.

If, after a shareholder acquires an equity interest in a securities company, its shareholder type changes as a result of the adjustment in the securities company's equity structure, it shall satisfy the conditions for the type of shareholder to which it corresponds after the change.

Article 13:     The de facto controller of at least 5% of the equity of a securities company shall satisfy the conditions set forth in Items (1) to (4) of Article 8 hereof. The de facto controller of a securities company shall additionally satisfy the conditions set forth in Item (5) of Article 9 and Items (3) and (4) of Article 10 hereof.

Article 14:     Where a limited partnership acquires an equity interest in a securities company, it shall additionally satisfy the following requirements:

(1)     the equity of the securities company that any one limited partnership controls may not reach 5%, except in circumstances recognized by the CSRC; if the managing partner or largest limited partner of two or more limited partnerships is the same or another affiliated relationship or persons-acting-in-concert relationship exists between/among them, equity holding percentages of such limited partnerships shall be counted together; and

(2)     the general partner responsible for executing the affairs of the limited partnership shall satisfy the conditions set forth in Article 7 hereof.

Article 15:     If a fund organized as a company acquires an equity interest in a securities company and entrusts management of the securities company equity to a fund manager, such fund shall be an industry investment fund actually controlled by the government, have carried out record filing with the relevant state department and Article 14 hereof shall apply thereto mutatis mutandis.

Article 16:     If a non-financial enterprise acquires an equity interest in a securities company, it shall additionally satisfy the following requirements:

(1)     complying with the guiding opinions of the state on strengthening the oversight of non-financial enterprises that invest in financial institutions; and

(2)     in principle, the equity of the securities company actually controlled by any one non-financial enterprise may not exceed 50%.

 

Part Three: Equity Management Requirements

 

Article 17:     The office of the board of directors of a securities company is the body handling the equity management affairs of the securities company and shall arrange for the carrying out of the work associated with equity management affairs.

The chairman of the board of a securities company is the person with primary responsibility for the equity management affairs of the securities company. The board secretary of the securities company shall assist the chairman of the board in his/her work and is the person directly responsible for the equity management affairs of the securities company.

Article 18:     If there is to be a change in its registered capital or equity, a securities company shall formulate a working plan, the shareholder selection criteria, etc. The securities company and the equity transferor shall provide to the contemplated participant in advance information such as the securities company's shareholder conditions, the procedures that are required to be carried out, details of the securities company's business operations and potential risks.

The securities company and the equity transferor shall properly conduct due diligence of the contemplated participant and specify the subsequent handling measures in the event that the contemplated participant does not satisfy the conditions. If it is found not to satisfy the conditions, they may not enter into an agreement therewith. Where relevant matters are subject to the approval of the CSRC, it shall be specified that the agreement enters into effect only after such approval.

Article 19:     A securities company, in respect of a violation of regulations or breach of undertakings that could occur in the course of a change in its registered capital or equity, shall agree upon handling measures with the relevant subject in advance, specify the mechanism for pursuing the liability of the responsible persons and cooperate in the investigation and handling by the regulator.

Article 20:     The securities company shall make arrangements for guarding against risks during the change in its registered capital or equity so as to ensure its normal operations and that the interests of its clients are not prejudiced.

Where the approval of the CSRC is required in accordance with the law, the shareholders of the securities company shall, until such approval, continue to independently exercise their voting rights in proportion to their equity percentages, and the equity transferor may not recommend relevant persons of the equity transferee to serve as directors, supervisors or senior officers of the securities company and may not in any manner transfer its voting rights in a disguised manner.

Article 21:     A shareholder of a securities company shall be fully aware of the rights and obligations of shareholders, stay fully apprised of information such as the securities company's operating and management situations and potential risks, have reasonable investment expectations, have a genuine intent to make its capital contribution and carry out the necessary internal decision-making procedures.

Article 22:     The shareholders of a securities company shall perform their capital contribution obligations in strict accordance with laws, regulations and CSRC provisions.

A shareholder of a securities company shall use its own funds to acquire an equity interest in the securities company, the source of such funds shall be lawful, and it may not use funds that are not its own, such as entrusted funds, to acquire such equity interest, unless otherwise provided in laws or regulations.

Article 23:     A shareholder of a securities company shall give a true, accurate and complete account of its equity structure, down to the de facto controller or ultimate beneficial owner, its affiliated relationship or persons-acting-in-concert relationship with other shareholders, and may not evade examination and approval or oversight of its securities company shareholder qualifications by means such as withholding information or fraud.

Article 24:     A shareholder of a securities company and its controlling shareholder or de facto controller may not have equity interests in more than two securities companies, and they may not have a controlling interest in more than one securities company. The following circumstances shall not count toward the number of securities companies wherein there is an equity interest or controlling interest:

(1)     directly holding or indirectly controlling less than 5% of the equity of a securities company;

(2)     taking an equity interest in another securities company through the securities company controlled by them;

(3)     in other securities companies controlled by the securities company;

(4)     in a transitional arrangement made for the purpose of acquiring or restructuring a securities company;

(5)     having authorization from the State Council to hold the equity of a securities company; or

(6)     another circumstance as recognized by the CSRC.

Article 25:     A securities company shall maintain a stable equity structure. The duration of the holding of the equity of the securities company by its shareholders shall comply with laws, administrative regulations and relevant CSRC provisions.

The de facto controller of a shareholder of a securities company shall honor a lockup period equivalent to that of the securities company shareholder for the securities company's equity that it controls, except in circumstances lawfully recognized by the CSRC.

Article 26:     A shareholder of a securities company may not create a pledge over the securities company's equity that it holds during the equity lockup period. If a shareholder of a securities company wishes to pledge equity of the securities company that it holds after the lockup period, it may not pledge more than 50% of the equity that it holds.

If a shareholder pledges the equity that it holds, it may not prejudice the interests of the other shareholders or the securities company, may not circumvent in bad faith the equity lockup period requirements, may not provide that the pledgee or another third party exercise its voting rights or other such shareholder rights and may not transfer in a disguised manner control over its equity in the securities company.

Article 27:     A securities company shall strengthen its reviews of shareholder qualifications, verify the information of shareholders and their controlling shareholders, de facto controllers, affiliated persons, persons acting in concert and ultimate beneficial owners and keep itself apprised of changes therein, determine the impact that a shareholder has on its operations and management, accurately and completely report or disclose relevant information in a timely manner in accordance with the law and, when necessary, carry out procedures for filing for an approval.

Article 28:     A securities company shall provide for the regulatory requirements in respect of equity management, such as shareholder rights and obligations, equity lockup period and persons responsible for equity management affairs in its articles of association and, in its articles of association, specify the following:

(1)     that the major shareholders or controlling shareholder are required to replenish the securities company's capital if necessary;

(2)     that a shareholder that is subject to, but has not secured, the approval of the regulator or that has failed to carry out record filing with the regulator or that has yet to complete rectification, may not exercise rights such as its right of requesting the convening of a shareholders' meeting, right to vote, right of nomination, right to raise a motion and right of disposal;

(3)     that a shareholder that has given false representations, abused its shareholder rights or has otherwise prejudiced the interests of the securities company may not exercise rights such as its right of requesting the convening of a shareholders' meeting, right to vote, right of nomination, right to raise a motion and right of disposal; and

(4)     the measures for dealing with a shareholder, the securities company, the persons in charge of equity management affairs and relevant persons in the event of an illegal or improper act relating to equity management affairs, such as a violation of laws, administrative regulations or regulatory requirements.

Article 29:     A securities company shall strengthen its management of affiliated transactions, accurately identify affiliated persons, strictly implement an examination and approval system and information disclosure system for affiliated transactions, avoid prejudicing its and its clients' lawful rights and interests, and report information on its affiliated transactions to the CSRC and its agency in a timely manner.

A securities company shall, in accordance with the penetrative principle, manage its shareholders and their controlling shareholders, de facto controllers, affiliated persons, persons acting in concert and ultimate beneficial owners as its own affiliated persons.

Article 30:     A shareholder of a securities company and its de facto controller may not:

(1)     fraudulently make their capital contributions, make false capital contributions, illegally withdraw their capital contributions or do so in a disguised manner;

(2)     interfere in the securities company's operating and management activities in violation of laws, administrative regulations or the company's articles of association;

(3)     abuse their rights or influence to appropriate securities company or client assets, engage in the diversion of benefits or prejudice the lawful rights and interests of the securities company, other shareholders or clients;

(4)     demand in violation of regulations that the securities company provide it or its affiliated person financing or security, or order, instruct, assist or accept from the securities company financing or security provided using the assets of its securities brokering clients or securities asset management clients;

(5)     conduct improper affiliated transactions with the securities company or exploit their influence on the operations and management of the securities company to obtain improper gains;

(6)     entrust a third party or accept the entrustment of a third party to hold or manage equity of the securities company without approval, or accept or transfer in a disguised manner control over equity of the securities company without approval; or

(7)     commit another act that is prohibited by the CSRC.

The securities company and relevant subjects such as its directors, supervisors and senior officers may not cooperate with a shareholder of the securities company and the de facto controller thereof in causing any of the foregoing circumstances to arise.

If the securities company discovers that any of the aforementioned circumstances applies to a shareholder or its de facto controller, it shall take measures to prevent the violation from becoming more serious in a timely manner and report the same to the CSRC agency of the place where it is domiciled within two working days.

 

Part Four: Penal Provisions

Article 31:     If a securities company changes relevant equity-related matters without carrying out the statutory procedure therefor, the CSRC or its agency shall handle the matter in accordance with Article 218 of the Securities Law.

Article 32:     If an entity or individual holds or actually controls at least 5% of the equity of a securities company without having secured approval therefor, the CSRC or its agency shall handle the matter in accordance with Article 71 of the Regulations for the Oversight of Securities Companies.

If, without approval, an entity or individual entrusts a third party or accepts the entrustment of a third party to hold or manage equity of a securities company, or subscribes for, acquires or actually controls equity of a securities company, the CSRC or its agency shall handle the matter in accordance with Article 86 of the Regulations for the Oversight of Securities Companies.

Article 33:     If a shareholder of a securities company fraudulently makes a capital contribution, makes a false capital contribution, illegally withdraws its capital contribution or does so in a disguised manner, the CSRC or its agency shall handle the matter in accordance with Article 151 of the Securities Law.

Article 34:     If, in the course of an administrative permission procedure, a relevant subject withholds relevant information or provides fraudulent materials, the CSRC or its agency shall handle the matter in accordance with Article 78 of the Administrative Permission Law.

If a relevant subject secures an official reply for an administrative permission relating to the equity of a securities company through improper means, such as withholding information or fraud, the CSRC or its agency shall handle the matter in accordance with Articles 69 and 79 of the Administrative Permission Law.

Article 35:     If a securities company or a shareholder thereof or the de facto controller thereof violates provisions by failing to report relevant matters in accordance with provisions or the information that it submits contains false records, misleading statements or material omissions, the CSRC or its agency shall handle the matter in accordance with Article 222 of the Securities Law.

Article 36:     If a securities company provides financing to, or security for, a shareholder or an affiliated person thereof in violation of provisions, the CSRC or its agency shall handle the matter in accordance with Article 222 of the Securities Law.

If a shareholder of a securities company or its de facto controller orders, instructs, assists or accepts from the securities company financing or security provided using the assets of its securities brokering clients or securities asset management clients, the CSRC or its agency shall handle the matter in accordance with Article 86 of the Regulations for the Oversight of Securities Companies.

Article 37:     If a securities company, a shareholder thereof, a shareholders' de facto controller or other relevant subject violates these Provisions, making the securities company's corporate governance structure unsound, internal controls flawed, operations and management disrupted or in violation of laws or regulations, the CSRC or its agency shall handle the matter in accordance with Article 70 of the Regulations for the Oversight of Securities Companies; or making the securities company's risk control indicators cease to comply with provisions, seriously jeopardizing the securities company's stable operation or prejudicing clients' lawful rights and interests, the matter shall be handled in accordance with Article 150 of the Securities Law; or making the securities company operate in violation of the law or giving rise to a material risk, the matter shall be handled in accordance with Article 153 of the Securities Law.

If a director, supervisor or senior officer of a securities company violates these Provisions, causing the securities company to be in a major violation of laws or regulations or giving rise to a material risk, the CSRC or its agency shall handle the matter in accordance with Article 152 of the Securities Law.

Article 38:     If a securities company, a shareholder thereof, a shareholders' de facto controller or other relevant subject violates these Provisions and laws and administrative regulations such as the Securities Law and the Regulations for the Oversight of Securities Companies are silent on the appropriate measures for dealing with or penalizing the same, the CSRC or its agency may take regulatory measures such as ordering rectification of the matter, giving a regulatory lecture, issuing a letter of warning, ordering the giving of a public explanation or ordering regular reports. Regulatory measures such as an order for rectification, giving of a regulatory lecture, issuance of a letter of warning, order to participate in training or declaration as a persona non grata may be taken against the directly responsible directors, supervisors, senior officers and other directly responsible persons. Additionally, depending on the circumstances, relevant subjects may be given a warning and fined up to Rmb30,000. If a criminal offense is suspected, the case shall be transferred to the judicial authorities in accordance with the law.

Article 39:     The CSRC and its agency shall record the delinquent acts of relevant organizations and persons such as securities companies, their directors, supervisors, senior officers, shareholders and their de facto controllers and relevant intermediary firms in the capital market integrity file database in accordance with relevant CSRC provisions on integrity oversight and share the information with other government authorities through the national credit information sharing platform.

Article 40:     If a securities company fails to comply with these Provisions in managing its equity, the CSRC may revise such company's regulatory assessment grade.

 

Part Five: Supplementary Provisions

Article 41:     In these Provisions, the terms "at least" and "not less than" include the number in question, and "less than" and "exceeding" exclude the number in question.

Article 42:     The phrase "a securities company increases its registered capital and a material adjustment in its equity structure arises as a result thereof" means that the securities company increases its registered capital and adds a shareholder holding at least 5% of its equity or a major shareholder, or there is a change in its largest shareholder, controlling shareholder or de facto

The phrase "a securities company changes a shareholder holding at least 5% of its equity" means that the securities company adds a shareholder holding at least 5% of its equity or a major shareholder, or there is a change in its largest shareholder or controlling shareholder.

The phrase "a securities company changes a de facto controller holding at least 5% of its equity" means that the securities company adds a de facto controller holding at least 5% of its equity or there is a change in its de facto controller.

Article 43:     If the state provides otherwise in respect of the administrative transfer of state-owned equity of securities companies, such provisions shall govern the relevant requirements.

If the acquisition of an equity interest in a securities company touches upon the duties of a financial regulator such as the regulator for comprehensive operations of the financial industry or state-owned assets, it shall comply with state policies on comprehensive operations of the financial industry and relevant provisions of the state-owned asset administration and other financial regulators.

The shareholders of a foreign-invested securities company shall additionally satisfy CSRC provisions on the administration of foreign-invested securities companies.

Article 44:     When the shares of a securities company purchased by an investor on a stock exchange reaches at least 5%, it shall announce the same in accordance with the law and apply to the CSRC for approval thereof. Until it secures such approval, the investor may not continue to increase its holding of the shares of the company in question. If the CSRC withholds its approval, the investor shall rectify the matter in accordance with the law within 50 trading days from the date of denial of approval (excluding the period of suspension of trading, and if it has held the shares for less than six months, it shall rectify the matter after the expiration of the six months).

When the shares of a securities company purchased by an investor on NEEQ reaches at least 5%, matters shall be handled with reference to the first paragraph hereof.

If an investor publicly trades and transfers shares of a securities company on a stock exchange or NEEQ and the equity change matter does not require examination and approval or record filing, the requirements of Articles 18 and 19 hereof shall be waived.

Article 45:     These Provisions shall be effective as of the date of promulgation. In the event of a discrepancy between these Provisions and provisions of the CSRC on the administration of the equity of securities companies preceding the implementation hereof, matters shall be handled in accordance with these Provisions.