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Order of the State Council of the People’s Republic of China
No. 523
Regulation on Risk Management of Securities Firms was passed in the sixth standing conference on April 23, 2008. It’s now publicized and takes effect accordingly.
Premier Wen Jiabao
April 23, 2008
Chapter 1 General Provisions
Article 1 This Regulation is formulated with the purpose of controlling and eliminating risks of securities firms, protecting legal right of investors and social public interests, and ensuring healthy development of securities industry, based on Securities Law of People’s Republic of China (hereinafter referred to as Securities Law) and Law of the People’s Republic of China on Enterprise Bankruptcy (hereinafter referred to as Law on Enterprise Bankruptcy).
Article 2 The securities regulatory authority under the State Council executes organization, coordination and supervision of risk management of a securities firm according to law.
Article 3 The securities regulatory authority under the State Council should establish coordination and quick response mechanism together with the People’s Bank of China, Finance Department of the State Council, Public Security Department of the State Council, other financial regulatory authorities of the State Council and provincial people’s government.
Article 4 The related local people’s government should take effective measures to maintain social stability during risk management process of the securities firm.
Article 5 Normal securities brokerage business should be guaranteed during risk management process of the securities firm.
Chapter 2 Suspending Business for Internal Rectification, Custody, Takeover, Administrative Restructuring
Article 6 The securities regulatory authority under the State Council can appoint spot working group of risk supervision to conduct special inspection on securities firms, supervise business operation and management activities such as transferring fund, disposing assets, allocating personnel, using chop, developing and performing contract of the securities firm, and report status to local people’s government in timely manner, once major risk potential of the securities firm is founded.
Article 7 Securities regulatory authority of the State Council can order to close part or all businesses of the securities firm for internal rectification once risk control target of the securities firm does not meet relevant prescription and the rectification is not complete within a certain period. The time limit for rectification after close of business is three months.
If securities brokerage business is ordered to be closes for rectification, the securities firm can entrust its securities brokerage business to the securities firm, which should be recognized by securities regulatory authority under the State Council, for management within a certain period. If the securities firm does not entrust brokerage business or transfer customer properly within this period, the securities regulatory authority of the State Council should transfer the customers to other securities firms.
Article 8 If a securities firm meets the following conditions, the securities regulatory authority under the State Council can hold custody of business involving customer such as securities brokerage; if it’s serious, the securities firm can be taken over:
（ⅰ）Governance is in chaos and management is out of control;
（ⅱ）Use customer’s assets inappropriately and cannot make up;
（ⅲ）Delivery violation happened for many times or delivery violation amount is huge during settlement of securities transaction;
（ⅳ）Risk control target does not meet requirement and major financial crisis occurs;
（ⅴ）Other situations that may impact sustainable business operation of the securities firm.
Article 9 If securities regulatory authority under the State Council determines to hold custody of customer-related business of the securities firm, they should choose specialized institute such as securities firms to form trust group based on prescribed procedure and perform business operation management right of customer-related business like securities brokerage of the entrusted securities firm.
The trust group starts to perform the following role and responsibility since the day of custody:
（ⅰ）Ensure securities brokerage business of the securities firm runs properly and pay advanced operation capital and transaction settlement funds with customer when it’s necessary by following the rule;
（ⅱ）Take effective measures to maintain security of customer’s assets during custody;
（ⅲ）Audit risks existed in the securities firm and report to emergent issues in business operation process to securities regulatory authority under the State Council in timely manner, as well as put forward resolutions;
（ⅳ）Other roles and responsibilities to be performed as required by securities regulatory authority under the State Council.
Custody period normally not exceeds 12 months. At the end of 12th month, if custody needs to be continued, the securities regulatory authority of the State Council can extend custody period but should not be longer than 12 months.
Article 10 The entrusted securities firm should undertake custody fee and business operation cost during custody. The securities regulatory authority of the State Council should audit so custody fee and operation cost during custody.
The trust group will not bear loss of the entrusted company.
Article 11 If securities regulatory authority under the State Council determines to take over a securities firm, they should organize takeover team with professionals based on prescribed procedure and perform business management right of the securities firm. Principal of the taken over securities firm has authority of legal representative of the securities firm, and shareholder meeting, board meeting, supervisory committee, manager and deputy manager should cease their roles and responsibilities.
Takeover group starts to perform the following roles and responsibilities since the day of taking over:
（ⅰ）Take over property, chop, account book, document, etc. of the securities firm;
（ⅱ）Determine management affair of the securities firm;
（ⅲ）Ensure normal running of securities brokerage business of the securities firm and improve internal control system;
（ⅳ）Audit property of the securities and keep as well as collect assets based on law;
（ⅴ）Control risk of the securities firm and put forward risk elimination proposals;
（ⅵ）Audit violation behavior of personnel in the securities firm;
（ⅶ）Other roles and responsibilities required by securities regulatory authority under the State Council.
Takeover period normally not exceeds 12 months. At the end of 12th month, if takeover needs to be continued, the securities regulatory authority of the State Council can extend takeover period but should not be longer than 12 months.
Article 12 When a securities firm has major risk, it can directly apply to securities regulatory authority under the State Council for administrative restructuring if the following conditions are met:
（ⅰ）The financial information is true and complete;
（ⅱ）Support from provincial people’s government or related department;
（ⅲ）Has detail rectification measures as well as feasible restructuring plan.
A securities firm, which is order to close business for internal rectification, held custody or taken over, if meets the foregoing conditions, can also apply to securities regulatory authority under the State Council for administrative restructuring.
The securities regulatory authority under the State Council should make decision of either approving or not approving within 30 working days of handling administrative restructuring application; If it is not approved, reasons should be stated.
Article 13 A securities firm can proceed administrative restructuring by adopting capital injection, equity restructuring, liability restructuring, assets restructuring, acquisition or other approaches.
Administrative restructuring period normally not exceeds 12 months. At the end of 12th month, if administrative restructuring is not complete a securities firm can apply to the securities regulatory authority of the State Council for extending administrative restructuring period, which however, should not be longer than 6 months.
Securities regulatory authority under the State Council should coordinate and supervise administrative restructuring of the securities firm.
Article 14 Execution decisions made by securities regulatory authority under the Sate Council ordering the securities firm to close business, be held custody, be taken over and engage in administrative restructuring should be publicized and its announcement should be pasted in business location of such securities firm.
The execution decisions should include the name, measure, reason, scope and other concerning issues of the securities firm.
The publicizing day of execution decision is the day of such execution and the execution decision takes effect since then.
Article 15 Credit and debt of the securities firm will change no matter it' has been ordered to close business for rectification, be held custody, be taken over or engaged in administrative restructuring.
Article 16 If the security company meets normal business operation conditions during rectification, custody, takeover or administrative restructuring period, it can resume normal business after approval of securities regulatory authority under the State Council.
Article 17 If the securities firm still cannot meet normal business operation conditions during rectification, custody, takeover or administrative restructuring period, but can pay back due debt, the securities regulatory authority under the State Council can revoke its securities business license based on the law.
Article 18 The securities firm, whose securities business license is revoked, should cease securities business and settle customers, who are willing to be transferred to other securities firms. During the transferring process, all concerned parties should take necessary measures to ensure normal securities transaction of the customers.
If the securities firm, whose securities business license is revoked, has some customers not being settled, the securities regulatory authority under the State Council should observe Article three of this regulation to form an administrative liquidation team to clear accounts, settle customers and transfer securities assets.
Chapter 3 Revocation
Article 19 If a securities firm appears the following situations, the securities regulatory authority under the State Council can directly revoke such securities firm:
（ⅰ）If it have serious illegal operation or has huge business risks;
（ⅱ）Cannot pay back due debt and its assets cannot clear off the debt or lack solvency;
（ⅲ）Need protection fund for securities investors.
Article 20 If a securities firm still cannot meet normal operation conditions during rectification, custody, takeover or administrative restructuring, and appears situations prescribed in Article 19 item (ⅱ) or item (ⅲ) of this regulation, securities regulatory authority under the State Council should revoke the securities firm.
Article 21 When securities regulatory authority under the State Council revokes a securities firm, it should make revocation decisions and organize administrative liquidation team by choosing law firm, accounting firm and other professional institutes as prescribed procedure to execute administrative clearance of such securities firm.
Revocation decision should be publicized. The publicizing day should be execution day and .execution decision takes effect since then.
If securities regulatory authority under the State Council conducted administrative liquidation prior to implementation of this regulation, the execution day is publicizing day of administrative liquidation.
Article 22 During administrative liquidation, the principal of administrative liquidation team will execute roles and responsibilities of legal representative of the securities firm.
Following are roles and responsibilities of administrative liquidation team:
（ⅰ）Manage property, chop, account book, document, etc. of the securities firm;
（ⅱ）Liquidate account, audit asset and liability status and register creditor's rights that comply with national prescription;
（ⅲ）Assist in confirming and acquiring of creditor's rights that comply with national prescription;
（ⅳ）Assist protection fund regulatory institute for securities investors in making up transaction settlement funds of customers;
（ⅴ）Settle customers as their will;
（ⅵ）Transfer securities assets;
（ⅶ）Other roles and responsibilities required by securities regulatory authority under the State Council.
Securities mentioned in the previous term refers to computer information management system, transaction system, telecommunication system, transaction seat and other assets necessary to maintain normal securities brokerage business of the securities firm.
Article 23 The shareholder meeting, board meeting, supervisory committee, manager as well as deputy manager of the revoked company should cease performance of their roles and responsibilities.
During administrative liquidation, shareholder of the revoked securities firm shall not organize liquidation or join in administrative liquidation work if no permission.
Article 24 During administrative liquidation, customer-related businesses of the revoked securities firm such as securities brokerage business should be held custody by the securities firm, which is chosen by securities regulatory authority under the State Council according to prescribed procedure.
Article 25 If asset, personnel, finance or business of related party, which is set up or actually controlled by the securities firm, are mixed with the revoked securities firm, they should also be incorporated in the scope of administrative liquidation after approval of securities regulatory authority under the State Council.
Article 26 The credit and debt of the securities firm will not change because of the revocation.
Since the securities firm is revoked, calculation of debt interest will stop.
Article 27 Liquidation result of the revoked securities firm by administrative liquidation team should be audited by accounting firm with related qualification of securities and futures, and submitted to securities regulatory authority under the State Council for appraisal.
Based on account liquidation result, appraised by securities regulatory authority under the State Council, the administrative liquidation team should apply to protection fund regulatory institute for securities investors for making up transaction settlement funds of customers.
Article 28 The administrative liquidation team should publicize related issues, which need be registered by the creditor, within 10 days of its establishment.
Creditor, who complies with related national prescription, should take relevant documents to declare creditor's right within 90 days of publicizing. The administrative liquidation team should register as prescribed. Any overdue declaration without property reason will not be registered.
If the registered creditor's rights are confirmed in line with national prescription, administrative liquidation team should apply for acquisition of such funds and assist in acquisition according to related national rule; if the registered creditor's rights are confirmed not in line with national acquisition prescription, the administrative liquidation team should inform declarer
Article 29 Administrative liquidation team should adopt open approaches such as bidding and requesting for quotation to transfer securities assets among institutes that have securities business operation qualifications. Securities assets transferring proposal should be submitted to securities regulatory authority under the State Council for approval.
Article 30 Administrative team should not transfer assets other than securities, but if securities regulatory authority approves they can transfer assets that are easily depreciated and suffering from loss or otherwise that protects interests of the customer and creditor.
Article 31 Administrative liquidation team shall not discharge individual liability but except for the following situations that protect interests of customer and creditor:
（ⅰ）Liability generated from continuing performance of unfulfilled contract of both parties requested by administrative liquidation team;
（ⅱ）General expenditures for staff salary and social insurance to maintain normal business operation;
（ⅲ）Other cost generated during implementation of roles and responsibilities of administrative liquidation team.
Article 32 After securities regulatory authority under the State Council approves, administrative liquidation team can apply to people’s court to cash securities assets and other assets, which are sealed up, withhold, frozen, or subject to other mandatory measures, in order to protect creditor’s interests. The capital of cashed assets should be frozen.
Article 33 After administrative liquidation cost is audited by securities regulatory authority under the State Council, it can be discharged anytime by the disposed property of the securities firm.
Administrative liquidation cost mentioned in the previous term refers to management and transferring cost of property of the securities firm by administrative liquidation, and lost of administrative liquidation team in performing roles and responsibilities as well as employing professional institute, etc.
Article 34 Time limit of administrative liquidation is 12 months. At the end of 12th month, if the administrative liquidation is still not complete, securities regulatory authority under the State Council can decide extension of such period, which shall not be longer than 12 months.
Article 35 During administrative liquidation period, the handled securities firm is free from administrative fee and tax prescribed by administrative regulation such as VAT and business tax.
Article 36 If a securities firm is ordered to close business for administrative liquidation by securities regulatory authority under the State Council, it should be executed according to related prescription of this chapter.
Chapter 4 Bankruptcy Liquidation and Reorganization
Article 37 When a securities firm is revoked or closed, if Article 2 of Enterprise Bankruptcy Law is met, the securities regulatory authority under the State Council or its entrusted administrative liquidation team can apply to people’s court for bankruptcy liquidation of so revoked or closed securities firm after completion of administrative liquidation according to related prescription of Enterprise Bankruptcy Law.
Article 38 If a securities firm meets Article 2 of Enterprise Bankruptcy Law, securities regulatory authority under the State Council can directly apply to people’s court for reorganization of such securities firm.
Based on related prescription of Enterprise Bankruptcy Law, the securities firm or its creditor can apply to people’s court for bankruptcy liquidation or reorganization of the securities firm, but should get approval from the securities regulatory authority under the State Council according to prescription of Article 129 of Securities Law.
Article 39 With respect to a securities firm, if no need for protection fund for securities investors, the securities regulatory authority under the State Council should revoke its securities business license before approving bankruptcy liquidation. The securities firm should cease securities business operation and settled customers according to Article 18 of this regulation.
With respect to a securities firm, if needs protection fund for securities investors, the securities regulatory authority under the State Council should not approve bankruptcy application of such securities firm or its creditor but revoke the securities firm for administrative liquidation according to chapter three of this regulation.
Article 40 If people’s court accepts reorganization and bankruptcy liquidation application of the securities firm, securities regulatory authority under the State Council can recommend manager candidate to the people’s court.
Article 41 For securities that have conducted bankruptcy liquidation, management can directly register creditor's right, which does not comply with national acquisition prescription while being registered during administrative liquidation.
Article 42 If a securities firm is judged by people's court to reorganize, the securities firm or manager should submit draft reorganization plan proposal to creditor's meeting, securities regulatory authority under the State Council and people's court at the same time.
Article 43 10 days since each voting team of creditor's meeting passed draft reorganization plan, the securities firm or manager should raise application to the people's court for approval of such reorganization plan. If the reorganization plan is related to Article 129 of Securities Law, the securities firm or manager should also apply to securities regulatory authority under the State Council for relevant approval at the same time. The securities regulatory authority under the State Council should make either approving or not approving decision within 15 days of receiving the application.
Article 44 If voting team of creditor's meeting did not pass draft reorganization plan but the draft complies with prescription of Article 87.2 of the Enterprise Bankruptcy Law, the securities firm or manager can apply to people's court for approval of such draft reorganization plan. If the draft of reorganization plan related to Article 129 of Securities Law, the securities firm or manager should also apply to securities regulatory authority under the State Council for approval of related issues at the same time. The securities regulatory authority under the State Council should make either approving or not approving decision within 15 days of receiving the application.
Article 45 The approved reorganization plan should be executed by the securities firm and supervised by the manager. When the supervision term expires, the manager should submit supervision report to people's court and securities regulatory authority under the State Council.
Article 46 If related issues of the reorganization plan is neither approved by securities regulatory authority under the State Council nor by the people's court, the people's court will terminate reorganization procedure and announce bankruptcy of the securities firm.
Article 47 Once reorganization procedure is terminated and securities firm is announced of bankruptcy by people's court, the securities regulatory authority under the State Council should make revocation decision of the securities firm and people's court should organize bankruptcy liquidation based on the Enterprise Bankruptcy Law. Tax related issues should be executed according to prescription of the Enterprise Bankruptcy Law and Law of the P.R.C. Concerning the Administration of Tax Collection.
If people's court believes it is necessary to implement the administrative liquidation of the securities firm, the securities regulatory authority under the State Council should organize administrative liquidation team according to chapter three of this regulation, liquidate account, assist in sorting, confirming and acquiring creditor's rights that comply with national prescription, assist protection fund regulatory institute for securities investors in making up customers' transaction settlement funds, transfer securities assets, etc.
Chapter 5 Supervision and Coordination
Article 48 Securities regulatory authority under the State Council should perform the following roles and responsibilities during risk management of the securities firm:
（ⅰ）Develop risk management proposal of the securities firm and organize execution;
（ⅱ）Disappoint risk management working group to supervise and guide the securities firm, custody group, takeover group, administrative liquidation group, manager, and other agencies and staff that are involved in the risk management;
（ⅲ）Coordinate with stock exchange, securities depository and clearance institute, protection fund regulatory institute for securities investors to ensure securities brokerage business of the securities firm running normally;
（ⅳ）Audit and punish violation behavior of the securities firm;
（ⅴ）Report to public security of suspected crime and transfer suspected criminal case according to relevant prescription;
（ⅵ）Report to local people's government on risk status and impact to social stability of the securities firm;
（ⅶ）Other roles and responsibilities required by law and administrative regulation.
Article 49 During risk management process of the securities firm, if any suspected criminal case within jurisdiction of public security is found, it should be examined by public security department of the State Council. The related local government should provide support and cooperation.
Public security should support and cooperate if spot working team of risk management, administrative liquidation group and manager need to inquire and copy working related materials, which are detained by the public security. For the securities firm under process of bankruptcy, the public security should transfer the frozen assets, which are involved in lawsuit, to people's court that's handling the bankruptcy cases and keep necessary evidence.
Article 50 Securities regulatory authority under the State Council that manages based on chapter two and chapter three of this regulation can apply to people's court for ceasing the civil procedure or execution procedure of defendant, the third party or executed person involving the securities firm as well as its branch.
If assets, personnel, finance or business of related company set up or actually controlled by the securities firm mix with those of the securities firm, the securities regulatory authority under the State Council can apply to people's court for ceasing of civil procedure or execution procedure of defendant, the third party or executed person involving the related company.
During implementation of the above two prescribed measures, the debt of the handled securities firm cannot be liquidated individually except for prescription in Article 31 of this regulation.
Article 51 If the handled securities firm or its related customer can transfer or keep secret of the illegal capital, securities or the securities firm violates prescription of individual debt liquidity in this regulation, the securities regulatory authority under the State Council can prohibit outbound transferring of related fund and securities from capital account and securities account.
Article 52 Local government of the handled securities firm as well as its branch should cooperation risk management work of the securities firm according to related national regulation, develop pre-proposal to maintain social stability, check, prevent and eliminate unstable factors, and maintain normal business order of the handled securities firm
Local government of the handled securities firm and its branch should organize personnel of related department to set up sorting and confirming group of individual creditor's right to sort and confirm registered individual creditor's right according to national regulation.
Article 53 Protection fund regulatory institute for securities investors should acquire creditor's right and make up transaction settlement fund of customers according to national regulation.
The protection fund regulatory institute for securities investor can check using status of protection fund for securities investor.
Article 54 Shareholder, actual controller and creditor of the handled securities firm and related party as well as personnel of the handled securities firm should cooperate on risk management work of the securities firm.
Article 55 Board of director, supervisor, senior management and other related person of the handled securities firm should properly keep property, chop, account book, document and other substance of the securities firm, which are used or managed. They should hand them over to custody group, takeover group, administrative liquidation group or manager and cooperate with spot risk management group, custody group, takeover group and administrative liquidation group on the investigation.
Article 56 Custody group, takeover group, administrative liquidation group and securities firm that is ordered to close business for rectification, be held custody or administrative restructuring should report working status to securities regulatory authority under the State Council according to regulation.
Article 57 The custody group, takeover group, administrative liquidation group as well as the working staff should be conscientious and loyal to their roles and responsibilities.
If shareholder and creditor of the handled securities firm have evidence to prove illegal performance of roles and responsibilities of custody group, takeover group, administrative liquidation group and their working staff, they can claim at securities regulatory authority under the State Council. If the securities regulatory authority under the State Council confirms after investigation, they can order the custody group, takeover group, administrative liquidation group as well as their working staff to correct or substitute them.
Article 58 Agencies or staff which encounter the following situation will be prohibited from participating in risk management work of the securities firm:
（ⅰ）Had criminal punishment or suspected with crime and put on record for inspection and appeal;
（ⅱ）Suspected of violating the law and is put on record for audit by administrative department, or subject to administrative punishment less than three years ago due to serious violation of law;
（ⅲ）Still in the period of prohibition into securities market;
（ⅳ）Weak internal control and have major potential risk;
（ⅴ）Have relationship with managed items of the handled securities firm;
（ⅵ）Other situations recognized by the securities regulatory authority under the State Council of not suitable in participating in risk management work of the handled securities firm.
Chapter 6 Legal Responsibility
Article 59 Since the board director, supervisor and senior management of the securities firm hold major responsibility of the handling, their position qualifications will be suspended for one to three years; in serious cases, their position qualifications and securities working qualifications will be revoked and may be subject to prohibition of entering securities market according to the regulation.
Article 60 If board director, supervisor, senior management and other related staff appear the following situations, they should be fined with more than the same amount or less than double of their annual income and their position qualifications and securities working qualifications can be suspended; in serious cases, their position qualifications and securities working qualifications will be revoked with fine over two times and less than five times of their annual income. They may also be subject to prohibition of entering securities market according to the regulation:
（ⅰ）Refuse to cooperate with spot working group, custody group, administrative liquidation group to perform their roles and responsibilities;
（ⅱ）Refuse to hand over property, chop, account book or document to the custody group, takeover group, administrative liquidation group;
（ⅲ）Hide, destroy or fabricate related document, or provide false information deliberately;
（ⅳ）Hide property; remove or transfer property without permission;
（ⅴ）Hinder normal operation order and business running of the securities firm and generate unstable factors;
（ⅵ）Other situations that hinder normal risk management of the securities firm.
If illegal behavior is conducted by board director, supervisor or senior management instructed by shareholder or actual controller of the securities firm, the shareholder and actual controller should be subject to heavier punishment of the above prescription.
Chapter 7 Supplementary Provisions
Article 61 If a securities firm needs be dissolved due to appearance of such reasons as division or merger prescribed in company rule, it shall apply to securities regulatory authority under the State Council for dissolution and attach the reason as well as proposals on transferring of securities assets, settling up securities business, settling customers, etc. It can legally disband and liquidate after being approved by the securities regulatory authority under the State Council. The liquidation process needs to be supervised by securities regulatory authority under the State Council.
Article 62 Risk management of a futures company should be executed according this Regulation.
Article 63 This Regulation takes effect as of the day of promulgation.
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