2021.08.24 WU, Lei、XIAO, Xian
Recently, we noted that the China Securities Regulatory Commission (CSRC) has for the first time imposed administrative penalties for misconduct in the China Interbank Bond Market (CIBM). According to four Administrative Sanction Decisions released by the CSRC (i.e.,  No. 44,  No. 56,  No. 57, and  No. 58), three issuers of non-financial enterprise debt financing instruments (the "debt financing instruments") and the relevant responsible persons were punished by the CSRC for making false statements in the issuance documents. This was the first time that the CSRC penalized illegal misconduct in the CIBM since November 2018 when the People's Bank of China (PBOC), the National Development and Reform Commission (NDRC), and the CSRC jointly issued the Opinions on Issues Concerning Further Strengthening Law Enforcement in the Bond Market (the "Opinions").
We believe that although this first instance of administrative penalties imposed by the CSRC mainly targeted at the issuer’s behavior of misstating its financial conditions, resulting in false statements and material omissions in the issuance documents of debt financing instruments, the Opinions have notably set up a framework for the unified law enforcement of the CSRC in the CIBM. We believe that the CSRC will further strengthen and expand the investigation and punishment of misconduct in the CIBM in accordance with the law enforcement principles proposed by the Opinions, of which the key points are summarized as follows.
Pursuant to the Opinions, the CSRC may conduct investigations into the following bonds violations in the CIBM and may seek a variety of sanctions in accordance with relevant stipulations in the Securities Law.
Violations by the Bond Issuer: If any issuer of debt financing instruments has made false statements, misleading statements or material omissions in the issuance documents or in the process of fulfilling the ongoing information disclosure obligations required by the regulatory rules, the CSRC may seek sanctions against such issuer in accordance with Article 197 of the Securities Law.
Violations by the Bond Underwriter: If commercial banks, securities companies and other bond underwriters commit any violations in the course of the issuance and underwriting of debt financing instruments, such as making false statements, misleading statements or material omissions in the issuance documents, the CSRC may seek sanctions against such bond underwriters in accordance with Article 184 of the Securities Law.
Violations by the Bond Service Providers and the Relevant Professions: If professional institutions and professions such as credit rating agencies, certified public accountants and lawyers that provide services in relation to debt financing instruments fail to perform their duties of care and due diligence, and the documents issued contain false statements, misleading statements or material omissions, the CSRC may seek sanctions against such bond service providers and relevant professions in accordance with Paragraph 3, Article 213 of the Securities Law.
Transaction Violations: The CSRC can punish transaction violations such as insider trading, market manipulation, etc. in relation to debt financing instruments pursuant to Articles 191, 192 and other relevant stipulations of the Securities Law.
Based on the principles of the Opinions, bonds violation in the CIBM may lead to one or more of the following legal penalties:
Self-Disciplinary Sanctions by the National Association of Financial Market Institutional Investors (NAFMII): Pursuant to the Rules on Self-Disciplinary Penalties in the Interbank Bond Market, the NAFMII may adopt various self-disciplinary sanctions such as regulatory admonishment talk, circulating a notice of criticism, warnings, suspension of involved business, suspension of members' rights against institutions that commit violations and the responsible persons. Based on public information released by the NAFMII, for the first half of 2021, the NAFMII has initiated investigations into a total of 43 suspected cases and imposed self-disciplinary sanctions against a total of 46 involved institutions and persons, including 13 issuers, six lead underwriters, three market-making institutions, one accounting firm, two other-type financial institutions and 21 responsible persons.1
Administrative Penalties by the CSRC: Based on the principles of the Opinions, the CSRC can initiate investigations and seek penalties for misconduct of the issuer, underwriter, professional institutions, as well as for insider trading, market manipulation, and other types of transaction violations in connection with debt financing instruments. Additionally, the Opinions specify that the CSRC may also impose a ban of market entry on responsible persons for bond violations in the CIBM.
Criminal Liability: Pursuant to the Opinions, the CSRC may refer potential criminal cases arising from their investigations to criminal law enforcement authorities for criminal prosecution.
Civil Compensation Liability for False and Misleading Statements in Connection with Sale of Bonds: In July 2020, the Supreme People's Court issued the Symposium Minutes of the National Courts’ Trial of Cases Concerning Bond Disputes, which specify matters concerning civil litigation for fraud, or false and misleading statements made in connection with the sale of bonds, such as the acceptance of a lawsuit, jurisdiction, and determination of the responsibilities of the involved issuer, underwriters, and bond service providers. At present, the first civil compensation trial on the misconduct of false and misleading statements in the CIBM is currently underway at the Beijing Financial Court.2
Pursuant to the Opinions, the CSRC may adopt the following means to investigate potential bonds violation in the CIBM:
Pursuant to the Opinions, the CSRC may take several law enforcement measures authorized under Article 170 of the Securities Law, such as the right to investigate and collect evidence, the right to seal up or freeze properties or accounts, and to notify the exit and entry administration authorities to prevent involved persons from leaving the country. Additionally, the CSRC may obtain evidence such as trading record, materials related to registration, depository, and settlement of bonds, and information disclosure documents from the NAFMII, depository and clearing institutions, and other market participants. When necessary, the CSRC may also obtain information from the competent departments and authorities, such as credit records, social insurance records, customs records, tax payment records, company information, and communication records of the involved persons or institutions under the investigation.
Cooperation Obligations of Institutions and Persons under Investigation: The Opinions provide the cooperation obligations of institutions and persons under investigation. If responsible persons fail to cooperate with the investigation, the CSRC may recommend the relevant regulatory authorities or competent departments to order the employers of such responsible persons to give disciplinary punishments on them, or recommend cancelling their position qualifications, or bar them from working in the financial industry.
Coordination Mechanism with the PBOC and the NDRC: The Opinions stipulate that the PBOC and the NDRC shall coordinate and consult with the CSRC in dealing with relevant bonds violation cases, if necessary, issue written opinions on professional issues involved in the case, cooperate with the CSRC in replying and responding in the administrative reconsideration proceedings and administrative litigations in connection with the case, and forward any potential evidence of misconduct to the CSRC in a timely manner.
We will continue to monitor the situation and keep our clients apprised of any important developments.