The General Office of the State Council released the Opinions on Further Enhancing the Protection of Small Investors’ Rights and Interests (The General Office of the State Council〔2013〕No.110) on Dec 27, 2013.
Based on the reality of China's capital market and the need to protect investor's legitimate rights and interests, the Opinions focus on the long-lasting and pressing issues regarding investor protection and develop the regulatory system for the protection of the rights and interests of small investors in capital markets. The Opinions is a guiding document for the protection of small investors and the facilitation of the sound development of capital markets. The Opinions marks a crucial milestone in the development of China's capital markets, which has significant practical implications and potential influences in the future.
Opinions on Further Enhancing the Protection of Small Investors’ Rights and Interests Issued by the General Office of the State Council, People’s Republic of China
The General Office of the State Council〔2013〕No.110
To the people's governments of all provinces, autonomous regions and municipalities directly under the Central Government, ministries under the State Council, and institutions and agencies affiliated to the State Council:
Despite being the main participants in China’s capital markets, small investors are rather vulnerable to infringement of their lawful rights and interests due to their lack of sufficient information accessibility, risk prevention and self-protection. Safeguarding the rights and interests of small investors is a top priority for securities regulators, for it is closely related to the welfare of the whole nation and serves as the foundation for the sound and sustainable development of the capital market. Although significant progress has been made in the protection of small investors in recent years, we still have a long way to go in protecting market openness, fairness and impartiality, and in meeting the needs of investors. In order to implement the decisions of the 18th CPC National Congress and the 3rd plenary session of the 18th CPC Central Committee and to follow the instructions of the State Council, the General Office of the State Council, upon the approval of the State Council, issues the following opinions to further protect small investors.
I. Improve the Investor Suitability System[The investor suitability system is aimed at classifying investors by their risk tolerance and investment experience. It also requires securities and futures companies and other intermediaries to assess the risks of financial products and services and recommend them to investors with corresponding risk tolerance levels.]
Establish the criteria for investor classification. In line with the reality of China’s capital markets, the criteria for investor classification will be formulated and released, along with follow-up assessment and adjustments. Meanwhile, we will further standardize investor suitability rules for different tiers of markets and different products, clearly specifying the scope and methods for investor participation.
Adopt a scientific approach in determining risk levels. Securities and futures companies and other intermediaries should assess and determine the risk levels associated with various financial products and services, recommend to investors products and services suited to their risk tolerance and risk identification capabilities, and provide them with full explanation of issues that might affect their rights and interests. Investors must not be provided with misleading or fraudulent information.
Further elaborate regulations and market service rules. Securities and futures companies and other intermediaries should establish codes of conduct and internal accountability mechanisms. The sales representatives should not be permitted to trade in their own names for clients, and should explicitly remind clients to provide authentic information. Clients’ personal information should be kept strictly confidential and secure, and must not be sold or illegally provided to other parties. The suitability rules should be strictly implemented with enhanced supervision. Parties found to have violated the suitability rules and caused losses to investors shall be held liable.
II. Optimize investment returns mechanisms
Guide and support listed companies to enhance their capabilities to provide sustainable returns to investors. Listed companies should improve corporate governance and profitability, and take initiative in sharing profits with investors. If returns are diluted through IPOs, follow-up offerings or M&A transactions, listed companies and related parties should undertake to adopt concrete measures to make up for the dilution effect and deliver on such commitments.
Improve the system of profit distribution. Listed companies should disclose dividend policies, especially the commitments and detailed plans for cash dividend payments. Failure to deliver on such commitments should be documented within the integrity record of the companies, which should get permission for follow-up offerings unless and until relevant rectification requirements are met. Independent directors and relevant intermediaries should express their opinions in an explicit manner on whether a company’s profit distribution policy might harm small investors’ rights and interests.
Establish a system for diverse investment returns. Mechanism for share repurchase will be improved, encouraging listed companies to buy back shares when the prices fall below the book value per share. A "scrip dividend" system should be introduced, as a new means of dividend distribution. Listed companies that are able to generate steady cash dividends for shareholders should enjoy favorable supervisory policy. Guidelines for dividend distribution should be differentiated according to the types of companies and the ex-rights and ex-interests arrangements should be improved.
Develop professional intermediaries that cater to small investors. The development of financial products suitable for small investors and investment in the capital markets by small investors via institutions should be encouraged. Fund managers should deliver on dividend commitments and be devoted to creating high returns for investors. The fund management fee schemes and rates should be diversified, forming a model that aligns the interests of fund managers with that of fund unit holders.
III. Ensure small investors’ right to know
Strengthen the relevance of information disclosure. Information that could affect investors’ decision-making should be disclosed in a truthful, accurate, complete and timely manner and be readily accessible to small investors. The contents of the disclosures should be succinct and easy to understand with risks fully explained. Internal systems and process for information disclosure should be improved and secretaries of boards and related staff should be held accountable for failure to meet the reporting requirements. Rules should be made to encourage voluntary and simplified information disclosure.
Promote market transparency. Exchanges and relevant parties have the obligation to report on and disclose information that could significantly influence market prices and to indicate corresponding risks in a prompt manner. A unified platform for information disclosure should be established. Disclosure mechanisms for cross-market transactions and market contingencies should be improved, as should the accountability mechanism for disclosure violations. Regulators should also enhance their efforts to conduct on-going monitoring and supervision over disclosure of sensitive issues and events.
Fulfill obligations for information disclosure. Listed companies must fulfill their duty for information disclosure and must not illegally disclose information to any parties before disclosing it to the public. The undertakings made by controlling shareholders and actual controllers in disclosure documents must be specific and practical. Controlling shareholders and actual controllers should also make clear commitments especially on how to compensate small investors in cases of violations and honor such commitments. Listed companies should specify the time and method for taking and responding to investors’ inquiries, and improve the response mechanism for public opinions.
IV. Foster the voting mechanism for small investors.
Improve the voting mechanism for small investors. Listed companies should be encouraged to adopt online voting in all shareholder meetings. The use of cumulative voting in the election of boards of directors and supervisors should be advocated. Listed companies should be forbidden to restrict small shareholders’ rights to solicit proxies. A third party witness system for shareholder voting should be fostered. A system should be developed to allow small investors to propose to remove unqualified directors. Self-regulatory organizations should improve the registration and performance evaluation system for independent directors.
Establish a separate counting system for small investor votes. Listed companies should count the votes of small investors separately on proposals that may significantly affect small investors’ interests. The voting results should be disclosed in a prompt manner and reported to securities regulators.
Ensure that small investors can fully exercise their shareholder rights. Regulations on avoiding conflicts of interests banning horizontal competition, and addressing related-party transactions should be improved. Controlling shareholders and actual controllers are prohibited from restricting or obstructing small shareholders in the exercise of their lawful rights, or harming the interests of the company and its small shareholders. The mechanism for general bondholders’ meetings for publicly offered corporate bonds and the stewardship code for fund trustees should be improved. Fund managers must facilitate fund unit holders to exercise their voting right and encourage small investors to attend fund unit holders’ meetings.
V. Establish a diverse dispute-resolution mechanism
Bolster dispute resolution mechanisms. Listed companies and securities and futures companies should be primarily responsible for handling investors’ complaints, improve their complaint handling mechanisms and disclose their work processes and the status of complaints being handled. Securities regulators should improve the registration and documentation of complaint handling and use the effectiveness of the complaint handling practices to evaluate the compliance level of an institution. Dispute resolution through negotiations or settlement between small investors and market entities should be encouraged.
Foster the role of third-party institutions in dispute resolution. Self-regulatory organizations and market entities should be encouraged to independently or jointly offer free mediation services to small investors in accordance with relevant laws. Efforts should also be made in reinforcing arbitration services for securities disputes. Mechanisms will be developed to bridge mediation with arbitration and litigation.
Strengthen coordination and cooperation. Relevant agencies should assist judicial authorities in improving the litigation system for civil tort. Legal process should be enhanced to facilitate small investors to protect their rights at lower costs. An effective remedial (support and assistance) system tailored to small investors should be established. Investor protection measures should be strengthened in cases of bankruptcies and liquidation.
VI. Enhance the compensation mechanism for small investors
Urge violators and related parties to take initiative to compensate investors. Controlling shareholders and actual controllers of listed companies responsible for securities law violations are liable to take initiative to compensate small investors with their own shares and assets. Those who cause losses to investors by making false or misleading disclosures or omitting important information in the IPO prospectuses should compensate investors in accordance with relevant laws and regulations, and intermediaries should assume corresponding liabilities. Fund managers and asset trustees should compensate fund unit holders in accordance with relevant laws and regulations for any losses suffered by fund unit holders due to their failure to perform their fiduciary duty.
Develop a mechanism to deal with delisting risks of listed companies. Companies at risk of being delisted due to violations should disclose an assessment of such risks in their periodic reports and propose response plans. The feasibility of establishing repayment funds for publicly offered corporate bonds should be explored. Listed companies should adopt an insurance system for the delisting risks and include a clause that specifically addresses delisting risks into the liability insurance scheme. Meanwhile, the professional liability insurance system for intermediaries should also be improved.
Reinforce the risk remedial mechanism. Under the current policy framework, securities and futures companies and fund managers should improve their independent remedial mechanisms and use special risk reserves to compensate investors for their losses. The securities insurance sponsors’ guarantee funds and reserves for violation risks by related listed companies shall be further explored and developed. Pilot programs of administrative settlement system for securities and futures disputes should be carried out. The feasibility of and means to expand the sources and use of the securities investor protection fund and futures investor safeguard fund should be studied.
VII. Strengthen supervision and law enforcement on securities violations
Foster supervisory policies. Securities regulators must incorporate investor protection into the entire supervisory process and ensure its implementation in each regulatory procedure. For transactions that need to be licensed by, registered or filed with supervisory authorities, relevant authorities should make special arrangements to protect investors’ interests based on the characteristics of such transactions. Shareholders of restricted stocks should disclose their plans to sell shares and be prohibited from trading before such disclosure is made. Such shareholders should also be encouraged to voluntarily extend the lock-up period. A database of integrity records, for all market participants should be set up and be accessible to all relevant authorities. Investors should be able to consult such database before choosing financial service providers. Incentive and disciplinary mechanisms should be established to reward honest behaviors and punish the breach of market integrity.
Carry out strict inspection and enforcement on violations of small investors’ rights. Authorities should conduct thorough investigation and impose stern sanctions on inappropriate adjustment of earnings forecast, price irregularities due to non-disclosures, disclosure ahead of the designated media, disclosure in the form of news release rather than official reporting, fabricated or misleading information, insider trading and market manipulation. Controlling shareholders and actual controllers should be severely punished for directly or indirectly transfer and misappropriate corporate assets. Whistleblowers reward programs should be set up.
Strengthen coordination in enforcement efforts. All relevant authorities should make concerted efforts to crack down on securities crimes and curb infringement on small investors’ rights. Contingency plans for violations of small investors’ rights should be established. Measures for handling protests need to be in place. Securities regulators and the police should further strengthen cooperation in law enforcement and take more preventative actions. Regulators should also assist the police and judicial authorities in developing litigation standards and related judicial interpretations.
VIII. Promote small investors education
Further improve the financial literacy of small investors. Investor education should be gradually incorporated into the national education system, and pilot programs may be implemented in some areas. Better use of mass media tools should be made for investor education and advocating investor rights. Securities and futures companies should take responsibility for educating investors about their products and services, and provide enough funding and human resources to incorporate quality investor education into every business procedure.
Raise the awareness of risk prevention among investors. Self-regulatory organizations should strengthen their functions in investor education and enhance self-regulatory rules on members’ investor education programs and services. Small investors should take the initiative to become rational investors, abide by laws and regulations when exercising their rights, form good investment habits, and avoid acting on rumors or conforming to speculative activities, thus increasing their competence in risk prevention and self-protection.
IX. Bolster the investor protection system
Establish an integrated investor protection system. An integrated and well-rounded investor protection system that incorporates “legal protection, regulatory protection, self-regulatory protection, market protection and investors’ self-protection” should be promptly developed. Investor protection should become routine responsibilities for relevant authorities and market participants with institutionalized and standardized procedures. Regulators, self-regulatory organizations and market entities shall foster their infrastructure and organizational systems for investor protection, increase the amount of resources devoted to the cause, and explore more effective communication channels with small investors. Regulators should formulate regulations on inspection and evaluation systems for small investor protection, and use the results as a basis for decision-making in day-to-day supervision and the granting of administrative licenses.
Improve the organizational systems for investor protection. Small investors’ associations and non-profit organizations for protecting investor rights should be established in order to provide support and assistance for investors, and offer comprehensive dispute resolution services employing mediation, arbitrage, litigation, among others. The professional role of securities attorneys should be fully exploited, and practitioners should be encouraged to provide more pro bono services to small investors.
Create a favorable policy environment. Regulators should further improve policies and measures to increase the level of protection provided for small investors. State shareholders and actual controllers of listed companies should exercise their rights in accordance with the law, and support companies in fulfilling their legal obligations. Fiscal, taxation and securities authorities should make refine the tax schemes of securities transactions and dividend payment in order to improve the investment environment. Ministries, agencies under the State Council and local governments should abide by laws and regulations when requesting non-public information from listed companies. Relevant authorities should improve the gathering and distribution of market data and set up an effective inter-ministerial coordination mechanism to boost information-sharing. International exchanges and cooperation on securities regulation should be enhanced to facilitate cross-border regulation of investor protection.
General Office of the State Council, the People’s Republic of China
25th December, 2013