December 28, 2001

The other day, China Securities Regulatory Commission imposed administrative penalties on the two companies and related persons in charge of Zhejiang Securities Co., Ltd. and Gansu Securities Co., Ltd. for their conducts against securities regulations.

Principal of relevant department of the CSRC says that it is a significant lesson by the two companies’ conducts against laws and regulations.

The causes lie firstly in the poor law-abiding consciousness of the companies’ senior executives and their lack of standard operation conception. The senior executives of the companies did not carefully study about laws, lacking in the correct recognition of the solemnity of laws and clear knowledge of the consequence from the violation of laws. Some of the senior executives incorrectly thought that their conducts were but common practice in securities market, knowing that what they did were against the laws. And they chanced the luck with an idea that law does not apply to the majority of people breaking it. Some of them, while dealing with the relation between long-term interests and short-term interests, blindly pursued short-term interests and imposed unpractical indicators to business department and sales department, encouraging the employees to try to avail themselves of the loopholes of laws under the name of “business innovation”. If the managements of a company lack of the conception of standard operation, they are possibly to slacken the precaution and control over rule-breaking risks, and the employees of the company will carry out their work under mistaken directions. For instance, some principals of sales department slacken the legal and ethic restrictions to blindly pursue profits, and some do not have the courage of or restrain themselves from pointing out the conducts that are obviously known to be breaking the laws due to the considerable indicators received and large pressure from the leaders of the company, reflecting that the company’s internal control system for risk precaution is but a mere skeleton. Still some rack their brain to give ideas to the company of playing edge ball for certain personal interests. All those instances conclude that the characteristic of individuals, particularly that of senior executives, is essential to the standard operation and healthy development of a securities company.

The causes lie secondly in the issues of the perfection and implementation of the company’s internal control system. The CSRC released early this year the Guidance for Internal Control of Securities Companies, requesting all securities companies to establish a complete internal control system and restrictive mechanism to be strictly implemented. Such is the least requirement to the construction of the internal control system of a securities company. After the release of the Guidance, many securities companies have actively carried out the work and perfected various rules and measures of the company in accordance with the requirements, with the loopholes filled up and the operation as well as the risk precaution largely improved as a result. Whereas there are also companies work but merely on the paper to the requirements of the Guidance. And there are still certain companies having not yet up to the requirements of the Guidance, with the failure to observe the principles of independency and inter-restriction and phenomenon of decisions by the minority, having considerable risks and hidden problems.

The principal says that there is profound meaning in the law-abiding and standard operation of securities companies. This issue is a significant one because securities companies bear the responsibility to function as a bridge in securities market. The standard operation of securities company not only influences the sustainable development of the company itself, but also affects the interests of listed companies and the vast majority of investors, the confidence of various entities in securities market, and the healthy development of the overall securities market. Therefore, the CSRC has attached significant importance to the supervision work by bringing up the supervision over the law-abiding and standard operation of securities companies to a strategic position. Concerning employees management, the Commission is amending Management Measures of Securities Practitioners and Code for Practice of Securities Practitioners in an aim to strengthen the management of the qualification of practitioner and senior executives, and further improve the practitioners’ business level, law-abiding consciousness and ethic standard. Likewise, perfection and implementation of securities companies’ internal control system shall be reinforced. In the days to come, the CRSC shall urge securities companies to carry out such work by further perfection and implementation of various supervision measures. To securities companies that are not up to the requirements or fail to effect implementation, the CSRC shall raise difference to the qualification of their senior executives or request their board of directors to change persons or even temporarily stop the procedures of part or all of their business applications. In addition, the CSRC shall continuously press securities companies to, in the presence of opportunities and challenges emerging from China’s entry into WTO, carry on their studies to further improve their law-abiding consciousness and business levels, adjust the operation concept timely by orienting to standardized operation from the extensive operation of the past with business innovation carried out within the frames of laws and regulations, and strictly abide by laws to prevent and solve operation risks, practically bearing the responsibilities entrusted by securities market.

The China Securities Regulatory Commission

(This English version by Shenzhen Securities Information Co., Ltd. is for your reference only. In case any discrepancy exists between the Chinese and English context, the Chinese version shall prevail.)