CSRC: Seriously punish major violations and increase the cost of breaking the law.

On January 17th, the China Securities Regulatory Commission (CSRC) issued the "Basic Rules for Administrative Penalty Discretion of the China Securities Regulatory Commission" (referred to as the "Discretion Rules"), and the relevant department heads of the CSRC answered questions from reporters regarding the "Discretion Rules". It was introduced that the Discretion Rules reflect a policy direction of strict supervision. By making good use of legal authorization and following the principle of proportionality, serious penalties are imposed on major cases of violations to increase the cost of violations. For example, in cases where the controlling shareholder or actual controller organizes financial fraud, manipulates the market through "false market value management", engages in malicious reduction of holdings for arbitrage, and the circumstances are severe and harmful without any mitigating factors, the punishment will be applied with increasing severity, up to the maximum penalty. In cases of severe penalties, the Discretion Rules detail eight "situations that should be penalized severely" and eight "situations that can be penalized severely" to further limit discretionary powers. The original text is as follows: The relevant department heads of the CSRC answered questions from reporters regarding the "Basic Rules for Administrative Penalty Discretion of the China Securities Regulatory Commission" On January 17, 2025, the CSRC issued the "Basic Rules for Administrative Penalty Discretion of the China Securities Regulatory Commission" (referred to as the "Discretion Rules"). The relevant department heads of the CSRC answered questions from reporters regarding the "Discretion Rules". Question 1: What is the background of formulating the "Discretion Rules"? The exercise of administrative discretion power is related to the vital interests of the people. Regulating the exercise of administrative discretion power is a key link in promoting the construction of a government based on the rule of law. Article 34 of the Administrative Penalty Law of the People's Republic of China stipulates: "Administrative organs may establish standards for administrative penalties in accordance with the law, standardize the exercise of administrative discretion power, and publicize the standards for administrative penalties." The 3rd Plenary Session of the 20th Central Committee of the Communist Party of China emphasized the need to "improve the system of standards for administrative discretion power in the field of administrative penalties". After the revision of the Securities Law of the People's Republic of China in 2019 and the promulgation of the Futures and Derivatives Law of the People's Republic of China in 2022, the upper limit of the amount of fixed fines is up to two million yuan, and the upper limit of the multiple fines is up to ten times. Detailing and quantifying the flexibility of discretionary ranges, making good use of the administrative penalty power granted by law, is of great significance to avoid phenomena such as inconsistent severity of administrative law enforcement, lack of consistency in leniency and severity, inconsistency in penalties for similar cases, stabilize market expectations, and uphold fairness and justice. At the same time, in accordance with the State Council's Opinions on Strengthening Supervision, Preventing Risks, and Promoting the High-Quality Development of the Capital Market (referred to as the new "Nine Measures"), implementing the requirements of having a regulatory system with "long teeth and thorns", having a set of fair, scientific, clear, and transparent discretion standards is necessary to ensure precision in crackdowns, strict supervision, and management, while avoiding disorderly and excessive severity. Therefore, we have carefully summarized the experience in handling administrative penalty cases in recent years, especially since the implementation of the revised Securities Law, and conducted in-depth research on common and frequent issues related to discretionary penalties. After extensive research and discussions, we have formulated the "Discretion Rules" to guide and regulate the administrative penalty discretion work of the CSRC and its branches. Question 2: What are the main contents of the "Discretion Rules"? The "Discretion Rules" consist of twenty-five articles, mainly including the following contents: First, clarifying the basic requirements of administrative penalty discretion. Clarify the purpose and basis of formulation, the definition of administrative penalty discretion, the guiding principles to be followed in exercising discretionary powers, and the discretion policies. Second, specifying the levels and circumstances of discretion. The rules divide administrative penalty discretion into non-penalty, penalty exemption, penalty reduction, lenient penalty, common penalty, severe penalty, and other levels, clearly defining their meanings and classification methods, and specifying the specific application situations of each level of discretion. In cases where there are both lenient and severe penalty circumstances, the rules stipulate that the penalty should be decided after comprehensive consideration of the specific circumstances of the case. Third, combined with the actual administrative penalty practices of the CSRC and its branches, the rules clarify the requirements for confiscation of illegal gains, punishment of co-offenders, penalties for directly responsible personnel of entities, etc. Concerning issues related to the number of acts and penalties, the rules specify "cumulative penalties for multiple independent violations." Regarding the application of old and new laws, the rules clarify "leniency and severity from the old law" and "application of the new law to violations that span old and new laws." In accordance with the Administrative Penalty Law and other laws, regulations, and relevant policy documents, the rules specify the basic requirements for approval by the main responsible persons, collective discussion situations, and the promotion of "layered accountability" and "coordinated enforcement," as well as the CSRC's supervision and guidance over the exercise of penalty powers by its branches. Question 3: What are the prominent features of the "Discretion Rules"? The "Discretion Rules" mainly have the following prominent features: First, making administrative penalty discretion more precise and transparent. The rules differentiate between different levels of discretion and specify the circumstances for no penalty, penalty exemption, penalty reduction, lenient penalty, and severe penalty. In particular, for fines within the statutory range, the rules specify tiered standards for lenient, common, and severe penalties, making the discretion more precise. This prevents simple high or low penalties, avoids disproportionate penalties, and allows people to clearly see and feel fairness and justice. Second, reflecting a policy direction of strict supervision. By making good use of legal authorization and following the principle of proportionality, serious penalties are imposed on major cases of violations to increase the cost of violations. For example, in cases where the controlling shareholder or the actual controller organizes financial fraud, manipulates the market through "false market value management," engages in malicious reduction of holdings for arbitrage, and the circumstances are severe and harmful without any mitigating factors, the punishment will be applied with increasing severity, up to the maximum penalty. In cases of severe penalty circumstances, eight "situations that should be penalized severely" and eight "situations that can be penalized severely" are further detailed to limit discretionary powers. Third, adhering to combining punishment with education. Fully utilize administrative penalties to educate and guide citizens, legal persons, and other organizations to consciously abide by the law and cooperate with supervision. For example, for first-time violations with minor consequences and timely corrections, they may not be penalized; for units that voluntarily report violations before the incident and actively cooperate with investigations, they may have their penalties reduced; for cases where there is no dispute about the facts of the violation and a confession and penalty settlement agreement is signed, they may receive lenient penalties.Je ne parle pas franais.Question 4: What are the requirements for administrative punishment discretion in cases of co-offending? When two or more parties jointly engage in market manipulation, insider trading, or other illegal activities, with strong subjective malice and significant objective harm, the "Discretion Rules" provide specific regulations for the punishment discretion in these cases. In summary, it is "determination of the whole before separate punishment," meaning that all parties are initially considered as a whole, with subjective faults, illegal behaviors, and illegal gains identified, and then the amount of confiscated illegal gains and fines are allocated based on the roles and participation of each party in the co-offending. However, if laws, administrative regulations, or rules have already established separate penalty rules for co-offending behaviors, they should be handled according to the corresponding rules. For example, if the controlling shareholder or actual controller of an issuer organizes or instructs fraudulent issuance or illegal disclosure of information, which poses significant social harm and is a priority for severe crackdown, Article 181 and Article 197 of the Securities Law have set independent penalties for such cases, and they do not need to be handled as co-offending cases. Therefore, Article 14 of the "Discretion Rules" provides for situations like these. Question 5: What provisions does the "Discretion Rules" make in terms of comprehensive accountability and integrated punishment and prevention? To combat illegal activities in securities and futures, it is necessary to combine punishment, prevention, and treatment, and continuously increase the comprehensive accountability efforts from all directions. In accordance with the decisions and requirements of the Party Central Committee, the State Council, and relevant laws, administrative regulations, and rules, the "Discretion Rules" stipulate that if illegal behaviors are suspected of constituting crimes, they should be promptly transferred to judicial authorities for criminal investigation and prosecution. In cases where illegal behaviors also involve civil torts, efforts should be made to pursue civil liability. In cases where no punishment is warranted by law, corresponding administrative supervision measures can be taken based on the circumstances and recorded in the integrity file of the securities and futures market, notifying self-regulatory organizations to take disciplinary actions in accordance with the law. By taking various measures, the protection of investors, especially small and medium-sized investors' legitimate rights and interests is effectively implemented, maintaining a sound market ecology. Furthermore, the "Discretion Rules" provide further clarification on the coordination between criminal punishment and administrative punishment: in cases where illegal behaviors are suspected of constituting crimes, and assets have been confiscated or fines imposed during the transfer to judicial authorities, the transfer documents should clearly state the situation of confiscated assets and fines. In cases where a fine has been imposed after a criminal conviction, there is no longer a need for a fine in the subsequent administrative punishment. Lastly, in cases where illegal behaviors are suspected of constituting crimes, and after the transfer to judicial authorities it is determined that criminal liability is not required, but administrative punishment is deemed necessary, the proper administrative penalty should be imposed according to the law. Question 6: What considerations are there for the next step in implementing the "Discretion Rules"? The "Discretion Rules" are an important measure to implement the decisions and arrangements of the Party Central Committee and the State Council regarding the rule of law. In the next steps, we will strengthen organizational implementation to ensure that the "Discretion Rules" are effectively implemented and produce results. First, we will enhance publicity and interpretation to fully promote the enforcement philosophy of "severe punishment for serious violations and proportionate fines," allowing the general public to understand the policy direction and values of regulatory authorities and prompting market participants, especially controlling shareholders, actual controllers, securities and futures market personnel, to abide by the rules and regulations and use the "Discretion Rules" to regulate their behavior. Second, we will ensure effective training of personnel involved in administrative punishment within the CSRC and its affiliated agencies so that they understand and apply the "Discretion Rules" in all aspects of case investigation, trial, hearing, and decision-making. The CSRC will also further strengthen supervision and guidance for its affiliated agencies in exercising their administrative punishment discretion correctly. Third, based on documents like the "Discretion Rules," we will enhance top-level design, focus on key issues, and continue to strengthen the construction of the administrative punishment system to develop a clear, logical, scientifically sound, and effective system of CSRC administrative punishment rules. This article was selected from the "CSRC Release" WeChat public account, GMTEight Editor: Liu Jiayin.