New regulatory regulations to prevent unannounced shareholding: direct investment by brokerage firms cannot be sponsored (VC312)

The Securities Regulatory Commission officially announced on July 8 that the direct investment business of securities companies will be included in regular supervision, and at the same time issued relevant regulatory guidelines. In the future, the establishment of a direct investment company for securities firms and daily business including the establishment of direct investment funds can be reported to the local securities regulatory bureau.

The new regulatory requirements require that the direct investment department of a securities company cannot invest in a company that has been sponsored by the securities firm to be listed. This means that the practice of direct investment companies making surprise stocks before their sponsorship projects go public will become history.

The above regulations are from the "Guidelines for Direct Investment Business of Securities Companies" that have just been publicly released, and the new regulations require that securities companies serving as counseling agencies, financial advisors, sponsors or lead underwriters of companies to be listed, shall sign relevant agreements or substantively develop relevant From the date of business, the company's direct investment subsidiaries, direct investment funds, industrial funds, and fund management institutions may no longer invest in the enterprise to be listed.

Because the direct investment is earlier than the unrestricted sponsorship, this new rule does not completely stop "sponsor + direct investment". The industry believes that as long as the direct investment department can make independent decisions and proceed from its own interests and project reality, it should be able to prevent conflicts of interest to a certain extent. But the key still lies in the improvement of the internal control system of securities firms and direct investment companies, and the effectiveness of external supervision.

Actively accept supervision

The "sponsored + direct investment" business model and the surprise stock-taking phenomenon among GEM companies were once the target of criticism from public opinion. After the launch of the Growth Enterprise Market in 2009, the first few batches of companies generally issued with a very high price-earnings ratio, and at the same time realized a huge amount of funds raised. Around this stage is also a period when securities companies such as direct investment and other institutions rushed to buy shares in listed companies. For example, Yangpu Medical, which was sponsored by a securities firm, was listed at the end of 2009, and its direct investment company invested in it in May 2009, just less than 7 months apart.

The direct investment surprise investment was suspended, largely due to public opinion supervision and the regulatory authorities' response to public opinion.

In 2007, the direct investment business was piloted on a case-by-case basis, and the scope of the pilot company was expanded the following year. The pilot conditions were further relaxed by April 2009. At the same time, the China Securities Regulatory Commission issued the "Guidelines for Direct Investment Business of Securities Companies." However, due to the financial crisis at this stage, most of the direct investment companies are carrying out project reserves, which have not yet had market influence, and therefore have not attracted public attention. It was not until the resumption of new shares in June 2009 that the direct investment company re-entered the media vision as the market started.

According to the follow-up of the pilot situation and the issues reflected by the media public opinion, the supervisory department timely improved the supervisory rules. In September 2010, the Securities Regulatory Commission sent a letter requesting securities firms to strengthen the audit and management of direct investment subsidiaries, requiring securities companies and direct investment subsidiaries to disclose to the public the institutional arrangements to prevent conflicts of interest, and the basics of managers and investment decision-makers Situation, take the initiative to accept social supervision. In December 2010, the Securities Industry Association also issued a document to further clarify the information isolation and business isolation requirements for direct investment business and investment bank business.

The latest regulatory guidelines also clearly require that securities companies conducting direct investment business should establish a mechanism for public opinion supervision and rapid response to market queries, promptly analyze and judge the content of public opinion and market queries, conduct self-examination, and explain to the public. If the self-examination finds problems or deficiencies, the securities company and the direct investment subsidiary shall take effective measures in a timely manner to correct, rectify, and improve, and the relevant situation shall be reported to the securities regulatory bureau where the securities company is located, and announced to the public.

Independent investment decision

After entering the regular supervision stage, the core of the direct investment business supervision is still to control investment risks and prevent conflicts of interest. The former mainly involves the separation of legal persons between securities firms and direct investment companies, as well as the strict limitation of the investment scale of their own funds. The latter emphasizes the independence of personnel, decision-making and information isolation.

According to the requirements of personnel independence, all senior executives and practitioners of direct investment companies are full-time and may not work part-time in securities companies; investment bank personnel of securities companies are strictly prohibited from engaging in direct investment business. In terms of independent decision-making, direct investment companies should make independent judgments on investment projects, and securities companies must not intervene illegally. In addition, there is information isolation, which requires the establishment of an information separation wall mechanism between securities companies and direct investment subsidiaries, prohibits investment banking departments from leaking sensitive information, and provides special arrangements for direct investment companies to participate in the project.

Relevant persons from the China Securities Regulatory Commission said that whether a securities firm conducts direct investment business with its own funds or managed funds is actually not a securities franchise business, that is, there is no need for the China Securities Regulatory Commission to issue a license. Private enterprises, foreign-invested enterprises, and some state-owned enterprises generally carry out equity investment business in line with the attributes of direct investment, and foreign-invested and private equity investment institutions dominate the market. These institutions are basically not subject to supervision.

In comparison, the direct investment business of securities companies is strictly regulated by the China Securities Regulatory Commission and dispatched agencies. The institutional arrangements, regulatory requirements, and risk control of direct investment subsidiaries are stricter, and information transparency is also higher. During the direct investment pilot period, the supervisory role of public opinion also promoted the direct operation of direct investment companies.

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