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Business scope of securities companies

The Provisional Regulations on the Examination and Approval of the Business Scope of Securities Companies, promulgated by the China Securities Regulatory Commission (CSRC), took effect on December 1 2008. The Provisional Regulations signal the CSRC's willingness to relax the regulations amidst the general pessimism of the China stock market as one of the world's worst performing stock markets in 2008.

The key provisions of the Provisional Regulations include:

  • As long as it complies with respective rules and practices, a securities company does not have to apply for separate operation licence for its advisory services in relation to its brokerage business. Nor does it have to apply for a separate operation licence for its dealership.
  • As long as segregation is properly made in terms of geographic coverage or targeted clients, affiliated securities companies will not be barred from engaging in the same type of business.
  • A mechanism is put in place where, on one hand, a securities company may apply to the CSRC for opening an innovative business even if such a business is not clearly stipulated in the Securities Law and various regulations. On the other hand, the CSRC will not certify more than four types of new business for a newly established securities company, or more than two types of new businesses for an existing securities company which plans to expand its services. Addition of new business will not be certified unless at least six months have lapsed from the last certification of the business of the same company.

According to the Provisional Regulations, a new business may not be formally launched until i) the CSRC approves the proposed addition of new service, which process could take as many as 45 working days for CSRC certification alone; ii) a new business licence is issued, which normally takes 15 working days; iii) credentials of management and facilities are certified by the local arm of the CSRC; and iv) a new operation licence for engaging in securities-related business is issued. The CSRC can at least control three of the four steps. If that is not enough, the CSRC has made it clear it has discretion to decide whether it will approve a few selected companies to run the innovative business as an exploration, with possible consultation with expert panels, or put these innovative businesses infinitely on hold.

In sum, the Provisional Regulations provide an avenue through which struggling securities companies may feel relaxed when providing services such as consulting or dealership formally constrained by regulatory formalities. When it comes to innovative services such as short sales and margin loans, the CSRC still holds the leash tight.

Adam Li

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