Provisions of the Supreme People’s Court on Civil Compensation Cases Involving Misrepresentations in the Securities Market

April 2022

Di Wu

On January 21, 2022, the Supreme People’s Court promulgated the Provisions of the Supreme People’s Court on Civil Compensation Cases Involving Misrepresentations in the Securities Market the (“Provisions”) to improve the fundamental systems in the capital market, raise the cost of capital market violations, cause market participants to perform their inherent responsibilities, safeguard the rights and interests of investors, promote the comprehensive and deepened reform of the capital market, and create a good ecology for the market.

Based on the implementation of the Provisions of the Supreme People’s Court on the Civil Compensation Cases Arising from Misrepresentations in the Securities Market (2003), as well as the relevant provisions of the Civil Code and the new Securities Law, the Provisions summarize the market development, legislative evolution, and the difficult issues encountered in trials, then further refine and clarify the elements of the civil liability for misrepresentations in the securities market, the accountability mechanisms, etc., as highlighted below:

1. The preliminary administrative or criminal procedure under the original judicial interpretation is abolished to enable the timely and comprehensively protection of the injured investors’ right of action.

2. Misrepresentations such as false records, misleading statements, material omissions, failure to disclosure pursuant to applicable requirements, etc., are clearly defined; a predictive information safe harbor system is stipulated, and critical content in the determination of misrepresentations, such as the implementation date, disclosure date, materiality, and the causal relationship of a transaction, are optimized and improved.

3. The criteria for determining the fault of directors, supervisors, senior executives, and other directly responsible persons, the independent directors, sponsoring and underwriting institutions, securities service institutions, and other entities, as well as their immunity defenses, are refined.

4. The liability of controlling shareholders and actual controllers is increased by stipulating the liability of the counterparties in major asset reorganization transactions, pursuing the liability of those who provided assistance in the misrepresentation, and preventing under-the-table compensation agreements by sponsoring and underwriting institutions, etc., to ensure that these institutions stay diligent throughout the process and clarify the relevant liable entities.

5. The record date and benchmark price system are optimized, and an explanation of the method for calculating losses from different types of misrepresentation is added.  In addition, the treatment of loss calculation for multi-account transactions is also stipulated, and information that relates to the determination of the causal relationship of losses is clarified to improve the rules of loss determination in a more systematic and comprehensive manner.