Measures for an Appropriate Management of Securities and Futures Investors

James Cheng
The China Securities Regulatory Commission (the “CSRC”) promulgated the Measures for the Appropriate Management of Securities and Futures Investors (the “Measures”) on December 12, 2016. As discussed below, the Measures set out rules regarding what kind of appropriate obligations should an investment institution bear on matters such as the risk tolerance of investors, risk classification of investment products, full disclosure of risks, and providing tailored opinions:
I. Scope
The Measures state that they will primarily apply to institutions that sell securities and futures products or provide securities and futures services to investors (the “Institutions”).
II. Supervisory and administrative agencies
Pursuant to the Measures, the CSRC and its delegated agencies shall supervise the Institutions’ performance of the obligations. Self-regulatory organizations such as securities and futures exchanges, registration and settlement agencies and all securities and futures associations will serve as a self-governing organization engaging in autonomous administration over the Institutions’ performance of their obligations.
III. Key provisions of the Measures:
1. Creation of a multidimensional system to classify investors (as general investors and professional investors) to unify the classification criteria and administrative requirements for investors.
2. The minimum requirements for products and services, as well as the division of labor, are specifically stipulated to establish a classification mechanism for such products and services that is rigorously monitored for risk control.
3. Set out the obligations to be performed by the Institutions in all elements of the appropriate management regime so that the relevant conduct is strictly regulated.
4. Special protection of general investors is highlighted with targeted products and tailored services provided to investors.
5. Enhancement of self-regulatory duties and legal responsibilities to ensure a thorough performance of the appropriate obligations.
IV. Impact analysis
The promulgation of the Measures may affect both Institutions and investors. For the Institutions, the promulgation of the Measures may increase their responsibilities for compliance management; they may be required to conduct a reassessment of their current compliance management system before the Measures enter into effect on July 1, 2017. Two points should be specially noted: First, an appropriate management system needs to be established for alignment with other laws and regulations, technologies and equipment and personnel deployment to avoid compliance risks. In addition, the Institutions should properly create and maintain their management system materials, which are not only part of supervisory requirements but also serve as immunity evidence in the event of disputes with investors, since the burden of proof lies with the Institutions.
From the perspective of an investor, with more specific risk classifications for products and services, as well as investor risk tolerance levels, the Institutions may more likely provide more leading recommendations, and the investors may grow to rely more on such opinions. It may be, however, more difficult to show undue influence on the part of the Institutions.
In general, the Measures provide for more specific and operable administrative measures and stipulate a half-year preparation period. They are expected to have a substantive impact on the regulation of the market.