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What is the SFC doing to increase supervision and enforcement efforts?

The SFC increased regulatory enforcement efforts to severely punish private equity violations

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With the promulgation and implementation of the Interim Measures for the Supervision and Administration of Private Investment Funds, the private equity industry has ushered in a period of rapid development, and the number of private equity funds has exploded, and the phenomenon of private equity funds violating laws and regulations has also become commonplace. Li Chao, vice chairman of the Securities and Futures Commission (SFC), said recently that the SFC has increased the strength of supervision and enforcement, and seriously dealt with violations of the law, and took more than 200 administrative and regulatory measures in 2016,*** involving dozens of securities fund institutions and related senior managers and practitioners.

There are violations of the law and chaos

The China Fund Industry Association announced on the 3rd that in 2016, *** received 1,454 investor complaints, with a monthly average of more than 120 cases handled, an increase of more than one times over 2015. The complaints mainly involved five aspects: payment or redemption, registration and filing, fund collection, investment operation, and violation of laws and regulations.

Previously, the SFC organized special inspections of 305 private equity institutions by various securities regulatory bureaus in the first half of 2016, which found that four private equity institutions were suspected of illegal fund-raising and illegal operation of securities business; six private equity institutions had commitments to guaranteed capital and guaranteed returns, misappropriated or misappropriated fund property, mixed fund assets with their own funds, and fraudulent acquisition of funds by fictitious investment projects, and other serious violations of the law and infringement of the 65 private equity institutions exist public solicitation, not in accordance with the contractual agreement trust fund property, investment direction does not comply with the contractual agreement, expenses do not comply with the contractual agreement, not in accordance with the contractual agreement on information disclosure, securities private equity institutions practitioners do not have practitioner qualifications, and other general violations; 199 private equity institutions have inaccurate registration and filing information, untimely updating, qualified investors, and other problems. The 199 private equity institutions have other irregularities such as inaccurate registration and filing information, untimely updating, incomplete management system of qualified investors, risk rating of private equity funds and inadequate assessment of investors' risk identification and risk-bearing ability.

"Fund companies bear the responsibility of managing assets for investors, and a very important task of securities companies is to deliver quality products to the capital market." Li Chao emphasized that, in this regard, the industry has not given full play to the capital market "gatekeeper" and financing "forensic" role.

Heavy punishment

The China Securities Journal reporter learned from the inspection department of the Securities and Futures Commission (SFC) that, according to the specific circumstances of the illegal and irregular behavior of a number of private equity institutions, the SFC has punished the relevant institutions and responsible persons in accordance with the law.

The typical cases include the violation of laws and regulations by Zhongfenghao Investment Fund Management (Beijing) Co. (hereinafter referred to as "Guangdong Zequan") were suspected of trading "combustion control technology" information disclosure violations.

The case of Zhongfenghao's violation of laws and regulations was discovered by the inspectors of the Securities and Futures Commission (SFC) in March 2015 during the special inspection of "Two Strengthening and Two Curbing", which found that Zhongfenghao was suspected of violating the relevant provisions of "Interim Measures for the Supervision and Administration of Private Equity Funds" in the areas of registration and filing, qualified investors, fund-raising, and investment operation, and initiated a case investigation of Zhongfenghao. The investigation was initiated by Zhongfeng Hao.

During the investigation, the Beijing Securities Regulatory Bureau (BSRC) received a report from the public that Zhongfenghao's "Factoring Debt Grading Plan Phase 1" product had not been paid on schedule, involving more than 200 investors, with a total amount of more than 20 million yuan, and another 230 million yuan of unspecified payment. The Beijing Securities Regulatory Bureau immediately copied the suspected criminal clues to the Beijing Municipal Public Security Bureau.

"Zhongfeng Hao failed to register for the record in accordance with the regulations, and some of the reported information was inconsistent with the actual situation. At the same time, the implementation of the qualified investor system is not in place, there are a large number of individual investors whose investment is less than 1 million yuan." The case officer introduced to the reporter, Zhong Feng Hao in the fund-raising process also exists in the public collection, exaggerated propaganda suspicion. In addition, it also failed to disclose the information of fund operation to investors according to the contract, and failed to disclose the affiliation with the project company according to the regulations.

The case officer pointed out that, due to the above illegal behavior of Zhongfeng Hao, the supervisory authority and investors could not truly and comprehensively understand the information of the company's project operation, and the risk accumulates. Investors were attracted by the false and exaggerated publicity, which led them to make wrong investment decisions and eventually caused huge property losses.

During the investigation, Hu Dongxu, then president of Zhongfeng Hao and the person primarily responsible for the violations to be determined, suddenly lost contact. Hu Dongxu has not been coming to work since he talked to the regulator, citing illness, and the company's affairs were temporarily handled by vice president He Jiangfeng.

In January 2016, the payment risk of Zhongfeng Hao became apparent, and the criminal clues of suspected illegal fund-raising came to the fore, involving a huge number of people and amount of money. At the same time, the public security organs received the report of illegal fund-raising by the public, and decided to investigate Zhongfenghao, and the Beijing Securities Regulatory Bureau immediately set up a joint mechanism with the public security organs to cooperate with each other.

At that time, Cao Jinfeng, the actual controller of Zhongfenghao, stayed in the U.S. for a long time, and after repeated persuasion by the staff of the Securities and Futures Commission (SFC), Cao Jinfeng came back to the country in February 2016, and went to the supervisory organization to report the current situation of the company, and undertook to deploy the funds to solve the current payment problems. After investigation, the public security authorities determined that Zhongfeng Hao was suspected of illegal fund-raising and arrested Cao Jinfeng according to the law. At present, the case has been transferred to the procuratorate for review and prosecution.

Two private equity suspected of trading "combustion control technology" disclosure violation case is the exchange through the big data system of the same investment adviser (manager) under the name of a number of private equity products screening, found that an investment manager actually control two private equity institutions, two institutions control or decision-making 19 private equity products large buy a single stock and failed to fulfill the information disclosure obligation after holding more than 5% of the stock. The case was self-established, self-organized and self-reviewed by the Qinghai Securities Regulatory Bureau.

"This case *** involves 19 private placement products, 19 securities accounts, dozens of bank accounts, nine trust companies and asset management companies, a very wide range of business." Case officers said the relevant units and individuals involved in the case are distributed in Beijing, Shanghai, Guangzhou, Kunming, Harbin, Dongguan, Xi'an, Shenzhen and many other cities, the discovery and investigation are very difficult.

Compared with such a huge workload, only four full-time inspection cadres can be mobilized to appear overstretched. In the face of all the difficulties, the Qinghai Securities Regulatory Commission to give full play to the "overall work of a chessboard" concept, from the personnel are also tight other offices to draw the strongest complementary inspection force, to the investigation team equipped with legal, accounting, finance, computers and other professional professional cadres, to improve the level of specialization of the investigation team. At the same time, a number of special meetings were held to discuss the case, and all forces worked together.

Multiple investigation teams traveled to the motherland to investigate and collect evidence, and successfully completed the investigation of the case. The final case file materials amounted to more than 55 volumes, the final report of the investigation amounted to more than 104 pages. The unremitting efforts and hard work laid a solid foundation for the trial of the case, and the case trial team concluded the case in accordance with the law from the speed and severity of the case, penalized the two companies involved, and actively responded to market concerns.

Sound supervisory rules

"Some private equity fund managers are indifferent to the law and still disregard the laws and regulations when the Interim Measures for the Supervision and Administration of Private Investment Funds has been promulgated and implemented and there is a law to follow." The relevant person in charge of the inspection department of the Securities and Futures Commission said that the investigation and handling of the above cases once again reminds that private equity management institutions should effectively fulfill their filing and reporting obligations, and strengthen the management of compliance and risk control; the managers of private equity institutions should enhance their legal awareness, improve their professionalism, and effectively fulfill their diligence and responsibility, and actively fulfill their obligations to disclose information, and ensure that the disclosure of information is timely, accurate, complete and truthful.

Legal compliance, honesty and trustworthiness are the fundamentals of the healthy and sustainable development of the private equity industry. The special inspection and law enforcement crackdown is aimed at establishing a regularized supervision and inspection mechanism to urge private equity institutions to continuously improve their awareness of compliance and standardize their business practices.

Li Chao said that since 2016, the Securities and Futures Commission adhere to the concept of comprehensive and strict supervision in accordance with the law, resolutely return to the supervision of the principal, and strive to improve the rule system of institutional supervision. At the same time, combing and standardizing the business system of securities and fund institutions, taking the initiative to curb the tendency of blind expansion and regulatory arbitrage in the industry, and promoting the industry to return to its roots and focus on its main business. Comprehensively strengthen risk control and compliance management, promote the industry to establish a self-restraint mechanism, later can not rely only on the regulator to clean up the problem, the institutions themselves should have the motivation to strengthen internal control and compliance.

"In the next step, the SFC will follow the unified deployment of the Party Central Committee and the State Council, uphold the correct regulatory philosophy, strengthen supervision, and firmly guard the bottom line of no systemic financial risks." Li Chao emphasized that in 2017, in terms of institutional supervision, it is necessary to focus on so many things: first, to fully implement the requirements of compliance and risk control, and to practice good internal skills and lay a good foundation. The second is to standardize the investment banking business, fully implement the responsibility of underwriting and sponsorship, to prevent "disease from entering by the mouth", and strive to improve the quality of intermediary institutions themselves, and effectively serve the real economy. Thirdly, it will continue to enrich the types of financial products to better serve the needs of the general public for wealth management and pension protection. At the same time, the SFC will continue to support those operating standards, outstanding capabilities, strong internal control industry institutions, and encourage them to strive to build a fully functional, outstanding core competitiveness, with international competitiveness of the first-class investment banks and modern asset management organizations.