China’s top securities regulator, the China Securities Regulatory Commission (CSRC), plans to crack down on listed companies that hire consulting firms to avoid disclosure obligations. Although this practice avoids regulatory oversight, it can lead to regulatory arbitrage and insider trading.This new investigation could make information disclosure services subject to CSRC regulations[para. 1][para. 2].
In April, the CSRC sent a survey to companies listed on mainland China’s stock markets asking about their use of consulting firms for information disclosure over the past three years. These surveys asked for details such as the name of the consultancy employed and the services provided.[para. 3].
Many newly listed companies are unfamiliar with disclosure rules and rely on consultancies to draft and review documents such as financial statements and regulatory announcements.[para. 4]. This need is underscored by the fact that company leaders often ask whether disclosure errors can result in jail time, pointing to a lack of understanding among companies.[para. 5].
The main reasons for using consulting services are to avoid disclosure violations, reduce internal workload, improve disclosure expertise, and stay updated on regulatory developments and policy directions. .[para. 6].
Despite encouragement from stock exchanges for companies to seek guidance on disclosure directly, many companies prefer to use third-party consulting firms. They want compliance guidance and advice to exploit regulatory loopholes.[para. 7]. Consultancy firms founded by former securities regulators are highly sought after as they are well versed in policy and have good connections within the regulatory body. For example, major companies such as Shanghai Inface Group and Shenzhen Value Online Information Technology were founded by former securities regulators.[para. 8][para. 9].
These consultancies are expected to leverage their connections to provide additional regulatory insights and help companies navigate regulatory scrutiny.[para. 10]Listed companies may also seek advice on controversial business opportunities that may appear compliant with regulations but may not pass the stock exchange’s direct examination.[para. 11].
Another risk associated with outsourcing disclosure services is insider trading, where the consultant’s staff has early access to a company’s financial information. Unlike accounting firms, disclosure consulting firms often lack effective internal governance to prevent insider trading. Furthermore, not all consulting firms prohibit their employees from trading stocks, and even those that have such a prohibition may circumvent it by having their employees trade on their behalf. You can.[para. 12][para. 13].
In September 2021, the CSRC imposed restrictions on former employees, conducted a 10-year regulatory review of all retirees, and placed special oversight on those founding consulting and securities technology companies. went. The higher the former employee’s status in the CSRC, the longer the mandatory waiting period before assuming a role related to their previous regulatory work.[para. 14][para. 15].
AI generated, for reference only
