On April 8, 2018, the US-China Business Council submitted comments to the China Securities Regulatory Commission (CSRC), concerning the CSRC’s latest Draft Administrative Measures for Foreign-Invested Securities Companies. The English and Chinese versions of the comment letter are posted here for reference.On behalf of the more than 200 members of the US-China Business Council (USCBC), we appreciate the opportunity to provide comments to the China Securities Regulatory Commission (CSRC) on the Draft Administrative Measures for Foreign-Invested Securities Companies (the draft measures).
The release of these measures for public comment represents an effort to integrate the opinions of a variety of stakeholders into the final formulation and implementation of China’s administrative measures for foreign invested securities companies. We hope additional steps will be taken to ensure consultation with industry stakeholders on these comments before a final version of the measures is released.
We appreciate steps taken by CSRC to raise the cap on foreign financial institutions’ investment in Chinese securities companies from 49 percent to 51 percent; and to raise the cap on total foreign ownership in a listed Chinese brokerage from 25 percent to 51 percent. We also appreciate CSRC’s reassurances that the ultimate goal is to eliminate caps on foreign financial institutions’ ownership of Chinese securities firms within three years. While CSRC’s notice makes clear that the draft rules are intended to implement directives to open the sector to foreign investment, the draft regulations themselves do not expressly detail these changes in ownership caps. Article 7 currently states that the “cumulative investment shall not exceed China’s commitment for opening the securities industry,” but including the specific ownership limits and time frame for further liberalizations in the rules themselves would provide greater clarity and certainty as to what the rules mean and how they will be applied.
Our member companies have some additional questions and concerns with the proposed changes and with other conditions for foreign invested securities joint ventures to operate in China’s market. To that end, USCBC is pleased to provide specific recommendations as follows.
Article 4 provides that senior management personnel provisions pertaining to foreign-invested securities companies will comply with the Company Law, the Securities Law and other relevant provisions of the CSRC. USCBC recommends removing restrictions on the number of foreign senior management personnel for a foreign majority-controlled joint venture. Removing existing restrictions would facilitate the utilization of foreign knowledge and expertise in China’s securities market, and would reflect the Chinese government’s commitment to increase foreign ownership in Chinese securities companies to 51 percent and removing foreign ownership restrictions within three years.
Article 4 also indicates that a foreign-invested securities company may not jeopardize China’s national security. USCBC member companies would appreciate clarification as to whether this is a reference to the existing MOFCOM/NDRC national security review of foreign investment, or if this means CSRC will also review the national security implications of foreign investments in securities joint ventures. It would also be helpful to have further details on the scope of such national security reviews, the standards, and the mechanisms for these reviews. USCBC encourages any review of national security to be narrowly tailored, as overly broad reviews create uncertainty and may discourage further foreign investment.
Article 5 expands the initial business scope of a foreign-invested securities company. USCBC appreciates CSRC’s efforts to eliminate initial business scope restrictions that limited new securities joint ventures to underwriting, B-share brokerage, treasury and corporate bond business, specifying instead that the initial scope be compatible with the controlling or largest shareholder’s securities business experience. This will provide more flexibility to foreign investors setting up securities joint ventures. We encourage CSRC to explicitly allow both new and existing securities joint ventures to apply for four business licenses simultaneously, rather than being restricted to applying for two licenses in any six month period.
The draft measures do not indicate any changes to the rules governing how existing securities joint ventures can qualify to expand their business scope. The existing rules for securities subsidiaries include being in compliance with relevant laws and risk indicators and having a market share above the industry median. We encourage CSRC to accord flexibility to existing securities joint ventures so that they are not subject to an industry median ranking requirement or similar condition. Securities joint ventures with a track record of commitment to China should receive equal if not better treatment than new securities joint ventures.
Article 6 indicates that overseas shareholders of a foreign-invested securities company must be financial institutions that, during the past three years, have been compliant with the laws and regulations of their home country; and that have not during that time been subject to severe punishment or under investigation by the relevant authorities for alleged major violations of laws and regulations. USCBC recommends disqualifying foreign investors only if their main business license has been revoked or suspended or if one or more of their main business lines has ceased operating during the three year period.
We also recommend removing this requirement that a foreign investor not have been under investigation for alleged major violations of laws and regulations during the previous three years, since it is not uncommon for large international firms operating globally to be subject to investigation or regulatory inquiries. At minimum, we recommend clarifying what constitutes an investigation that would disqualify a potential foreign investor. We note it is also not uncommon for large international firms to be subject to sanctions from time to time, so monetary fines or penalties should not be a basis for disqualification. These are not necessarily indicators of the fit and proper status of a foreign investor.
We recommend that a better basis for reviewing a foreign investor’s qualification would be for CSRC to require a foreign shareholder to provide a statement on its current general regulatory status or a no-objection letter from its home regulator. This would better align with existing rules in other parts of China’s financial sector. The China Banking and Insurance Regulatory Commission (CBIRC), for instance, only requires that foreign applicants provide a photocopy of their business license of financial business permit issued by the financial regulatory authority of the country where a foreign shareholder of the bank to be formed is located, along with a written opinion from the authority.
In addition, the draft measures do not specify whether the qualification requirements under Article 6 apply to existing foreign joint venture securities companies. As existing securities join ventures have already been approved by the CSRC, the new rules should not apply retrospectively to the increasing of foreign shareholding in an existing foreign joint venture, whether by equity transfer or capital injection.
Article 7 specifies that overseas shareholder may make capital contributions in freely convertible currencies, and that the overseas shareholders’ aggregate shareholding percentage may not exceed the percentage committed for opening up of the Chinese securities market. Since the foreign parent, as the controlling shareholder, is responsible for ensuring the securities joint venture’s robust risk management, capital and liquidity, USCBC encourages CSRC to allow foreign shareholders additional channels for assuming risks and providing capital, liquidity, credit support. It would be helpful, for example, if the foreign parent could contribute both cash and kind to the securities joint venture, could provide sub-loans to the securities joint venture to supplement its capital, and could guarantee the securities joint venture’s domestic borrowing. This would also be consistent with current policies for foreign bank subsidiaries in China, so it would further regulatory coordination between CSRC and other relevant authorities such as PBOC and SAFE.
USCBC thanks the China Securities Regulatory Commission for providing this opportunity to comment on the draft administrative measures. We hope that these comments are constructive and useful to the CSRC as it reviews the draft measures. We would appreciate the opportunity for further dialogue on these issues and are happy to follow up as appropriate.
The US-China Business Council