Strengthen the coordination of enforcement and multi-dimensional accountability; improve the system for protecting investors' legitimate rights and interests

Securities Times Two Sessions Reporting Team

Rule of law is the foundation of the capital market. In recent years, China’s legal system for the capital market has been continuously improved, and judicial authorities have maintained a “zero tolerance” attitude to deter illegal and irregular activities, effectively maintaining market order.

In the first year of the 14th Five-Year Plan, the judicial interpretation on civil compensation for insider trading, market manipulation, and other violations will be accelerated for formulation and issuance, further strengthening the judicial protection system of the capital market. Wu Qing, Chairman of the China Securities Regulatory Commission, stated at the Fourth Session of the 14th National People’s Congress during the economic-themed press conference that the CSRC will continue to improve the system for protecting investors’ legitimate rights and interests.

During the two sessions, many representatives and committee members focused on the rule of law construction in the capital market, suggesting revisions and improvements to the Securities Law and Certified Public Accountants Law, accelerating the issuance of more judicial interpretations, increasing penalties for securities violations and crimes, establishing a third-party accountability chain, and smoothing channels for investor rights protection. These measures aim to effectively safeguard the legitimate rights and interests of small and medium investors through legal and regulatory improvements.

Strengthening Criminal Enforcement and Building a “Dare Not Violate” Ecosystem

Judicial power is an important force in maintaining order in the capital market. Over the past year, courts nationwide concluded 25,000 cases involving securities, futures, and funds, a 53.6% increase year-on-year; prosecutors prosecuted 418 individuals for securities crimes such as financial fraud, insider trading, market manipulation, and fraudulent issuance. Severe punishment of securities and futures violations further purifies the market ecology.

Despite strict measures, financial fraud by listed companies remains a stubborn problem, and illegal activities like insider trading and market manipulation continue to operate at high levels. Last year, courts accepted 27,000 securities disputes, with 96.3% related to false statements in securities.

“Trading-related securities crimes are becoming increasingly professional, covert, and complex in chain. We must adhere to strict law enforcement, address both symptoms and root causes, and accelerate the construction of a healthy market ecosystem where violations are not dared, not possible, and not wanted. Improving institutional rules and solidifying the rule of law foundation for strict punishment are essential,” said Chi Rida, a member of the National Committee of the Chinese People’s Political Consultative Conference, Vice Supervisor of the All China Lawyers Association, and Chief Partner of Gongcheng Yingtai Law Firm in Shanghai.

In the new year, the CSRC has explicitly committed to consolidating and enhancing the comprehensive deterrent and preventive effects against financial fraud. “We should strengthen penalties for related illegal activities, improve laws and regulations, and increase the cost of violations,” said Tian Xuan, a deputy to the National People’s Congress and a distinguished professor at Peking University.

Many representatives and committee members pointed out that current laws and regulations lack sufficient penalties for financial fraud and other illegal activities, with illegal gains not matching the penalties imposed. Focusing on proportionality between crime and punishment, Chi Rida suggested strengthening the connection between securities law and criminal law, improving standards for criminal prosecution, and quantifying the circumstances of “serious cases.” Tian Xuan proposed raising the maximum prison sentence for securities fraud to 20 years, significantly increasing fines, and introducing civil compensation mechanisms to impose heavy costs on violators.

Improving Third-Party Accountability and Strengthening “Accomplice” Crackdowns

To combat financial fraud, punishing the “main offenders” is not enough; “accomplices” must also be targeted. In recent years, the CSRC has worked with multiple departments to intensify efforts against third-party institutions involved in financial fraud, but related misconduct still persists.

“Gatekeepers” failing in their duties often mean the fraud chain remains unbroken. To address prominent issues like audit fraud, a draft amendment to the Certified Public Accountants Law, recently submitted for the first review by the 14th National People’s Congress Standing Committee, proposes increasing penalties for issuing false reports from the current maximum of five times the illegal gains to ten times.

Qin Rongsheng, a member of the Chinese People’s Political Consultative Conference and professor at Beijing National Accounting Institute, pointed out that recent practice shows some certified public accountants actively conspire in fraud, deviating from their gatekeeper responsibilities; others fail to detect or suspect fraud due to insufficient professional skepticism or superficial audit procedures. He suggested accelerating the revision of the CPA Law to clarify types of professional responsibilities, standards for accountability, and exemption conditions, and to deepen industry governance and regulatory collaboration.

“Financial fraud is a malignant tumor hindering the development of the current capital market, and third parties such as suppliers, clients, and financial institutions colluding further increase the concealment and harm of fraud,” said Zhu Jiandi, chief partner and chairman of Lixin Certified Public Accountants.

In response to this issue, Zhu Jiandi called for comprehensive and multi-dimensional accountability for third-party collusion in fraud. “Holding those who lead or cooperate in fraud accountable and compensating investors is essential. It is urgent to improve relevant provisions in the Securities Law and create a legal environment that holds colluding parties accountable.”

Improving Compensation Rules and Smoothing Rights Protection Channels

Severe punishment and accountability are means; protecting investors’ rights and interests is the ultimate goal. Ensuring that investors can easily obtain compensation has been a key focus in recent years’ rule of law development in the capital market. Wu Qing said that the CSRC will work to tighten the safety net for protecting investors’ legitimate rights and interests, promote smooth channels for investor rights relief, improve diversified dispute resolution pathways, and facilitate the implementation of typical civil cases such as representative lawsuits and pre-emptive compensation.

The Supreme People’s Court recently clarified that this year it will formulate judicial interpretations on civil compensation for insider trading and market manipulation. Industry experts believe that this move will help unify judicial standards, effectively prevent inconsistent rulings, and further facilitate investor rights relief channels.

Chi Rida emphasized that the upcoming judicial interpretation on civil compensation should focus on strengthening the deterrent and remedial functions of civil damages. Promoting the normalization of representative lawsuits for securities disputes, simplifying procedures, reducing costs, and solving evidentiary difficulties are priorities. The principle of compensation first should be upheld, ensuring illegal gains are primarily used to compensate investors, and firmly eliminating phenomena of illegal profits. The combined use of measures such as confiscation of illegal gains, fines, and market bans should create a rigid constraint where the cost of violations far exceeds the benefits.

“Further improving the multi-channel resolution mechanism for securities disputes, smoothing channels like representative lawsuits and pre-emptive compensation, and perfecting the operation of the investor protection fund are essential to ensure timely relief and full compensation,” said Chi Rida. He looks forward to the judiciary accelerating the issuance of rules related to civil damages for securities infringement, standardizing loss assessment, causality, and evidence responsibilities, significantly reducing the cost of rights protection, and effectively safeguarding investors’ rights and interests.