On December 21, Huaan Securities was subject to self-regulatory supervision measures by the National Equities Exchange and Quotations (NEEQ). The reason was that its proprietary trading account submitted a buy order for Guanwei Technology (834739) – a stock for which Huaan Securities acts as a market maker – even though the order only existed for 15 seconds and no actual transaction occurred. Nevertheless, Huaan Securities still could not avoid the NEEQ’s self-regulatory penalties.
According to incomplete statistics from the NEEQ official website and East Money Choice data, as of December 22, 2016, the China Securities Regulatory Commission (CSRC) and the NEEQ had imposed a total of 281 penalties on New Third Board-listed companies since the market’s inception. Among these, 230 penalties were issued by the CSRC and the NEEQ in 2016 alone.
Market insiders believe that after the market was cleansed through regulatory efforts in 2016, positive policies for the New Third Board in 2017 – such as the entry of public funds and the lowering of access thresholds – are expected to be implemented.
Listed companies are the core of the New Third Board, and 2016 was undoubtedly a year when a regulatory storm swept through these enterprises.
On January 27, 2016, the NEEQ issued a notice titled Do Not Confuse "Tolerance" with "Connivance", stating: "Tolerance is a key feature of the New Third Board – it tolerates losses and operational risks of small and medium-sized micro-enterprises. However, tolerance by no means implies connivance with illegal and irregular behaviors in the market. Effective supervision is a crucial condition for safeguarding market innovation, boosting investor confidence, and laying a solid foundation for the long-term healthy development of the New Third Board."
Based on incomplete statistics from the NEEQ official website and East Money Choice data, as of December 22, the NEEQ had imposed 103 regulatory measures on listed companies in 2016. In contrast, this figure was only 42 in 2015 and a mere 6 in 2014.
At the same time, the CSRC also strengthened its supervision of the New Third Board. According to incomplete statistics from East Money Choice data, the CSRC and local securities regulatory bureaus imposed 127 penalties on listed companies in 2016, compared to just 3 penalties in 2015.
Since its expansion in 2013, the New Third Board has grown to 10,105 listed companies – nearly double the 5,129 companies at the end of 2015. In a notice issued in January 2016, the NEEQ noted: "As the number of market entities increases, the number of illegal and irregular behaviors by listed companies has gradually risen, with increasingly diverse forms. Such behaviors have been involved in multiple business areas, including listing, trading, financing, mergers and acquisitions, and institutional management."
From the expansion of listed companies to stricter supervision, the New Third Board has embarked on a path of market cleansing. Beyond the CSRC and the NEEQ, regulatory authorities such as industry and commerce, taxation, and customs have also supported this effort to purify the market.
2016 New Third Board Regulatory Storm: CSRC and NEEQ Penalties Increase by 400% Year-on-Year
In 2016, the core of supervision remained focused on the information disclosure of listed enterprises.
Information disclosure is the first "threshold" that unlisted public companies must cross to become public companies. According to East Money Choice data, as of December 22, 2016, government departments including the CSRC, NEEQ, and tax authorities had imposed a total of 381 penalties on New Third Board-listed companies since the market’s establishment. Among these, 149 violations were related to information disclosure.
Of these, 121 regulatory actions were due to the failure to promptly disclose major corporate events, involving 118 listed companies including Guoshun Investment (430136).
One type of undisclosed major event is the occupation of funds by related parties – a long-standing issue. Since the start of 2016, the CSRC has focused heavily on this problem.
Regardless of the type of related party, the amount of funds occupied, or whether the funds were repaid, no company escaped CSRC supervision. Companies such as Zhongtianli (831035), Zhongnan Cartoons (833156), and Yuanquan Co., Ltd. (831453) were all penalized for this violation.
Second, more than a dozen listed companies failed to disclose notes to their financial statements when releasing annual reports, resulting in major omissions. However, most of these omissions occurred during the 2014 annual report disclosure period. When problems arise in annual reports, no party is spared: the NEEQ typically penalizes the listed company, its secretary to the board, and its sponsoring brokerage for major omissions in annual reports.
In addition to the aforementioned failures to disclose, 22 cases of false or seriously misleading information disclosure were subject to supervision. For example, on December 6, 2016, ST Yuanbo (430734) was regulated by the CSRC for inaccurate disclosure in its 2016 semi-annual report.
On November 16, 2015, China Science & Merchants Investment Group (832168) was also penalized by regulators for information disclosure violations: it revealed specific details of its financing plan to the media without first disclosing the plan through the NEEQ’s designated information disclosure platform.
Furthermore, omissions in the disclosure of major lawsuits, external investments, profit distributions, equity pledges, and other events, once discovered, also resulted in regulatory penalties.
On October 17, 2016, He 矿 Co., Ltd. (830856) was required by the NEEQ to submit a written commitment because it used raised funds before obtaining the share registration letter issued by the NEEQ. In 2015, companies such as Huajie Electric (831985) were summoned for interviews by the NEEQ for using raised funds in advance.
In addition, 5 companies including Zijing Co., Ltd. (832900) were regulated for failing to disclose periodic reports on time. The undisclosed periodic reports in these cases included failures to promptly disclose related-party fund occupation in interim reports, corporate suspension information, major information, and periodic reports.
At the same time, government departments such as industry and commerce, taxation, customs, environmental protection, statistics, and the central bank also actively participated in supervising the New Third Board market. On April 21, 2016, Shenzhen Kairuide (832386) was administratively penalized by the Shenzhen Central Sub-branch of the People’s Bank of China for issuing a rubber check. Companies such as Wuhua Co., Ltd. (835224) were successively penalized by tax authorities for irregular tax practices.
2016 also marked a year of intensified supervision by the NEEQ over the market-making business of market makers.
According to incomplete statistics from East Money Choice data, since the establishment of the New Third Board, a total of 11 market makers have been penalized for non-compliant market-making operations, involving at least 27 listed companies. Among these, penalties against 10 market makers were issued in 2016.
The aforementioned non-compliant market-making behaviors mainly included: proprietary trading accounts participating in the trading of stocks for which they act as market makers, market-making quotations, and submitting market-making applications before a listed company switches from agreement-based transfer to market-making transfer.
According to the Self-Regulatory Supervision Measures Information Form disclosed by the NEEQ in April 2016, the first penalty against a market maker for non-compliant market-making operations in New Third Board history occurred on October 27, 2015. Anxin Securities was subject to supervision measures including interviews and orders to rectify, as its proprietary trading account and market-making account simultaneously held the same market-making stock.
Subsequently, Zhongtai Securities, Kaiyuan Securities, and Huaan Securities were successively regulated for issues such as proprietary trading accounts participating in the trading of market-making stocks. Huaan Securities, which was just regulated recently, violated rules due to a 15-second buy order from its proprietary account.
In fact, starting from January 2016, the NEEQ entered a "high-pressure period" of supervising market makers’ market-making business. On January 5, 2016, Yingda Securities was issued a warning letter by the NEEQ – the first case in New Third Board history where a market maker was subject to regulatory measures for market-making quotations.
Yingda Securities was penalized because, in the process of providing market-making services for Mingli Co., Ltd. (831963), it submitted quotes and executed transactions at prices significantly deviating from the latest transaction price indicated by the market, causing sharp fluctuations in the stock’s price and the NEEQ Market-making Index during intraday trading.
The NEEQ’s penalty against Yingda Securities was limited to self-regulatory supervision. However, Guotai Junan Securities angered the NEEQ by implementing a trading strategy of "selling market-making stocks to reduce the current year’s floating profits from market-making business."
On January 29, the NEEQ issued a disciplinary decision on Guotai Junan’s abnormal quotation incident. On December 31, 2015, the Market-making Business Department of Guotai Junan submitted active sell orders for 16 stocks including Yuanrong Technology at prices significantly lower than the latest transaction prices, causing sharp price fluctuations in these stocks during the closing session. The NEEQ imposed disciplinary measures such as public condemnation on Guotai Junan and relevant staff.
Beyond market-making trading, market makers also engaged in non-compliant behaviors during the market-making application stage. On May 26, 2016, GF Securities, Guohai Securities, Shanghai Securities, Guangzhou Securities, and Dongguan Securities were all subject to supervision measures such as interviews and requirements to submit written commitments, as they submitted market-making applications while the listed companies were still under agreement-based transfer.
"The strengthened supervision in 2016 is just the beginning; 2017 will be the real year of regulation. Currently, the market is still rife with chaos, so it is necessary to intensify supervision," the head of New Third Board research at Lianxun Securities told New Third Board Online.
Looking back at the "pace" of policy supervision in 2016:
On January 29, the NEEQ issued the Measures for the Evaluation of the Practice Quality of Sponsoring Brokerages on the National Equities Exchange and Quotations (Trial), which officially implemented the sponsoring brokerage practice quality evaluation system starting from April 1, 2016.
On April 6, 2016, the NEEQ released the Guidelines for the Due Diligence of Sponsoring Brokerages on the National Equities Exchange and Quotations (Trial) (Draft for Comment); on June 8, the official version of the guidelines was issued.
On April 29, the Measures for the Implementation of Self-Regulatory Supervision Measures and Disciplinary Sanctions on the National Equities Exchange and Quotations (Trial) was released, further regulating market violations and protecting the legitimate rights and interests of market participants.
A landmark policy was the release of the Detailed Rules for the Termination of Listing of Stocks of Listed Companies on the National Equities Exchange and Quotations (Draft for Comment) on October 21. This marked the New Third Board’s imminent entry into the era of mandatory delisting, as a normalized and market-oriented delisting mechanism is expected to be established, further protecting the legitimate rights and interests of investors.
The head of New Third Board research at Lianxun Securities stated: "The strengthened supervision in 2016 is just the beginning. Currently, the New Third Board market is still in a state of ‘chaos.’ 2017 will be the real year of regulation. The advent of the era of normalized and market-oriented mandatory delisting will undoubtedly bring an era of high-pressure supervision for listed enterprises, market makers, and intermediaries alike."
On the other hand, on December 13, the list of the first 10 private equity institutions to participate in market-making was announced. Private equity market-making is expected to be launched in 2017. With the participation of private equity firms, competition among market makers will gradually intensify, and market makers will face stricter supervision.
For the New Third Board in 2017, after the market was cleansed through regulatory efforts in 2016, positive policies such as the entry of public funds and the lowering of access thresholds are expected to be implemented.
Notably, with the advancement of private equity market-making and the introduction of the CSRC’s new investor suitability policies, investors’ expectations for the New Third Board may have already changed.
This article is produced by New Third Board Online. Author: Cai Yaru.
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