China’s Worst Brokerage Isn’t Getting Any Better

An indebted regional securities firm dogged by controversy has once again come bottom of an official annual league of brokerages compiled by the China Securities Regulatory Commission (CSRC), indicating the firm has made little progress in tackling risks identified by the watchdog.

N-Securities Co. Ltd., based in the northeastern city of Shenyang, Liaoning province, was awarded a D rating by the commission in its latest annual review covering 98 brokerages, according to a statement (link in Chinese) released on Wednesday, the same ranking as the previous year. Among the CSRC’s five main rating categories, D is the second lowest and indicates the regulator believes the firm lacks the ability to deal with risks. N-Securities was the only firm to get a D ranking this year and no brokerages were given an E ranking.

The broker has suffered from weak profitability and rising debt. Among the 98 brokerages tracked by the government-backed Securities Association of China, the self-regulatory body for the securities industry, the firm ranked 95th in terms of total assets in 2019, 96th in terms of revenue and last in terms of net profit, according to a report (link in Chinese) released in July.

N-Securities has been in trouble with regulators for more than a year. It was indirectly controlled by shadowy financial tycoon Zhang Zhenxin, a low-profile businessman who owned and chaired financial conglomerate UCF Holdings Group Ltd. which had interests in peer-to-peer lending and bitcoin mining. Zhang died in a London hospital in September from multiple organ failure, leaving behind a trail of debt.

In March 2019, the CSRC said that N-Securities had failed to meet regulatory requirements on at least four risk-control indicators, which affected its ability to meet its financial obligations. In May that year, the Liaoning province branch of the CSRC said it had installed officials in the offices of N-Securities to monitor its operations including money transfers, asset disposals, personnel arrangements, the use of company seals and contract signing. Regulators have rarely stepped in to oversee a securities firm’s operations in such detail and the action indicated they had identified major risks in the business. According to regulations enacted in 2008, such onsite inspection could lead to the suspension of a company’s businesses, or even a takeover by regulators.

The CSRC started releasing its annual review in 2010 to offer a comprehensive evaluation of securities companies based on their business operations, corporate governance and risk compliance records. The review covers the period (link in Chinese) from May 1 to April 30 and the final ranking is based on a number of factors including audited financial statements.

Regulators generally pay extra attention to brokers with low ratings to monitor and prevent financial risks, devoting additional resources to ensuring those companies have risks under control. The firms are also subject to more spot checks.

The CSRC’s annual review also downgraded Tianfeng Securities Co. Ltd. to A from AA the previous year. The firm has received several warning letters from the securities regulator over the past year. In September 2019, the Jiangsu provincial branch of the CSRC said (link in Chinese) some of Tianfeng’s employees at the branch in Nanjing city did not have the proper qualifications to offer securities investment consulting services to customers. This was a violation of industry regulations and reflected the firm’s inadequate internal control mechanisms, the regulator said.

One firm that’s dropped off the CSRC’s annual list is CEFC Shanghai Securities Ltd. It was also given a D rating in the 2019 review. The regulator in November revoked all of the brokerage’s licenses, citing unlawful activities including extending financing to parent company CEFC Shanghai International Group and its affiliates. CEFC Shanghai International was the main business subsidiary of CEFC China Energy Co. Ltd., the fallen energy and financial conglomerate controlled by secretive tycoon Ye Jianming. The CSRC appointed Grandall Law Firm (Beijing) to carry out an administrative liquidation of the brokerage and allowed Guotai Junan Securities to take over its securities business during the liquidation period.

Timmy Shen contributed to this report.

Contact reporter Tang Ziyi (ziyitang@caixin.com) and editor Nerys Avery (nerysavery@caixin.com)

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