CSRC Probes Information Disclosure Consultancies Amid Tightening Stock Market Oversight

China’s top securities regulator, the China Securities Regulatory Commission (CSRC), is set to crack down on listed companies hiring consulting firms to circumvent information disclosure obligations, a practice that has avoided regulatory scrutiny but can lead to regulatory arbitrage and insider trading. This new investigation might subject information disclosure services to CSRC regulation[para. 1][para. 2].

In April, the CSRC sent out surveys to companies listed on Chinese mainland stock markets, inquiring about their use of consultancies for information disclosure over the past three years. These surveys asked for details about the consultancies hired, including their names and the services provided[para. 3].

Many newly listed companies, unfamiliar with information disclosure rules, rely on consultancies to draft or review documents, such as earnings reports and regulatory announcements[para. 4]. This need is highlighted by the fact that company leaders often ask if they will face jail time for disclosure mistakes, pointing to a lack of understanding among these companies[para. 5].

The main reasons for hiring consultancy services are to avoid disclosure violations, reduce internal workload, enhance the professionalism of information disclosure, and stay informed about regulatory developments and policy directions[para. 6].

Despite encouragement from stock exchanges for companies to directly seek their guidance on information disclosure, many firms prefer using third-party consultancies. They seek compliance guidance and advice on exploiting regulatory loopholes[para. 7]. Consultancies founded by former securities regulators are highly favored due to their familiarity with policies and good contacts within regulatory bodies. For instance, leading firms like Shanghai Infaith Group and Shenzhen Value Online Information Technology were established by former securities regulatory employees[para. 8][para. 9].

These consultancies are expected to leverage their connections to provide additional regulatory insights and help companies navigate regulatory inspections[para. 10]. Listed companies might also seek advice on controversial business opportunities that appear compliant but might not pass direct scrutiny from stock exchanges[para. 11].

Another risk associated with outsourcing disclosure work is insider trading, as consultancy staff gain early access to companies’ financial information. Unlike accounting firms, information disclosure consultancies often lack effective internal governance to prevent insider trading. Additionally, not all consultancies prohibit employees from trading stocks, and even those with such bans can have staff bypass them by having others trade on their behalf[para. 12][para. 13].

In September 2021, the CSRC imposed restrictions on its former employees, implementing a 10-year regulatory review on all departing personnel, with special scrutiny on those setting up consulting or securities technology firms. The higher the former employee's position at the CSRC, the longer the mandatory waiting period before they can assume roles related to their previous regulatory work[para. 14][para. 15].