Legal Issues Study On Advance Compensation System Of China Securities Market

In recent years,the number of cases such as false statement and fraudulent listing in China securities market is increasing.While the securities regulatory authorities attacked severely on these illegal acts,they also started to emphasize on the importance of protection of investors interests.Considering that traditional securities market has some shortcomings such as lack of civil remedies,high cost and long term of rights protection,in order to further protect investors’ interest,the advance compensation system is now gradually introduced into the securities market.The so-called advance compensation system refers to when illegal acts like false statement and fraudulent listing happen in securities market,one of the corresponding joint liability parties compensate for the investors’ losses in advance before the administrative penalty is made by the securities regulatory authorities,followed by the party shall have the right to recover from the other joint liability parties who did not participate in the compensation.In 2016,for the first time,the China Securities Regulatory Commission(CSRC)proposed this system in its announcement,which stipulated the advance compensation responsibility of sponsor organization.In the second draft of the Securities Law(Revised Draft)in 2017,the advance compensation system was also included.In practice,the first use of the system was in Wanfu Biotechnology false statement case in 2013.In that case,Ping An Securities,as the sponsor,capitalized RMB 300 million to set up a specific compensation fund to pay for the investors in advance.It is foreseeable that the advance compensation system will be more and more involved in the development of the securities market as an effective method of investor protection.However,some problems are still existed in advance compensation system of securities market.In theoretical aspect,the main problems are the unclear legal basis,the construction,principles and mechanisms of the system need to be complete,and criticisms of abuse of administrative power and lack of responsibility foundation.In practical aspect,since the China Securities Industry Association(CSIA)has not yet introduced the implementation details under the advance compensation system,some problems regarded to the drafting,implementation of the system need resolution.Therefore,on the basis of the past research on the advance compensation system in our country,this article analyzes the three precedent cases(Wanfu Biotechnology,Hirisun,Xintai Electric),compares and refers some measurements and experience of advance compensation system overseas,and tries to figure out an effective mode of advance compensation system in China.Through the analysis of the three cases and the comparison with the civil compensation of investors in other securities cases,the author finds that the investor protection mechanism under the advance compensation system increases the proportion of the compensated investors,raises the amount of compensation,and shortens the paying time,which shows its own necessity and advantage compared with traditional reliefs like lawsuit.Meanwhile,the author believes that the advance compensation system in securities market has same or similar internal legal logic compared with the systems in normal civil laws.The advance compensation system in securities market reflects the lean of the law on the weak,the focus on investors and the protection of capital market,showing the order value and the efficiency value of law.In addition,this article studies the changes in elements of the advance compensation system in the Securities Law(Revised Draft)as compared with the system promulgated by CSRC,mainly on the broadening on the subject of the system.Besides,the author makes a simple definition on the validity and nature of the advance compensation system,that is,a reconciliation act,and the advance compensation agreement is essentially a format contract.Finally,in the choice of the construction mode of the advance compensation system,the author’s advice is to adopt self-discipline compensation of joint liability party plus administrative compensation of Securities Investor Protection Fund(SIPF),which could combine market behavior and administrative intervention organically in order to protect the investors.In the design of specific advance compensation system details,the author’s advice is to absorb some effective overseas experience,as well as based on local cases.Meanwhile,to further improve the advance compensation system in China,three methods are suggested: introducing hearing system into the formulation,giving priority to the advance compensation agreement so that it is enforceable,and implementing the liability insurance system.