Risk Watch: Securities Regulator Sets up Supervision Committee

During a meeting of the China Securities Regulatory Commission’s (CSRC) Issuance Examination Committee, CSRC chief Liu Shiyu announced that a new Issuance Supervision Commission would operate in parallel with the Issuance Examination Committee to strengthen financial oversight.

Why it matters: Under the current issuance system, members of the Issuance Examination Committee have the power to authenticate companies before they are listed on the market, but they won’t be held accountable for mistakes. In the worst case scenario, Issuance Examination Committee members who blunder have only been made to leave the Committee. Several cases of listing fraud have emerged in recent years.

One notable case of potential listing fraud involves the IPO of Chinese conglomerate LeEco’s technology company. Three or four of the Issuance Examination Committee members who undertook the Le.com IPO were investigated between July and August, according to mainland media reports.

The backdrop: Anti-corruption investigators have targeted members of the Issuance Examination Committee, the most powerful department in the CSRC, in recent years.

On Aug. 30, 2015, CSRC first rank deputy director Yao Gang, an Issuance Examination Committee member who was known as “Issuance Emperor,” was purged. Yao’s downfall came after the arrest of his former secretary Liu Shufan and former subordinate Li Liang. Liu reportedly made 3 million yuan (about $454,000) per illicit deal, while Li Liang made 7 million yuan.

This April, former Issuance Examination Committee member Feng Xiaoshu was arrested for profiting off his authentication of Pre-IPO Capital Partners Ltd. Feng invested 3 million yuan in Pre-IPO before it was listed and dumped the shares after the listing, a move that earned him 248 million yuan.

Our take: We earlier reported that Xi Jinping would focus his efforts on cleaning up corruption in the financial sector after the 19th Party Congress. Xi has already made several moves during the past month since the Congress: