Part IV: Market Subjects Violating Regulations
Case 4: Never Readily Believe “Managing Money Instead of Clients” and Make Your Securities Investment in the Right Way
Source: China Securities Regulatory Commission www.csrc.gov.cn
Some securities practitioners mislead clients into trusting them to illegally manage their assets instead by promise of professional stock investments, bottom-earning income, and agreed revenue sharing. However, when the investments suffer losses, conflicts often arise, and the illegal fact that practitioners manage money instead emerges.
A (holding the securities broker's practice certificate), a former employee of brokerage business department, privately signed a cooperative financial agreement with the client B of the business department, stipulating that A will conduct securities trading operations on the RMB600,000 in the client's account, with a commission period of 12 months (from March 17th, 2015 to March 17th, 2016). During the contract period, if the account generates more than 20% profit, A will enjoy 20% of the profit; if the profit does not exceed 20%, the profit will be owned by the client; if the loss exceeds 20%, the client has the right to terminate the agreement or request A to continue the operations free of charge until profitable. The two parties terminated the agreement early due to a serious loss occurred to the account. A has admitted the violation behavior in writing to the local Securities Regulatory Bureau. A invested on behalf of the client and agreed to share investment income in violation of regulations, which was a behavior in violation of the Securities Law, the Interim Provisions on the Management of Securities Brokers, the Securities Brokers Practice Regulations (Trial) and the Code of Conduct for Securities Practitioners, therefore, the CSRC took administrative supervision measure of issuing a warning letter. The China Securities Industry Association took disciplinary measures against him A in accordance with the Rules for Handling Self-Regulatory Cases and the Methods for Implementation of Self-regulatory Measures and Disciplinary Measures. The client B eventually suffered property damage because he blindly believed in the promise of A.
Management money on behalf of clients refers to securities company employees privately accept clients' entrustment and act as an agent to engage in securities investment and management.
Article 143 of the Securities Law stipulates that a securities company that handles brokerage business shall not accept a discretionary order from the client to determine the securities trading, the type of securities selected, the trading number or the trading price; Article 144 stipulates that A securities company shall not in any way commit to the proceeds of the client’s securities trading or to compensate for the loss of the securities trading; Article 145 stipulates that a securities company and its employees shall not accept the client's securities trading entrust in private without through the business site established by law.
Article 13 of the Interim Provisions on the Administration of Securities Brokers (hereinafter referred to as the “Interim Provisions”) stipulates that securities brokers shall practice within the scope stipulated in Article 11 and the authorization of securities company, and shall not have the following behaviors: ) account opening, cancellation, transfer, securities subscription, transaction or fund access, transfer, inquiry for clients; (3) reach agreements with clients on sharing investment income with clients, and make commitment on income from securities trading or compensating for losses resulted from securities trading.
Article 20 of the Securities Brokers Practice Regulations (Trial) stipulates that securities brokers shall practice within the scope stipulated in Article 11 and the authorization of securities company, and shall not have any behaviors banned in Article 13; Article 32 stipulates that employees of securities companies engaged in securities brokerage marketing activities shall observe the Regulations.
Article 1 of the Code of Conduct for Securities Practitioners stipulates that employees should consciously abide by the rules and regulations of the institution and the industry-recognized professional ethics and code of conduct.
As seen from this case, investors must clearly distinguish the differences between the asset management business conducted by securities companies and their employees’ behavior of illegal money management on behalf of clients. Pursuant to Article 45 of the Regulations on the Supervision and Administration of Securities Companies, securities companies may engage in securities asset management business accepting clients' entrustment and uses client assets for investment in accordance with the Securities Law and these Regulations. The income generated by the investment should be enjoyed by the client, and the loss should be borne by the client. Securities companies may charge the management fee as agreed. When a securities company engages in securities asset management business, it shall sign a securities asset management contract with the client, stipulating the investment scope, investment ratio, management period and expenses. The securities asset management business is the conduct of company, for which, the securities company should be the main body to sign the relevant asset management contract with investors in writing. An employee’s management of money on behalf of clients is his/her personal behavior, for which, generally, the practitioner and the investor privately sign the relevant contract or oral agreement. At present, securities companies strictly prohibit employees from engaging in illegal money management activities, and adopt a series of strict preventive measures, and fully reveal risks through follow-up phone calls. Even so, if investors still make such private entrusts, which are generally recognized as the personal behavior of the concerned practitioner; once the investor has incurred losses due to such an illegal money management, what the investor can do is to claim rights from the practitioner.
Investors should not blindly believe what practitioners promise in violation of the law, but maintain a rational investment philosophy, and improve professional knowledge and experience. Investors can effectively prevent risks and obtain investment returns only by continuously learning, understanding business rules and products in the securities market, analyzing market information, making judgments independently and accumulating investment experience.
This article is extracted from the “Risk warning and prevention for investors" - Case of “Protecting Investor • Knowing Rules & Identifying Risks” - Never Readily Believe “Managing Money Instead of Clients” and Make Your Securities Investment in the Right Way on the official website of the China Securities Regulatory Commission.