Three brokerages were fined consecutively on March 9. What is the regulatory crackdown targeting?

What transformation paths do securities firms have under high-pressure regulation?

Since March, the securities industry has faced a new wave of regulatory storms. Nine firms, including Tianfeng Securities, Guoyuan Securities, and Huaxi Securities, have received penalties, with investment banking and brokerage businesses being the “hard-hit areas.”

Reporters noted that these penalties are mostly retrospective accountability for existing projects from previous years, and a dual accountability model of “institution + responsible person” is generally adopted, conveying a clear “zero tolerance” attitude from regulators.

Interviewees analyzed that the regulatory retrospective accountability for existing projects reflects an upgrade of “penetrating accountability.” The high-pressure situation not only forms substantial constraints but also creates a strong compliance deterrent, forcing securities firms to reassess the weight ratio of business expansion and compliance management.

Investment banking brokerage as the “hard-hit area”

Reporters have learned that since March of this year, nine securities firms including Tianfeng Securities, Guoyuan Securities, Huaxi Securities, Zheshang Securities, Lianchu Securities, GF Securities, Zhongde Securities, Dongfang Securities, and Guotai Haitong have received penalties, including orders to rectify, public reprimands, and issuance of warning letters.

Among these, investment banking and brokerage businesses have become the areas with the most violations. In terms of brokerage, Guoyuan Securities’ Qindao Siliu Middle Road Securities Business Department received a warning letter for failing to timely report internal sanction information; GF Securities’ Suzhou Avenue East Securities Business Department was also warned for reasons including inadequate supervision of the professional behavior norms of employees, some individuals without futures qualifications engaging in futures IB business and receiving rewards, and the department head making inappropriate remarks at morning meetings, as well as implementing short-term incentives for fund sales.

Haitong Securities (now merged with Guotai Haitong Securities), Dongfang Citigroup Securities (later renamed to Dongfang Securities Underwriting and Sponsoring, now merged into Dongfang Securities), Huaxi Securities, Zhongde Securities, and others have faced issues in investment banking. It is worth noting that the penalized projects are predominantly from previous years and not new projects, showing the characteristics of “institution + responsible person” dual accountability.

Taking Haitong Securities as an example, as the sponsor for Hainan Puli Pharmaceutical’s 2020 non-public stock issuance project and the 2021 issuance of convertible corporate bonds to unspecified recipients, it had multiple issues in its ongoing supervision work: inadequate verification of certain abnormal situations or issues that should have been noted; non-compliance in the professional conduct of project team staff; imperfect internal quality control and internal review mechanisms; and inaccuracies in the related ongoing supervision reports and special verification opinion conclusions.

Dongfang Citigroup Securities, acting as the independent financial advisor for Guangyuyuan Chinese Medicine’s equity purchase of assets and fundraising for related transactions, faced the following issues during its ongoing supervision work: failure to maintain reasonable professional skepticism regarding the authenticity of sales business and accuracy of sales expenses; necessary due diligence on professional opinions issued by accounting firms was not conducted; inadequate ongoing supervision verification of performance commitment completion; inaccuracies in related ongoing supervision reports and special verification opinion conclusions.

Huaxi Securities has been accused of numerous issues in underwriting and entrusted management of certain bond projects: inadequate due diligence on significant matters such as collateral information, insufficient verification of fundraising usage, and lack of relevant work systems.

In addition, Zhongde Securities faced issues such as insufficient due diligence and untimely filing of documents in the 2020 non-public stock issuance and listing project for Taiyuan Heavy Industry and the 2022 non-public corporate bond issuance project.

Conveying a “zero tolerance” determination

How should we understand the regulatory signals released behind the current intense penalties?

“Since the beginning of this year, the frequent issuance of penalties against securities firms, particularly in investment banking and brokerage, is not simply tightening regulation but a profound reshaping of the industry ecology,” said Chen Xingwen, Chief Strategy Officer of Heisaki Capital, in an interview with the International Financial News, analyzing from three aspects:

First, the retrospective accountability of existing projects reflects an upgrade in “penetrating accountability.” The flaws accumulated during the past few years of easing the registration system are now being cleared, which is both an inevitable result of risk exposure and a signal from the regulatory authorities of their “zero tolerance” bottom line.

Second, the “institution + individual” dual penalty mechanism breaks the previous practice of “penalizing institutions but not individuals,” directly transmitting compliance pressure to the business front lines and forcing practitioners to respect market rules.

Third, global financial regulation is increasingly resonating, and financial intermediaries must return to serving the real economy rather than engaging in regulatory arbitrage.

Xiong Wen, a lawyer from Beijing Yingke (Shanghai) Law Firm, stated in an interview with the International Financial News that the frequent disclosure of penalties reflects a deep-seated shift in regulatory logic, mainly manifested in three aspects:

First, the regulatory mindset has shifted from “emphasizing development and neglecting regulation” to a substantial change towards “compliance as a prerequisite and strict regulation.” The current regulatory authorities are conducting retrospective accountability for existing projects in traditional business areas like investment banking and brokerage, breaking the “one-off” mentality of luck. This indicates that regulation now focuses not only on business growth and innovation but also on compliance risk control as a rigid foundation for industry development.

Second, the regulatory model has transitioned from “single regulation of institutions” to a dual penalty model of “institution + individual.” The targets for penalties now cover both the institutional entity and the directly responsible practitioners (including management and project handlers), significantly increasing the costs of violations and demonstrating a firm determination to enforce the “gatekeeper” responsibilities of intermediary institutions.

Third, the regulatory perspective has extended from “front-end access” to “full chain and full cycle.” The current penalties against existing projects from previous years mean that regulation has shifted from purely pre-approval to ongoing supervision and post-verification during the project’s lifespan, strengthening the full chain accountability mechanism. Securities firms are required to maintain professional standards throughout the entire project lifecycle, with no time blind spots where “project completion equals exemption from responsibility.”

“The frequent issuance of penalties is closely related to the ongoing tightening of regulation, and compliance in the financial industry will become increasingly important,” independent financial commentator Guo Shiliang told reporters. In the future, financial institutions and practitioners will emphasize compliance and professionalism even more. Strict penalties will serve as a warning, conducive to standardizing healthy industry development; regulated management among securities firms will help enhance competitiveness and compliance levels, promoting the long-term healthy development of the industry.

Paths for securities firms’ development

Against the backdrop of tightening regulation, securities firms, while pursuing economies of scale, must pay more attention to professional quality. Specifically, what new thoughts should business development consider?

“Given the current high frequency and wide coverage of penalties, the warning effect of regulation has already taken shape—risk prevention and strong regulation are prerequisites for high-quality development,” lawyer Xiong Wen emphasized. This high-pressure situation not only imposes substantial reputational and business constraints on the involved institutions but also creates a strong deterrent throughout the industry, forcing all securities firms to reassess the weight ratio of business expansion and compliance management.

Regarding the future paths for securities firms, Xiong proposed three suggestions:

First, shift from a “scale-oriented” focus to a “quality and compliance-oriented” approach. Securities firms should prioritize professional quality as their core competitiveness and survival baseline, establishing an internal control system that resonates with regulatory standards, ensuring diligence in project selection, due diligence, and ongoing supervision.

Second, transition from “passive compliance” to “active compliance and embedded compliance.” Securities firms need to build a risk prevention and control system that collaborates across front, middle, and back offices, deeply embedding compliance and risk control requirements into every node of business processes, establishing a comprehensive mechanism for deterring and punishing financial fraud.

At the crossroads of asset allocation, Chen Xingwen views this regulatory storm as a catalyst for structural reform on the supply side of the industry. Short-term pain is inevitable, but in the long run, it helps break the vicious cycle of “bad money driving out good,” allowing securities firms with real pricing power, research capabilities, and customer stickiness to stand out.

In Chen Xingwen’s view, the warning effect of penalties is becoming apparent, but the deeper insight lies in the strategic reconstruction of the development paths of securities firms:

First, the transformation towards light capital has shifted from a “choice” to a “survival” issue. The profit margins of traditional channel businesses have been sharply compressed by compliance costs, forcing securities firms to migrate towards high value-added areas such as wealth management and institutional services, which aligns with the trajectory of overseas investment banks evolving from transaction-based to advisory-based models.

Second, compliance capability itself is increasingly becoming a core competitiveness. Leading securities firms, with their more comprehensive risk control systems and digital compliance tools, are expected to capture market share amidst industry reshuffling, forming an optimization of the structure under the “Matthew effect.”

Third, the window period for reverse layout has already opened. Observing from the perspective of capital flow, periods of frequent penalties often accompany pressure on sector valuations, but historical data shows that after regulatory clearing, the ROE recovery elasticity of quality securities firms is significant. When market sentiment overreacts, it is precisely a litmus test for distinguishing true growth from false growth.

Reporter Zhu Denghua

Text edited by Chen Si