Comment On Securities Class Action System Will Effectively Increase The Illegal Cost Of Capital Market

Recently, the Supreme People's Court issued the provisions on Several Issues concerning representative litigation in securities disputes (hereinafter referred to as the provisions). On the same day, China Securities Regulatory Commission (CSRC) issued the "notice on the work related to investor protection institutions participating in the litigation of special representatives of securities disputes". As a special investor protection institution, the China Securities small and medium sized Investors Service Center has drafted and publicly released the litigation business rules of the special representative of the China Securities small and medium sized Investors Service Center (Trial), which will be implemented from July 31. At this point, the construction of securities class action system ushered in new progress, marking the real implementation of securities class action system in China.

The litigation system of special representative has gone a long way from legislation to implementation. Article 95 of the new securities law has a principle provision for representative action, which puts forward the general principle of "express withdrawal and implied accession", which has the nature of class action.

In the middle of March this year, the Shanghai financial court issued the provisions on the litigation mechanism of representatives of securities disputes (for Trial Implementation), and issued detailed rules for the first time. On July 14, the Shanghai financial court officially opened the "small and medium-sized investor protection class" to meet the diversified judicial needs of small and medium-sized investors. During this period, the regulatory authorities also issued various measures to crack down on the illegal activities in the capital market. Although the emphasis is different, they all come to the same goal in different ways. They are all measures to actively explore the civil litigation mechanism in line with China's national conditions and the judicial needs of the securities market.

It was a difficult journey. As we all know, financial fraud, insider trading and other illegal activities in the capital market will seriously harm the rights and interests of investors and the long-term healthy development of the capital market. However, the number of investors in China's securities market has reached 167 million, most of which are small and medium-sized investors. When they are faced with illegal acts that damage their own interests, they are often unable to sue or unwilling to sue, so there is a situation of "silent majority". On the one hand, because of the long and complex litigation cycle, it is difficult for investors to bear the expensive litigation costs and obtain comprehensive and substantial compensation.

On the other hand, in the past, it also faced some practical problems. The difficulty of Securities Litigation lies in the fact that when it comes to litigation, the formulation of detailed rules such as the burden of proof and litigation trial should be carefully considered. And a large number of cases, even if there are many plaintiffs, are one person one case. The number of cases is large, occupying a lot of judicial resources, but the compensation is very small. Therefore, the interests of investors are often not effectively protected.

A series of regulations issued this time are of unprecedented significance. They further refine the relevant provisions of the Securities Law on the representative litigation system, clarify the basic process of the system operation, and increase the operability of the system. It makes a clear response to the procedural provisions and practical problems of ordinary representative litigation and special representative litigation, as well as the two types of representative litigation. This means that the class action system is no longer a "flower in the mirror, a moon in the water", but a real and operable landing, rooted in China's capital market.

After the implementation of the special representative litigation system, there will be two effects. On the one hand, the cost of safeguarding the rights of investors will be effectively reduced, and the majority of investors with common interests will naturally enjoy the fruits of litigation without litigation by all and paying a lot of litigation costs. As long as the litigation efficiency is high, the investor can get low compensation. On the other hand, the illegal cost of capital market will rise, which will promote listed companies to improve the level of internal governance and standardized operation. Once there are illegal behaviors, the actual controller and the listed company will be subject to class action, and will be "compensated" to the end. If the cost of violation increases, it will have a great deterrent force, which will help to crack down on illegal behaviors such as insider trading, false information and market manipulation in the securities market, urge listed companies and their senior executives to operate in compliance with the law and curb the chaos in the capital market.

The remedy of the weakness of the basic system of civil compensation for securities also helps to lay a good institutional foundation for the comprehensive deepening reform of the capital market and boost the high-quality development of the capital market.

Under the background of China's economic transformation and upgrading, under the background of the construction of China's capital market system and the improvement of supervision results, it is particularly important to establish and maintain a capital market with legal guarantee and healthy operation. A healthy, dynamic and sustainable capital market should be able to punish the illegal and counterfeiting behaviors in a timely and effective manner, so as to put an end to the future troubles of development.

This series of policies is an important judicial practice of the representative litigation provisions in the securities law. It needs a process for the progress of legislation to be transformed into the effect of practice. But we have clearly seen a positive trend in investor protection.

(editor Ouyang looks for a sword)