The Duty Of Due Diligence Of Securities Service Institutions

Securities service agency is the information bridge and credit intermediary between investors and lenders in the capital market.Along with the deepening of the reform of the regulatory system of China’s capital market,the establishment of a strong securities trading system with the information disclosure sat at the heart has become the regulatory foundation and social consensus.The Securities Law revised in 2019clarified that China’s capital market will formally implement the reform of stock issuance registration system with the information disclosure as the core,and strengthen the information disclosure liability of issuers,securities service agencies and stock exchanges.The purpose is to return the right to investors to make the value judgment and selection in the market,realizing the structural transformation of securities supervision from “maintaining order” to “allocating resources by the market”.At the same time,the Securities Law has strengthened the duty of diligence of securities service agencies and improved their legal liabilities.The primary function of securities service agency is to check,verify and examine company information,ensure the authenticity,accuracy and completeness of listed company information,and thus protect the rights and interests of investors.It is helpful for investors to rate the company`s value accurately,improving the governance level of listed companies,and prevent the risk of the overall securities market.In recent years,there is an increasing trend of false statement cases increased the supervision and social cost,involving the avoidance of due diligence requirements of securities service agency.Therefore,it is necessary to conduct a special theoretical study on the diligence and responsibility of securities service agency.This theoretical research needs to reveal the commercial essence of securities service agency as information intermediaries in the capital market.Besides,which requires reinterpreting its institutional function of as public gatekeeper and the significance of diligence and responsibility rules.Traditionally,securities service agencies take reputation as their foundation,which means gatekeepers guarantee the quality of information disclosure and securities issuance to investors with their own reputation.Currently,the reputation mechanism is challenged by the social reality.Quite a few factors can dissolve the gatekeeper’s reputational constraints.“See the forest through the trees,and find the source through the stream”.Based on the link of "information-trust-faith-credit",we investigated the position and role of securities service agency in the capital market.As institutional information intermediaries,securities service agencies play the functions of professional information production and credit creation.Due diligence is the coupling of contractual obligations and legal obligations of securities service agencies,which is the requirement of regulators for the practicing behaviors of securities service agencies,which also plays an important role in the construction of investor-oriented disclosure system.The application of the duty of diligence also mets practical dilemmas,due to the defects of the legal system and the reversed induction to account.The interaction between administrative punishment and judicial adjudication provides a flexible and equitable design for the solution of relevant issues.As for the subjective meaning,accounting firms,law firms and other professional service institutions are embedded information intermediaries in the market,which offers information production,screening,verification and reporting,playing the role of information supply and the credit creation.Securities service agencies are the specialized information producers and providers for clients in the capital market,and“gatekeeper” is their functional role given by regulators.The institutional intermediaries can enhance the credit level,but also bring joint liability to the subject of information disclosure obligation in the legal system.In the context of public policy,the securities service agency is a typical infomediary institution,which has the functions of information transmitting and investigation,which is also an important firewall to prevent public risk in the capital market.At the fundanmental level,the legal relationship of securities service business has both of public and private law characteristics.The duty of diligence is not only the private contractual obligation between the client and the professional organization,but also the legal obligation and responsibility to the securities service agency in the information disclosure system.As the participant of information disclosure activities,securities service agencies have experienced changes from traditional service mode to modern financial economy.The information disclosure system itself can be regarded as a fiduciary structure,which means securities service agencies no longer barely provide professional services to clients,but provide professional information to both clients and potential investors based on mandatory rules in the capital market.The duty of diligence is the substantive and procedural constraint on the practice behavior of securities service agencies and professionals expressed by the law on the basis of the consent of the principal,investors and regulators.The fiduciary theorems helpful to determine the multi-stakeholder relationship in the whole corporate governance structure,and promote the construction of modern service system of capital market oriented by investors’ value judgment.In term of the specification,the understanding of the content of due diligence relevent to the identification of subjective faultiness in the false statement disputes.The concept of diligence and responsibility can be traced back to the “good father’s diligence and attention” in the liability system of Roman law,which indicates that the debtor should perform his obligations in accordance with a good father’s attention in the contractual relationship,and embodies the principle of contractual interest in Roman law.After the revision of the Securities Law in 2005 in China,due diligence has been written into the provisions of securities service agencies,which has officially become a key standard in the Securities Law.As a tool of pre-regulation,the requirement of diligence and responsibility in the legal system provides a principled guide for the compliance and risk prevention of enterprises,and a valuable benchmark for the evaluation of the practice behavior of the professionals.The nature of the duty of diligence here can be interpreted from three different legal dimensions:the tort law,the contract law and the fiduciary law.The way of fiduciary principle provides a broader perspective and aids to understand the fiduciary relationship between professional knowledge industries,principals and investors,which also strengthens the regulation on non-diligent issues of industry regulator,securities regulatory and judicial authorities.As to the legislation,we found that the concept of diligence due diligence is widely distributed in different legal documents,normative contexts and industry standards,via the textual empirical analysis of due diligence norms in China`s legal system.In different contexts,the normative attributes of due diligence can be principles,standards,obligations,attitudes or policies.For different industries,the requirements of diligence have industrial differences,and the way of accountability is varied.The regulatory effect of the duty of diligence is faced with the challenge of the defects of legal provisions and the conflict of practical interests.The meaning of due diligence in the Securities Law is a general requirement with uncertain content.In practice,there are some problems such as the difficulty in determining the standard of conduct and the excessively strict joint liability.Thus,strengthening the evaluation standard of diligence duty with the protection of investors’ rights and interests as the core in the legislation,implementing the internal compliance incentive mechanism of securities service agencies,and perfecting the joint and several liability clause for securities false statement disputes will help to urge securities service agencies to fulfill the diligence duty.In regard to the application,the realization of the goal of diligence and responsibility norms of securities service agencies needs the assistants of external public forces,including the practice standards led by the industry authorities,the administrative intervention,and the judicial adjudication of false statement lawsuits.Taking more than one hundred written decisions of administrative penalties of China Securities Regulatory Commission(CSRC)as samples,it is found that the behavioral performance of non-diligence includes the violation of practice standards and regulation rules,the internal control system and process are defective or the implementation is formalistic,and the professional opinions of other securities service agencies are not checked carefully,etc.In terms of the determination of due diligence,the administrative regulatory authorities focus on the compliance of the information verification behavior of securities service agencies,and emphasize the process,enthusiasm,negligence,substantive and bounded nature of the duty of diligence.The judiciary authorities usually recognize the facts of professional judgment of the administrative regulatory decisions,and the focus of the examination lies in the seriousness of the subjective fault of the actor,the rationality of the defense,and the fairness of the liability sharing for damages.With respect to the regulation,the limited diversity regulation strategies should be adopted to motivate securities service agencies to fulfill their duty of diligence from four aspects: the system collaborative optimization,the enterprise independent compliance,the digital technology,and the responsibility identification logic.It is a systematic project to urge securities service agencies to perform their duties,which requires multi-subject cooperative governance,rather than relying on the administrative intervention.In addition to the administrative law enforcement and justice of securities after the event,attention should also be paid to the construction of enterprise compliance risk control system as a prior regulation.Confront with the digital development of securities service industry,public policies to support the integrated development of digital technology and securities service business can alleviate the low efficiency of administrative supervision,poor information transparency and other problems.For the determination of liability for securities false statement disputes,judicial authorities should adhere to the principle of orderly and mutually supportive review,form a coherent and complete framework of tort liability demonstration,and enhance the credibility of the judgment.Based on the empirical and normative analysis,this paper studied the deep-seated theoretical issues involved in the diligence and responsibility of securities service agencies from six aspects: the subject,the foundation,the specification,the normtive and applicable analysis,and the regulation strategy.The innovation of this study reflects in three aspects: firstly,it makes an in-depth interpretation of the securities service agency,analyzes the function and role of securities service agencies based on the information theory,which pays attention to social functions of producing specialized information and enhance the credit level of securities service agencies as institutional information intermediary.Secondly,on the basis of the delegation model of securities services,it tries to explain the legal relationship among the principal,the securities service agency and the investor from the fiduciary theory,and give an interpretation of the normative significance of diligence and responsibility norms for building the investor-oriented information disclosure system and for improving the level of corporate governance.Thirdly,put the medium and micro questions of diligence and responsibility under the macro perspective of securities regulatory governance,and the related problems of diligence and responsibility of securities service agencies are examined from the perspective of regulatory governance and multiple regulations.