Gatekeeper Responsibility Of The Securities Attorney

Initial Public offering restarts in China in 2014 with a series of regulatory policy adjustments made by China Securities Regulatory Commission(hereinafter referred to as “CSRC”). Turning the current Approval-based IPO system into the Registration system is a major trend after the National People’s Congress of the People’s Republic of China made the reform plan for the initial public offering system as a legislative plan. The essence of registration system are mandatory information disclosure and risks notification, it focuses on ex ante information disclosure and ex post punishment.As the gatekeeper of the capital market, intermediary agencies are the core of the mandatory information disclosure. Gatekeeper could reduce the cost of raising money on one hand and on the other hand reduce the information asymmetry of investors. In the traditional theory of gatekeeper, gatekeeper should be an independent intermediary agency who makes information disclosure after the due diligence investigation and guarantees the quality of securities issued by issuer with its reputation capital. Gatekeeper should also report once fraud or mislead information are found to protect the investors.The theory of gatekeeper recognizes that reputation capital is the very motivation of the gatekeeper to protect the investors.Gatekeeper would rationally analyse the loss of reputation capital and the gain of co-fraud and then make a choice. Nonetheless, the foundation of gatekeeper theory has been challenged because reputation capital analysis fails in Enron fraud case and Subprime mortgage crisis of 2008 due to the dereliction of duty of auditors and rating agencies.The theory of reputation capital has some shortages. Firstly, payment mechanism of gatekeeper is materially easy to cause conflict of interest. Secondly, in a highly-monopolized market, gatekeepers would lack the motivation to promote their standard of information disclosure while a low criterion is enough. Thirdly, One-client practice theory believes that reputation capital of an individual partner in the gatekeeper agency is way too tiny than the interest gained from a big client.The malfunction of reputation capital and independence can be traced to the payment mechanism of gatekeeper. The old payment mechanism is as follows: Issuer company hires a gatekeeper agency and pays money to the gatekeeper for the inspection service given by the gatekeeper to the investors. Hence, gatekeeper would be occasionally induced by the issuer company when the potential interest of fraud activity is larger than the potential loss of reputation capital. In order to solve this problem, a new gatekeeper-client relationship should be established.Attorney is no longer the only litigator in the development of business world and is able to provide full-range legal services(including without limitation, securities legal service) to the client. But whether attorney should be a gatekeeper is always legitimately debated between legislative department and the legal profession. The legal professions have their own consideration because being a gatekeeper means enormous responsibilities. The rebuttals made by attorneys are as follows: a. report responsibility will chill attorney-client communication; b. information disclosure and responsibilities to investors are contradicted with the loyalty to the client.In fact, reporting liability would not chill the attorney-client communication and may give attorney more power coping with clients. The loyalty of the attorneys to their client is limited per se. Securities attorney meets the basic features of gatekeeper and should burden more responsibilities and liabilities in the process of the explosion of market opportunities. Furthermore, Securities attorney is unique gatekeeper career and should have its own standard of being a gatekeeper. The particular standards are due diligence, independence, attorney certification and reporting liability.On the perspective of securities attorney being a gatekeeper, some problems like shortage of reputation capital and independence can be found under the circumstances of our country. The specific issue in our country is the sponsor-led mode which means sponsor dominates the process of the issuance of securities and leaves attorney no room to participate. Moreover, reputation capital of securities attorney in our country has not been fully built due to the lack of incentives and lower entry threshold.The whole picture should be changed on the purpose of solving the aforesaid problems. Disclosure attorney and transaction attorney could be separated as disclosure attorney aims at information disclosure and transaction attorney focuses on the transaction structure and risks. Another path to the independence of securities attorney may be found if we reconsider the principal-agent relationship. For example, stock exchange may act as a principal to hire gatekeeper in order to divide the securities attorney and the issuer company.Whereas the previous scenario is hard to achieve, some practical advice follow. Under the circumstance of registration system reform, the old sponsor-led mode should be changed thus securities attorney could share more opportunities in the capital market. Securities attorney should have more specific scope of duty and have more severe legal liability to increase the cost of fraud. Bar association should play a more important role in incenting the entire attorney profession. CSRC should be empowered with more ex post judicial power to regulate the market. Stock exchange should be more independent as it’s the real market power to inspect the company.