Research On Administrative Liability Of Directors For Securities Misrepresentation

Misrepresentation,as a persistent problem in the securities market,has always been severely cracked down on by securities enforcement agencies around the world.Administrative penalty against directors is one of the important means to deter misrepresentation.The principle of “presumption of fault” is applied in current practice to determine whether the director is liable or not,therefore the focal point in the cases is whether the director has exercised due diligence.Although the directors have raised all kinds of arguments,such as lack of knowledge and involvement,lack of professional background,performance of their duties and reliance on expert’s advice,the regulator did not consider them to be reasonable.The inability to prove due diligence and the phenomenon of “signature responsibility” have caused several problems.The jurisprudential basis for directors’ responsibility in misrepresentation is the“duty to monitor”.The enforcement practice has achieved useful experiences on directors’ duty to monitor,however there is still room for further consensus.First,duty to monitor is an inevitable requirement of the transformation of the role the board of directors,who play as “system maintainer” or “supervisor” in the modern corporate structure,and is also the centralized embodiment of the duty of diligence in the context of information disclosure.Second,duty to monitor is stipulated in departmental regulations and other regulatory documents whose legal effect is relatively low.However,it can be effectively interpreted into the articles of existing Company Law and Securities Law.Third,history tells that misrepresentation happens when the internal control system is weak and the supervision by directors is absent,and therefore directors should be held liable for misrepresentation for failing to fulfill their oversight duties.In order to precisely determine whether the director should bear administrative liability,it is necessary to clarify the connotation and criteria of duty to monitor,which is also helpful to prevent abuse of power and provide conduct guidance for directors.Considering the latest foreign theories and practices,the connotation of the duty to monitor can be specified into two parts: the duty of internal control and the duty of real-time monitoring.The former refers to the duty of directors to establish an information and report system in company,while the latter refers to the duty of directors to carry out “police patrols” and to take the initiative to investigate when“red flag” appears.At last,this article proposes suggestions to the determination of directors’ administrative liability for misrepresentation in China: firstly,the determination should focus on evaluating of whether the director has fulfill his duty to monitor,which means degerming whether the directors have fulfilled the duty of internal control and the duty of real-time monitoring in order in each case;secondly,the statutory exemptions for directors in misrepresentation should be established to provide a basis for directors to defend themselves.In particular,the “reasonable reliance rule” should be applied,which means the directors could rely on expert reports and not be held administratively liable after reasonable investigation.