Regulators Clamp Down on Lax Vetting of Accounts on 'New Third Board'

(Beijing) — Three securities firms have been criticized by regulators and ordered to improve the way they screen clients after they opened trading accounts for them on the "new third board" exchange without properly assessing their customers' ability to handle the high risk.

This is the first set of regulatory warnings issued after the country's top securities regulatory body stepped up efforts in March to control entry requirements for investors on the Beijing-based National Equities Exchange and Quotations (NEEQ), also known as the new third board.

The new third board contains shares in smaller technology companies that are considered to be of higher risk than those on the Shanghai and Shenzhen exchanges. Regulators now require securities firms to assess their clients to make sure they are knowledgeable about the risks of investing and can afford a certain degree of losses.

In the first three months of 2016, a Shanghai branch of the Guizhou-based Hua Chuang Securities opened NEEQ trading accounts for 284 clients. In the self-inspection process ordered by the securities regulators in March and April, the securities firm did not disclose any violations. But Shanghai securities market regulators subsequently found that 96.8% of them were not eligible.

Meanwhile, the Shanghai branch of Beijing-based Dongxing Securities had opened NEEQ trading accounts for 418 ineligible investors from May 15, 2015, through March 2016, according to regulators.

The Shanghai Securities Regulatory Bureau has decided to suspend both security firms' right to open new NEEQ trading accounts for six months since Oct. 10.

In Anhui province, the provincial Securities Regulatory Bureau demanded that Huaan Securities, based in Anhui's capital of Hefei, improve before Nov. 15 its procedures for opening NEEQ trading accounts due to the inadequate risk control in place.

In March, the China Securities Regulatory Commission further clarified the entry barriers for investing on the new third board, requiring retail investors to not only own securities assets worth at least 5 million yuan ($742,000) on the previous trading day, but also have more than two years of investment experience in securities or a professional background related to accounting, investment and finance. A professional designation recognized by China such as certified public accountant (CPA) and chartered financial analyst (CFA) also count.

For institutional investors, a 5 million yuan capital contribution from shareholders is required, evidenced by audited financial statements or capital verification reports made by accounting firms.

Contact reporter Dong Tongjian (tongjiandong@caixin.com); editor Ken Howe (kennethhowe@caixin.com)