China's Securities Association has drafted a revised set of implementation rules concerning the professional integrity of securities firms and their staff, and has begun soliciting feedback from major brokerages. The proposed revision to the "Implementation Rules for the Clean Practice of Securities Operating Institutions and Their Staff" seeks to strengthen the existing management framework for ethical conduct in the sector.

The current rules have been in effect since 2020, contributing positively to the promotion of integrity-focused culture and management within brokerage firms. However, as capital market reforms accelerate, the need to fortify the industry's ethical foundation has become more pressing. The rise of digital operations and growing international engagement within the sector introduces new risks to existing risk-prevention mechanisms.

Instances of ethical breaches remain an occasional concern, harming the sector's image and long-term viability. This indicates that current clean practice management has areas needing improvement, prompting the association to proceed with revisions. The four primary aims of the revision include fostering a distinct financial culture, extending risk-prevention protocols to cover new business areas, rectifying internal control weaknesses, and refining procedural requirements to ensure a practical and effective systems framework.

The forthcoming changes are structured around five key areas. A central focus is on reinforcing the accountability of leadership in risk prevention. This involves guiding firms to leverage their party organizations for political oversight, merging party-building activities with daily compliance, and requiring boards to review annual integrity reports. It also mandates that senior executives oversee policy implementation and department heads enforce related measures across all operational levels.

Another key area involves strengthening supervisory mechanisms. Firms will need to designate specific departments to oversee compliance, facilitate the sharing of information among audit, compliance, risk, and HR units, and encourage internal whistleblowing systems. Internal audits across key sectors like investment banking, bond trading, and brokerage services are set to be intensified, particularly for marketing and promotional activities.

With respect to internal controls, the revised rules will demand annual risk assessments and the creation of targeted mitigation strategies. When contracting third parties, contracts must contain explicit clauses prohibiting commercial bribery and illicit benefit transfers. Engagement with any third-party found to be in violation must be terminated. Additionally, asset management operations must not be structured to facilitate the transfer of undue benefits.

Adapting to new operational realities is a further component. For innovative business ventures, pre-launch assessments of ethical risks will be mandatory, along with the establishment of both prevention and response mechanisms. The digitalization of operations brings attention to algorithmic and system-based risks, prohibiting the misuse of parameters, system privileges, or settings for personal gain. Guidelines will also be updated to manage the ethical risks associated with overseas business activities.

Finally, the revised rules will refine incentive mechanisms. Firms will have the authority to recover remuneration from personnel found to have engaged in misconduct, based on internal policies and employment agreements. Conversely, proactive measures will be encouraged, with employees who resist corrupt practices or report significant risks being given priority for awards and promotions. Firms are also encouraged to periodically recognize role models of integrity and publicize their conduct.