Huatai Securities Business Department Manager Issued Warning Letter, Exposing Two Violations: Entertainment Expenses as a "Gray Area" and Gaps in Customer Identity Verification

Why is AI · Securities Industry Hospitality Expense Management Prone to Becoming a Hotbed of Interest Conveyance?

Recently, the Qinghai Securities Regulatory Bureau issued an administrative regulatory decision, taking supervisory management measures against Fu Jie, the person in charge of Huatai Securities Co., Ltd. Xining Xinning Road Securities Branch, by issuing a warning letter, and recording it in the integrity archive of the capital market. This penalty directly targets two core violations of the branch, not only exposing management loopholes at a single outlet but also reflecting the widespread lack of compliance control in grassroots securities firms in the industry. It also sends a clear signal that regulators are tightening responsibilities for frontline institutions and strengthening industry compliance.

Two violations strike at the compliance bottom line, potential risks should not be underestimated

From the facts disclosed in the penalty decision, both issues at this branch have touched the red line of compliance in the securities industry, and the potential risks are worth vigilance. The first violation is inadequate management of financial reimbursement processes, with hospitality expenses used without prior approval, and the reimbursement process not reflecting the specific purpose of the hospitality expenses, posing a risk of interest conveyance. Hospitality expense management is a core area of integrity regulation in the securities industry. Because securities firms’ branches have certain business entertainment needs during client development and business expansion, lacking prior approval and purpose traceability mechanisms can easily become channels for gray-area interest conveyance: at a minimum, issues such as illegal rebates to attract clients and exceeding hospitality standards may occur; at worst, it could evolve into collusion of interests with clients, listed companies, and related parties, even involving serious illegal activities like market manipulation and insider trading. The regulatory authority explicitly pointed out “the existence of interest conveyance risks,” highlighting the seriousness of this issue. The second violation is the failure to effectively perform continuous identity verification for some investors, and inadequate fulfillment of real-name account usage responsibilities. The real-name system for accounts is a fundamental system in the securities market and a core defense against market manipulation, money laundering, nominee holdings, and leveraged trading. If the branch fails to implement continuous identity verification obligations, it may lead to accounts being illegally used by others, providing channels for off-market financing, securities lending, and even illegal funds entering the market, directly disrupting market order and harming investors’ legitimate rights and interests. According to the relevant requirements of the “Regulations on the Integrity of Securities and Futures Business Institutions and Their Staff” and the “Measures for the Administration of Securities Brokerage Business,” these violations are clear. As the branch manager, Fu Jie bears primary responsibility for the daily operation and management of the outlet. The supervisory measure of issuing a warning letter and recording it in the integrity archive also reflects the regulatory approach of “regulation targeting individuals and responsibilities.”

Weak internal controls at grassroots outlets are industry-wide pain points

The violations at Huatai Securities Xining Branch are not isolated but are a microcosm of the common compliance control shortcomings in securities industry grassroots branches. In recent years, the number of penalties disclosed by securities regulatory bureaus across various regions has continued to rise, with violations mainly concentrated in areas such as inadequate integrity, lack of investor identity verification, entrusted wealth management, and illegal profit promises. These issues have multiple industry-wide reasons behind them. First, some securities firms emphasize “performance over compliance” in their assessment orientation. In the context of declining commission rates and increasing industry competition, the evaluation of branches often focuses on account openings, trading volume, and revenue, with less emphasis on compliance. Some branches, in order to meet performance targets, do not hesitate to breach compliance bottom lines to attract clients, even tacitly allowing violations. Especially in third- and fourth-tier cities and remote areas, where the headquarters’ supervision is weaker due to distance, there is a greater risk of “regulatory vacuum.” Second, the authority of branch managers is overly concentrated, and internal control mechanisms are virtually absent. Many grassroots branches have their personnel, finance, and operational powers concentrated in the manager, and internal financial approval and compliance review processes are often superficial, making it difficult to effectively check the manager’s management behavior. The issue of unapproved hospitality expenses exposed this time is a typical manifestation of the failure of internal checks and balances. Additionally, some securities firms allocate more compliance resources to headquarters and core businesses, resulting in insufficient and less professional compliance personnel at grassroots outlets, making it difficult to implement compliance requirements on the front line and to detect and curb potential violations in a timely manner.

Clear signals of stricter regulation, compliance is the industry’s lifeline

The penalty issued by the Qinghai Securities Regulatory Bureau also sends a clear signal that compliance regulation in the securities industry is continuously sinking and tightening. In recent years, regulators have continuously strengthened compliance supervision over securities operating institutions, extending penalties from headquarters to grassroots outlets, and from institutions to responsible individuals. The “dual penalty system” aims to reinforce the dual responsibilities of organizations and individuals, pushing securities firms to strengthen compliance management across the entire chain and maintain the bottom line of avoiding systemic risks.