The use of disclosure consulting services by publicly traded companies has come under regulatory scrutiny, as the niche but growing industry poses numerous risks if left without proper regulation. Recently, companies listed in China’s A-share market received a thorough and detailed survey about disclosure consulting firms from the securities regulator. Industry insiders hope that this move will aid the healthy development of this nascent industry. While niche, the role that these consulting firms play in the development and reform of China’s capital markets should not be underestimated.
Disclosure consulting services include the preparation or review of routine announcements, periodic reports, social responsibility reports, and responses to regulatory inquiries, as well as consulting on policy. The widespread use of these services has led to the emergence of leading firms in the sector. The industry’s growth shows that companies recognize the importance of disclosure, and its development trajectory is overwhelmingly positive. However, there are issues that cannot be ignored, such as the risk of information leaks. Of particular concern is whether the founders of some consulting firms, formerly employed by regulatory bodies, might lead to “regulatory arbitrage” or a grey area of operations — an issue that the market is closely watching. The survey by the China Securities Regulatory Commission (CSRC) reflects a rational and moderate stance by the regulator, aimed at promoting legal and compliant operations to support the healthy and stable development of the capital market.
The rapid growth of disclosure consulting firms is set against a specific backdrop. Compared to mature capital markets, China’s disclosure system is still evolving. Deficiencies and violations occur occasionally among listed companies. As the disclosure system improves, the demand for consulting services grows.
The advancement of registration system reforms creates higher standards for information disclosure by listed companies or those in the process of going public. Essentially, these reforms aim to make the entire issuance and listing process more standardized, transparent and predictable through a core focus on disclosure. This also poses new challenges for regulators, who need to set comprehensive, reasonable and clear disclosure requirements, ensure market players fulfill their disclosure duties, and strengthen penalties for violations. Disclosure consultants must also adhere to these rules.
Disclosure typically involves core company information, especially during significant events, where procedures and confidentiality obligations are strictly defined. Consulting firms gaining access to such information before it is public means an increased risk of information leaks. Therefore, securing information and standardizing internal mechanisms are critical, with specific responsibilities for institutions and related personnel needing further clarification. Additionally, some consulting firms provide digital services for listed companies, with a few leading firms developing digital platforms. Given the immense market value of company information, inadequate regulation could foster unscrupulous or even illegal activities.
Listed companies already have dedicated disclosure departments and can communicate directly with exchanges, supported by various intermediaries. Yet, disclosure consulting firms have carved out a niche, indicating strong market demand for their services. This also relates to a mystique cultivated by some in the industry, often leveraging personal networks and familiarity with regulatory processes to offer perceived benefits beyond those available through official channels. Such allure, while contributing to the growth of these services, also risks causing them to deviate from their intended path, which regulators view with concern. Thus, regulatory reviews should be impartial and handle any issues with strict adherence to the law.
Therefore, demystifying disclosure consulting services is necessary. Professionalism and service quality are fundamental for these firms. Pursuing loopholes for short-term gains or relying on connections to navigate grey areas might offer immediate benefits but will ultimately harm the industry. In some cases, consulting firms have indeed assisted companies in executing remarkable maneuvers. Now, some of these firms may not surpass others in expertise, yet companies are willing to pay a premium for their services, raising intriguing questions about cost-benefit calculations. This sentiment might be the biggest obstacle on the developmental path of disclosure consulting services.
According to current regulatory policies, it is not strictly forbidden for regulatory officials to establish or join disclosure consulting firms after leaving office. However, their former roles mean there are inherent moral risks. In recent years, the regulatory focus has tightened on issues like the “revolving door” between government and business. While it’s inappropriate to directly apply these rules to the field of disclosure consulting, the business risks associated with former regulators’ involvement should not be overlooked.
Disclosure consulting services have emerged in response to market demand, representing a new type of intermediary in China’s financial market. The issue isn’t whether these services are needed, but how they should be developed. Currently, in this niche business area, competition under the principles of integrity and market rules has yet to fully develop. In building China’s capital market, accurate, complete and timely disclosure is essential for maintaining market order and protecting investor rights. The market eagerly awaits the results of the CSRC’s survey, hoping it will lay the groundwork for establishing and promoting sound practices in disclosure consulting services.
