HKEx Proposes New Structures for Listing Matters

Regulatory

06 May 2002

Hong Kong Exchanges and Clearing Limited (HKEx) has proposed new structures for listing matters. The proposal is designed to provide a simpler administrative framework along with the necessary checks and balances. It includes one-stop decision-making and one-stop appeals to help promote efficient, speedier handling of listing matters.

Under the proposed structures, listing matters would be handled by HKEx's listing division and a new HKEx adjudication division set up to handle disciplinary matters referred by the listing division. In addition, the chief executive of HKEx would be able to suspend a listing in an emergency situation or when there was a need for swift action.

Appeals would be adjudicated by two committees comprised primarily of external members. The Listing Matters Committee would judge appeals on listing decisions and other non-disciplinary listing matters, and the User Appeal Committee would judge appeals on disciplinary listing matters. The listing division would not be able to appeal decisions of the adjudication division.

The Securities and Futures Commission would continue to oversee HKEx in the performance of its listing-related responsibilities.

Proceedings that began before the implementation of the new structures would continue according to the current procedures unless the parties involved agreed to use the new structures. As a result, the current Listing Committee and Listing Appeals Committee would continue to operate until all outstanding proceedings were concluded or transferred to the new structures.

A summary of the report on the proposed structures concerning listing matters is enclosed.

Report on Proposed Structures Concerning Listing Matters

Background

Soon after the Financial Secretary announced plans to demutualise and merge the five exchanges and clearing houses into the Hong Kong and Exchanges and Clearing Limited, the Financial Services Bureau issued a blueprint of the various measures to create an appropriate business and regulatory framework for HKEx in its paper entitled "Hong Kong Exchanges and Clearing Limited: Reinforcing Hong Kong's Position as a Global Financial Centre" in July 1999. The paper sets out the broad direction for HKEx's corporate structure but leaves certain matters falling within the purview of HKEx for it to decide.
One of the measures the Government proposed to ensure good corporate governance of HKEx was the establishment of four governance committees, including a Listing Matters Committee (the "LMC") to adjudicate appeals on listing decisions and other listing matters and a User Appeal Committee (the "UAC") to adjudicate disciplinary matters concerning listed companies and participants. Listing matters would be categorized into disciplinary-related and non-disciplinary-related matters, which would be dealt with respectively under the proposed UAC and the LMC.
This briefing paper gives an overview of the current and proposed structures for handling disciplinary-related and non-disciplinary-related listing matters as well as the rationale for the proposed structures. The proposed structures aim to create an administratively simpler framework while providing the necessary checks and balances especially in relation to potential or real conflicts of interest. They will have no effect on the standards that must be met for the approval of listing applications.

Overview of the current and proposed structures

A summary of each of the current and proposed structures are set out respectively in Appendices 1, 2, 3 and 4. At present, the Stock Exchange is solely responsible for the day-to-day administration of all listing matters, including vetting of prospectuses in relation to listed companies. The Listing CommitteeNote 1 (the "LC") is vested with the powers and functions of the board of the Stock Exchange in respect of all listing matters, subject to the powers of review vested in the Listing Appeals CommitteeNote 2 (the "LAC") as specified in the Stock Exchange Listing Rules. The LC has sub-delegated most of its delegated powers to be discharged by the Listing Division (the "LD") which therefore deals with all matters concerning the Stock Exchange Listing Rules in the first instance except e.g. applications for listing by new applicants and cancellation of listing. In general, a party in respect of which a decision has been made by the LC may request to have the decision against him referred to the LC again for review (called the Listing (Review) CommitteeNote 3 (the "LRC")). Subject to the Stock Exchange Listing Rules, a final avenue for appeal against the decision of the LC and the LRC (as the case may be) in certain matters is available at the LAC.
The proposed structures are adopted from the Government's proposal for governance committees, namely, the UAC and the LMC. The primary consideration is to ensure that HKEx's commercial interests and the public interest are properly balanced, and that HKEx performs its regulatory functions properly and effectively. HKEx's corporate governance structure should afford sufficient protection for the public interest vested in HKEx and at the same time provide the necessary flexibility and incentive for HKEx to pursue its commercial interests.
Under the proposed structures, the UAC and the LMC will hear appeals against decisions made internally by a new Adjudication Division of HKEx and the LD in respect of disciplinary-related and non-disciplinary-related listing matters respectively.

The User Appeal Committee

The UAC is a new committee established to hear appeals from decisions of the Adjudication Division and the Chief Executive of HKEx. A decision by the Adjudication Division or the Chief Executive of HKEx can be reviewed only once by the UAC. It consists of two non-executive directors of HKEx and 10 to 13 other external market professionals and public interest representatives.

The Listing Matters Committee

The LMC is a new committee established to hear appeals from decisions of the LD. A decision by the LD can be reviewed only once by the LMC. It consists of two non-executive directors of HKEx and 10 to 13 other external market professionals and public interest representatives.

The Adjudication Division

The Adjudication Division is a new independent division designated to adjudicate matters referred by the LD.

Rationale for the proposed structures

The proposed structures allow first instance decisions and adjudication in respect of listing matters to be made and conducted internally by the LD and the Adjudication Division respectively. The Chief Executive of HKEx would also be able to suspend a listing in an emergency situation or when there is a need for swift action. The proposed structures are aimed at providing the necessary checks and balances in that appeals to the UAC and the LMC, which are primarily made up of external members, review a prior decision made internally. Requests for appeals to the UAC and the LMC are unrestricted with no pre-conditions to be satisfied. A decision by the Adjudication Division (or the Chief Executive of HKEx) and the LD can be reviewed only once by the UAC and the LMC respectively. However, the LD will not have any right of appeal to the UAC against the decisions of the Adjudication Division.
In addition, decisions in respect of approval of listing by new applicants and cancellation of listing are required to be approved by an internal group comprised of executives of the LD and the Chief Executive of HKEx. Checks and balances are further ensured in relation to disciplinary-related listing matters in that the tasks of investigation and adjudication are undertaken separately by the LD and the Adjudication Division respectively.
Details of the proposed structures and the related external procedures will be reflected in the Stock Exchange Listing Rules. The relevant Stock Exchange Listing Rules changes are subject to the SFC's approval prior to implementation.
The proposed structures are administratively simpler, which allow resources to be better utilised. We expect to improve efficiency, particularly, as the LD and the Adjudication Division will carry out their respective functions on a day-to-day basis. One-stop decision-making and one-stop appeals will help to promote efficient, speedier handling of both disciplinary-related and non-disciplinary-related listing matters.

Checks and balances

HKEx is keenly aware of the conflicts of interest that may arise between, on the one hand, the commercial interests of the HKEx group of companies (the "HKEx group"), and on the other hand, the proper performance of regulatory functions by the HKEx group in the public interest. Indeed, the Exchanges and Clearing Houses (Merger) Ordinance specifically requires the HKEx group to adequately deal with possible conflicts of interest.

Conflicts of interest

The Securities and Futures Commission (the "SFC"), HKEx and the Stock Exchange have agreed on certain procedures to deal with matters in which conflicts of interest may arise to ensure proper performance of regulatory functions by HKEx. Under these procedures, a Conflict CommitteeNote 4 will assess whether a conflict of interest or potential conflict of interest does or may arise in relation to a particular situation. In the event that the Conflict Committee determine that a conflict of interest or potential conflict of interest does or may arise but consider that the matter can be resolved in a manner which assumes HKEx's proper performance of its regulatory functions, it shall make written proposals to that effect for consideration by the SFC. The Conflict Committee will refer to the SFC any matters that may impede HKEx's performance of its regulatory functions. The SFC will take the place of the Stock Exchange as the listing authority in respect of listing applicants and listed companies where conflicts of interest (actual and potential) between them and the HKEx group arise. The said procedures are set out in the Memorandum of Understanding for the Listing of Hong Kong Exchanges and Clearing Limited on The Stock Exchange of Hong Kong Limited entered into between the SFC, HKEx and the Stock Exchange dated 22 August 2001. This Memorandum of Understanding is a public document.
Under the proposed structures, the LD, the Adjudication Division, the Chief Executive of HKEx, the UAC and the LMC will also be required to comply with conflicts of interest guidelines in situations when any of them is materially interested in the subject matter under consideration. These guidelines will form part of the Stock Exchange Listing Rules to be implemented.

Good corporate governance

HKEx's success lies in its ability to create an effective business structure and at the same time, ensure integrity in the performance of its regulatory functions. HKEx's regulatory functions are not performed within commercially driven business units but rather centralised in a regulatory unit, the Listing, Regulation and Risk Management Functional Unit ("LRRM"). LRRM is completely segregated from other business units to ensure its independence in performing its regulatory functions.
The SFC also oversees the Stock Exchange in the performance of its listing related responsibilities. This oversight will remain under the proposed structures which includes the Stock Exchange submitting monthly reports to the SFC containing details of the Stock Exchange's activities in relation to its listing responsibilities. The Stock Exchange also fully co-operates with the SFC in all audits or reviews of its listing functions conducted by the SFC from time to time and consults with the SFC before it approves any rule or requirement change that is intended to have a general effect. Details of this overall oversight is set out and agreed between the SFC and the Stock Exchange in the Amended and Restated Memorandum of Understanding Governing Listing Matters dated 6 March 2000. This Memorandum of Understanding is also a public document.
To further ensure integrity of regulation, the proposed structures provide an unrestricted appeal channel, i.e. not required to satisfy any pre-condition, in respect of decisions of the Adjudication Division (or the Chief Executive of HKEx) and the LD at the UAC and the LMC respectively. Both the UAC and the LMC comprise primarily of external members.

Timetable

Subject to the approval of the relevant Rule amendments and procedures as well as appointment of the members of the UAC and the LMC, the proposed structures are targeted for implementation later this year.

Note 1 :
The Listing Committee refers to the Listing Committee (for Main Board) or the GEM Listing Committee, as the case may be. The Listing Committee consists of 25 members : 6 individuals who are Exchange Participants or their directors (if they are companies), 6 individuals who are directors of listed issuers, 12 individuals who are neither Exchange Participants nor their officers or employees (e.g. persons engaged in fund management or merchant banking, a barrister or solicitor) and the Chief Executive of HKEx (with the Chief Executive of the Stock Exchange as his alternate).

The GEM Listing Committee consists of 21 members : 4 individuals who are Exchange Participants or their directors (if they are companies), 4 individuals who are directors of listed issuers, 12 individuals who are neither Exchange Participants nor their officers or employees and the Chief Executive of HKEx (with the Chief Executive of the Stock Exchange as his alternate).

Note 2 : The Listing Appeals Committee consists of 3 members with the Chairman of the Board of HKEx as the Chairman and any one member of the Board of HKEx (except the Chief Executive of HKEx) as the Deputy Chairman. The third member is chosen by the Chairman as and when the Listing Appeals Committee is required to review a decision of the Listing Committee.

Note 2 Note 3 All the members of the Listing Committee present at the first hearing shall not participate in the review hearing.

Note 4 : The Conflict Committee is nominated by the Board of HKEx to consider conflicts of interest or potential conflicts of interest and comprises not less than 3 employees of HKEx, at least 2 of which shall be either the Chief Executive of HKEx, the Stock Exchange or the Hong Kong Futures Exchange Limited or the Chief Operating Officer of HKEx.

Appendix 1

Process overview in relation to disciplinary related listing matters
under the current Stock Exchange Listing Rules

Note 1 : The Listing Committee refers to the Listing Committee (for Main Board) or the GEM Listing Committee, as the case may be. The Listing Committee consists of 25 members (for GEM 21 members) : 6 individuals (for GEM 4 individuals) who are Exchange Participants or their directors (if they are companies), 6 individuals (for GEM 4 individuals) who are directors of listed issuers, 12 individuals (for both Committees) who are neither Exchange Participants nor their officers or employees (e.g. persons engaged in fund management or merchant banking, a barrister or solicitor) and the Chief Executive of HKEx (with the Chief Executive of the Stock Exchange as his alternate). All hearings before the Listing Committee are primarily by way of written submissions and oral submissions at the hearing are limited to matters not contained in written submissions.

Note 2 : Courses of action other than instituting disciplinary proceedings which may be taken by the Listing Division include requesting the party who has allegedly acted in breach of the Stock Exchange Listing Rules to take all necessary action to remedy the alleged breach and requesting the party to take all necessary steps to ensure compliance with the Stock Exchange Listing Rules and to avoid a recurrence of similar incidents in the future.

Note 3 : Review does not require proof of any ground by any party who has been sanctioned by the Listing Committee. No fee is payable. All the members of the Listing Committee present at the first hearing shall not participate in the review hearing.

Note 4 : Final review is only available to any party who is the subject of specified sanctions imposed by the Listing Committee, including a public statement involving criticism, a public censure and a ban from acting as a professional advisor. No fee is payable.

Note 5 : The Listing Appeals Committee consists of 3 members with the Chairman of the Board of HKEx as the Chairman and any one member of the Board of HKEx be the Deputy Chairman (except the Chief Executive of HKEx). The third member is chosen by the Chairman as and when the Listing Appeals Committee is required to review a decision of the Listing Committee.

Appendix 2

Process overview in relation to disciplinary related listing matters
under the proposed new structure

Note 1 : Adjudication Division is a new and independent division which is designated to adjudicate matters referred by the Listing Division. The Adjudication Division may decide not to commence disciplinary proceedings after adjudication of a referral matter which may be dealt with by issuing a letter to the party concerned to state that similar occurrence in the future should be avoided.

Note 2 : Adjudication is by written submissions and correspondence only.

Note 3 : Appeal is as of right (no pre-requisite condition is required to be satisfied) available to any party in respect of which a decision has been made by the Adjudication Division or the Chief Executive of HKEx. A decision by the Adjudication Division or the Chief Executive of HKEx can be reviewed once only by the User Appeal Committee. Appeal is subject to payment of a specified fee.

Note 4 : The User Appeal Committee is a new committee established for the purpose of hearing appeals from decisions of the Adjudication Division and the Chief Executive of HKEx. The User Appeal Committee consists of 2 non-executive directors of HKEx and 10 to 13 other external market professionals and public interest representatives. Appeals are conducted by oral hearing only.

Note 5 : Remittance of the matter to the Adjudication Division for reconsideration of the decision on liability and/or penalty may include a direction to the Adjudication Division to make a decision afresh in respect of any specified matter. A decision by the Adjudication Division in respect of a remitted matter is subject to appeal.

Appendix 3

Review and appeal avenues for non-disciplinary related matters under the current

Stock Exchange Listing Rules

02050603

Note 1 : A review of any decision of the Listing Division, the Listing Committee or the Listing (Review) Committee is subject to payment of a specified fee.

Note 2 : All the members present at the hearing of the Listing Committee shall not participate in the Listing (Review) Committee hearing.

Appendix 4

Process overview in relation to non-disciplinary related listing matters

under the proposed new structure

Note 1 : Decisions in respect of applications for listing by new applicants and cancellation of listing are required to be made by an internal group comprised of executives in the Listing Division (who are of at least a specified grade including the Head of the Listing, Regulation and Risk Management Functional Unit) and the Chief Executive of HKEx. Each matter shall be determined by at least 2 members from this internal group.

Note 2 : Appeal as of right (no pre-requisite condition is required to be satisfied) and subject to review fee. Any party in respect of whom a decision has been made by the Listing Division may request for appeal. A decision by the Listing Division can be reviewed only once by the Listing Matters Committee. Appeals are conducted by oral hearing only.

Note 3 : Listing Matters Committee is a new committee established for the purpose of hearing appeals from decisions of the Listing Division. The Listing Matters Committee consists of 2 non-executive directors of HKEx and 10 to 13 other external market professionals and public interest representatives.

Note 4 :
Remittance of the matter to the Listing Division may include a direction to the Listing Division to make a decision afresh in respect of any specified matter. A decision by the Listing Division in respect of a remitted matter is subject to appeal.

Updated 06 May 2002