The Stock Exchange of Hong Kong Limited (SEHK), a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEx), and the Securities and Futures Commission (the SFC) have jointly published a Consultation Conclusions Report on the Regulation of Sponsors and Independent Financial Advisers (IFAs) (the Conclusions Report). SEHK has also published amendments to the Listing Rules (Main Board and GEM) consistent with the policy conclusions set out in the Conclusions Report.

The policy conclusions and rule amendments address, amongst other things:

• when an issuer must appoint a sponsor or post-listing adviser (to be known as compliance advisers);
• the role and responsibilities of issuers in assisting sponsors and compliance advisers;
• undertakings and declarations required to be given by sponsor and IFA firms to SEHK;
• independence requirements for sponsors, compliance advisers and IFAs; and
• the roles and responsibilities of sponsors, compliance advisers and IFAs including the due diligence SEHK expects they should typically perform.

The Conclusions Report also describes initiatives for enhanced licensing criteria for those wishing to act as sponsors or IFAs, which will be subject to further public consultation by the SFC.

The policy conclusions and rule amendments have been informed by public consultation conducted by SEHK and the SFC including, most recently, a targeted consultation regarding the proposed rule amendments with sponsor and financial advisory firms most directly interested.

The consultation and policy development process has been necessarily extensive for two primary reasons. Firstly, the roles of sponsors and IFAs are of special importance in Hong Kong due mainly to the unusually large proportion of listed companies and listing applicants whose domicile and main operations are located outside the jurisdiction. Secondly, the consultation process revealed more about the variance of expectations of investors, regulators and some sponsors and IFAs with regard to the duties of sponsors and IFAs; it was important to understand the reasons for this variance thoroughly before finalising our proposals.

"The rule amendments make abundantly clear what SEHK and the SFC expect of sponsors, compliance advisers and IFAs. Those expectations, whilst necessarily high, are subject to what is reasonable and appropriate in each set of unique circumstances", the HKEx's Head of Listing, Richard Williams, said.

Ashley Alder, Executive Director Corporate Finance SFC explained that "The rule amendments should change the incentive structure for sponsorship work and provide a more even playing field. Firms not currently meeting the regulators' expectations will need to reassess their compliance arrangements and do more. The market should be in no doubt that SEHK and the SFC will continue to co-operate to ensure failures to meet the standards are addressed promptly and effectively".

The rule amendments will commence on 1 January 2005. A summary of the rule amendments and the transitional arrangements for their implementation is set out below.

Background

On 10 January 2003, the Secretary for Financial Services and the Treasury published the Corporate Governance Action Plan for 2003. It was a coordinated approach by the Government, the SFC and SEHK to improve corporate governance. The plan contained measures to tighten the regulation of IPO intermediaries, including a proposal to conduct a consultation exercise and to make amendments to the Listing Rules.

In May 2003 SEHK and the SFC commenced the consultation exercise with publication of a joint consultation paper. The consultation paper set out a number of proposals aimed at reinforcing the regulatory regime for sponsors, underwriters and IFAs. The consultation period closed on 31 July 2003, drawing a total of 129 submissions.

The Conclusions Report addresses the consultation proposals and respondents' comments about them. It also sets out SEHK's and the SFC's conclusions with regard to each of the consultation proposals.

Summary of rule amendments

Key points of the amended Listing Rules are listed below.

Appointment   

• New applicants (including issuers who undergo a deemed new listing) must appoint (at least) one sponsor to assist with their initial application for listing.
  
  
• New applicants may decide whether to engage one sponsor or a number of sponsors but all sponsors appointed by a new applicant will have responsibility for ensuring the obligations and responsibilities of the sponsors are fully discharged.
  
  
• Listed issuers must appoint a compliance adviser for the period commencing on its initial listing and ending on:  
                 
  • Main Board: publication of financial results for first full financial year after listing;
  • GEM: publication of financial results for second full financial year after listing.
    
    
• SEHK may direct a listed issuer to appoint a compliance adviser at any other time.  
  
  Impartiality and independence
  
  
• Sponsors, compliance advisers and IFAs must perform their duties with impartiality (that is, without bias). 
  
  
• At least one sponsor appointed by a new applicant and all IFAs must be independent; Compliance advisers need not be independent.
  
  
• The independence tests will be bright-line tests set out in the Listing Rules.
  
  
•  Sponsors and IFAs must give SEHK a statement relating to independence. They must also advise SEHK if there is any change to the information in the statement after it is given.
  
  Role and responsibilities
  
  
• Sponsor, compliance adviser and IFA firms must give an undertaking to SEHK to, amongst other things, comply with the Listing Rules and cooperate in any Listing Division investigation.
  
  
• Sponsors must make a declaration to SEHK stating, amongst other things, that, having made reasonable due diligence inquiries, the sponsor has reasonable grounds to believe and does believe that the answers provided in the directors' declarations are true and complete,  the new applicant is in compliance with the basic listing conditions, the listing document contains sufficient particulars and information and the bases and assumptions on which the expert sections of the listing document are founded are fair, reasonable and complete.
  
  
• In determining what are reasonable due diligence inquiries, sponsors must have regard to a new practice note, Due diligence by sponsors in respect of initial listing applications. The practice note provides guidance as to SEHK's expectations of the due diligence steps sponsors will typically perform.
  
  
• Compliance advisers need only provide advice and guidance when requested by the listed issuer who must consult with and, if necessary, seek advice from their compliance advisers on a timely basis in prescribed circumstances, for example, before publication of any regulatory announcement, circular or financial report.
  
  
• IFAs must take all reasonable steps to satisfy themselves that:
                
  • there is a reasonable basis for making the statements required by MB rule 14A.22(1) to (5) or GEM rule 20.22, as applicable; and
  • there is no reason to believe any information relied on by the IFA in forming its opinion or any information relied on by any third party expert on whose advice or opinion the IFA relies in forming its opinion, is not true or omits a material fact.      

Transitional arrangements

The amended rules will come into operation on 1 January 2005.

IFAs

The amended rules will apply to all appointments of an IFA made after 1 January 2005. (Appointment will be taken to be the earlier of the IFA agreeing its terms of engagement with the issuer and the IFA commencing work as IFA to an issuer.)

Sponsors

• For all listing applications made on or before today (19 October 2004), the rule amendments will not apply. (By "listing application" we mean the submission by a new listing applicant of a Form A1 for Main Board applications or Form 5A for GEM applications. Where the new applicant submits more than one such form, SEHK considers the application to be made on the date the latest form is submitted.)
  
  
• For all listing applications made after today but before 1 January 2005 and where the listing application has been finalised on or before 1 January 2005 (for example, the new applicant has been listed or has withdrawn its application), the rule amendments will not apply.
  
  
• Subject to the discretion of the Listing Division described at paragraph (4) below, for all listing applications made after today but before 1 January 2005 and where the listing application is still in progress on 1 January 2005, the rule amendments will apply commencing on 1 January 2005, including in respect of stages in the application process that have already passed at 1 January 2005.
  
  For example, if a new applicant submits a Main Board Form A1 or GEM Form 5A in December 2004 and that application is still in progress on 1 January 2005, then the new applicant and its sponsor must comply with the amended rules commencing on 1 January 2005. That will include that on 1 January 2005:
  
  
  • in compliance with Main Board rule 3A.03 or GEM rule 6A.03, as applicable, the sponsor must give an undertaking to SEHK in the terms set out in Main Board rule 3A.04 or GEM rule 6A.04, as applicable; and
  • in compliance with new Main Board rule 3A.08 or GEM rule 6A.08, as applicable, the sponsor must make a statement to SEHK relating to independence.
• SEHK's Listing Division will have discretion to modify the requirements referred to at paragraph (3) above where a new applicant can demonstrate that it would cause the new applicant significant hardship to comply.

Timetable