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20 September, 2017
The Hong Kong Stock Exchange (Stock Exchange) and the Securities and Futures Commission (SFC) have jointly announced their consultation conclusions on proposals to revamp the regulatory structure for making decisions in listing related matters. The June 2016 consultation (summarised in our earlier bulletin) generated considerable negative market feedback resulting in a change of approach by the SFC and Stock Exchange. The consultation conclusions modify the original proposals, taking account of the views raised.
The originally proposed Listing Policy Committee is to be replaced with the Listing Policy Panel (LPP) with the same remit to advise on listing policy with broader regulatory and market implications. The LPP will be formed by a memorandum of understanding between the SFC and the Stock Exchange rather than being a committee under either of them.
The proposal to introduce a Listing Regulatory Committee responsible for deciding, and providing guidance on, listing applications and matters relating to suitability or broader policy concerns has been dropped. However, the SFC has, in tandem, modified its approach to its role in regulation to separately achieve a greater involvement in the decision making process. This approach was made public in a recent speech by the SFC's Chief Executive Officer, Ashley Alder, and in the its new Regulatory Bulletin launched on the same day.
In this bulletin, we briefly examine the proposals being taken forward by the SFC and the Stock Exchange.
Listing Policy Panel to be introduced as an advisory body on listing policy with broader regulatory and market implications
The LPP will act as an advisory body on listing policy with broader regulatory or market implications. It will have no rule making powers and its recommendations will not be binding on the organisations its members represent. However, the LPP will serve as a consultative and steering body and will enable dialogue between the regulators on key policy issues. The LPP will be able to ask the Listing Department to prepare detailed proposals on matters being considered by the LPP. The Listing Department will also need to consult, and take into account the views of, the LPP when formulating proposals to amend the Listing Rules or on other policy proposals.
The LPP will be formed by a memorandum of association between the Stock Exchange and the SFC and will have terms of reference to govern how and when it will meet. Similar to the originally proposed Listing Policy Committee, the LPP will be made up of the Chairperson and two Deputy Chairpersons of the Listing Committee, the Chief Executive of Hong Kong Exchanges and Clearing Limited (HKEX), the Chairperson of the Takeovers Panel, the Chief Executive Officer of the SFC and two senior executives from the Corporate Finance Division of the SFC, together with the addition of two non-executive directors from each of the boards of the HKEX and SFC.
Listing Regulatory Committee proposal dropped amid increased, early-stage intervention by the SFC
The proposals to introduce a Listing Regulatory Committee are not being been pursued by the SFC and the Stock Exchange. Instead, the consultation conclusions set out the SFC's new approach to intervening in serious cases under the SFC's existing powers under the Securities and Futures (Stock Market Listing) Rules (SMLR) and the Securities and Futures Ordinance (SFO). Through earlier and more direct intervention in serious cases, the SFC has enhanced its approach to regulation with the aim of protecting the market and investors.
For IPO transactions, the SFC will communicate directly with the applicant rather than routing comments through the Stock Exchange. The SFC's focus in its review of listing applications will be on concerns under the SMLR where the SFC can object to a listing application on a variety of grounds including (i) where there is non-compliance with the Listing Rules or applicable laws or where the application does not meet the required standard of disclosure; (ii) if the application contains false or misleading information (including by omission); (iii) if the applicant fails to provide information required by the SFC; or (iv) where there are public interest concerns.
Where the SFC has concerns and it is likely to object to a listing under the SMLR, the SFC will issue a letter of mindedness to object directly to the listing applicant.
For ongoing listing compliance matters, the SMLR also empowers the SFC to direct the Stock Exchange to suspend a company's shares due to concerns about false and misleading disclosures, the maintenance of a fair and orderly market, public interest concerns or failure to comply with SFC conditions. The SFC may also require listed corporations and other persons to produce books and records under section 179(1) of the SFO.
The market was alerted to the SFC's new approach to regulation in July through Ashley Alder's speech and the Regulatory Bulletin referred to above. The Regulatory Bulletin details cases where the SFC has already been taking a more interventionist stance through its direct engagement on IPO and post-IPO cases where it has objected to listings and proposed transactions and requested suspensions. The SFC has also issued a number of circulars to set its regulatory expectations on matters such as the roles of directors, financial advisers and valuers on corporate finance transactions (see our bulletin for further details) and GEM listings (see our bulletin for further details).
Other initiatives being taken forward
As a result of the above, there will be no real changes to the role of the Listing Department and Listing Committee as envisaged in the consultation paper. However, the Chief Executive of HKEX will only be invited to attend policy meetings, not those involving individual cases, and on a non-voting basis.
The SFC will continue its oversight of the Stock Exchange's performance and will make public the results of its audit review (which will be an enhanced process compared to the existing regime).
There will be a separate consultation exercise by the Stock Exchange in 2018 to take forward proposals to establish independent committees made up of outside market participants to review Listing Committee decisions.
This is to address the SFC's concern that there should be no overlap between decision makers and those that review their decisions. The consultation will also cover the need to publish the proposed new committee's decisions to enhance transparency.
The proposals in the consultation paper to enhance the regime for conducting disciplinary proceedings are not being taken forward. There will be a further consultation on the Stock Exchange's disciplinary powers and sanctions in due course.
For further information, please contact:
William Hallatt, Partner, Herbert Smith Freehills
William.Hallatt@hsf.com
