SFC to tighten oversight of I.P.O. sponsors

PUBLISHED : Saturday, 29 October, 2011, 12:00am
UPDATED : Saturday, 29 October, 2011, 12:00am

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Ashley Alder, the new chief executive of the Securities and Futures Commission (SFC), has pledged to tighten oversight of listing sponsors to enhance investor protection.

The British lawyer, who replaced Martin Wheatley as the SFC's head this month, said he would release proposals in the coming months.

The regulation of investment banks, which act as sponsors of new listings, has come under the spotlight recently, following recent controversies about companies that get into trouble shortly after their listing.

The controversies have raised concerns that the sponsors failed to conduct proper due diligence of the information that the companies had provided to investors in their prospectuses.

Shares in Fujian-based sports fabric maker Hontex International Holdings were suspended from trading in April last year just 64 days after its listing, as the SFC accused the company of overstating its profits in December 2009.

'In reference to the private companies in China, there are some very good ones and there are some not so good ones,' Alder said yesterday in his maiden speech as head of the SFC. 'That is the reality and the listing sponsors have the responsibility to ensure they bring the right [companies] to market. The SFC is looking at a regime of regulation and it will come out in the next few months with new proposals.'

A Hong Kong resident since 1989, Alder was the SFC's executive director of corporate finance from 2001 to 2004. He is also law firm Herbert Smith's former head of Asia.

Speaking at a conference of the Hong Kong Investment Funds Association, attended by several hundred fund managers, Alder said the regulatory focus had changed in the eight years since his previous stint at the SFC. The focus then was on the corporate governance of listed companies, triggered by scandals such as the collapse of Euro-Asia Agricultural. The Shenyang-based orchid grower was found to have inflated its revenues by 20 times prior to its listing in 2001. The company collapsed a year after it went public.

'The agenda is very different nowadays. Now, we need to focus on how to prevent risks in the global system and regulate intermediaries to prevent mis-selling,'' Alder said.

The Lehman Brothers minibonds fiasco in 2008 sparked protests from thousands of investors, who said they had been misled by banks or brokers about the risks of the minibond products issued or guaranteed by the US investment bank.

The minibonds - which, despite their name, are not corporate bonds but consist of high-risk, credit-linked derivatives - became almost worthless after the bank collapsed in September 2008. A year later, banks and brokers agreed to repay investors between 60 and 100 per cent of their initial investments, at a cost of more than HK$5.2 billion.

'The SFC introduced disclosure rules and a cooling-off period to protect the interests of investors,' Alder said. The regulator would continue 'to focus on surveillance and regulation to prevent mis-selling. There is also a need to do more on investor education,' he said.

Britain is establishing a new single regulator to oversee the conduct of financial products marketers, leaving the Bank of England to regulate the financial strength of the banks.

However, Alder said Hong Kong could continue to let the Hong Kong Monetary Authority regulate banks' securities staff while the SFC regulates brokers and fund managers.

'There are no conclusion of which model is better. What is more important is to have interaction between the different regulators so that they are familiar with each other's work,' Alder said.