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The Securities and Futures Commission (SFC) is an independent statutory body set up in 1989 to regulate the city’s securities and futures markets. It works to ensure orderly securities and futures market operations, to protect investors and help promote Hong Kong as an international financial centre and a key financial market in China. It is funded by levies on transactions conducted on the Stock Exchange of Hong Kong and the Hong Kong Futures Exchange, and by licence fees..

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SFC unveils tough new regulation for IPO sponsors

PUBLISHED : Wednesday, 12 December, 2012, 6:02pm
UPDATED : Wednesday, 12 December, 2012, 6:08pm

Banks preparing companies for listing on Hong Kong’s stock exchange will be made explicitly liable for IPO prospectuses, although they will also have more powers to ensure that their clients play by the rules, under proposals released by the city’s market watchdog on Wednesday.

The Securities and Futures Commission’s (SFC) new rules follow a six-month consultation but are still likely to draw opposition from a Hong Kong banking community which forced the abandonment of similar ideas in 2005.

Bankers had hoped for a watering down of the proposals, which would change Hong Kong company law to ensure that sponsors of initial public offerings face the same civil and criminal liability as company directors if a listing prospectus is found to have misled investors.

The clampdown comes at a tough time for Hong Kong’s stock exchange, where IPO volumes have fallen 63 per cent this year, according to Thomson Reuters data, while issuance has increased at Southeast Asian rivals Malaysia, the Philippines and Thailand.

“Although we are now experiencing lower IPO volumes these reforms will underpin market confidence during all market cycles,” SFC Chief Executive Ashley Alder said in a statement.

The proposals were first aired in May, when the SFC launched the consultation period and banks lobbied heavily to reduce the severity of penalties they would face for improperly preparing listing documents.

IPO sponsors, usually banks or corporate finance houses, prepare a company’s listing documents and perform due diligence to ensure they comply with Hong Kong’s listing rules.

The main source of relief for bankers in the published proposals is the emphasis that companies as institutions rather than individual bankers will be subject to increased liability for the accuracy and reliability of a company’s prospectus.

The SFC added that criminal liability will depend on whether a sponsor “knowingly or recklessly” signed off on a prospectus containing an untrue statement.

That reduces the possibility of individual bankers ending up in prison if they are found not to have followed the rules when preparing a client to list, although any individual who colluded in preparing an untrue statement could still be prosecuted under general Hong Kong law.

The SFC’s new recommendations on prospectus liability are not legally binding and the regulator will now have to apply to the government to put the proposals before the city’s Legislative Council.

However, the new regulations also give banks greater authority to scrutinise their clients before they list and ensure competitive pressures will not hamper them from performing their role as market gatekeepers.

In new proposals not included in the original consultation, the SFC said a sponsor will have to tell the regulator if their client is not following the rules or explain why if it decides to stop acting for them.

A company wanting to list in Hong Kong will also have to commit from the outset that it will fully cooperate with the sponsor and agree on the sponsors fees at the start of their relationship.

These new requirements, along with the proposed new code of conduct for sponsors, will apply to listing applications submitted on or after October 1, next year.

Investment banks have argued that competitive pressures and resistant clients can make it impossible for them to detect fraud.

The SFC’s proposals followed a series of scandals at mainland Chinese companies that have listed in Hong Kong.

Shares in Chinese textile maker Hontex International Holdings were suspended in 2010, just three months after listing, when regulators alleged it had overstated its financial position in the listing prospectus.

In April, the SFC revoked the licence of the sponsor of the Hontex listing, Mega Capital (Asia), and slapped it with a record fine.

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