Background

On 17 June 2016, the Securities and Futures Commission (“SFC”) and the Stock Exchange of Hong Kong Limited (“Exchange”) jointly issued a consultation on proposed enhancements to the Exchange’s decision-making and governance structure for listing regulation (“Consultation Paper”). The SFC and the Exchange proposed structural and procedural enhancements to the way in which listing regulation is carried out (“Proposals”).

We have written an article on the Consultation Paper: The SFC and HKEX Issued Joint Consultation on Proposed Enhancements to the Decision-making and Governance Structure for Listing Regulation.

The consultation period ended on 18 November 2016.  On 15 September 2017, the Exchange and the SFC issued their joint consultation conclusions (the “Consultation Conclusions”) on the Proposals.

 Proposals

The Consultation Paper is said to enable greater coordination and consensus-building on important listing matters between the SFC and the Exchange, as well as to ensure greater efficiency, transparency and accountability in the regulatory process.

Under the Proposals,

• The listing function will remain within the Exchange which will continue to be the frontline regulator for listing matters;
• The Listing Committee, together with the Listing Department, will continue to decide a large majority of IPO applications and post-IPO matters.
• The Listing Policy Committee (“LPC”) and the Listing Regulatory Committee (“LRC”) will be set up.
  • The SFC and the Exchange are equally represented in the two new committees, and
  • The committees will decide listing policy and policy-related listing matters with advice from the Listing Committee.
• The vetting and approval process for IPO applications that do not present suitability concerns or give rise to broader policy implications will be streamlined; and
• The SFC will no longer as a matter of routine issue a separate set of comments on the statutory filings made by listing applicants.

Summary of Public Submissions

A total of 8,793 submissions were received in response to the Consultation Paper.  Views of different groups varied.

The opposing parties include companies and related entities, brokerage firms, corporate finance adviser and sponsors, law firms, legislators, political parties and think tanks.

The arguments for opposing include:-

• the proposed structures are inconsistent with the existing three-tier regulatory structure and would give the SFC “front”- and “back-line” regulatory authority without sufficient checks and balances – concentration of powers in the SFC;
• the objectives could be achieved under the current arrangements;
• the current structure works well;
• the risks of over-regulation, the slowing down of market development; and
• the proposed structures would move Hong Kong away from a disclosure-based regime and towards a merit- or regulator-based regime and would stifle market development.

On the other hand, the Proposals were welcomed by the some other groups, such as investment managers, accounting firms, and academia.

The reasons for support include:-

• greater and more direct oversight of listing function by the SFC would be in line with international norms;
• the Proposals could mitigate the potential conflict of interests between the Hong Kong Exchanges and Clearing Limited (“HKEX”)’s role as a regulator and as a commercial entity and hence improve Hong Kong’s corporate governance; and
• the Proposals would enhance the dual regulatory structure and facilitate a more efficient and coordinated approval process which would be in the interest of the public.

Key Aspects

The Listing Policy Committee

It was proposed that the LPC be established by the Exchange to initiate, steer and decide listing policy, including new Listing Rules, Listing Rule amendments, market consultations and other matters that have policy implications or general effect.

The proposed composition of the LPC is designed to represent the different bodies within the current listing regulatory system that make policy-related decisions. It is designed to be an efficient “one-stop shop” to respond to policy issues which are often multi-faceted and difficult.

The LPC was proposed to replace the Listing Committee as the body responsible for oversight of the listing function and the Listing Department’s performance within the Exchange.

It is concluded that the LPC proposals will be adopted with amendments.  A Listing Policy Panel (“LPP”) will be established.

The LPP is an advisory, consultative and steering body to initiate and centralise discussions on listing policy with broader regulatory or market implications.

It will be formed outside of the Exchange and the SFC through MOU arrangements, rather than being a formal committee under the Exchange or the SFC.

The LPP comprises the chief executives of the SFC and HKEX, two senior executives of the SFC’s Corporate Finance Division, the chairperson and two deputy chairpersons of the Listing Committee, the chairperson of the SFC’s Takeovers and Mergers Panel as well as two non-executive directors from each of the boards of directors of HKEX and the SFC.

The LPP will serve as a focal point for new policy proposals to be raised and discussed by the LPP members. The LPP will have no rule-making powers, and its recommendations will not be binding on the organisations represented on the LPP.

The LPP will operate pursuant to terms of reference which will govern, among other things, how meetings are governed, how they are conducted and how frequently they are held.

LPP members will attend meetings as representatives and reflecting the views of their respective organisations.

The LPP will meet both on a regular basis and on an ad hoc basis as needed. The CEO of the SFC and the Listing Committee Chair will take turns to chair LPP meetings. The Head of Listing will serve as the secretarial for the LPP and will attend LPP meetings.

The Listing Regulatory Committee

It was proposed that the LRC would be established to decide on those day-to-day listing matters concerning individual new listing applicants or listed issuers that have suitability concerns or broader policy implications. This will ensure that important listing decisions are aligned with the overall policy direction set by the LPC.

Further, to enhance the structure for reviews of listing decisions, the LRC was proposed to replace the current Listing (Review) Committee as the review body for decisions made by the Listing Committee (except on disciplinary matters).

After considering the public submissions, the SFC and the Exchange have decided not to establish the LRC.

The SFC continues to engage in targeted intervention at an early stage and increase its direct presence in more serious listing matters that fall within the scope of the Securities and Futures (Stock Market Listing) Rules (“SMLR”) or the Securities and Futures Ordinance (“SFO”) more generally.

The Exchange will continue to make all decisions under its Listing Rules (including decisions on suitability of listing).

The SFC will, in performing its dual-filing function, concentrate its manpower on listing applications that are most relevant to its statutory objectives.

SFC staff will cease to review and comment on a listing application once they determine that the case does not raise concerns under the SMLR.

The Role of the Exchange

The existing procedures will continue to apply to Hong Kong IPO applications which will be received by the Exchange and filed with the SFC.

The Exchange will be the primary front-line regulator and will remain the contact point for all listing applications save in respect of concerns raised by the SFC under the SMLR.

The Exchange will continue to process and vet IPO applications in accordance with its usual procedures.

The Role of the Listing Committee

The role of the Listing Committee under the Listing Rules will remain unchanged.

The Listing Committee will continue to comprise representatives of investors, listed issuers and market practitioners, and the Chief Executive of HKEX (“HKEX CE”) will continue to be an ex officio member of the Listing Committee.

Going forward, The HKEX CE will attend Listing Committee meetings as a non-voting member representing the HKEX’s board only where listing policy matters are discussed. He will not attend Listing Committee meetings on individual cases.

The LPP may be invited by the Listing Committee to attend individual listing policy meetings of the Listing Committee.

A public body raised a governance issue that was not addressed in the Consultation paper. As the members of the Listing Committee are privy to a large amount of market-sensitive information, it is suggested that a more frequent rotation of members would help to minimise conflicts of interest and the perception of potential misuse of market-sensitive information.

The Role of the SFC

The Consultation Conclusions has clarified the role of the SFC as the statutory regulator which administers the SFO and the SMLR.

The role of the SFC as a statutory regulator has evolved to have a more direct presence in more serious areas of listing regulation.

Where listing applications raise concerns under the SMLR, the SFC will now interact directly with a listing applicant about its concerns, and the SFC and the Exchange will coordinate and cooperate to ensure the process is efficient.

Once the SFC has formed the view that a case does not give rise to concerns under the SMLR, it will cease to review and comment on it.

If the SFC concludes that its concerns under the SMLR are well founded, it will proceed to exercise its formal statutory powers under the SMLR to object to the listing.

The decisions of the SFC are subject to appeal to the Securities and Futures Appeals Tribunal.

The SFC will discharge its statutory oversight of the Exchange’s listing function through a materially enhanced, published audit of the Listing Committee and the Listing Department. The audit will focus on whether the Exchange has discharged and is discharging its duties under the SFO.

Review Mechanisms

To enhance governance within the Exchange’s structure for reviewing Listing Committee’s decisions, the SFC was of the view that there should be no overlap in membership between each review body and the body whose decisions it will review.

It was proposed that the Listing (Review) Committee and the Listing Appeals Committee (LAC) should be replaced with one or more independent committees that consist entirely of outside market participants with no current Listing Committee members or representatives of the SFC or HKEX.

Only a small number of submissions commented on this Proposal.

The Exchange supports this proposal in principle and will conduct a separate consultation in 2018 in this regard.

It is concluded that the proposed Listing Regulatory (Review) Committee will not be established, but the Listing Rules will be amended to codify paragraph 10.6 of the 2003 Listing MOU (i.e. among others, that the Listing Committee and the LAC shall, if requested by the SFC, consider and review any matter, including a decision by the respective committee itself) but the reference to the LAC shall be deleted.

Disciplinary Committees

The Listing Disciplinary Chairperson Group (“LDCG”), Listing (Disciplinary) Committee (“LDC”) and the Listing (Disciplinary Review) Committee (“LDRC”) will not be established.

The SFC’s enhanced supervisory audit of the Exchange’s performance in listing regulation will cover its enforcement of compliance with the Listing Rules.

The Exchange will conduct a further public consultation on its disciplinary powers and sanctions in due course.

In addition, the Exchange will, as part of a separate consultation, consult on whether decisions made by the proposed new review committees of the Exchange should be routinely published on a reasoned basis. The SFC will publish its final decision notices issued under the SMLR.

Summary

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.