... the Decision-making and Governance Structure for Listing Regulation
In June 2016, the Securities and Futures Commission (“SFC”) and the Stock Exchange of Hong Kong Limited (“Exchange”), a wholly owned subsidiary of the Hong Kong Exchanges and Clearing Limited (“HKEX”), jointly issued a consultation on proposed enhancements to the Exchange’s decision-making and governance structure for listing regulation (“Proposals”).
Under the Proposals, the Exchange 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 that do not have suitability concerns or broader policy implications as well as certain reserved matters under the Listing Rules (“Non-LRC Matters”).
Two new Exchange committees, the Listing Policy Committee (“LPC”) and the Listing Regulatory Committee (“LRC”), with equal representation from the SFC and the Exchange, will be established. The LPC will initiate, steer and decide listing policy, including new Listing Rules, Listing Rules amendments, market consultations and other matters with policy implications or general effect while the LRC will give guidance and decide in the first instance on IPO and post-IPO matters that have suitability concerns, broader policy implications or general effect or are of novel, potentially controversial or sensitive nature (“LRC Matters”). The Listing Committee will give non-binding advice to these two committees.
The SFC will no longer issue a separate set of comments on the statutory filings made by new applicants. Also, the LPC will replace the Listing Committee as the body responsible for oversight of the listing function including the Listing Department’s performance.
The Existing Decision-Making and
Governance Structure for Listing Regulation
Currently, the Exchange is responsible for the day-to-day administration of all listing-related matters including making new Listing Rules and Listing Rules Amendments and approving listing applications. To separate the commercial role of the Exchange (which is overseen by the board of directors of the Exchange (“Exchange Board”)) from its regulatory role, the Exchange Board has delegated all its powers and functions relating to listing matters to the Listing Committee, subject to the review procedures set out in the Listing Rules.
The 28 members of the Listing Committee draw on the commercial and business knowledge and experience of market users for policy formulation and regulatory decision-making and comprise representation from investor groups, listed companies and market practitioners. The Chief Executive of HKEX serves as an ex-officio member. However, as Listing Committee members are unable to administer the Listing Rules on a daily basis, it has delegated its listing powers and functions to the Listing Department and the Chief Executive of the Exchange except for some reserved matters including approval of IPO applications.
The Listing Committee has oversight of the Listing Department and the Chief Executive of the Exchange. It acts as an independent review body for decisions made by the Listing Department and the Chief Executive of the Exchange. The SFC has a statutory duty to supervise and monitor the Exchange’s performance of its listing-related functions and responsibilities. The Exchange and the SFC meets regularly to discuss listing-related matters and the SFC conducts periodic audits of the Exchange’s performance. Under the dual filing regime, the Exchange passes copies of materials submitted by listing applicants to the SFC.
The SFC has wide powers and functions in listing regulation under the Securities and Futures Ordinance (“SFO”) which are complemented by its powers of investigation and enforcement. Most notably, the SFC’s powers include: (1) to grant approvals on new Listing Rules and Listing Rules Amendments, give consent to waiver or modification to Listing Rules given by the Exchange in individual cases and direct the Exchange to make specific Listing Rules under the SFO; and (2) to object listing application, and to suspend trading in or delist any securities under the Stock Market Listing Rules.
Reasons for and Objectives of the Proposals
Although the existing structure has served the market well, but the regulators are wary that Hong Kong’s capital markets has become increasingly large and complex. When the current regulatory structure was developed 20 years ago, local companies comprise the majority of listings. Directors, management and shareholders of listed companies were generally based in Hong Kong. Today, many mainland and overseas companies are listed or applying for listing in Hong Kong, introducing a host of issues and risks. The Proposals push for a coordinated approach towards listing regulation and attempt to confront the many ongoing regulatory issues faced by the SFC and the Exchange including: (1) stock price manipulation, (2) corporate governance shortfalls, (3) disclosure problems and (4) misconducts which prejudice public investors. This requires greater interaction between listing policy and the operation of the Listing Rules, on one hand, and the regulation of listed companies under the SFO, intermediaries’ conduct regulation, application of the Takeovers Code and SFC enforcement considerations, on the other.
As for the objectives of the Proposals, there are three key things the regulators are trying to achieve: better coordination, efficiency and accountability. The Proposals aim to:
- Achieve, through the LPC, closer coordination and cooperation between the SFC and the Exchange on listing policy formation and provide the SFC with earlier and more direct input on listing policy matters and listing regulation.
- Streamline, through the LRC, the processes for important or difficult listing decisions that raise suitability issues or have broader policy implications. The SFC would collaborate with the Exchange and have earlier and more direct input.
- Simplify the process for initial listing applications so that they can be vetted and approved more efficiently.
- Establish clearer responsibility and accountability for decision-making in listing regulation and for oversight of the administration of the Listing Rules.
- Enhance procedural fairness for disciplinary matters.
Key Features of the Proposed Structure
Listing Decisions for Non-LRC Matters –
The Listing Committee and the Listing Department
The Listing Committee will continue to be the decision-maker for IPO applications and, in conjunction with the Listing Department, matters involving listed issuers that do not involve suitability concerns or broader policy implications. The Listing Department will be responsible for deciding whether an IPO application or a post-IPO matter is a LRC Matter and, if so, will refer it to the LRC for decision. In addition, the Listing Committee will provide non-binding views to the LRC in relation to the latter’s decisions on these LRC Matters. The composition of the Listing Committee will remain the same save that the Chief Executive of HKEX will cease to be a member of the Listing Committee to manage any conflict of interest.
Policy Development – The Listing Policy Committee
The LPC will steer the Exchange’s work on Listing Rule amendments and overall listing policy. The proposed composition of the LPC is designed to represent the different bodies within the current listing regulatory system that make policy-related decisions. The Proposals are intended to simplify and more closely align policy decision-making amongst the Listing Department, the Listing Committee and the SFC, which should in future be more efficient and more responsive in dealing with issues as they arise.
The LPC will comprise the Chairperson and two Deputy Chairpersons of the Listing Committee (including at least one investor representative), the Chief Executive of HKEX, the Chairperson of the Takeovers Panel, the CEO of the SFC and two senior executives from the Corporate Finance Division of the SFC. It is legitimate for the board of directors of HKEX (“HKEX Board”) to express a view on how a proposed rule amendment or policy may affect the commercial interests of HKEX. The Chief Executive of HKEX will represent, and will consult as necessary, the HKEX Board on the policy matters to be considered by the LPC. In addition, the Chairperson of the Takeovers Panel will be appointed a member as the Panel’s decisions concern listed companies and can be relevant to listing regulation. The Chairperson of the Listing Committee will act as the Chairperson of the LPC.
Listing Decisions for LRC Matters –
The Listing Regulatory Committee
The LRC will 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.
The LRC will comprise mostly the same members as the LPC save for the Chairperson of the Takeovers Panel, the CEO of the SFC and the Chief Executive of HKEX. An additional senior executive of the Corporate Finance Division of the SFC will be appointed. The LRC would therefore comprise three SFC executives as well as the Chairperson and two Deputy Chairpersons of the Listing Committee. The Chairperson of the Listing Committee will act as the Chairperson of the LRC.
As this committee will hear cases and appeals, it will meet much more frequently than the LPC. Alternates will be allowed to attend meetings in place of the appointed members because (a) potential conflicts of interest are more likely to arise, and (b) the LRC will hear reviews of decisions by the Listing Committee, and there is a need to ensure that the members from the Listing Committee do not hear the same case both in the first instance and upon any subsequent review.
Conduct of Meetings and Voting
Both the LPC and LRC will reach its decisions by consensus. If, however, any matter is put to a formal vote among members, a majority in support will be required for any decision (e.g. the approval of a public consultation or Listing Rule amendment (LPC) or the approval of a relevant listing or waiver application (LRC)) to be taken. The Chairperson of the LPC and the LRC, which will be the same person, however, will not have a casting vote.
The proposed voting arrangement means that, for those cases that are put to the LPC and LRC, the SFC would in effect be able to exercise its statutory powers under the SFO and under the Stock Market Listing Rules to object to a listing through its participation on the LRC. The Proposals intend to simplify the decision-making process involving the Listing Department, the Listing Committee and the SFC, and make it more straightforward and efficient.
Other Major Changes
The Listing Committee will act as review body for listing decisions of the Listing Department on non-LRC Matters. The LRC will replace the current Listing (Review) Committee as the review body for decisions of the Listing Committee (except on disciplinary matters). A new Listing Regulatory (Review) Committee, comprising members from the SFC and former members of the Listing Committee, will replace the existing Listing Appeals Committee as the final review body for certain listing decisions prescribed under the Listing Rules. To enhance procedural fairness in disciplinary hearings, a Listing Disciplinary Chairperson Group consisting of practising or retired senior counsel will be established. Each disciplinary hearing (whether at first instance or upon review) will be chaired by a member of this Group.
The Proposals have attracted criticisms from the IPO industry who view that the current structure works well and already provides the SFC with sufficient regulatory and veto powers and the Proposals are merely a power grab by the SFC with no incremental benefit. A more complex and time-consuming process will be counter-productive to the objective of achieving efficiency gain. They suggest there are more pressing needs to be addressed: (1) clarify and amend vague Listing Rules, (2) revisit listing requirements, and (3) strengthen enforcement.
There are concerns that the new structure will concentrate too much power within a small circle controlled by the SFC, and enabling the SFC to enter the approval process earlier may lead to more rejections of applications and impede the growth of the IPO market. The regulatory mind-set of the SFC may limit the room for novel development as illustrated by the differing positions concerning the company structure with weighted voting rights between the SFC and the Exchange. Furthermore, there is potential that many cases will be referred to the LRC by the Listing Department due to the vague definitions of suitability and broader policy concerns, thus challenging the claim that majority of the cases will stay with the LC.
Others claim that Hong Kong’s current disclosure-based regime works well as the comprehensive disclosure requirements are sufficient to deter problematic applications and enable investors making informed investment decisions. To eliminate problems of poorly performing listed companies and back-door listings, the SFC should increase enforcement and amend the Listing Rules. The government can also consider other means to increase investors’ redress.
In response, the SFC said concerns that the reforms threatened the local IPO market were overblown and they do not believe that the proposals will kill off the IPO market in light of its incremental nature. In fact, listing applicants will appreciate the better co-ordination between the front and second line regulators intrinsic in the proposals. Potentially, if the workflow is properly designed, that could quicken the IPO process. Approximately 90% of listing applications will only go to one committee, the Listing Committee. Only 10% of the complicated applications will go to multiple committees. The SFC will not gain any incremental powers from the reforms. The reforms can strengthen governance and transparency of the market and will increase investor protection. Currently, Hong Kong has less protection for small investors compared to jurisdictions with a self-regulatory model (e.g. class action in the USA).
The Proposals advocate both structural and procedural changes to the existing decision making and governance structure for listing regulation. Going forward, the LPC will have oversight of all matters with policy implications or general effect. The LRC will determine cases with suitability or broader policy concerns. The Listing Committee will continue to decide on cases which do not fall within these two categories, which should be the majority. If the Proposals are implemented, sponsors are expected to assess whether an IPO involves suitability issues or broader policy concerns. Where appropriate, listing applicants and their sponsors may use the current pre-IPO enquiry process for specific issues at the pre-IPO application stage.
The SFC and the Exchange are now inviting interested parties to submit their views and suggestions on the Proposals. It is expected that there will be room for fine-tuning the Proposals to address some legitimate market concerns. It seems however unlikely for the listing regulators to recall the Proposals due to their strong attitudes in pushing this reform. Furthermore, in light of the diverging views expressed since the publication of the consultation paper, the SFC and Exchange announced that an extension will give all interested parties further time to file their submissions. The consultation period will now end on 18 November 2016.
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|Published by ONC Lawyers © 2016|
 The reserved matters include (a) the power to approve most Main Board listing applications from new applicants – rules 2A.05, 2A.05A and 2A.05B of the Listing Rules; (b) the power to cancel the listing of a listed issuer – rule 2A.08 of the Listing Rules; and (c) the power to impose disciplinary sanctions – rule 2A.09 of the Listing Rules.
 See rule 2.04 of the Listing Rules.
 See rule 8.04 of the Listing Rules.
 Ibid n2.
 Rule 2A.01 of the Listing Rules.
 This is the Chief Executive of the Stock Exchange of Hong Kong Limited.
 A full description of the respective roles of the SFC and the Exchange is set out in the January 2003 Memorandum of Understanding Governing Listing Matters (Listing MOU) that is available on the websites www.sfc.hk and www.hkex.com.hk.
 Chairperson cannot exercise a deciding vote in case of a deadlock when the votes are equally divided.
 Section 6 of the Stock Market Listing Rules.
 Certain local chambers of listed companies, the local chambers of commerce as well as certain i-banks, a former LC Chairman and even an INED of the HKEX and the Legislative Councilor of the Financial Services sector have publicly criticized the Proposals.