Stricter regulations and tighter control for the securities market is a growing trend across the world. The Hong Kong market is presently faced with an increase in mainland private enterprises listing on the local exchange, resulting in shell planting and volatility in stock prices in the Growth Enterprise Market (the "GEM"). The regulators have taken up initiatives to address these issues and have introduced measures on accountability to better protect the market and the investors. Below we discuss the current position on the governance structure for listing decision making, the accountability of senior management for licensed corporations and the volatility of stoke prices in the GEM, and explain the initiatives of the regulators in response.

HKEX and SFC's ­­Joint Consultation on Listing Regulation

In June 2016, the Securities and Futures Commission (the "SFC") and the Hong Kong Clearing Limited (the "HKEX") issued a Joint Consultation Paper on Proposed Enhancements to The Stock Exchange of Hong Kong Limited's (the "Exchange") Decision-Making and Governance Structure for Listing Regulation. The joint consultation closed in November 2016.

The Joint Consultation Paper aims at:

  • Achieving closer coordination and cooperation between the SFC and the Exchange on policy formulation; Streamlining the processes for making listing decisions that involve suitability issues or have broader policy implications;
  • Simplifying the process for IPO applications as most of the IPO applications do not involve suitability issues or give rise to broader policy implications and SFC will no longer issue comments on the statutory filings made by new applicants;
  • Providing clearer accountability for decision-making within the Exchange;
  • Addressing the conflicts of the HKEX as both a listed company and a frontline regulator of listed companies; and
  • Improving quality of listed companies and investor protection.

The Joint Consultation Paper proposes to establish two new Exchange Committees on which the SFC and the Exchange have joint control. The SFC will have a bigger say in the listing approval process and an earlier and more direct input on listing policy matters and listing regulation going forward.

Firstly, the Listing Policy Committee will initiate, steer and decide on Listing Rule amendments and overall listing policy. The proposed composition of the Committee aims at including different bodies within the current regulatory system which make policy-related decisions. The Committee is expected to reach its decisions by consensus.

Secondly, the Listing Regulatory Committee will decide on day-to-day administration of the Listing Rules regarding suitability issues or broader policy implications. This ensures that important listing decisions are aligned with the overall policy direction. Besides, the composition of the Committee is quite similar to the Listing Policy Committee. Since the Committee will hear cases and appeals, alternates will be allowed to substitute the appointed members due to potential conflict of interest and to prevent members from hearing both the first instance case and the subsequent review.

It should also be noted that the Chairperson of both Committees will not have a casting vote in decision-making when a deadlock is encountered.

The proposal is considered by some long overdue. The lack of clarity in the roles of the SFC and the Exchange was highlighted in the penny stocks incident in 2002 which led to HK$10 billion wiped off the market value of affected companies. The Exchange had proposed to consolidate the market and potentially delist shares of companies trading at less than 50 cents. There had been no previous consultation with the SFC or the Hong Kong Government prior to the announcement of the proposal. The inquiry which followed highlighted institutional failures and recommended a review of the structure, role and operation of the Exchange's Listing Committee and a closer liaison of the Exchange and SFC.

Naturally there are concerns in the market that the proposal, if implemented, would increase SFC's decision making power and result in stricter regulations and suppression of the development of the market. It is also thought that there is an inherent conflict between decision making and regulating, and that the SFC should not have both powers.

SFC appears determined to see the proposal through. The proposal accords with the international best practice which sets the trend.

Augmentation of senior management accountability for licensed corporations

General Principle 9 of the Code of Conduct for Persons Licensed by or Registered with the SFC provides that the senior management of a licensed corporation should bear primary responsibility for ensuring the maintenance of appropriate standards of conduct and adherence to proper procedures by the corporation.

To clarify the duties and obligations of senior managers, the SFC has issued a circular to licensed corporations regarding measures for augmenting the accountability of senior management in December 2016.

According to Mr Ashley Alder, the SFC's Chief Executive Officer, "senior managers bear primary responsibility for the effective and efficient management of their firms, and they should be well aware of the obligations currently imposed on them as well as their potential liability if they fail to discharge their responsibilities".

"Senior management" of a licensed corporation includes directors of the corporation, responsible officers ("RO") of the corporation and Managers-In-Charge of Core Functions ("MIC").

"MIC" refers to an individual appointed by a licensed corporation to be principally responsible for managing any of the following eight core functions of the corporation:

  • Overall management oversight;
  • Key business line;
  • Operational control and review;
  • Risk management;
  • Finance and accounting;
  • Information technology;
  • Compliance;
  • Anti-money laundering and counter-terrorist financing.

The circular requires that for each of the core function, there should be at least one MIC. For the overall management oversight and key business line functions, the MICs in charge of them should be ROs because MICs of these functions usually have active participation in or responsibility for directly supervising the business of the regulated activities.

Corporate licence applicants and existing licensed corporations will have to submit up-to-date management structure information and organisational charts to the SFC from 18 April 2017. The deadline for submission is 17 July 2017. MIC of the overall management oversight and key business line functions, who are not already RO, should have applied for approval to become RO by 16 October 2017.

The augmentation of senior management accountability will broaden the category of officers coming under the supervision and disciplinary power of the SFC.

Price volatility in newly listed GEM stocks

Recently, the SFC and the Exchange have seen unusually high price volatility in GEM stocks post-listing. The average first-day price gain was 743% for all GEM stocks listed in 2015 and the trading prices of GEM stocks listed in 2015 fell by 47% within a month of their peak. Almost all GEM IPOs were conducted by way of placing only. Many listed GEM stocks have highly concentrated shareholdings and a small shareholder base. In 2015, the top 25 placees took up 96% of the shares offered for placing and the average number of placees for the entire issue was 135. Some investors repeatedly appeared as the top placees in unconnected GEM IPOs. The concentration of shares in the hands of a few shareholders gives rise to the ability to manipulate the price of the stock, compromising the integrity of the market and prejudicing the interests of the investors.

In response, the SFC and the Exchange have issued a joint statement regarding the price volatility of GEM stocks in January 2017. The joint statement emphasised that the GEM Rule 11.23 requires an open market in the securities for which listing is sought and an adequate number of holders of such securities. The minimum requirement of 100 public holders of a security is merely a guideline and satisfaction of such requirement does not mean that the open market requirement has been satisfied. The SFC or the Exchange will take appropriate actions against new applicants, sponsors and underwriters or placing agents if they fail to comply with the relevant policies and procedures to ensure that GEM IPO placing is conducted in a fair and orderly manner.

Following the joint statement, in February 2017, at least four GEM stocks were suspended from trading due to SFC inquiry under GEM Rule 11.23. On 22 February, a GEM stock started trading in the morning, went by more than 542% from its offering price at lunch break and was suspended from trading by 1pm. It is the first time that a GEM stock was listed for and suspended from trading on the same day.

The joint statement also warned that GEM stocks have a higher investment risk than companies listed in the Main Board, so potential investors should be aware of the potential risks of investing in these companies.


We expect to see the SFC and the Exchange work closer together to regulate the market and protect the investors. The Exchange will continue to juggle the conflict of being a listed company itself, interested in relaxing the control of the market, and encouraging more listings and being a frontline regulator of listed companies interested in maintaining a level playing field for the investors. Joint consultations and joint statements with the SFC will help address the conflict and stricter regulation of the market will be the way to go.

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