A Securities and Futures Commission (SFC) proposal to tighten regulation of initial public offering sponsors has drawn indignation from investment banks over the possibility of jail sentences under the new law, but investigative firms and lawmakers are throwing their weight behind the tougher rules.
The move aims to help Hong Kong to catch up with Singapore’s tougher regulatory regime for sponsors. The proposal would allow prison sentences for sponsors, such as brokers or bankers, who fail to ensure the accuracy of IPO documentation.
Steve Vickers, chief executive of Hong Kong risk consultancy firm Steve Vickers Associates, said the SFC proposal would encourage more firms to hire investigative firms to conduct due diligence but would still not enable Hong Kong to catch up with Singapore. “But now at least the SFC proposal is catching up,” he said.
Vickers said Singapore had a more comprehensive practice note on how to conduct due diligence, while the SFC proposal lacked sufficient detail. For example, Vickers said the SFC proposals used the word “reasonable” without giving a full definition.
Edward Chow Kwong-fai, deputy chairman of the Business and Professionals Federation of Hong Kong, endorsed the SFC proposal, saying sponsors carried ultimate responsibility for the quality of new listings.
Paul Chan Mo-po, legislator for the accounting constituency, said: “It’s time for the SFC to reform sponsor regulation to restore investor confidence and strengthen the reputation of the Hong Kong market.”
A bid by the markets watchdog to tighten sponsor regulations in 2005 was dropped due to stiff opposition.
Former SFC chief executive Martin Wheatley and the current CEO, Ashley Alder, considered reform was needed after some new companies encountered problems shortly after listing. Fabric manufacturer Hontex International was suspended from trading after only 64 days as a listed company in Hong Kong after the SFC found its 2009 prospectus contained misleading information.
And, over the past two months, the Financial Reporting Council has put 13 companies on a watch list, including some newly-listed firms that allegedly have accounting problems.
Apart from the imposition of jail sentences, the SFC proposal also suggests sponsors should complete most of their due diligence on companies before submitting an advanced draft prospectus to the stock exchange. Sponsors would also need to check on reports submitted by auditors or valuers.
Some international investment banks, including Morgan Stanley and Goldman Sachs, last week appointed a law firm to negotiate with the SFC, seeking greater consultation on the criminal liability clauses.
Local investment banks are also worried. Joseph Tong Tang, executive director of Sun Hung Kai Financial, which has acted as sponsor for listings in the past, supported the direction of the reform, but said the criminal liability was too tough.
“No doubt the due diligence requirements should be improved, given the many problems revealed by newly-listed companies,’’ Tong said. “But, I think unless IPO laws are absolutely clear, it would be unfair to have a criminal sentence if the SFC has a lot of discretion in the matter. Criminal convictions can only occur if the matter is beyond reasonable doubt, which is quite a high standard.”
Patrick Rozario, a partner with accounting firm BDO, said criminal liability was probably too harsh, and a professional reprimand or suspension were adequate penalties.
Keith Pogson, president of the Hong Kong Institute of Certified Public Accountants, said his members were also opposed the proposal, saying the threat of being sued was enough to ensure members upheld “the highest standards while performing their role as auditors”.
Pogson suggested criminal sanctions should only apply where there was intent to defraud.