Clifford Chance

In this review report, the SFC continues its focus on listed company compliance and recommends enhancement of the investigatory and enforcement processes for oversight of the Hong Kong Stock Exchange

The Securities and Futures Commission (SFC) has published a report (Report) summarising the key findings and recommendations of its 2019 review regarding the performance of The Stock Exchange of Hong Kong Limited (SEHK) in its regulation of listing matters in 2018.

The SFC has a statutory duty to supervise and monitor the activities carried on by the SEHK and this periodic review of the SEHK's performance is a means to discharge this function. According to the Memorandum of Understanding between the SFC and the SEHK dated 28 January 2003 (Listing MOU), the SFC is to focus on the SEHK's work in developing and enforcing the Listing Rules; the adequacy of the SEHK's systems and processes, and the effective management of conflicts of interest within the SEHK including the supervisory functions of the Listing Committee.

SFC recommendations on enforcement against listed companies

The SFC has made, amongst others, the following recommendations to the SEHK which relate to SFC enforcement work concerning listed companies:

• The proportion of the Listing Department's decisions for which a review is sought in any given year is very small. The Listing Committee performs oversight of the Listing Department mainly through acting as an independent review body for decisions; review is conducted upon request by a listed issuer or applicant, or the SFC. There is no other process for the Listing Committee to check that the Listing Department is interpreting the Listing Rules in accordance with policy. Whilst the Listing Department reported to the SFC individual complaints monthly, this only contained a brief description of status and was not designed to be a form of direct oversight. The Listing Committee should explore further avenues in addition to its existing oversight processes to ensure that the Listing Department is carrying out delegated functions and powers as specified in the Listing Rules.
• The Listing Department should expand its regular reporting to include reasons for notable decisions not  to take disciplinary or other further action against an issuer or director, and notable complaints received against listed issuers and how the complaints are being handled.
• In handling complaints against listing applicants, the Listing Department should amend its protocol that no further regulatory action is required when the relevant listing application has been withdrawn or terminated, but rather, further regulatory action (including a referral to the SFC) should be evaluated on a case-by-case basis.

These recommendations are in line with the SFC's proactive enforcement approach in recent years.

The Report also reviewed the steps taken by the SEHK in respect of the SFC's recommendations set out in the 2018 review report.

• In response to the SFC's recommendation that the SEHK should try to accelerate its review of its enforcement function and sanctions to examine whether this function can be discharged more effectively, the SEHK is conducting a policy review of its disciplinary powers and sanctions with a view of issuing a consultation paper in 2020.
• The SFC recommended that the reasons for rejecting, or not to take further action in relation to, a referral case should be properly documented; and if the facts and circumstances surrounding the case cast doubt on the reliability of the representations or information provided by the issuer, the Listing Enforcement staff should critically consider all the relevant information before relying on the representations or information provided. The Listing Enforcement updated its operating manual in December 2018 to respond to this recommendation.

Enforcement statistics

The Report further reviewed the operations of the Listing Department in 2018:

• The Listed Issuer Regulation team referred 81 cases to Listing Enforcement in 2018, representing a significant increase from 40 referral cases in 2017.
• The SEHK handled 111 investigations in 2018, representing an increase of 29.1% from 2017.
• The SEHK completed 21 disciplinary cases in 2018 compared with 9 cases in 2017. All of these disciplinary cases were concluded with public sanctions being imposed by the SEHK.
• The SEHK took action against 120 directors in 2018, compared with 24 directors in 2017.
• The number of public statements, directions, and warning/cautionary letters issued by the SEHK also increased.

SEHK updated statement on settlement approach

Subsequent to the publication of the Report, the SEHK published on 26 June 2020 an updated statement outlining the SEHK's approach towards and criteria for settlement of disciplinary matters involving breaches of the Listing Rules, and settlement procedures.

In particular, the SEHK emphasised its fundamental objectives in deterring future breaches, influencing compliance culture and enhancing corporate governance, and noted that settlement is acceptable only if it results in an acceptable regulatory outcome and is subject to approval by the Listing Committee. As a general rule, the Listing Division is less likely to be amenable to settlement proposals the further the enforcement action has progressed.

Conclusion

According to this latest review of performance by the SFC and recent figures, whilst the SEHK has stepped up its investigations and disciplinary sanctions, there is still room for improvement in oversight by the Listing Committee and for the Listing Department and Enforcement to be more robust. Meanwhile, the SEHK's updated statement setting out the approach for settlement is welcomed. We now await the SEHK's review and consultation paper on its disciplinary powers and sanctions. For listed issuers and their directors, they can continue to expect a tougher enforcement stance from both the SFC and the SEHK.