Regulatory Minefield: What is on the Regulators’ Recent Agenda?

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. These include the below.

1. HKEX and SFC’s Listing Regulation

In 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 paper proposes to establish two new 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.

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 joint consultation closed in November 2016.

2. 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.

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.

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

3. Price Volatility in Newly-Listed GEM Stocks

Recently, the SFC and the Exchange have seen unusually high price volatility in GEM stocks post-listing. In 2015, the top 25 placees took up 96 percent 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.

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.

In February, at least four GEM stocks were suspended from trading due to an SFC inquiry under GEM Rule 11.23. On 22 February, a GEM stock started trading in the morning and was suspended from trading by 1 PM. It is the first time that a GEM stock was listed for and suspended from trading on the same day.

The SFC and the Exchange’s joint statement 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.  

Action Items

We expect to see the SFC and the Exchange to work closer together to regulate the market and protect investors. The Exchange will continue to balance the conflict of being a listed company itself, interested in relaxing the control of the market, while encouraging more listings and being a frontline regulator of listed companies. Joint consultations and joint statements with the SFC will help address this conflict.


Partner, Clyde & Co.