SFC gives 9-month window to improve primary markets compliance

SFC gives nine month window to improve primary markets compliance

The Hong Kong regulator has published consultation conclusions on its new code of conduct for book building and placing activities in ECM and DCM transactions. There were few material changes to the proposed text as a result of the consultation, and implementation is scheduled for August 2022. This gives affected brokers and investment banks a potentially challenging nine-month timeframe to roll out new policies, processes and controls.

New code of conduct for ECM and DCM transactions – what did the consultation include?

The SFC’s consultation, published in March, introduced a new code of conduct for book building and placing activities in ECM and DCM transactions. The regulator’s aim is to bring Hong Kong regulation in this space in line with the global IOSCO standards and address concerns around potential conflicts of interest and market misconduct observed amongst certain syndicate members and intermediaries. The consultation proposed a number of changes in a new paragraph of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. The paragraph specifically covers ‘Bookbuilding and Placing Activities in Equity Capital Market (ECM) and Debt Capital Market (DCM) transactions’.

The SFC’s intention was to provide a formal definition outlining which intermediaries are involved in such activities, set out the standards of conduct required of these intermediaries, and require information such as fee arrangements be determined at an earlier stage.

The changes are intended to help address issues such as inflated or opaque demand, preferential treatment, misleading ‘book messages’ and enhance accountability by putting the Overall Coordinator (OC) under greater conduct requirements.

A further proposal in the original consultation was that the roles of a head of syndicate and a sponsor should be coupled, effected through a proposed amendment to paragraph 17 of the Code of Conduct. In broad terms, this would require that for IPOs at least one OC, which is either within the same legal entity or the same group of companies, also acts as a sponsor. As this sponsor will be independent of the issuer, the SFC hopes this will allow the intermediary to provide better quality advice to the issuer (as they play both the roles of the OC and sponsor) and address concerns that the sponsor may compromise their due diligence in order to win the OC role.

Consultation conclusions – were there material changes?

At the end of October, the SFC published its consultation conclusions. The new sections of the Code were seen as essential by the SFC, to align requirements in Hong Kong to the global IOSCO standard, and clamp down on poor practices and potential market misconduct observed amongst certain syndicate members and intermediaries.

The market seems to have been broadly supportive of the proposals, with only a small number of material changes being made to the proposed text of the Code as a result of the consultation, including:

  • Clarifying the scope of coverage, specifically excluding private placements and block transactions from ECM, but maintaining the broad scope for DCM transactions, to include bonds with a third country nexus if bookbuilding and/or placing activity is undertaken by a Hong Kong intermediary.
  • Applying only certain aspects of the new code to non-syndicate intermediaries acting on an execution only basis (often private banks or small brokers)
  • Limiting the information which members of the syndicate must pass to the syndicate lead on the clients comprising any omnibus orders, and strictly limiting the way in which this information can be used by the syndicate lead.
  • Applying the sponsor coupling requirement solely to IPOs on the Main Board.

These minor changes will be welcomed by respondents to the consultation, although some may fear the controls around the use of client data may be insufficient to prevent client poaching in a highly competitive market.

With the new section of the Code now agreed, implementation is scheduled for August 2022. Many firms will need to update processes, implement new policies and design new controls in advance of the nine-month deadline. This may be challenging, given how embedded some of the behaviours targeted by the Code may have become, and the complexity and relatively long lifecycle of certain ECM and DCM transactions.

How Bovill can help

Bovill have extensive experience in designing and implementing compliance frameworks for primary markets. We can assist you in preparing to comply with the new Code by:

  • Conducting a gap analysis between current practices and the new Code
  • Reviewing recent transactions, to identify any current practices which may fall foul of the SFC requirements
  • Developing compliant policies and procedures
  • Training staff on the new requirements, and global best practice.

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