SFC to set new standards for ECM and DCM activities

SFC to set new standards for ECM and DCM activities

As Hong Kong welcomed the Year of the Ox, the regulator was busy drafting a new consultation paper on the proposed code of conduct for book building and placing activities in ECM and DCM transactions. The changes are likely to be significant for those affected, so it’s worth getting on top of them as soon as possible. 

The SFC’s aim is to bring Hong Kong regulation in this space in line with global standards and address concerns around potential conflicts of interest, as identified in the latest IOSCO reports.

A number of changes will be included in a new paragraph of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. The paragraph will specifically cover ‘Bookbuilding and Placing Activities in Equity Capital Market (ECM) and Debt Capital Market (DCM) transactions’. The SFC intends to provide a formal definition of 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 hope is the above changes will 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 is 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.

As with any consultation, the SFC have set a deadline for market participants to submit their written comments on the proposals discussed in their paper by 7 May 2021, so certainly a useful consideration for those intermediaries involved in these activities.

Code of conduct for bookbuilding – what you should be doing now

For firms engaged in ECM and DCM activities this change is likely to be significant, so it will be important to stay on top of these changes as early as possible.

If you’re likely to be affected, we’d recommend reading the consultation paper in detail to understand the full breadth of the proposed changes, and determine whether you will need to upgrade any of your relevant controls and procedures. This may include a review of your book building processes, including internal mechanisms and engagements with any relevant third parties. You can read the paper here: Consultation Paper on (i) the Proposed Code of Conduct on Bookbuilding and Placing Activities in Equity Capital Market and Debt Capital Market Transactions and (ii) the “Sponsor Coupling” Proposal.

Addressing the proposals as soon as possible will help you keep on top of developing regulations as they come into effect, maintain robust policies and procedures in line with your regulatory obligations, and allow you to coherently plan an approach for any changes that you may be required to make. This will be particularly important if you’ll need to adjust your bookbuilding processes in light of this change.

How we can help

Bovill regularly works with clients to carry out health checks of their code of conduct policies and procedures, to ensures their effectiveness, and determine the necessary changes in line with the new proposals from the SFC.

We can help you to:

  • Perform a full assessment of your role as an intermediary in ECM and DCM transactions, and how the new regulations could affect you
  • Examine how the changes to sponsorship roles may affect you or third parties and how this may change the responsibilities to you as the Overall Coordinator
  • Suggest practical ways you can implement the changes to stay abreast of the regulatory developments
  • Provide training to relevant staff on the key changes, risks and your new obligations in regard to the code of conduct changes.
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