Enhanced Hong Kong Stock Exchange disciplinary powers and sanctions to take effect on 3 July 2021

The Stock Exchange of Hong Kong Limited (SEHK) has recently published consultation conclusions on proposed enhancements to the listing rules (LRs) relating to disciplinary powers and sanctions.

It will implement the LR enhancements as proposed in the consultation paper, except in relation to the imposition of secondary liability, where a note will be added to the LRs to clarify the position in relation to solicitors and certified public accountants in private practice. The revised LRs will come into effect on 3 July 2021.

These rule changes are one of a number of initiatives by the Hong Kong Exchanges and Clearing Limited (HKEX) and the Securities and Futures Commission (SFC) to strengthen the quality of capital markets in Hong Kong and tackle corporate misconduct, including the recently-published joint statement on IPO-related misconduct and SEHK consultation conclusions to increase the profit requirement for companies seeking to list on the Main Board (see our 28 May 2021 bulletin).

Objectives and impact of the enhanced disciplinary regime

The key focus of the LR enhancements is to ensure that the SEHK disciplinary regime is effective in delivering regulatory outcomes, including:

• having in place a full spectrum of disciplinary sanctions for breaches or misconduct of varying levels of gravity; and
• ensuring that disciplinary action can be brought against all parties responsible under the LRs.

The enhanced disciplinary regime is intended to strengthen the SEHK's powers to hold accountable and impose appropriate sanctions on individuals responsible for misconduct and LR breaches. Clarity will be provided on who is considered as senior management, a term that has been used in the LRs but has not been defined. A specific provision on secondary liability will also be added in respect of parties who cause by action or omission or knowingly participate in a contravention of the LRs or a requirement imposed by the Listing Division or the Listing Committee. This is in line with the global regulatory push for individual accountability, particularly in the financial services industry.

The SEHK will continue to make decisions on the appropriate disciplinary sanctions in light of a party's culpability and liability in the specific circumstances of the case, having regard to its enforcement policy statement and principles and factors in determining sanctions and directions in disciplinary hearings. It will, however, have more sanctions tools at hand and be able to impose sanctions against a broader range of parties, and under a broader set of circumstances.

Overview of the key LR enhancements

Marked-up changes to the Main Board LRs and GEM LRs are set out in Appendix 3 and Appendix 4 respectively of the conclusions paper. The following is an overview of the key changes.

1. Defining “senior management” 

“Senior management” will be defined as any person:

• occupying the position of chief executive, supervisor, company secretary, chief operating officer or chief financial officer, by whatever name called;
• performing managerial functions under the directors’ immediate authority; or
• referred to as senior management in the listed issuer’s corporate communication or any other publications on the SEHK’s website or on the listed issuer’s website.

2. Expanding the disciplinary regime to cover more parties 

The parties who may be subject to disciplinary action (Relevant Parties) will be expanded to include:

• employees of professional advisers of listed issuers and their subsidiaries (added as a specific category for clarity – existing LRs already contemplate that employees of professional advisers can be banned following a breach);
• guarantors of structured products;
• guarantors of issues of debt securities under the Main Board LRs (such guarantors are already included in the disciplinary regime under the GEM LRs); and
• parties who give undertakings to or enter into agreements with the SEHK (where possible, the SEHK will include a clause in the undertaking or agreement to alert the parties that they are subject to the SEHK’s disciplinary jurisdiction).

Relevant Parties under the current regime include listed issuers and their subsidiaries, directors (and alternates of directors) of listed issuers or their subsidiaries, senior management of listed issuers or their subsidiaries, substantial shareholders of listed issuers, professional advisers of listed issuers or their subsidiaries, authorised representatives of listed issuers, and supervisors of PRC issuers.

3. Broadening the power to issue PII Statements 

The SEHK’s power to issue a public statement to the effect that a director continuing to remain in office is prejudicial to the interests of investors (PII Statement) will be extended as follows:

• removing the threshold of “wilful or persistent failure by a director of a listed issuer to discharge his responsibilities under the [LRs]” (in response to feedback, the SEHK has indicated that it will consider publishing guidance to the market to provide further clarity on the circumstances that may warrant the imposition of a PII Statement);
• making it clear that a PII Statement can be made whether or not an individual continues in office at the time of the PII Statement; and
• extending the scope of a PII Statement to include the senior management of the relevant listed issuer (in addition to directors) and the directors and senior management of the listed issuer’s subsidiaries.

4. Enhancing follow-on actions where an individual continues to be a director or a member of senior management of the named listed issuer after a PII Statement has been made against him/her 

Follow-on actions will include the denial of facilities of the market to the listed issuer for a specified period, in addition to the more serious actions of suspension or cancellation of listing.

5. Requiring a listed issuer to include a reference to the PII Statement in all its announcements and corporate communications unless and until the individual subject to a PII Statement with follow-on action is no longer its director or member of senior management 

In response to the suggestion to publish a list of individuals subject to a PII Statement, the SEHK has stated that information regarding all public sanctions can be found on the HKEX website, and details of certain sanctions can be found in the HKEX’s Enforcement Bulletin. It will consider if the presentation or searchability of that information can be enhanced.

6. Extending the scope of disclosure in listing documents and annual reports to include public sanctions against directors and members of senior management 

The scope of disclosure in listing applicants’ listing documents and listed issuers’ annual reports in respect of their directors and members of senior management (current and/or proposed, as the case may be) will be extended by requiring provision of full particulars of any public sanctions made against those individuals by statutory or regulatory authorities.

This helps make such information (which is already a matter of public record) more readily available to those who may be most interested in it.

7. Broadening the power to deny the facilities of the market to a listed issuer 

As with the issue of a PII Statement, the threshold of “wilful or persistent failure by a listed issuer to discharge its responsibilities under the [LRs]” for ordering the denial of the facilities of the market will be removed.

In addition to denying the facilities of the market for a specified period, the SEHK will also be empowered to deny such facilities until the fulfilment of specified conditions. Examples of conditions include conducting an independent internal controls review and implementing any recommendation, and obtaining independent shareholders’ ratification in respect of a matter.

8. Introducing director unsuitability statements as a new sanction 

In the case of serious or repeated failure by a director to discharge his/her responsibilities under the LRs, the SEHK will be empowered to state publicly that in its opinion the director is unsuitable to occupy a position as director or within the senior management of a named listed issuer or any of its subsidiaries.

This is a more serious sanction than a PII Statement and is reserved for the most egregious or severe cases of misconduct. The director unsuitability statement will normally be accompanied by follow-on actions (see below).

9. Making the follow-on actions, publication requirements and enhanced disclosures in respect of PII Statements also applicable to directors against whom a director unsuitability statement has been made 

These are equivalent to the changes in 4, 5 and 6 above in relation to PII Statements.

10. Expanding the ban on professional advisers and their express obligations under the LRs 

“Professional advisers” include financial advisers, independent financial advisers, lawyers, accountants, property valuers or other persons retained by an issuer to provide professional advice in relation to a matter governed by the LRs. They do not include sponsors or compliance advisers.

The ban on professional advisers (and named individuals employed by professional advisers) will be extended to cover banning from representing any party (rather than just a specified party) in relation to a stipulated matter or matters coming before the Listing Division or the Listing Committee for a stated period.

The express obligations on professional advisers when acting in connection with LR matters will be expanded. Professional advisers shall use all reasonable efforts to ensure that their clients understand and are advised as to their obligations under the LRs (in addition to the scope of the LRs). A new obligation not to knowingly provide any information to the SEHK which is false or misleading in a material particular has also been added.

11. Including an explicit provision permitting the imposition of a sanction where there has been a failure to comply with a requirement imposed by the Listing Division, the Listing Committee or the Listing Review Committee (in addition to breach of the LRs) 

This is a clarification of the existing position rather than a new power.

12. Imposing secondary liability on Relevant Parties 

The SEHK will be empowered to impose sanctions on Relevant Parties who have caused by action or omission or knowingly participated in a contravention of the LRs or a requirement imposed by the Listing Division, the Listing Committee or the Listing Review Committee.

Following the consultation, a note has been added to the LRs imposing secondary liability to clarify that in respect of parties covered by section 23(8) of the Securities and Futures Ordinance (solicitors and certified public accountants in private practice):

• a sanction may be imposed for secondary liability only in the circumstances prescribed for disciplinary action in the arrangements agreed from time to time between the SEHK and the relevant professional regulatory bodies; and
• in considering whether such a party has secondary liability, the SEHK will take into account (among other things) whether the party has knowingly or recklessly facilitated or participated in a breach of the LRs or any undertaking given or any agreement with the SEHK.

13. Including an express obligation to provide complete, accurate and up-to-date information or explanations when interacting with the SEHK or the SFC in respect of their enquiries or investigations 

14. Other amendments on procedural aspects of review applications

Amendments will be made to align the requirements and practices relating to review applications and decisions in respect of disciplinary and non-disciplinary review matters, such as:

• using business day as benchmark for counting the periods for filing review applications and for requesting or providing written reasons for decisions;
• requiring all review applications to be served on the Secretary to the Listing Committee or the Listing Review Committee;
• counting the period for filing review applications from the date of issue of the decision or the written reasons;
• counting the period for requesting written reasons from the date of issue of the decision; and
• counting the period for providing written reasons from the date of receipt of the request.