Circular to intermediaries - Distribution of research reports of eligible Mainland ETFs under Stock Connect

1. This circular sets out the conditions under which the Securities and Futures Commission (SFC) would consider it acceptable to distribute research reports relating to eligible Mainland exchange-traded funds (ETFs) under Stock Connect¹ (Relevant Reports) in Hong Kong pursuant to section 103 of the Securities and Futures Ordinance (SFO).  The requirements and conditions for distributing Relevant Reports are generally consistent with the existing practices and requirements for the distribution of research reports on eligible Mainland stocks under Stock Connect.

   Background

2. The SFC continues to work closely with the China Securities Regulatory Commission (CSRC) to deepen mutual capital market access between the Mainland and Hong Kong and promote the coordinated development of both markets.

3. In July 2022, the inclusion of ETFs under Stock Connect (ETF Connect) allowed Mainland and Hong Kong investors to trade eligible ETFs listed on each other’s market through their local brokers. The scheme has been operating smoothly and highly welcomed by market participants. 

4. To enhance investors’ access to information on eligible ETFs under ETF Connect, the CSRC has clarified that the current arrangement for Mainland securities companies to forward research reports of eligible Hong Kong stocks under Stock Connect on the Mainland can apply to research reports of eligible Hong Kong ETFs under ETF Connect². On a reciprocal basis, the SFC sets out in this circular the relevant requirements for intermediaries to distribute Relevant Reports in Hong Kong.

5. The SFC is of the view that a Relevant Report would not be considered an advertisement or invitation prohibited by section 103(1) of the SFO, subject to the satisfaction of certain conditions as set out in paragraphs 6 to 9 below.

   Conditions for distributing Relevant Reports

   A. Distribution party

6. The Relevant Report is distributed in Hong Kong by a firm which is an intermediary licensed or registered for Type 4 regulated activity (advising on securities), or an intermediary licensed or registered for Type 1 regulated activity (dealing in securities) if the distribution of such Relevant Report to clients is wholly incidental to its securities dealing business.

   B. Preparation  

7. Where the Relevant Report is prepared by an intermediary, the intermediary must:

   a)    take responsibility for the Relevant Report and comply with the applicable requirements in the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct), including General Principles 1, 2, 5 and 6, and paragraphs 2.1 and 12.2 of the Code of Conduct; and

   b)    ensure that:

            i.        information in the Relevant Report is factual, fair and balanced³; and

            ii.        the Relevant Report contains information that is timely and consistent with the Stock Connect eligible Mainland ETFs’ offering documents with prominent and adequate disclosures (see paragraph 9 below).

8. Where the Relevant Report is prepared by a CSRC-licensed group company of an intermediary that distributes such report, the intermediary must:

   a)    exercise due skill, care and diligence in the selection and ongoing monitoring of the CSRC-licensed group company to ensure its competence, implement processes and procedures to ensure the group company complies with the applicable Mainland laws and regulations, and ensure a legally binding written contract is in place between itself and the group company in relation to the group company’s preparation of the Relevant Report and its distribution by the intermediary⁴;

   b)    comply with the applicable requirements in the Code of Conduct, including General Principles 1, 2, 5 and 6, and paragraphs 2.1 and 12.2 of the Code of Conduct; and

   c)    take responsibility for the Relevant Report by taking reasonable steps to ensure the quality of the Relevant Report such that, among others:

           i.        the information in the Relevant Report is factual, fair and balanced³; and

           ii.        the Relevant Report contains information that is timely and consistent with the Stock Connect eligible Mainland ETFs’ offering documents with prominent and adequate disclosures (see paragraph 9 below).

   C. Disclosure

9. The Relevant Report should contain prominent and adequate disclosures of conflicts of interest and warning statements. A list of illustrative examples of such disclosures are set out in the Appendix. Please note that those examples are for reference only and not meant to be complete or exhaustive. The text of the disclosure may vary, but the message must be clear and not disguised.

   Application

10. If you wish to seek clarification of any aspects of this circular, please contact the relevant case team members of the Investment Products Division in charge of your fund group or client and/or relevant case officers in the Intermediaries Division in charge of your intermediary.

Investment Products Division                                  Intermediaries Supervision Department                      
Securities and Futures Commission                      Intermediaries Division
                                                                                                       Securities and Futures Commission    

¹ A list of eligible Mainland ETFs under Stock Connect is available here: https://www.hkex.com.hk/Mutual-Market/Stock-Connect/Eligible-Stocks/View-All-Eligible-Securities?sc_lang=en

² The CSRC issued the amended Interim Provisions of the CSRC on Securities Fund Business Institutions’ Use of Securities Investment Consulting Services Provided by Hong Kong Institutions on 20 March 2020. These provisions allow Mainland securities companies to forward research reports issued by Hong Kong intermediaries licensed or registered for Type 4 regulated activity regarding eligible Hong Kong stocks under Stock Connect to their Mainland clients in accordance with the provisions. They are available here: https://www.gov.cn/zhengce/zhengceku/2020-03/26/content_5495790.htm

The two regulators issued a joint announcement on ETF Connect on 27 May 2022 which provides that other issues which are not mentioned in that joint announcement shall be dealt with in accordance with the requirements set out in the joint announcements on Stock Connect. The joint announcement is available here: https://www.sfc.hk/en/News-and-announcements/Policy-statements-and-announcements/Joint-Announcement-of-the-CSRC-and-the-SFC    

³ The Relevant Report may contain views on buying, holding or selling with target prices provided that there is a reasonable basis for such views.

⁴ If an intermediary distributes a Relevant Report prepared by its CSRC-licensed group company, it shall observe the Principles on Outsourcing issued by the International Organization of Securities Commissions (IOSCO) and, among others, ensure proper contractual arrangement and oversight over the relevant group company.