Proposed Code of Conduct for Corporate Finance Advisers (只 有 英 文 版 )

Attached for your reference is a speech given today by Mr David Stannard, Executive Director of the Securities and Futures Commission, at The Hong Kong Securities Institute Professional Development Seminars.

Only English version of the speech is available.

Good afternoon Ladies and Gentlemen.

First of all, I would like to thank our host, the Hong Kong Securities Institute, for providing the forum to talk to you about this topic. I am going to speak during the first half of the session on the Commission's recently proposed Code of Conduct for Corporate Finance Advisers and some of its key requirements. Estella Ng of the Stock Exchange will then talk to you about the proposed listing rules governing sponsors and financial advisers, which are proposed to be included in a new chapter 3A of the Main Board Listing Rules.

As part of our normal process, the Commission and the Stock Exchange have exposed the proposed code and rules for public consultation. The consultation papers were published at the beginning of May. We initially allowed one month for comments. At the requests of a number of market practitioners, we have agreed to extend the consultation period to the end of June. We hope that this will give enough time for the market to fully consider the proposals and make comments.

Background

Let me talk a little about the background. The Hong Kong securities market has grown substantially in recent years, and this has led to a substantial increase in the number of players in the market - listed companies, financial advisers, lawyers, accountants and others. Go back to 1983, when I first arrived in Hong Kong. There were very few involved in corporate finance. The market was effectively dominated by three investment banks - merchant banks as they were called then. Wardley, Schroders & Chartered and Jardine Fleming.

Since that time, the market has expanded significantly - and that is all to the good. However, with the rapid increase in the number of players in the market, the experience and expertise has become very thinly spread. A few dinosaurs such as myself are still around. However, many new entrants have not had the training and the benefit of systems and back-up provided in earlier days. As a result, there are, I believe, market participants who need help in getting the basis requirements in place. This is desirable for the whole market and this is a primary aim of what we and the Stock Exchange are trying to do.

We want to assist the industry by helping it raise its overall standard of professionalism and expertise, for the benefit of the whole market.

The proposed Code and chapter 3A share a common theme. They both govern the conduct of market practitioners engaging in the provision of corporate finance advice by setting a benchmark of the standard expected in this market place.

In our preparation of the Code of Conduct, we spoke to a number of investment banks and looked at their internal codes of conduct and guidelines. We also discussed the draft Code with a number of investment banks. From the initial reactions we received, the market is generally supportive of the Code. Of course, there will be some areas where people will have comments. I would be surprised if that was not the case. That is the point of the Consultation exercise. We want those comments, so that we can take them into account when finalising the Code of Conduct.

The market has for a long time called for guidelines and directions to help assist the planning and execution of transactions. Regulators certainly do not wish to administer rules and regulation in the dark, and the regulatees are right to demand more transparency. By introducing the Code, we hope that the market will find that it provides clear and useful guidance.

The proposed Code sets a benchmark for standards of behaviour expected in the industry, without imposing new or additional requirements. For some financial advisers, the Code will inevitably require them to "upgrade" their standard of operation for the better. They will need time to do so. However, we believe that there should be a common standard in the industry that everyone should abide to. In the longer term, we hope that such a code of conduct will help contribute toward building confidence in the market place and maintaining Hong Kong's position as an international financial centre.

This is not the first Code of Conduct that the Commission has released. The Fund Manager Code of Conduct was published in 1997. That has, we believe, been found to be useful by the fund management industry. We hope that the corporate finance practitioners will likewise find this Code useful.

We have said in the consultation paper that the Code does not replace any existing codes, rules or regulations, but supplements them in relation to financial advisers. Under the current framework, the Code will operate in conjunction with all the relevant securities laws, the Takeovers Code, the Share Repurchase Code, and of course, the Stock Exchange's Listing Rules (both for the Main Board and GEM).

The proposed Code is targeted at licensed or exempt persons (corporations or individuals) who are engaged in "advising on corporate finance". We have adopted the same definition as in the Securities and Futures Bill which was published as the White Bill in April this year. This definition is in fact a rather long one but basically, it covers giving advice concerning:

This covers a wide range of activities, which are currently being carried out by registered or exempt investment advisers (or securities dealers as the case may be). In the definition, we have carved out the advice given by a corporation to its group companies; and advice given by solicitors and accountants again wholly incidental to their practices.

Rather than taking you through the entire Code, I would like to use the limited time available to highlight some of the key proposals.

Conduct of Business

On Conduct of Business, the proposed Code requires that a financial adviser should be fit and proper to conduct its business. This is in line with our licensing requirement which demands that all registered persons should be fit and proper.

The Commission released policy statements on Fit and Proper Criteria, and Code of Conduct for persons registered with the Commission in 1990 and 1994. Financial advisers are expected to comply with the guidelines set out in these statements.

In the proposed Code, we are asking that a financial adviser should properly manage its business - by instituting proper control over its financial and operational affairs. One of the important requirements under this head is to require a financial adviser to maintain an effective compliance function which should be headed by a Designated Compliance Officer.

In our discussions with investment banks during the drafting of the Code, we found that their response was generally that corporate finance activities do already come under the supervision of a designated compliance officer. We believe that an internal compliance function should be a pre-requisite of all corporate finance businesses. You may wish to note that there is already a similar requirement in the Commission's Code of Conduct for Fund Managers.

Competence

We expect that all corporate finance advisers should possess the necessary degree of competence. That sounds like common sense. It is.

It is already an adopted practice of the Corporate Finance Division of the Commission, and indeed of the Stock Exchange, that registered directors or representatives of a corporate finance adviser, who have not been actively involved in corporate finance business, are required to demonstrate their resources, competence and suitability before embarking on a transaction. We generally require such practitioners to prepare a list of their qualifications and previous experience in handling relevant corporate finance work. Relevant corporate finance experience is not only limited to experience gained in the local market. We also take account of experience from overseas market where the standard of regulation and style of practice is commensurate with that in Hong Kong.

Conflicts of interest

The proposed Code states that a financial adviser should avoid engaging in work that may give rise to any concern regarding conflicts of interest. A registered person should take all reasonable efforts to avoid situations that may give rise to a conflict of interest, and should not unfairly place its interests above those of its clients. Where the conflict of interest concern cannot be removed, it should take the most prudent action in declining to act.

Where the circumstances require that a financial adviser be independent, for example, when acting as an independent financial adviser to the independent board or shareholders, it should observe the respective requirements of the Takeovers Code or the Listing Rules. We normally seek confirmation of a corporate finance adviser's independence by way of a letter and require disclosure of any material relationship between the adviser and the parties to the transaction which existed in the two year period leading to the engagement. The requirement for the latter is to ensure that any prior relationship does not adversely affect the independence of the adviser.

We expect corporate finance advisers to be in a position to exercise proper and prudent judgement as to whether the situation of the case would give rise to any conflict of interest concerns. Where there are any doubts, we would recommend advisers to consult us on an informal basis. Our experience indicates that early consultation will usually reduce chances of delay in the later stage of a transaction.

The proposed Code merely codifies the practices of the market and of the regulators in dealing with conflict of interest issues.

Standard of work

We expect that corporate finance advisers should aim to deliver a high standard of work at all times. We expect advisers to act with integrity, due skill, care and diligence in the work that they are engaged in.

In the proposed Code, we have attempted to set out the standard of work expected of financial advisers in two specific areas:

These are based on current market practices and because of their importance, they have been codified here. We believe that these two areas of work should require special attention of the advisers. However, that does not mean that advisers can slacken off in other areas.

In our administration of the requirements of the Takeovers Code, we place great importance on the verification work in obtaining confirmation of financial resources of offeror. The financial adviser should observe the highest standard and duty of care in carrying out this task. We have asked that the confirmation should take the form of obtaining an irrevocable commitment from a party upon whom reliance can be placed, such as a bank, that the requisite funds will be made available for the purpose of the offer. We have also cautioned that financial adviser should exercise exceptional care in accepting a lower standard than the Code requirement.

We have also included in the proposed Code the responsibilities of a sponsor in an initial public offering. We have not attempted to extend the sponsor's role, but merely codify their responsibilities in the Code. Particular attention was focussed on this in the light of the tom.com IPO.

Financial advisers play a very important role in a transaction in analysing the information for shareholders for voting purpose and ensuring full and fair disclosure of all relevant facts. We have included in the proposed Code that a financial adviser in its capacity as adviser to the issuer or as independent financial adviser should ensure that no relevant information is withheld or omitted from documents to shareholders. Whilst we acknowledge that directors of the issuer are ultimately responsible for the contents of documents, financial advisers should play a role to ensure that there is in fact full and fair disclosure. This is crucial in ensuring that investors are able to make proper and informed decisions.

Further, the Code requires that, where reliance on the work of experts or other professional is planned, a corporate finance adviser should:

The Code also requires that a financial adviser should only rely on the opinion given by independent experts or other professionals after due and careful consideration, and after making appropriate enquiries.

Some market practitioners have commented that this is very onerous on them. They cited that they are not in a position to assess the competence or integrity of a firm of experts, and do not have the expert knowledge to opine on whether any opinion from certain specialized experts such as property valuers, actuaries etc is reasonable.

We believe that financial advisers should not "hide" behind other experts in a transaction, as they are the party that is providing the overall advice to the board or the minority shareholders. Financial advisers should always be on guard to query and assess opinions or valuations provided by experts in this day and age, when the innovations applied to the valuation of internet or hi-tech ventures test new limits with almost every new transaction. In such cases, we expect that the financial advisers should not just accept valuations at face value, but should review the bases and principles adopted by the experts so as to ensure that they are reasonable. We appreciate that not all financial advisers are equipped to carry out these very complex transactions, involving opinions from many professionals. We expect that in such circumstances the financial adviser concerned should self-assess to see if it has the necessary skills to carry out the engagement before undertaking the task.

We also believe that, in the longer term, the knowledge and skills of financial advisers should be raised through continuous professional training, which is a requirement in the proposed Code.

Conclusion

We hope to use the proposed Code to upggrade the standard of practice in our market. It will be a benchmark, along with other SFC codes and guidelines, against which a financial adviser's fitness and properness will be measured. Naturally, breaches of the Code requirements will reflect adversely on an adviser's fitness and properness.

The proposed Code, no doubt, will demand more efforts on the part of some financial advisers to upgrade their standard of work and to be more accountable to their client and to the shareholders to whom they provide their advice.

I have not touched on every aspects of the Code in this talk, but rather, within the limited time, tried to highlight certain key features for more thought. The Commission welcomes your comments. Please get them in by 30^th June. We hope that with this Code we could help build a common standard that is achievable.

Some of you may have points that you wish to make or questions that you wish to ask. In the light of the consultation exercise, I think it best not to answer questions on specific provisions, but I would be happy to hear views on the general principles and aims of the Code.

First, however, let me hand you over to Estella, who will talk about the proposed new Chapter 3A of the Main Board Listing Rules.

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