Regulatory framework and corporate finance advisory standards
Regulatory framework and corporate finance advisory standards
This domain tests who does what in Hong Kong corporate finance - the division of labour between the SFC, the Exchange and the Companies Registry - and the standards expected of the licensed advisers who sign off on transactions.
The regulators and their instruments
- SFC: statutory regulator under the Securities and Futures Ordinance (Cap. 571). It licenses intermediaries (Types 1, 4 and 6 are the corporate-finance-relevant activities), authorises prospectuses under Part XV SFO, polices market misconduct, and administers the Takeovers Code through the Takeovers Executive.
- SEHK/HKEX: a commercial exchange whose Listing Rules are contractual, not statutory. The Listing Committee decides listing applications, waivers and rule interpretation; the Listing Division drafts and enforces.
- Companies Registry: registers prospectuses under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) and charges under the Companies Ordinance (Cap. 622).
- Dual filing regime: every listing document filed with the Exchange is simultaneously filed with the SFC, giving the SFC statutory hooks over false or misleading disclosure.
Adviser standards
- An IPO sponsor must be a licensed corporation or registered institution; sponsors must be formally appointed at least two months before Form A1 is filed (Rule 3A.02), and where more than one sponsor is appointed the sponsor-coupling requirement applies.
- Practice Note 21 imposes a reasonable due-diligence standard: the sponsor cannot simply accept management representations or expert reports it has reason to doubt.
- An independent financial adviser under the Takeovers Code or Chapter 14A must have no shareholding, financing or advisory relationship that could compromise its opinion.
- The Code of Conduct (paragraph 10.1 on conflicts, paragraph 17 on analysts) requires Chinese walls, disclosure and, where a conflict cannot be managed, declining the mandate.
Worked example
Bank B is a Type 6 adviser asked to act as IFA on a connected acquisition, and its sister proprietary desk holds 3% of the counterparty. The holding is not a controlling stake, but it makes independence questionable: the Executive expects an IFA opinion free from any interest in the outcome. The correct answer is to decline, or - if the stake is disposed of and no other relationship exists - to disclose fully and seek the Executive's consent before accepting. Marks usually lie in identifying the conflict and applying the disclose-or-decline test, not in quantifying the stake.
Traps
- Treating the Listing Rules as legislation; they are the Exchange's rules, backed by the SFC's statutory powers.
- Confusing Type 1 (dealing in securities) with Type 6 (advising on corporate finance) when asked what licence a sponsor needs.
- Forgetting that a prospectus needs both SFC authorisation and Companies Registry registration.
- Assuming an IFA can act where an affiliate holds even a small stake, without disclosure and consent.