1 Regulation of Sponsors and Independent Financial Advisers Joint HKEx / SFC Press Conference 19 October 2004.

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Regulation of Sponsors and

Independent Financial Advisers

Joint HKEx / SFC Press Conference

19 October 2004

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Today, we are pleased to announce:

• consultation conclusions

• rule amendments (commence 1 Jan 2005 – subject to transitional arrangements)

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Agenda:

• Introduction

process

key objectives

key aspects

• Ashley Alder, SFC

• Detail:

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• Conclusions informed by extensive market consultation

THE PROCESS:

• In conjunction with May 2003 consultation paper

• Conclusions and rule amendments approved by SEHK and Commission

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KEY OBJECTIVES:

• Sponsors play an important role in HK. Variance of expectations

• To address expectation gap:

clear framework for role of sponsors, compliance advisers and IFAs

make it abundantly clear what is expected of them and issuers that appoint them

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KEY ASPECTS:

Conclusions and amended rules:

• WILL clearly set out:

when sponsors, CAs and IFAs must be appointed

• WILL codify current expectations

when sponsors, CAs and IFAs must be independent and what is independence

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KEY ASPECTS: (cont’d)

role of sponsors, CAs and IFAs including due diligence

role of issuers in assisting sponsors and CAs

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• WILL NOT expect sponsors to verify expert reports/ be experts

• WILL allow engaging of 3rd party professionals (but sponsor must ensure work not substandard)

KEY ASPECTS: (cont’d)

• WILL make it clear that sponsors, CAs and IFAs can only do what is reasonable and appropriate

• WILL NOT shift obligations from directors/experts to sponsors

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Ashley Alder

Executive DirectorCorporate Finance Division

Securities and Futures Commission

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Patrick Meaney

Vice PresidentListing Enforcement

Listing DivisionHong Kong Exchanges and Clearing Limited

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THE RULE CHANGES:

• include new rules re IFAs

• include new chapter re sponsors and CAs

To implement policy, rules amended to:

• include new PN re due diligence by sponsors

• address incidental amendments

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THE RULE CHANGES: (cont’d)

Rule amendments will cover:

(at least) one sponsor to assist new applicant with IPO

• appointment

if > one sponsor, all responsible

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THE RULE CHANGES: (cont’d)

SEHK may direct appointment of a CA at other time

listed issuers must appoint CA from initial listing to:

- MB: 1+ year

- GEM: 2+ years

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THE RULE CHANGES: (cont’d)

sponsors, CAs and IFAs must perform duties impartially

• impartiality and independence

at least one sponsor and all IFAs must be independent

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THE RULE CHANGES: (cont’d)

listing documents must disclose whether sponsor is independent and if not, how

independence tests = bright-line tests

sponsors and IFAs must give SEHK statement re independence and advise if change

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THE RULE CHANGES: (cont’d)

firms must undertake to SEHK to e.g. comply with rules and cooperate in investigation

• role and responsibilities: sponsors

sponsors must:

- comply with undertaking

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THE RULE CHANGES: (cont’d)

- be closely involved in new applicant’s preparation of listing document

- conduct reasonable due diligence and declare to SEHK re same

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THE RULE CHANGES: (cont’d)

have regard to new PN re what is reasonable due diligence

new PN:

- applies only to sponsor firms; not CAs/IFAs/individuals

- not checklist of minimum steps

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THE RULE CHANGES: (cont’d)

- is SEHK’s expectations of typical steps

- is subject to reasonableness

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THE RULE CHANGES: (cont’d)

declaration will cover due diligence re:

- director’s declaration(s)

- compliance with basic listing conditions

- sufficiency of listing document

- new applicant’s systems and controls

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THE RULE CHANGES: (cont’d)

- directors’ collective experience, qualifications and competence

- directors’ individual experience, qualifications and competence

- expert sections of listing document including whether:

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THE RULE CHANGES: (cont’d)

factual information relied on by expert is true and complete (unless

verified by expert)

all bases and assumptions = fair, reasonable and complete

expert appropriately qualified, experienced and resourced

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THE RULE CHANGES: (cont’d)

expert scope of work appropriate

expert independent

listing document fairly represents expert views

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THE RULE CHANGES: (cont’d)

firms must undertake to SEHK

• role and responsibilities: CAs

CAs need only provide advice and guidance if asked by issuer

listed issuers must consult and, if necessary, seek advice from CAs on timely basis in prescribed circumstances e.g. before publication of announcement

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THE RULE CHANGES: (cont’d)

when CA is consulted, it must e.g. ensure issuer properly guided and advised

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THE RULE CHANGES: (cont’d)

firms must undertake to SEHK

• role and responsibilities: IFAs

must take all reasonable steps to be satisfied:

- reasonable basis for making statements required

- no reason to believe any information relied on is not true/omits material fact

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• some limitations re termination and resignation of sponsors and CAs

THE RULE CHANGES: (cont’d)

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• Amended rules commence 1 Jan 2005

TRANSITION TO THE NEW RULES

• Press release sets out transitional arrangements