30-05-2019

4. Recommendations. 4.5 CG disclosures

A 4.5.1 Legal status of CG-related disclosures

Step required
Amend the listing rules and CG Code to bring specific CG- related disclosures made pursuant to it within section 384(3) of the SFO.

Recommendation level
Advocate.

Topic addressed
Disclosures made pursuant to but in breach of the listing rules and CG Code in general are only enforceable by the SEHK, however, the sanctions available to the SEHK are weak and do not include the ability to impose a fine.
Bringing a disclosure within section 384(3) creates an avenue for enforcement by the SFC in respect of false or misleading information.

Details of recommendation
1.Disclosures made pursuant to Chapters 4 (periodic financial reporting), 14 (notifiable transactions) and 14A (connected transactions) or Appendix 14 of the listing rules to be made to the SEHK and SFC under a new declarative form.
2.The form will contain declarations confirming the correctness of the disclosures (this does not require any change in any required disclosure).
3.The form to contain declarations consistent with the declarations required to be made by sponsors on an initial listing application regarding the issuer's management (paragraphs (b)(v)&(vi) of MBLR Appendix 19) and so will include a statement that reasonable efforts having been undertaken etc.
4.The form to contain the warning notice required by section 384(3)(b)(ii) SFO to bring it within the provisions of that section.

Attendant considerations
Under this approach, a relatively quick enforcement action can be taken by the SFC summarily before a magistrate, more egregious matters can be pursued under indictment.
It is important the declarations are also made by the directors, not merely the issuer, to ensure that any enforcement action taken under section 384(3) is able to be applied to the directors individually.
Some resistance may be expected from some quarters of the director community as it represents an increase in their personal liability.

Jurisdiction references
United States (Regulation S-K and Federal securities laws).
UK (Financial Conduct Authority listing rule 9.8.6 R). Singapore (Securities and Futures Act (Cap. 289) (SFA)). Mainland China Securities Regulatory Commission.

Section 3 reference
3.3.1Legal status of CG disclosures. See also:
3.7.1Impact of regulatory design;
3.7.3 Enforcement agencies.

C 4.5.2 Status of listing rule compliance and related disclosures (continuing)

Step required
Amend listing rules to require disclosure of breaches. Disclosure to be made subject to section 384(3) of the SFO.

Recommendation level
Compelling.

Topic addressed
Directors already give an undertaking to the SEHK (Appendix 5B) to use best endeavours to procure compliance with the listing rules.
Shareholders and the market have a legitimate expectation to know whether or not an issuer is complying with the listing rules.
Where the listing rules are breached, the sanctions available to the SEHK are weak and do not include the ability to impose a fine.
Bringing a disclosure within section 384(3) creates an avenue for enforcement by the SFC in respect of false or misleading information.

Details of recommendation
1.An issuer and each of its directors to be subject to (1) a continuing obligation to promptly report breaches of the listing rules and (2) an annual obligation to certify compliance with the listing rules over the year, subject to any disclosure of breaches made during the year.
>2.New declarative forms to be added to the listing rules in respect of the foregoing self-reporting and annual obligations.
3.The form to contain appropriate declarations pertaining to the compliance by the issuer with the listing rules, and the relevant director with their director's undertaking, including, e.g. reasonable belief having made reasonable enquiries etc.
4.The form to contain the warning notice required by section 384(3)(b)(ii) SFO to bring it within the provisions of that section.
5.The listing rules to be amended to require the relevant issuer or director form to be submitted upon a breach of the listing rules or director's undertaking, and annually in respect of each annual reporting period together with the issuer's annual reports.
6.To consider expanding the annual certification to include a statement that the company's procedures, systems and controls are adequate to enable the board to comply with their obligations and that the directors possess adequate experience and qualifications etc. (reflecting the certification requirement imposed at the time a listing applicant is admitted to listing).

Attendant considerations
Under this approach, a relatively quick enforcement action can be taken by the SFC summarily before a magistrate, more egregious matters can be pursued under indictment.
It is important the declarations are made by the directors, not the company, to ensure that any enforcement action taken under section 384(3) is able to be applied to the directors individually, not the company.
>It is suggested that the details of the new rules and form require directors to set out: (1) the details of the breach, (2) how it was identified and rectified, (3) the steps taken to avoid a recurrence, and (4) the estimated costs or other consequences to the company, if any.
It is suggested that consideration be given to making the initial disclosure of a breach reportable only to the SEHK/SFC. This would enable the SEHK/SFC to determine/confirm that the listing rules have been breached, and to make an appropriate decision as to what steps are warranted, such as requiring the issuer to correct the breach and/or to make an announcement, granting a waiver, or to consider imposing a sanction. The grounds on which the SEHK/SFC would exercise the foregoing should be clearly set out and be based on a premise of fostering good CG through appropriate transparency and regulatory discipline.
As this recommendation proposes an annual declaration by directors, it can be combined with the annual declaration proposed in recommendation A4.5.1 «Legal status of CG- related disclosures».
Some resistance may be expected from some quarters of the director community as it represents an increase in their personal liability.

Jurisdiction references
United States (Rules of NYSE and Nasdaq; Form S-K and Federal securities laws).
Singapore.
Mainland China.
Hong Kong (director's dealing).

Section 3 reference
3.3.2 Disclosure of listing rule compliance.
3.6.1 Information disclosures generally. See also:
3.7.1 Impact of regulatory design;
3.7.3 Enforcement agencies.

C4.5.3Facts regarding director independence

Step required
Amend the listing rules to bring INED disclosures regarding independence within section 384 SFO.

Recommendation level
Compelling.

Topic addressed
Independence is important and assessed by the SEHK based on facts provided in the «written confirmation» of the INED.
However, the sanctions available to the SEHK for INEDs who provide misleading information are weak and do not include the ability to impose a fine.

Details of recommendation
1.A new declarative form to be added to the listing rules for directors to use when stating the facts relevant to a determination of their independence.
2.The form will contain declarations confirming the correctness of the facts stated (but not any inference as to independence the SEHK may draw from those facts).
3.The form to contain the warning notice required by section 384(3)(b)(ii) SFO to bring it within the provisions of that section.
4.The form will be required to be submitted by INEDs annually together with the issuer's annual reports, i.e. by way of update that no relevant circumstances have changed.

Attendant considerations
Under this approach, a relatively quick enforcement action can be taken by the SFC summarily before a magistrate, more egregious matters can be pursued under indictment.
The SEHK's powers to sanction the director for a false disclosure remain intact.

Jurisdiction references
Hong Kong. United States. Mainland China.

Section 3 reference
3.7.9 Determination of independence.