A year ago, on April 1 2003, Hong Kong introduced new
legislation setting out the legal framework for its securities
and futures industry - the Securities and Futures Ordinance. On
its first anniversary, the debate over its success continues.
Some parts of the new regime run smoothly, others less so. In
this special report, some of the market's leading practitioners
review the most widely debated issues.
One of the most controversial of these has been the
introduction of a dual filing regime. This followed mounting
concern about the ineffective regulation of disclosure and, in
turn, the increased risk to investors that would create a
negative impact on the city's status as an international
financial centre. The success of the regime and its future role
is now a key element in the public debate on the regulation of
Dual filing allows the Securities and Futures Commission
(SFC) to flex its statutory enforcement powers in regulating
public disclosure by listed companies and listing applicants.
Before the introduction of the SFO, Hong Kong Exchanges and
Clearing (HKEx) was primarily responsible for the task, and
relied on the sanctions (public or private censure) set out in
the contract-based Listing Rules.
The Securities and Futures (Stock Market Listing) Rules and
section 384 of the SFO bring listed company filings within the
SFC's statutory web. Section 384 makes it a criminal offence to
knowingly or recklessly file false or misleading information
with the Commission. The Rules (made under section 36 of the
SFO) close the trap by requiring listed companies to file
(within one business day of publication) any public disclosure
that they disseminate under the Listing Rules, including public
announcements, circulars and press releases.
Applicants for listing must also file a copy of the
prospectus for review by the SFC, which will comment, if
necessary, to improve the standard of disclosure. The Rules
give the SFC the power to veto an application for listing on
grounds of inadequate disclosure.
Initially, the market was concerned that dual filing would
lead to delays - and additional costs - caused by two
regulators separately vetting and commenting on listing
applications. It seemed an unnecessary burden on already
stretched resources for both the SFC and HKEx to carry out the
same task. There was also the possibility of introducing
regulatory risk by blurring their responsibilities.
Proving the doubters wrong
The SFC has regularly published statistics on dual filing
since its introduction. Up to January 15 2004, the SFC reviewed
91 applications for listing and commented on 38 of these. The
average response time was seven working days. Of the
applications that received comment, many were not then taken
forward. It appears that in only one case the SFC thought it
necessary to consider exercising its power of veto.
As the Financial Services and Treasury Bureau noted in its
recent paper, and as the statistics seem to demonstrate, dual
filing has been responsible for "strengthening the gate-keeping
mechanism" for initial public offering disclosure. (In one
report the SFC gave the extraordinary example of a sponsor
submitting a prospectus that was essentially a copy of the
prospectus of another company prepared by that sponsor).
Similarly, market practitioners agree that any early fears
that dual filing would create a negative impact on the listing
process have not materialized. On that basis at least dual
filing has been a success.
The key issue is what the future holds for dual filing. The
Bureau's paper proposes the expansion of the dual filing regime
(Model D) as one of four models to regulate listing. The SFC
would take on more statutory powers and HKEx's role would be
It is no surprise that the regulators differ as to the scope
of the Commission's responsibility under Model D. Nevertheless
the key players in the debate acknowledge that dual filing in
its current form has its limitations.
First, it is difficult to achieve a successful prosecution
under section 384 given the need to satisfy the high burden of
proof for criminal cases and to show the required mental
element of the offence. Secondly, the Rules impose no positive
disclosure obligations, but simply create a blunt mechanism of
correction (for listing applications) and sanction (for listed
companies). And thirdly, unlike the provisions in section 277
and 298 of the SFO (false and misleading disclosure), the
intention of section 384 was not to regulate listed company
The SFC, in its response to the Bureau's paper, said the
Commission only ever designed dual filing as an interim measure
pending further reform. The question for the Bureau is what
that reform should involve.
Given the consensus of both the SFC and HKEx for Model D, it
seems unlikely that the Bureau will agree with one market view
that shared regulation fails to deliver cost efficiency or a
proper basis for accountability and responsibility. Market
players should expect that this creature of expediency will
remain a feature of the Hong Kong market in one form or