Why Hong Kong regulators will stick with dual filing

Author: | Published: 23 May 2005
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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 listing.

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 modified accordingly.

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 disclosure.

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 another.