Regulation of Sponsors and

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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

• Ashley Alder, SFC

• Detail

• process

• key objectives

• key aspects

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THE PROCESS

• Conclusions informed by extensive market
  consultation

• 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 codify current expectations

• WILL clearly set out

• when sponsors, CAs and IFAs must be appointed

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

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• KEY ASPECTS (contd)

• role of sponsors, CAs and IFAs including due
  diligence

• role of issuers in assisting sponsors and CAs

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KEY ASPECTS (contd)

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

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

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

• WILL NOT shift obligations from directors/experts
  to sponsors

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Ashley Alder Executive Director Corporate
Finance Division Securities and Futures Commission
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Patrick Meaney Vice President Listing
Enforcement Listing Division Hong Kong Exchanges
and Clearing Limited
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• THE RULE CHANGES

To implement policy, rules amended to

• include new chapter re sponsors and CAs

• include new rules re IFAs

• include new PN re due diligence by sponsors

• address incidental amendments

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• THE RULE CHANGES (contd)
• Rule amendments will cover

• appointment

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

• if gt one sponsor, all responsible

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• THE RULE CHANGES (contd)

• listed issuers must appoint CA from initial
  listing to

- MB 1 year
- GEM 2 years

• SEHK may direct appointment of a CA at other time

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• THE RULE CHANGES (contd)

• impartiality and independence

• sponsors, CAs and IFAs must perform duties
  impartially

• at least one sponsor and all IFAs must be
  independent

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• THE RULE CHANGES (contd)

• 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 (contd)

• role and responsibilities sponsors

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

• sponsors must

- comply with undertaking
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• THE RULE CHANGES (contd)

- be closely involved in new applicants
preparation of listing document
- conduct reasonable due diligence and declare
to SEHK re same
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• THE RULE CHANGES (contd)

• 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 (contd)

- is SEHKs expectations of typical steps
- is subject to reasonableness
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• THE RULE CHANGES (contd)

• declaration will cover due diligence re

• directors declaration(s)
• compliance with basic listing conditions
• sufficiency of listing document
• new applicants systems and controls

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• THE RULE CHANGES (contd)

• 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 (contd)

• 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 (contd)

• expert scope of work appropriate

• expert independent

• listing document fairly represents expert views

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• THE RULE CHANGES (contd)

• role and responsibilities CAs

• firms must undertake to SEHK

• 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 (contd)

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

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• THE RULE CHANGES (contd)

• role and responsibilities IFAs

• firms must undertake to SEHK

• 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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• THE RULE CHANGES (contd)

• some limitations re termination and resignation
  of sponsors and CAs

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TRANSITION TO THE NEW RULES

• Amended rules commence 1 Jan 2005

• Press release sets out transitional arrangements