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Press release LCQ6: Regulating the listing of Mainland enterprises in Hong Kong (26.10.2005) Wednesday, October 26, 2005 Following is a question by the Hon Wong Ting-kwong and a written reply by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, in the Legislative Council today (October 26): Question: It has been reported that although the number of Mainland enterprises listed in Hong Kong is growing, their main businesses are carried out in the Mainland, and their management and the largest portion of their assets are located outside Hong Kong. Furthermore, since China is not yet a signatory to the Multilateral Memorandum of Understanding of the International Organization of Securities Commission, the local monitoring authorities have difficulties in finding evidence when such companies are suspected of malpractices. Hence the regulatory work of the Securities and Futures Commission and the Stock Exchange of Hong Kong are adversely affected. Even if the local monitoring authorities have obtained relevant evidence, law enforcement officers in the Mainland are often reluctant to come to Hong Kong to give evidence. Moreover, there is no extradition law between the Mainland and Hong Kong to provide for the extradition of suspects to stand trials in Hong Kong. In this connection, will the Government inform this Council: (a) how the authorities address such problems as finding evidence, securing witnesses to come to Hong Kong to give evidence and extraditing suspects in the process of combating the malpractices of the above companies in order to safeguard the interests of Hong Kong investors and to maintain Hong Kong's reputation as an international financial centre; and (b) given that the local monitoring authorities have proposed to strengthen the 1 regulation on sponsors by requiring them to take up the same responsibilities as the management of listed companies in relation to the contents of the prospectus so as to reduce the risks to Hong Kong shares caused by the listing of poorly managed Mainland enterprises, whether the authorities have assessed the feasibility of the proposal and if it will be supported by the industry; if they have, of the assessment results? Reply: Madam President, (a) The regulatory structure of the securities and futures industry is enshrined in the Securities and Futures Ordinance (SFO) (Cap. 571). Under this regulatory structure, the Securities and Futures Commission (SFC) is an independent statutory regulator responsible for, inter alia, maintaining and promoting the orderliness of the securities and futures industry, providing protection for members of the investing public and for minimizing crime and misconduct in the industry. To enable SFC to discharge its statutory duties effectively, it has been vested with a wide range of investigative powers such as obtaining documents and explanations from listed companies and parties closely connected with them, and disciplinary powers in respect of its licensees, including sponsors. SFC's reply to part (a) of Member's question is appended below "SFC has maintained an excellent working relationship with the China Securities Regulatory Commission (CSRC), who has been rendering assistance to SFC to the extent that it can. SFC has entered into a Memorandum of Understanding with CSRC, which provides for exchange of non-public information. "SFC has to rely on voluntary co-operation from witnesses, suspects, and companies in the Mainland. CSRC has assisted SFC in conducting interviews in the Mainland. SFC will continue to discuss with CSRC to further strengthen co-operation. However, where local government agencies are involved, co-operation from CSRC alone is not enough. "On the domestic front, SFC maintains regular communication and good cooperation with local enforcement agencies such as the Police and the Independent 2 Commission Against Corruption, and such cooperation facilitates information sharing among the authorities and co-ordinated investigations on corporate crimes including cross-boundary cases. SFC will also continue to work closely with the Hong Kong Exchanges and Clearing Limited, the frontline regulator, to strengthen listing regulation and raise the standards of intermediaries like sponsors." (b) Sponsors are regulated by SFC under the licensing regime enshrined in SFO. Under the SFO, sponsors are required to obtain a licence to carry out Type 6 regulated activity, i.e. advising on corporate finance. The regulatory regime enshrined in SFO empowers SFC to set standards, investigate into misconduct and impose disciplinary sanctions on sponsors. SFC's reply to part (b) of Member's question is appended below "Sponsors play an important role in assessing a company's suitability for listing and bringing such company to market. Under the Listing Rules promulgated by the Stock Exchange of Hong Kong, a sponsor must be closely involved in the preparation of the prospectus and conduct reasonable due diligence inquiries to satisfy itself as to the disclosures in the document. In view of the critical assessment required to be done by sponsors on the accuracy and completeness of the information given by the company and its directors, and their significant economic interest in the success of an offer, there is justification for imposing liability on sponsors for untrue statements/material omissions in a prospectus in the same manner as directors of the company are so liable. "In line with those jurisdictions which specifically impose liability on the underwriters of an offering (including Australia, Singapore and the US), a due diligence standard is proposed to be built into the existing statutory framework in order for defendants to discharge the "reasonable belief" defence in legal proceedings for untrue prospectus disclosures/material omissions. "The proposal for extending civil and criminal liability for misstatements in prospectuses to sponsors is one of the subjects discussed in the Consultation Paper on Possible Reforms to the Prospectus Regime. The consultation will end on 30 November 2005. As no formal submissions on the above proposal have been received to date, we are not currently in a position to assess the level of support by the industry." 3