18 June 2010
Division 2, Financial Services Branch
Financial Services and the Treasury Bureau
18/F, Tower I
18, Harcourt Road
Consultation Paper for the Proposed Statutory Codification of Certain
Requirements to Disclose Price Sensitive Information by Listed Corporations
The Hong Kong General Chamber of Commerce is pleased to offer its considered opinion on the proposed statutory codification of certain requirements to disclose price sensitive information by listed companies.
While the Chamber supports the cultivation of a continuous disclosure culture among listed corporations and, in principle, has no objection to the proposed statutory codification, there are a number of issues in relation to which we would like to provide comments, as follows.
Question 1(a)- Do you agree with the proposal to adopt the existing definition of “relevant information” from the insider dealing regime under the SFOto define PSI?
Question 1(b)– Do you agree that a listed corporation should be obliged to disclose to the public as soon as practicable any “inside information” that has come to its knowledge and that it should be regarded to have knowledge of the inside information if a director or an officer has come into possession of that information in the course or performance of his duties?
No. In relation to the second part of this question, the most important objective is to ensure that the inside information is appropriately escalated within a corporation in a timely manner, so that the corporation can make the information available to the public. This is borne out by paragraph 44 of the SFCConsultation Paper on the Draft Guidelines on Disclosure of Inside Information (issued by the SFCin March 2010) which states that “The corporation should establish and maintain appropriate and effective systems and procedures to ensure any material information which comes to the knowledge of one or more of its officers be promptly identified, assessed and escalated for the attention of the Board of directors to decide about the need for disclosure”.
Additionally, we note that the SFCdraft guidelines also recognise that external consultation with e.g. lawyers may also need to take place - see para 2). In other words the phrase 'as soon as practicable'- which the SFCsays means ‘immediately’ - in s101B(1) needs to be qualified.
A more fundamental problem is the proposal with s101B(1), which would make a Company's liability absolute unlike 'officers' who would only be liable if they had acted intentionally, recklessly or negligently (see s.101G(2)). In other words, the proposal takes no account of the critical fact that decisions whether to disclose (including the assessment of whether information is likely to be price-sensitive or not) are often marginal, subjective and involve fine judgment. (The SFCdraft guidelines themselves recognise this - see for example para 23). Absolute liability is not appropriate for matters of this kind, and decisions not to disclose which are made in good faith and on reasonable grounds should be protected from liability. (Again, the SFCguidelines recognise implicitly the need to defer to the company's judgment - see para 10).
We suggest that the best way to deal with both of these concerns - the timing concern and the need to accommodate reasonable, good faith decisions - is through the creation of an additional safe harbour, which is dealt with in our answer to Question 2(c). A listed corporation would not be required to disclose if it has followed proper internal processes to ensure that decisions whether to disclose information are made by one or more directors as soon as reasonably practicable, and such director or directors have decided in good faith and on reasonable grounds that the information is not inside information.
Question 1(c)- Do you agree with the proposal that the disclosure must be made in a manner that can provide for equal, timely and effective access by the public to the information disclosed?
Yes. However, in relation to the proposed s.101C, we have two comments:
1. It would be preferable for s.101C(1) to provide that disclosure must initially be made by means of an electronic publication system such as envisaged under s.101C(2), and thereafter, should the listed corporation so choose, by any alternative means. This would have the advantages of making such disclosures uniform across the market and providing a single source of information for ease of investors’ reference. It would also follow the practice of the UK. If this approach were taken, the SFOwould also have to provide for what action should be taken in the case that disclosure by means of an electronic publication system is not possible.
2. Should there not be an obligation for the listed corporation to make this information easily available on its website as well (as is the case in the UK)?
Question 2(a) - Do you agree to the provision of the four proposed safe harbours?
We agree with these safe harbours in themselves, subject to the following:
Question 2(b)– Do you agree that the SFCshould be empowered to grant waivers, and to attach conditions thereto?
Yes. The current proposal is that the SFCwill be empowered to grant such waivers only when the disclosure of inside information “would mean a contravention against a court order or legislation in other jurisdictions” (s.101Eand paragraph 2.12). However, it is conceivable that other situations might arise in which the obligation to disclose inside information should be waived on a one-off basis (in circumstances in which s.101F could not be relied upon). This would allow the SFCto respond to rapidly developing situations in which the requirements of s.101Bshould be waived in relation to a particular set of circumstances faced by a particular corporation - such as in the hours before the run on Northern Rock in the United Kingdom, in response to which the rule in DTR2.5.5A(R) had to be introduced.
The Chamber therefore considers that it would be beneficial to provide that the SFCmay, in addition, grant specific one-off waivers to the requirements of s.101B:
1. on the application of a listed corporation and subject to such conditions as the SFC may choose to impose (as currently provided for in s.101E); and
2. subject to the public interest test (as currently imposed under s.101F).
Question 2(c)– Do you think that the legislation should provide for additional safe harbours? If so, what are these additional safe harbours?
Yes. The Chamber considers that further consideration should be given to the appropriateness of including additional safe harbours along the lines of the two additional safe harbours in Australia and New Zealand: (1) where the information comprises matters of supposition or is insufficiently definite to warrant disclosure; and (2) where the information is generated for the internal management purposes of the entity. Both Australia and New Zealand also include a “reasonableness test” as one of the tests for disclosure, whereby information does not need to be disclosed if “[a] reasonable person would not expect the information to be disclosed”; the relevant guidance note states that “[a] reasonable person would not expect information to be disclosed if the result would be unreasonably prejudicial to the entity”.
Question 2(d)- Do you agree that the SFCshould be empowered to prescribe further safe harbours in the form of rules under the SFO?
Question 3(a)- Do you agree to extend the jurisdiction of the MMTto handle breaches of the statutory disclosure requirements?
Question 3(b)- Do you agree with the proposed range of civil remedies as set out in paragraphs 2.31, 2.35 and 2.36?
Yes. However, given the difficulty in many cases in making disclosure decisions (see answer to Question 1(b) above), and the fact that breach of a cease and desist order is a criminal offence, the power to issue such an order should only be available in cases of deliberate and persistent breach.
Question 3(c)- Do you agree to grant the SFCdirect access to the MMTto institute proceedings on breaches of the statutory disclosure requirements?
No. We believe that an incremental approach should be taken to the introduction of the new legislation, given the significance of the changes that would be introduced. The initial priority should to allow listed issuers to time to understand and gain experience of working with the new rules, so that they can make any necessary changes to their internal processes, and achieve the primary objective of compliance. We are also concerned about the resource implications for the MMTin providing for direct access, not just for the statutory disclosure requirements, but also for the existing market abuse provisions. We suggested that this issue be re-visited at a later stage in the light of experience of the new rules.
Question 4- Do you agree that the SFCshould provide informal consultation for the listed corporations with regard to the statutory disclosure requirements, initially for a 12-month period?
Yes, but listed companies will need this guidance on an ongoing basis, not just 12 months, given the multiplicity of different disclosure situations.
Question 5- Do you think the administration and enforcement arrangements proposed by the SFCand SEHKin paragraphs 3.8 – 3.9 are appropriate?
No- see below.
Do you have any comments on the respective roles of the SFCand SEHKto further enhance clarity?
Yes. The Consultation Paper states that HKEx should remain as the ‘frontline regulator’ and as the ‘point of contact at the frontline’ (para 3.5). We agree. Consistent with this approach, HKEx’s existing role of monitoring unusual or unexpected price movements and stock transactions should be preserved, and HKEx given the power to refer to the SFCcases which may merit further investigation. From the point of view of public resources, this would be a more effective and efficient system than allowing both the SFCand HKEx to perform this initial monitoring role. It would also be consistent with the incremental approach we recommend.
2. Section 101G(1) - the obligation to put in place 'proper' safeguards to ensure compliance with the 'main' disclosure obligation - is unnecessary, unduly intrusive, and should be deleted. The potential sanctions for non-compliance with the main obligation are a sufficient incentive to ensure proper safeguards are in place, and no such obligation to put in place safeguards is contained elsewhere in the SFO. Breach of the main obligation would also by definition involve breach of the secondary obligation, resulting in a 'double jeopardy' effect.
3. FSTBmight consider whether it would be appropriate to include provisions for making a “holding announcement” as under DTR2.2.9(G)(2) of the UKdisclosure regime. This would entail a brief announcement being made while the corporation gathered further detailed information in order to make a detailed announcement.
I hope you find our comments useful.
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