New Sponsor Regime to Herald in Higher Standards

15 Dec 2006



The SFC is pleased to report the implementation progress of the new sponsor regulatory regime, which will become effective on 1 January 2007.

Of the 267 existing Type 6 intermediaries (Note 1), 90 have made submissions indicating that they would act as sponsors under the regime. 160 have indicated that they would not act as sponsors, and a licensing condition has been imposed, restricting them from acting as sponsors from 1 January 2007. 17 intermediaries have not yet responded to the SFC regarding their intentions.

The SFC is in the final stage of assessing the submissions made by intermediaries who intend to act as sponsors.

Mrs Alexa Lam, SFC’s Executive Director of Intermediaries and Investment Products, said: “The new sponsor regime not only raises the quality of Hong Kong’s financial market, but also enhances protection to investors. The SFC has carefully assessed the submissions to ensure that only intermediaries who meet the requisite standards are allowed to conduct sponsor activities in the market.”

During the assessment of the submissions by the 90 intermediaries who wish to act as sponsors, the SFC notes that some of them do not meet the eligibility criteria prescribed in the Guidelines for Sponsors and Compliance Advisers (Sponsor Guidelines), including the requirements regarding competence and experience (Note 2).

The SFC is issuing Letters of Mindedness (LOMs) to these intermediaries, informing them of its intention to impose the licensing condition restricting them from acting as sponsors from 1 January 2007. These intermediaries may make representations as a matter of due process, and may continue to carry out sponsor/compliance adviser work until the SFC has made a final decision. Meanwhile, if they wish to accept new work, they must first carefully consider whether they would be able to provide proper service to and act in the best interest of their clients, given the possibility that they ultimately may not be able to continue to act as sponsors.

Undertaking new sponsor or compliance adviser work after the receipt of LOM may raise the issue of an intermediary’s ability to control business risk and in general, its overall fitness and properness. For fairness to their clients, intermediaries that have submitted representations on LOM are expected to disclose this fact and explain its implications to their clients. For their own protection, clients should also check with the intermediary its sponsor status before engagement.

The SFC has issued a detailed circular (attached) to Type 6 intermediaries today to assist them to understand the process.

Mrs Lam said that since April 2006, when the conclusions on the regulatory proposals were announced, the market had been made fully aware of the requirements in order to continue as sponsors.

“Intermediaries are duty bound to act in the best interest of their clients. They have been forewarned that failure to do so could lead to fit and proper concerns,” she said.

Meanwhile, those 17 intermediaries that have not indicated their intentions have been issued with LOMs regarding the licensing condition. They may also make representations.

The SFC will keep the market informed of the implementation progress.

Ends

Notes:

1. Type 6 intermediaries refer to existing licensed corporations or registered institutions licensed or registered for Type 6 regulated activity under the Securities and Futures Ordinance.

2. The Sponsor Guidelines, outlining the specific eligibility and ongoing requirements for corporate finance advisory firms wishing to act as sponsors and compliance advisers, was published as part of the Fit and Proper Guidelines on 1 September 2006. Please see SFC press releases dated 5 October and 5 September 2006.




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