Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct)
These FAQs aim to provide guidance on the application of paragraphs 17.1A and 21 of the Code of Conduct, which sets out the standards of conduct expected of a licensed or registered person engaged in bookbuilding or placing activities in equity capital market and debt capital market transactions.
Effective date and transitional arrangements
Paragraphs 17.1A and 21 of the Code of Conduct will become effective on 5 August 2022. What are the transitional arrangements?
For share offerings in connection with listing applications governed by the Main Board Listing Rules and GEM Listing Rules, paragraph 17.1A and paragraph 21 of the Code of Conduct will apply to all listing applications submitted on or after 5 August 2022 (Effective Date). This includes listing applications which lapsed or were withdrawn and are then re-filed on or after the Effective Date.
With regard to the “Sponsor Coupling” requirement1, we have agreed with the Stock Exchange of Hong Kong Limited (SEHK) to put in place the following transitional arrangementsto minimise disruption to the industry due to the termination and reappointment of sponsors:
For listing applications submitted before the Effective Date which subsequently lapse and are re-filed after the Effective Date (but within three months from the lapse), the “Sponsor Coupling” requirement will be deemed satisfied provided that the relevant independent sponsor and overall coordinator (OC) have been appointed before the Effective Date and at least two months before the re-filing (regardless of whether the appointments were made at the same time) and both appointments remain valid at the time the listing application is re-filed.
For initial listing applications submitted on or after the Effective Date, the “Sponsor Coupling” requirement is deemed satisfied provided that:
the relevant independent sponsor was appointed and the related engagement letter was submitted to SEHK before the publication of the Listing Rules amendments on 22 April 2022;
the relevant OC was appointed before the Effective Date and at least two months before the submission of the listing application (regardless of whether the appointments were made at the same time); and
both appointments remain valid at the time of submission of the listing application.
Where applicable, any subsequent re-filing should be done within three months of the lapse of the previous listing application for the “Sponsor Coupling” requirement to be deemed satisfied.
For more information, please refer to no.20 to 21 of SEHK’s FAQ No. 077-2022 on consequential changes to the Listing Rules to complement the new Code of Conduct provisions on bookbuilding and placing activities in equity capital market and debt capital market transactions and the sponsor coupling proposal published on 22 April 2022 (click here).
For debt offerings and share offerings other than those in connection with listing applications, intermediaries are required to comply with paragraph 21 of the Code of Conduct when engaging in transactions (i) announced or (ii) for which they are appointed as a capital market intermediary (CMI), on or after the Effective Date.
1 Under paragraphs 17.1A and 21.4.1(b) of the Code of Conduct.
Orders placed on an omnibus basis
How should CMIs and OCs handle information about the underlying investor clients for orders placed on an omnibus basis?
For orders placed on an omnibus basis, information about the underlying investor clients (ie, name and unique identification number) should only be used, disclosed or provided for the purposes of discharging the responsibilities of CMIs and OCs under the Code of Conduct during the bookbuilding process for a specific share or debt offering transaction.
CMIs and OCs are strictly prohibited from using, disclosing or providing information about the investor clients for any other purposes. Failure to do so may constitute a breach of the Personal Data (Privacy) Ordinance (Cap. 486) or the Code of Conduct or both, which may subject CMIs and OCs to regulatory action.
CMIs and OCs are required to put in place proper policies, procedures and controls to ensure that prior consent is obtained from investor clients, where applicable, before disclosing information about them and that the information will only be used for the purpose specified.
Under paragraph 21.3.5(b) of the Code of Conduct, what information should a CMI provide to the OC or the issuer for orders placed on an omnibus basis for individual investor clients and corporate investor clients?
CMIs should provide the names and unique identification numbers of the investor clients that are in their files, while specifying the types of the identification documents providedfor orders placed on an omnibus basis. When the investor identification-related Code of Conduct requirements2 come into effect, for investor clients that have provided information pursuant to the new requirements, a CMI should provide the investor clients’ names and unique identification numbers based on the requirements. To the extent possible, the first type of unique identification number set out in the list below should be provided. Where the investor client does not hold this type of identification document, the next type of unique identification number on the list should be provided instead:
In the case of an individual investor client: (1) HKID card number; (2) national identification document number3; (3) passport number;
In the case of a corporate investor client: (1) legal entity identifier (LEI) registration document number; (2) company incorporation number; (3) business registration number; (4) other equivalent identity document number.
Such information should be provided to the OC for the sole purpose of identifying and eliminating duplicated orders, inconsistencies and errors. The same information may also be provided to the issuer upon request and with notification that the recipient should use this information only for specified purposes.
3In the case of a client with multiple national identities, the intermediary will have the discretion to select and provide any of the client’s available national identity information.
What should an OC do if orders from the same investor are identified amongst omnibus orders from different CMIs?
Under paragraph 21.4.4(a)(i) of the Code of Conduct, an OC should properly consolidate orders in the order book by taking reasonable steps to identify and eliminate duplicate orders, inconsistencies or errors. If orders from the same investor are identified amongst omnibus orders from different CMIs, the OC should make enquiries with the CMIs which have placed orders on behalf of the investor to ascertain the sizes of the orders and identify if they are duplicates and whether they need to be revised. The CMIs should ensure that allocations to the orders placed through them are in accordance with the CMIs’ allocation policies. The OC should ensure that the total allocation to the investor is consistent with the transaction’s overall allocation recommendation.
Delegation to overseas affiliates or group companies
Is a CMI responsible for compliance with paragraph 21 of the Code of Conduct of the bookbuilding and placing activities delegated to its overseas affiliates or group companies?
Yes. Where the performance of any bookbuilding or placing activity is delegated to an overseas affiliate or a group company of a CMI (eg, where orders from investor clients in an overseas market are collated by the CMI’s overseas affiliate or group company), the CMI will remain responsible for complying with paragraph 21 of the Code of Conduct in the performance of such bookbuilding and placing activities.
Rebates received by execution-only non-syndicate CMI
An execution-only non-syndicate CMI is only responsible for relaying investor clients’ orders to CMIs for inclusion in the order book and therefore, is required to comply only with paragraphs 21.3.3, 21.3.5 and 21.3.7. Footnote 7 of paragraph 21 of the Code of Conduct also states that given the non-syndicate CMI is not appointed by a syndicate CMI, it does not receive any remuneration directly or indirectly from the issuer client. However, if an execution-only non-syndicate CMI receives a rebate from another CMI for its placing efforts in a transaction, will it be required to comply with the other provisions of paragraph 21 of the Code of Conduct?
In the absence of any appointment to conduct bookbuilding or placing activities (including actively marketing an offering to its clients) by the issuer or a CMI, an execution-only non-syndicate CMI may receive a rebate from another CMI without being required to comply with the provisions of paragraph 21 of the Code of Conduct other than paragraphs 21.3.3, 21.3.5 and 21.3.7.
Record keeping requirements
What details should be maintained by CMIs for documenting the rationale for the allocation of share or debt securities?
CMIs should maintain sufficient records documenting the rationale underlying allocations made to investor clients. For example, investors may be grouped into different categories based on their size, the nature of their businesses (such as hedge funds or high-net-worth individuals), their understanding of the issuer client’s business and industry or their level of engagement with the issuer or CMIs during the offering process. OCs are expected to maintain sufficient documentation explaining the basis of the allocation to each category as well as any deviations within a single category.
OCs cannot discharge their record keeping obligations by simply providing the allocation policy to the issuer client without documenting the justifications for the allocation recommendation or simply obtaining the issuer’s sign-off on the final allocation.
Initial public offering (IPO)
Is “Sponsor Coupling” required if an IPO does not involve an offering or a placing tranche?
No. Pursuant to paragraph 21.1.1 of the Code of Conduct, paragraph 21 is applicable to a licensed or registered person which engages in providing services to issuers, investors or both in respect of an offering of shares or debt securities which involves bookbuilding or placing activities or advising, guiding and assisting the issuers with these activities. In situations where there are no bookbuilding or placing activities, “Sponsor Coupling” is not required. It should also be noted that the “Sponsor Coupling” requirement only applies to a placing of shares in connection with a new listing on the Main Board.
May a CMI be regarded as passing on a rebate provided by the issuer client to an investor client in breach of paragraph 21.3.7(a)(i) of the Code of Conduct if the sub-underwriter it appointed receives shares as a placee in the IPO (rather than for the purpose of distributing the shares to its investor clients in the same IPO) whilst at the same time receiving a sub-underwriting fee from the CMI?
In such circumstances, the sub-underwriter is effectively paid a fee indirectly by the issuer. As the sub-underwriter has taken up the shares as a placee rather than for the purpose of distributing shares to its investor clients, it is an investor client for the purpose of paragraph 21.3.7(a)(i), which prohibits a CMI from enabling any of its investor clients to pay, for each of the shares allocated, less than the total consideration as disclosed in the listing document. As a result, the CMI should not pay any rebate provided by the issuer to the sub-underwriter, regardless of how the rebate is structured or named (including any indirect payment of sub-underwriting fees by the issuer).
Is it permissible for a CMI to accept from the issuer of an IPO additional fees for its selling efforts on top of the fee arrangements disclosed in the listing document?
A:No, it is not permissible unless the nature and amount of such fees have been disclosed in the relevant listing document or otherwise to the public ahead of the listing. In addition, intermediaries are reminded that, under paragraph 21.4.8 of the Code of Conduct, OCs should notify the SFC (and SEHK) if there are any material changes to the information previously provided to the regulators about the total fees payable or paid to all syndicate CMIs participating in the offering. Under paragraph 21.4.2(b)(ii) of the Code of Conduct, an OC should also advise and guide the issuer client and its directors as to their responsibilities under the SEHK Requirements which apply to placing activities. Such responsibilities include the disclosure of material changes in the information disclosed in a listing document, including fee arrangements with CMIs.
Is a non-syndicate CMI required to comply with the GEM Placing Guideline4 if it is an “execution-only non-syndicate CMI”, ie, it was not appointed by the issuer or a syndicate CMI and its only responsibility in the IPO is to relay investor clients’ orders to another CMI for inclusion in the order book?
4Guidelines to capital market intermediaries involved in placing activities for GEM stocks.
Execution-only non-syndicate CMIs are only required to comply with the requirements governing:
Management supervision, ie, paragraph 8(a) of the GEM Placing Guideline;
Assessment of investor clients, ie, paragraphs 8(c) and 8(d)of the GEM Placing Guideline;
Order book, ie, paragraph 8(e) of the GEM Placing Guideline;
Offering of preferential treatments to investor clients, ie, paragraph 8(b)(iv) of the GEM Placing Guideline; and
Record keeping, ie, paragraph 8(f) of the GEM Placing Guideline.
Debt Capital Market
In global or Asia-Pacific debt offerings with multiple tranches or with syndicates comprising members in Hong Kong and overseas jurisdictions, the syndicate members in Hong Kong may have different degrees of control or involvement in the bookbuilding and placing activities. How should Hong Kong OCs and CMIs comply with paragraph 21 of the Code of Conduct?
Any Hong Kong syndicate members who are not exercising control over the whole order book for a global or Asia-Pacific debt offering, regardless of whether they have control over part of the offering, are deemed Hong Kong non-OC syndicate CMIs, and not OCs, for the purposes of paragraph 21 of the Code of Conduct.
As Hong Kong non-OC syndicate CMIs, they have to observe all the requirements in paragraph 21.3 of the Code of Conduct and would be deemed as compliant with the relevant sub-paragraphs of paragraph 21 of the Code of Conduct provided that the following expectations set out below are observed:
A13: expectation for appointment of non-OC syndicate CMIs;
A14: expectation for assessment of investor clients;
A15: expectation for order book and orders placed on an omnibus basis; and
A16: expectation for book update.
What if an issuer client refuses to appoint Hong Kong non-OC syndicate CMIs under a written agreement?
If an issuer client refuses to formally appoint Hong Kong non-OC syndicate CMIs under a written agreement before they conduct bookbuilding and placing activities in a debt offering, Hong Kong non-OC syndicate CMIs should inform the issuer client of their obligations under paragraph 21 of the Code of Conduct and request the issuer client to formally appoint them under written agreements to specify their roles and responsibilities, fee arrangements and fee payment schedule. If the issuer client refuses to do so, proper documentation should be maintained to demonstrate that reasonable steps have been taken.
How could Hong Kong non-OC syndicate CMIs assess whether their investor clients have any association with the issuer client in the absence of relevant information provided by other syndicate members or issuers in overseas jurisdictions?
Hong Kong non-OC syndicate CMIs in a syndicate may not be able to directly identify whether their investor clients have any associations with the issuer client if relevant information is not provided by syndicate members in overseas jurisdictions or an overseas issuer client. Nonetheless, they are expected to take reasonable steps to assess relationships based on available information obtained through, for example, (i) an assessment of the issuer client and debt offering; (ii) the public domain; and (iii) representations (including deemed representations) provided by investor clients.
Moreover, if Hong Kong non-OC syndicate CMIs identify any investor clients which have associations with the issuer client, they should provide sufficient information to enable overseas syndicate members with substantial control of the global or Asia-Pacific offering to assess whether orders placed by these investor clients may negatively affect the price discovery process. Proper documentation should be made to demonstrate that reasonable steps have been taken.
What if syndicate members in other jurisdictions do not disclose the identities of their investor clients, including the information about the underlying investor clients, when orders are placed on an omnibus basis?
If information about the underlying investor clients is not required by overseas syndicate members for orders placed on an omnibus basis, Hong Kong non-OC syndicate CMIs are not required to obtain such information from their investor clients.
Otherwise, Hong Kong non-OC syndicate CMIs should duly provide information about the underlying investor clients to overseas syndicate members, and they should take reasonable steps to ensure that such information will only be used for placing orders in the debt offering.
Nonetheless, in the scenario whereby the debt offering is entirely and solely within the control of Hong Kong OCs, Hong Kong OCs and CMIs should not accept omnibus orders if the information about underlying investor clients is not provided.
How can Hong Kong non-OC syndicate CMIs discharge their obligations to disclose information to the OC, non-syndicate CMIs and targeted investors in a debt offering where the syndicate comprises members from Hong Kong and overseas jurisdictions?
In general, Hong Kong non-OC syndicate CMIs should follow proper prevailing market practice for information disclosure in debt offerings. Where applicable, Hong Kong non-OC syndicate CMIs are expected to make reasonable efforts to request and update the status of the order book and other relevant information from overseas syndicates and disclose it to Hong Kong CMIs and targeted investors. If such information is not received from overseas syndicate members, proper documentation should be maintained to demonstrate that reasonable steps have been taken to obtain the information.
Are Hong Kong syndicates which are responsible only for advising the issuer on general strategic matters without advising on or engaging in bookbuilding and placing activities considered as OCs or CMIs under paragraph 21 of the Code of Conduct?
No. Paragraph 21 of the Code of Conduct only covers intermediaries which conduct bookbuilding or placing activities in Hong Kong.
If there is substantial demand for a debt offering from the proprietary orders of OCs and their group companies, can OCs recommend that their proprietary orders and those of their group companies have allocation priority over investor clients’ orders?
As stipulated in paragraph 21.3.10(b)(i) of the Code of Conduct, to properly manage potential or actual conflicts of interest and associated conduct risks when Hong Kong OCs have a proprietary interest in debt offerings, priority should always be given to satisfying investor clients’ orders over the proprietary orders of the OCs and their group companies. As such, Hong Kong OCs should not make allocation recommendations to the issuer which give their own proprietary orders and those of their group companies priority over investor clients’ orders.
However, allocation to proprietary orders could be prioritised over investor clients’ orders based on the issuer client’s allocation preference, provided that the issuer client has made specific instructions to this effect and its preference is duly documented and recorded.
What is the SFC’s expectation for the timing of the disclosure totargeted investors of rebates made to CMIs?
Hong Kong OCs and CMIs should make the disclosure to targeted investors of rebates made to CMIs no later than the time of the dissemination of the deal “launch message” and upon becoming aware of the information from overseas syndicate members.
Would Hong Kong OCs and CMIs who are not responsible for settling the payment of rebates to CMIs be required to maintain books and records of payment details?
As stipulated in paragraph 21.3.9(f) of the Code of Conduct, CMIs should document rebates offered by the issuer client and the payment details. As such, each of the Hong Kong OCs and CMIs (including non-syndicate CMIs, eg, private banks), regardless of whether it is responsible for settlement, is expected to maintain a proper record of how much rebate it has received, if applicable.
How do Hong Kong OCs and CMIs ensure any risk management transactions they intend to carry out will not affect the pricing of the debt offering?
If Hong Kong OCs or CMIs intend to carry out risk management transactions, they should take reasonable steps to disclose them to the issuer client along with their potential price effect on the debt offering.
Can a CMI receive any form of economic incentive directly or indirectly from the issuer client and pass it on to its investor clients, with the result that different investor clients pay different prices for the same debt securities?
A:As stipulated in paragraph 21.3.7(a)(ii) of the Code of Conduct, a CMI should not enter into any arrangements which may result in investor clients paying different prices for the debt securities allocated.
Last update: 6 May 2022