As outlined under the “Background” section of the Circular, the Circular is focused on advisory work of financial advisers on valuations in corporate transactions. As such, the Circular should apply to capital market transactions where there is a valuation involved.

It is our intention that the term “directors” includes, as the context requires, parties with the authority to make decisions for the company, which would include senior management as well as delegates of the directors. 

Conversely, the use of “directors” should not be taken as imposing an obligation for a specific engagement with every single member of the Board individually or at the same time as a whole Board.

If financial advisers are engaged in regulated activities, they should further consider if the scope of the mandate is sufficient to enable them to discharge their obligations and to comply with the requirements set out in the CFA Code, as appropriate. 

Where a financial adviser who is engaged in a limited or subordinated role becomes aware of potential issues in relation to valuation in a corporate transaction (e.g. no financial advisers seem to be providing an opinion on the valuation, even when such opinion ought to be reasonably expected or the directors, who had no prior experience of valuing a target company or asset, would be responsible for the valuation themselves), the financial adviser is expected to draw these issues to the attention of the directors to ensure paragraph 5.1 of the CFA Code (i.e. a Corporate Finance Adviser must act with due skill, care and diligence and observe proper standards of market conduct) is complied with.  It would be prudent for the financial adviser to maintain a record of any discussion or correspondence where such issues were drawn to the attention of the directors.

As discussed in the Circular, financial advisers should not rely solely on representations made by the directors and should conduct their own assessment and undertake reasonableness checks as appropriate.  For example, financial advisers are expected to conduct reasonableness checks on financial projections relating to the acquisition target. Where the financial projections appear overly aggressive or unrealistic, the financial adviser should raise these issues with the directors, and where appropriate, the valuer.  It would be prudent for the financial adviser to maintain a record of any discussion or correspondence where such issues were raised.

The SFC is not seeking in the Circular to impose due diligence obligations on financial advisers akin to those applicable to sponsors in an IPO context.  As such, the Circular does not refer to any code applicable to sponsors but only the CFA Code.  That said financial advisers should perform reasonableness checks and draw the directors’ attention to any forecasts or assumptions considered to be unrealistic and it would be prudent for the financial adviser to maintain a record of any such discussion or correspondence. 

Circumstances in which a financial adviser may need to cease to act should be a professional judgement made by the financial adviser based on its own evaluation of the circumstances of the transaction and the applicable regulatory requirements. Financial advisers are reminded of their obligations set out in paragraph 6.3 of the CFA Code.