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Proposed Statutory Codification of Certain Requirements to Disclose Price Sensitive Information by Listed Corporations
June 2010
Brian HoExecutive Director, Corporate Finance
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Objectives
Enhance continuous disclosure discipline among listed corporations
Improve market transparency and quality
Sustain HK’s position as an international financial centre and a premier capital formation centre
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Price Sensitive Information (PSI)
“Inside information” - borrowed from the concept of “relevant information” in the insider dealing regime (used since 1990)
Same set of information which is prohibited from being used for insider dealing and which is required to be disclosed
Same as the approach adopted by UK and other EU countries
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Disclosure Requirements
Listed corporation must disclose to the public as soon as practicable any “inside information” that has come to its knowledge
Directors and officers involved in the management of the listed corporation must take all reasonable measures from time to time to ensure compliance
Listed corporations not complying with the disclosure requirements would be in breach of the law
Individual directors and officers liable if
– The listed corporation has breached the disclosure requirements and
– The breach is a result of any intentional, reckless or negligent act on the part of any individual director or officer
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Safe Harbours
(A) Information the disclosure of which would contravene other Hong Kong laws (excluding contractual obligations) e.g. investigation by ICAC
(B) Impending negotiation or incomplete proposal the disclosure of which would compromise the conclusion of such negotiations e.g. takeover and merger transaction
(C) Trade secret e.g. new products, patents, inventions, manufacturing processes or customer lists
(D) Provision of liquidity support to a listed bank by the Government’s Exchange Fund or a central bank
(E) Waivers granted by Securities and Futures Commission (SFC) on disclosure which contravene overseas legislation
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Safe Harbours
Propose to empower SFC to make rules under Securities and Futures Ordinance (SFO) to prescribe further safe harbours
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Rumours
Corporations are not obliged to respond to mere rumours or speculation
If rumours or speculation about PSI, this indicates matters might have leaked
If leakage occurs, immediate disclosure is necessary
SEHK continues to administer LR 13.10 and monitor price movements and require negative announcements
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Guidelines
SFC will promulgate guidelines on what may constitute inside information and when would safe harbours be applicable, to facilitate compliance
Listed corporations may consult SFC on how to apply the disclosure provisions
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Guidelines: Inside Information
Inside Information has three key elements
The information about the particular corporation must be specific
The information must not be generally known to that segment of the market which deals or would likely deal in the corporation’s securities
The information would, if so known, be likely to have a material effect on the price of the corporation’s securities
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Guidelines: Inside Information
Inside information must be specific
Information can be identified, defined and unequivocally expressed
Information need not be precise as to particulars
Information about a transaction under contemplation or negotiation can be specific
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Guidelines: Inside Information
Inside information is not generally known
Information not known to persons who are accustomed or would be likely to deal in the securities of that corporation
Investor group may comprise sophisticated professionals as well as small retail investors
Readily observable matters (e.g. changes in commodity prices, foreign exchange rates and interest rates) would be regarded as information generally known
Rumours, speculation or expectation ARE NOT information generally known
Press reports, analysts reports, electronic subscription database or market commentary ARE NOT information generally known
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Guidelines: Inside Information
Inside Information would be likely to materially affect the price
Likelihood that the information would cause a change in price of a sufficient degree
Need to make an assessment of what effect on the share price the information will bring about should it be known to the market at the time (a hypothetical test)
Fixed thresholds of price movements or quantitative criteria alone are not suitable measures to determine materiality
Actual movement of the share price with hindsight provides reference but not conclusive evaluation
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Guidelines: Management Accounts
Distinguish between day-to-day activities and significant matters which may change a corporation’s course
Mere knowledge of likely annual or interim results would not be specific information unless substantial profits or losses are anticipated (even precise magnitude may not be known)
Management accounts likely to constitute inside information if the difference between the results which the market predict and the results which the directors know is significant
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Guidelines: Examples of Inside Information
Non-exhaustive and purely indicative list of examples of events and circumstances which may constitute inside information
Changes in performance or the expectation of the performance Changes in financial position e.g. cashflow crisis, credit crunch Takeovers and mergers Acquisitions or disposals Share placing, rights issue, other share issues Changes in value of asset or financial instruments Petitions or winding up orders Legal disputes and proceedings Cancellation of credit lines
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Guidelines: Analysts’ Reports
Corporations must not release inside information to analysts when answering questions or reviewing analysts’ reports
Corporation may clarify or correct analysts’ report if clarification or correction is confined to public information
If corporation becomes aware of inside information which would correct a fundamental misconception in an analysts’ report, it may disclose the information whilst correcting the report simultaneously
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Guidelines: Internal Matters
Matters of supposition or with indefinite elements or consideration of matters with hypotheses or scenarios are not specific information e.g. considering a major redundancy program or a substantial price cut
Once matters become specific or definite and are not within any safe harbour, immediate disclosure is required
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Guidelines: Preparing Periodic Disclosure
When preparing periodic disclosure (e.g. annual or interim financial reports), inside information not previously known to the corporation may emerge or information in respect of a previously announced matter or financial trend may crystallize into inside information
Corporation must disclose inside information immediately and cannot defer disclosure until the issue of the relevant periodic document
Disclosure requirements of inside information run parallel with and are in addition to periodic disclosure requirements
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Civil Sanctions
(1) regulatory fine up to $8 million on the listed corporation and/or director
(2) disqualification of the director or officer from being involved in the management of a listed corporation for up to five years
(3) “cold shoulder” order on the director or officer for up to five years
(4) “cease and desist” order on the listed corporation, director or officer
(5) a recommendation order that the director or officer be disciplined by any body of which that person is a member
(6) payment of costs of the civil inquiry and/or the SFC investigation by the listed corporation, director or officer
The Market Misconduct Tribunal (MMT) may impose-
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Civil Sanctions
The MMT has experience in dealing with cases relating to “inside information” and in considering various civil orders
– Chairman is a judge and appointed by the Chief Executive
– Chairman assisted by two persons from the business sector or professional bodies
– Proceedings adopted the civil standard of proofs and conducted in inquisitorial approach
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Other Remedies
Persons suffering pecuniary loss as a result of others breaching the disclosure requirements may rely on the results of the MMT proceedings to take civil actions for compensation
To keep under review the effectiveness of the regime, and consider the need for creating new requirements and additional sanctions, in the light of local and international market experience
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Enforcement
SFC as the enforcement authority, with existing investigation power under SFO
SFC may institute proceedings before the MMT direct
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Compared with Existing Listing Rules of the Stock Exchange of Hong Kong
(1) Create a formal statutory obligation for compliance
(2) Provide a clear set of PSI disclosure requirements with obligations and safe harbours explicitly set out in the law and SFC’s guidelines to facilitate compliance
(3) Allow SFC to resort to its powers under the SFO to conduct more effective investigation
(4) Enable all alleged breaches to be heard by an independent statutory body (the MMT)
(5) Allow a streamlined process for hearings of alleged breaches
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Compared with Existing Listing Rules of the Stock Exchange of Hong Kong
(6) Enable persons suffering pecuniary loss to rely on the results of the MMT proceedings to take civil actions for compensation
(7) Impose a wide range of statutory civil sanctions
Demonstrate our commitment to enhancing market transparency and quality
Enhance HK’s position as an international financial centre
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Timetable
Consultation period: 29 March – 28 June 2010
Subject to public views, submit Securities and Futures (Amendment) Bill to Legislative Council in the 2010/11 legislative session