Hong Kong Proposes Tightening Rules on Stock, Bond Sales


Hong Kong’s market regulator proposed to tighten rules for brokerages handling stock and bond sales to clamp down on inflated orders and the chase after higher fees in the Asian financial hub.

In a consultation for feedback from the financial industry, the Securities and Futures Commission, called on fixing syndicate memberships and fees at an earlier stage, as well as limiting a growth in discretionary fees over fixed payments. It proposed that at least one of the lead underwriters in an initial public offering should also act as a sponsor and be held legally responsible for due diligence to align costs and incentives, according to a report released on Monday.

The move comes amid a boom in deals in the city, stoked by an inflow of mainland Chinese cash and high-profile company listings. The fundraising frenzy has attracted more than a million retail investors on some deals, including those of Yidu Tech Inc. and Kuaishou Technology and the withdrawn Ant Group Co. listing. One third of the 144 listings in Hong Kong last year dropped on their first trading day, data compiled by Bloomberg show.

The regulator has noticed “inflated or opaque demand” in some offerings, as well as preferential treatment, rebates and misleading “book messages,” it said. It proposed to codify good practices such as disclosures of discounts and conflicts of interest.

“The general market perception is that more issuers were adopting fluid incentive structures (eg, the late determination of fee arrangements) which incentivize sell-side firms to compete more aggressively to join a syndicate, often at a late stage in an offering,” the SFC said.

In one debt offering, a broker placed an order for HK$20 million on behalf of a client who had only expressed interest in buying HK$5 million of securities, the SFC found in a review. “Submitting knowingly inflated orders or disseminating misleading book messages undermines the price discovery process and can mislead investors,” it said.

The proposal will also force banks to report their underwriting fee structures earlier to the SFC with an advised split of 75% fixed and 25% discretionary. The banks can alter the ratio if needed and report accordingly.

“Having a fee ratio guidance will inevitably limit flexibility,” said Leon Xu, managing director at Huatai International. “It would be better to raise to one third. All in all, the principle of the base fee trumping the discretionary fee makes sense.”

The rules would create new underwriting categories, including naming an overall coordinator and capital market intermediaries. The OC should see to it that the pricing and allocation recommendations to the issuer fully take into account the proposed code, while the CMI needs to ensure credible price discovery and a transparent and actual order book.

This will avoid the unclear seniority and responsibilities under the various roles such as “joint global coordinators,” “joint representatives” and “billing and delivery banks,” the regulator said.

The new rule would cover IPOs, other share offerings, real estate investment trusts, placings of listed shares to third party investors followed by a top up subscription, and all types of debt offerings.

Market participants have until May 7 to respond to the consultation.

©2021 Bloomberg L.P.

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