Consultation Paper on the Regulation of Sponsors and Independent Financial Advisers

1. Consultation Paper on The Regulation of Sponsors and Independent Financial Advisers 30 May 2003

2. Consultation Paper on the Regulation of Sponsors and Independent Financial Advisers • Joint proposal by the Exchange and SFC to introduce measures to tighten the regulation of IPO intermediaries.

3. Core Proposals • Introduce a common regulatory regime for Sponsors and IFAs • Introduce a Code of Conduct for Sponsors and IFAs

4. Common Regulatory Regime • A list of acceptable sponsors and a list of acceptable IFAs for both Main Board and GEM

5. Common Regulatory Regime Criteria for inclusion on List of Sponsors Firms • A body corporate • Appropriately registered/licensed or deemed registered/licensed under the SFO • Minimum capital requirement • At least 4 eligible supervisors • Able to discharge its responsibilities as a sponsor • Provide contractual undertaking to comply with the relevant Listing Rules and Code applicable to sponsors • Assist the Exchange with investigations

6. Common Regulatory Regime Criteria for inclusion on the List of Sponsors (Cont’d) Supervisors • Appropriately registered/licensed • At least 4 years of relevant corporate finance experience • Played a substantive role in at least 3 significant transactions • One HK transaction • One completed within the previous 2 years • One IPO • Provide contractual undertaking to comply with the relevant Listing Rules and Code applicable to sponsors • Assist the Exchange with investigations

7. Common Regulatory Regime Criteria for inclusion on the List of IFAs Firm • Same requirements as sponsor firms, except: • At least 2 eligible supervisors • No minimum capital adequacy requirement • Provide contractual undertaking to comply with the relevant Listing Rules and Code applicable to sponsors • Assist the Exchange with investigations Supervisor • Same requirements as eligible supervisors of a sponsor firm, except: • IPO experience is not required • Provide contractual undertaking to comply with the relevant Listing Rules and Code applicable to sponsors • Assist the Exchange with investigations

8. Common Regulatory Regime List of unacceptable persons • Exchange will maintain a list unacceptable persons • SFO registered/licensed or deemed to be registered/licensed under the SFO, under the supervision of an eligible supervisor may do Sponsors and IFA work • Non compliance with the Code may render individual become unacceptable persons • Not permitted to perform sponsor or IFA work

9. Code of Conduct for Sponsors and IFAs Purpose: • Clarify the content of the obligations • Expressed in terms of principles • Extent of due diligence depends on the circumstances

10. Code of Conduct for Sponsors and IFAs Listing document: • the “non-expert sections” • the “expert sections” • Determine whether it can reasonably rely on the truth and completeness of the statements

11. Code of Conduct for Sponsors and IFAs Obligations of Sponsor: • Due diligence • Management, directors and controlling shareholders • Business of the issuer

12. Code of Conduct for Sponsors and IFAs Obligations of IFA: • to satisfy that the terms and conditions of the transaction or arrangement are fair and reasonable and no grounds to believe that any information, expert advice or opinion relied on in relations to the transaction or arrangement are not true or omit a material fact

13. Code of Conduct for Sponsors and IFAs Declaration by sponsors and lead underwriters in listing documents • Suggested wordings of declaration:- • for “non-expert sections”: after reasonable investigation they believe and have reasonable grounds to believe that the information set out in the listing document is not materially false or misleading • for “expert sections”: they have no grounds to believe and do not believe that the information set out in those section of the listing document which have been prepared and authorised by [expert], is materially false or misleading

14. Code of Conduct for Sponsors and IFAs Declaration by IFAs in their reports • Due diligence work they have performed to reach their conclusion

15. Code of Conduct for Sponsors and IFAs Impact on due diligence costs • the need to balance the desirability of maintaining the competitive position of Hong Kong with improvements which will contribute to market integrity and investor confidence

16. Next Step • Consultation period closes on 31 July 2003 • Publish results and conclusions by end of October 2003 • Publish the Rule changes by end of December 2003 • Transitional Provisions

17. Thank you