SFC seeks to tighten rules for broker conduct in IPOs, debt offerings

Chad Bray
·3-min read

The Securities and Futures Commission has proposed tightening conduct rules for stock and bond offerings in Hong Kong, saying efforts by some brokers to generate higher fees had inflated demand and hampered price discovery in some cases.

The proposal would clarify the roles played by intermediaries in fundraising and set conduct standards for bookbuilding, pricing, allocations and placements, the regulator said in a consultation paper released on Monday.

Syndicate membership and fee arrangements would be set at an early stage, with written agreements specifying broker roles to enhance accountability and discourage undesirable behaviour, according to the SFC’s consultation. At least one head of the syndicate also would be required to act as a sponsor on initial public offerings under the proposal.

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“Hong Kong is one of the world’s largest capital raising centres. It is therefore vital to promote high standards of behaviour amongst those who arrange offerings,” Ashley Alder, the SFC’s CEO said in a statement. “Our proposals for clear conduct guidance for intermediaries participating in securities offerings are consistent with global regulatory standards and will boost overall investor confidence in our markets.”

Ashley Alder (right), CEO of the Securities and Futures Commission, has proposed tightening broker conduct rules for stock and debt offerings. Photo: Nora Tam
Ashley Alder (right), CEO of the Securities and Futures Commission, has proposed tightening broker conduct rules for stock and debt offerings. Photo: Nora Tam

The consultation period will run until May 7.

The proposed conduct requirements come as Hong Kong has seen a vast amount of capital flow into the city targeting high-profile offerings by mainland companies.

The retail tranche of Tencent-backed Kuaishou Technology’s US$5.4 billion IPO in January was nearly 1,200 oversubscribed, making it the most sought-after offering in the city’s history by small investors. The video-sharing platform’s shares soared 161 per cent in their debut on Friday.

The proposal also came as Hong Kong Exchanges and Clearing, the operator of the Hong Kong stock exchange, is seeking to increase the profit threshold for companies listing on its main board.

The SFC said it had found examples of “undesirable intermediary conduct,” including brokers without a mandate “swarming” order books at the last minute with pledges for shares of unknown quality.

“Such behaviour could be attributable to specific competitive pressures amongst intermediaries in an environment where fee arrangements affect incentives,” the SFC said. “This state of affairs can impact the fairness and orderliness of our capital markets and may affect investor confidence and future market development.”

The regulator said its proposed standards were designed to address a number of issues identified in its review, including inflated or opaque demand; preferential treatment and rebates; and misleading “book messages”.

In one debt offering, a broker artificially inflated the order book by placing an order of US$20 million when an investor said they only wanted to subscribe for US$5 million of debt securities, according to the SFC.

In another case, the heads of a syndicate disseminated misleading “book messages”, which overstated the demand for an IPO. The SFC did not identify the specific offerings in its consultation.

“Submitting knowingly inflated orders or disseminating misleading ‘book messages’ undermines the price discovery process and can mislead investors,” the regulator said.

The SFC also said sponsor incentives and liability were often not aligned, particularly in larger IPOs, leading to concerns a sponsor may compromise its due diligence to become the head of the underwriting syndicate and earn much higher fees to compensate for sponsor costs and responsibilities.

The regulator said earlier disclosure of syndicate and memberships to the SFC would help it identify arrangements that are “substantially different from market norms” and take action when there is any suspected misconduct, but noted that those arrangements are “primarily commercial decisions”.

The regulator said the market norm is for issuers to fix 70 per cent to 75 per cent of their advisers’ fees, the rest is discretionary.

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