SFC released consultation conclusions on the proposed code of conduct on bookbuilding

✓ Offerings listed in Hong Kong

For ECM transactions, the Code would regulate activities conducted in connection with an offering listed in Hong Kong.

✓ Activities conducted in Hong Kong

✓ Convertible and exchangeable bonds

Excludes:

× club deals
× private placements
× pre-priced deals

In respect of DCM, any bookbuilding or placing activities conducted in Hong Kong in connection with all types of debt offerings (except for club deals, private placements and pre-priced deals) will be considered in-scope.

The SFC has clarified that convertible and exchangeable bonds would fall within the scope of DCM activities for the purposes of the Code.

Overall Coordinators (OCs) and Capital Market Intermediaries (CMIs) should be appointed:

• at an early stage
• by written agreement
• specifying roles and responsibilities and fee arrangements.

This is applicable to ECM and DCM offerings.

In the case of IPO transactions, the arrangements with OCs will have to be submitted to the SFC before the Listing Committee Hearing.

Requirement refined for non-OC CMIs in IPOs.

For IPOs: the SFC agrees not to require appointment of non-OC syndicate CMIs and the determination of their fees be reported to the SFC.

This will provide flexibility for the issuer to appoint more syndicate CMIs at a later stage, as may sometimes be the case especially in smaller scale IPO as reflected in the comments received.

CMIs should take reasonable steps to:

• obtain an accurate understanding of the issuer; and
• establish a formal governance process to review and assess the offering.

It was originally proposed that an OC should provide advice to the issuer on:

(i) syndicate membership and fee arrangements;

The SFC agrees that:

• OCs will not be required to advise on syndicate membership and fee arrangements; but
• in the case of an IPO, OCs will be required to provide guidance to issuers on market practices for the fee split ratio (currently 75% fixed and 25% discretionary).

This is in response to reservations expressed by respondents about the potential conflicts of interest that may arise.

(ii) marketing strategy; and

(iii) pricing and allocation.

Requirements to advise on (ii) and (iii) remain applicable.

The SFC does not agree with some respondents' view that this requirement may create disincentive for CMIs to secure a higher price. It maintains that requiring OCs to advise the issuers on pricing and allocation would balance the interests of different parties and promote effective price discovery.

The SFC clarifies that the issuer will still have the final say on price and allocation and OCs are only required to follow the marketing and investor-targeting strategy agreed with issuer and provide explanation where there are deviations from it.

A CMI should not offer any rebates to its investor clients or pass on any rebates provided by the issuer.

There are also specific requirements on disclosure and prevention of differential pricing.

Rebates may be offered by issuers to intermediaries but cannot be passed on to end-investors.

CMIs are not required to police private banks' rebate arrangements.

Private banks (as execution-only non-syndicate CMIs) are required to comply with the requirement not to pass on rebates to investor clients.

CMIs should take reasonable steps to identify:

• in share offerings, investors subject to restrictions; or
• in the case of debt offerings, investors with association with the issuer or a CMI or its group companies.

OCs are no longer required to provide relevant information to CMIs.

Instead, OCs are now required to advise the issuer of the information to be provided to the CMIs.

Definition of "association" in the context of debt offerings clarified.

The SFC agrees that it would be more direct and efficient for the issuer to disseminate relevant information to the CMIs for the purposes of identifying these investors.

The SFC clarifies that in the context of debt offerings, "associated" investors are defined as investors who are directors, employees or major shareholders of the issuer, CMIs or their group companies.

CMIs have the responsibility to ensure that:

• the price discovery process is credible; and
• the order book is transparent and incorporates only bona fide orders.

For orders placed on an omnibus basis, CMIs will have to disclose to OCs and the issuer information about the underlying investors.

CMIs should not place knowingly inflated orders.

X-orders are prohibited.

Concerns over client poaching recognised.

Scope of information on omnibus orders limited to client's name and identification number.

Information can only be used for order allocation (and not for client poaching).

No other exemptions granted.

Suggestions for exemptions (for example for legitimate reasons such as orders from sovereigns and central banks and illegality) are not accepted by the SFC because disclosure of investor identity is considered fundamental to ensuring transparency during the bookbuilding process.

For the same reason, the SFC does not accept suggestions that the order book should only be made transparent to issuers and maintains that OCs should disseminate material information related to the offering in a timely manner to all syndicate CMIs.

CMIs should:

• disclose actual and potential conflicts of interest which may arise when the CMI has a proprietary interest in an offering; and
• give priority to investor clients’ orders over its own proprietary orders.

On what constitutes "proprietary orders", the SFC clarifies that:

OCs and CMIs must keep robust audit trail, including, among other things:

• records of all orders and changes to the order book; and
• key communications with and information provided to issuer and other CMIs and investors.

No quantifiable definition of changes or information that have to be recorded.

The SFC does not seem to agree with some respondents' view that this requirement would be burdensome.