Hong Kong Secretary for Financial Services and the Treasury K. C. Chan announced in March a proposal to require listed corporations to disclose price-sensitive information (PSI) in a timely manner to facilitate investors in making informed investment decisions.

The public is invited to comment on the proposal before the consultation ends June 28.

Speaking to the media in releasing the “Consultation Paper on the Proposed Statutory Codification of Certain Requirements to Disclose PSI by Listed Corporations,” Professor Chan said the Hong Kong Special Administrative Region Government supports the cultivation of a continuous disclosure culture among listed corporations — hence, the proposal to require by law that a listed corporation must disclose to the public as soon as practicable PSI that has come to the knowledge of the corporation.  

In defining “PSI,” the government proposes following the approach of the United Kingdom and other European Union nations — that is, to adopt the concept of “inside information” currently used in insider dealing, and to oblige listed corporations to make timely disclosure of such “inside information.” In other words, PSI will be equivalent to the information currently prohibited from being used in insider dealing under the Securities and Futures Ordinance. This concept has been in use under the law for 20 years, and the market is familiar with it.

“We propose that the directors and officers of listed corporations must take reasonable measures from time to time to ensure that proper safeguards exist to prevent the corporation from breaching the statutory disclosure requirements,” Professor Chan said.

He stressed that the government recognizes the need to strike a reasonable balance between ensuring market transparency and fairness in the provision of information to investors, and safeguarding the legitimate interests of listed corporations in preserving certain information in confidence to facilitate its operation and business development.

Accordingly, the consultation proposal sets out a number of conditions allowing listed corporations to not disclose or to delay disclosing certain PSI:

1. When the disclosure would constitute a breach against an order made by a Hong Kong court or any provisions of other Hong Kong statutes.
2. When the information is related to impending negotiations or incomplete proposals, the outcome of which may be prejudiced if the information is disclosed prematurely.
3. When the information is a trade secret.
4. When the government's Exchange Fund or a central bank provides liquidity support to the listed corporation.

“The proposed disclosure regime would create a statutory framework with a clearer set of PSI disclosure obligations and safe harbors for compliance by listed corporations, instead of relying on the existing Listing Rules — a contractual relationship between the Stock Exchange of Hong Kong (SEHK) and each listed corporation,” Professor Chan explained.

“It would help demonstrate to the market our commitment to enhancing market transparency and quality, thereby enhancing Hong Kong’s position as an international financial center and the premier capital-formation center in the region.”

The government proposes that the statutory disclosure requirements be enforced by the Securities and Futures Commission (SFC). The SFC would promulgate guidelines on what constitutes PSI and when the safe harbors would be applicable to facilitate compliance by listed corporations.  The SFC is consulting the public in parallel on its draft guidelines.

Since the Market Misconduct Tribunal (MMT) has experience in dealing with cases concerning inside information, the government proposes extending the jurisdiction of the MMT to deal with breaches of the PSI disclosure requirements.

“We propose a range of civil sanctions, including a regulatory fine up to HK$8 million (US$1.02 million) on the listed corporation and/or the director, disqualification of the director or officer from being a director of or managing a listed corporation for up to five years, issuing a ‘cold shoulder’ order on the director or officer (i.e., deprived of access to market facilities) for up to five years, issuing a ‘cease and desist’ order on the listed corporation, director or officer (i.e., an order not to breach the statutory disclosure requirements again), issuing a recommendation order that the director or officer be disciplined by any body of which that person is a member, and payment of costs of the civil inquiry and/or the SFC investigation.

“As the SEHK, which administers the Listing Rules, does not have investigatory power and may only resort to certain disciplinary actions such as private reprimand or public censure, the proposed statutory regime would mark an important step forward by allowing the SFC to conduct more effective investigation into a suspected breach of these statutory requirements, and the MMT to impose a range of civil sanctions,” Professor Chan said.

Subject to public comments, the government plans to introduce a bill to the Legislative Council to codify such disclosure requirements in the Securities and Futures Ordinance in the 2010-11 legislative session.

The consultation document can be found on the Web site of the Financial Services and the Treasury Bureau [www.fstb.gov.hk/fsb/ppr/consult/index.htm].