Due Diligence Guidelines –
Sponsor Appointment, Fees, Staffing and Controls
4. Sponsor Controls
4.1.1 There must be clear and effective reporting lines and channels so that decisions on critical matters are not made by the Transaction Team but by Management or a committee designated by Management for this purpose. Members of such designated committee should be independent of the Transaction Team and should have appropriate seniority and expertise necessary to consider the following matters as a minimum:
(i) acceptance of a mandate to act as a sponsor;
(ii) appointment of the Transaction Team and any significant variation to such appointment; and
(iii) resolution of suspicious circumstances, difficult or sensitive issues, conflicting information and material non-compliance by a listing applicant. [Paragraph 17.11(d) of the Code of Conduct]
4.1.2 Management is ultimately responsible for the supervision of the sponsor work and for compliance with all relevant legal and regulatory requirements, it may delegate operational functions to its staff but cannot abrogate its responsibilities. Accordingly, Management must put in place appropriate systems, controls and procedures to govern sponsor work, which include:
(i) formulation of an appropriate due diligence plan, amended or updated as necessary;
(ii) allocation of sufficient persons with appropriate levels of knowledge, skills and experience to each assignment over the period of the assignment;
(iii) implementation of the due diligence plan, with any outstanding steps or steps which deviate from the original plan identified, explained and followed up;
(iv) adequate supervision and management of the staff who carry out the work; and that the staff do not act beyond their proper authority;
(v) reviews of the standard and extent of due diligence work, and the performance of the Principals and the Transaction Team; and
(vi) escalation of critical matters including but not limited to those set out in paragraph 17.11(d) to Management or its designated committee for decision. [Paragraph 17.11(e) of the Code of Conduct]
4.1.3 Upon completion of a listing transaction, a sponsor should submit to the SFC, within 2 weeks after the first day of dealings, its team structure chart in respect of that listing transaction countersigned by a Principal who supervised the transaction. The chart should show the reporting line of each of the licensed or registered staff within the team together with their respective names, business titles and responsibilities, including in advising the listing applicant on compliance with the Code and the Listing Rules and the performance of due diligence. The SFC may seek further details from firms and individuals to substantiate their submissions. [Paragraph 17.11(f) of the Code of Conduct]
4.1.4 A sponsor should carry out an assessment annually in order to ensure that its systems and controls remain effective. Any material non-compliance issue should be reported to the SFC promptly. [Paragraph 17.12 of the Code of Conduct]
4.1.5 The annual assessment may take the form of an internal and/or external audit. A sponsor should devise its own programme based on its assessment of risks related to its operations, the firm’s business structures, its own internal systems and the track record of compliance including, but not limited to, any complaints received either from within or from third parties and any regulatory concerns raised by the regulators in the period under review. [Note to Paragraph 17.12 of the Code of Conduct]
4.2.1 Management should ensure that there is an effective management and organisational structure which ensures that the operations of the business are conducted in a sound, efficient and effective manner. Management should assume full responsibility for the firm’s operations including the development, implementation and on-going effectiveness of the firm’s internal controls and the adherence thereto by its directors and employees. Reporting lines should be clearly identified, with supervisory and reporting responsibilities assigned to the appropriate staff members.22 For guidance on a sponsor’s obligation under Paragraph 17.11(e)(vi) of the Code of Conduct to put in place appropriate systems, controls and procedures to escalate critical matters (including but not limited to those set out in Paragraph 17.11(d) of the Code of Conduct) to Management or its designated committee for decision, refer to Chapter 32 “Due Diligence Guidelines – Escalation of Critical Matters”.
4.2.2 A licensed or registered person should ensure that it has adequate resources to supervise diligently and does supervise diligently persons employed or appointed to conduct business on its behalf.23
4.2.3 Management is ultimately responsible for the supervision of the sponsor work undertaken by the firm, as well as compliance with all relevant rules, regulations, codes and guidelines. Whilst Management may delegate the operational functions to the staff of a sponsor, Management remains responsible for the discharge of these functions and such responsibilities cannot be delegated.24
4.2.4 It is acknowledged that Management is not expected to directly supervise daily operational matters such as monitoring the implementation of the due diligence plan. Management is however required to put in place appropriate systems, controls and procedures to govern key aspects of sponsor work.25
4.2.5 The annual assessment may take the form of an internal and/or external audit. A sponsor should devise its own programme based on its assessment of risks related to its operations, the firm’s business structures, its own internal systems and the track record of compliance including, but not limited to, any complaints received either from within or from third parties and any regulatory concerns raised by the regulators in the period under review.26
4.2.6 The SFC is of the view that each sponsor has an obligation to devise its own specific systems and controls in light of its business operations, and based on these, should decide the scope of its annual assessment.27
4.2.7 Senior management should bear primary responsibility for ensuring the maintenance of appropriate standards of conduct and adherence to proper procedures by the firm.28
4.3 Recommended Steps
4.3.1 A sponsor should maintain and update a record of the Transaction Team structure and composition and any changes thereto from the beginning and through the end of an engagement.29
24. See (January 2009) (failed to exercise due skill, care and diligence in supervising another RO in handling a main-board-to-GEM transfer application. As a member of Management, Wu should have ensured that due diligence had been substantially completed before submitting the Form A1 to the Stock Exchange), (April 2008) (supervisor not sufficiently involved in due diligence), (June 2006) (sponsor failed to conduct reasonable due diligence. Sponsors must conduct reasonable investigations themselves. They cannot delegate their responsibilities to other parties, in particular lawyers, unless there are areas of recognised expertise the delegates are competent in and the sponsor is not), (March 2006) (Sponsor failed to act with due skill, care and diligence when performing due diligence and to ensure their prospectus and submissions made to the Stock Exchange were accurate and complete. Inadequate supervision of its staff by responsible officers), (January 2005) (Sponsor failed to exercise due skill, care and diligence in performing its duties as sole sponsor), (December 2007) (responsible officer failed to properly, actively and diligently supervise the performance of duties by those to whom he had delegated responsibility), (December 2008) (responsible officer failed to adequately supervise the sponsor team during due diligence). (April 2013) (failure to conduct proper due diligence and undue reliance on the work delegated to external experts, SFC’s decision affirmed by in Jan 2014).
25. See (March 2006) (sponsor set out division of work before commencing the due diligence exercise and failed to ensure supervisors were sufficiently involved in the listing preparation), (April 2012) (sponsor failed to adequately supervise due diligence process. Due diligence inadequate and sub-standard).
HKCFEF Limited and the contributing law firms, accountants and sponsors are not offering these due diligence guidelines as legal, financial or professional advice or services and they should not be relied upon as such. These due diligence guidelines should not be used as a sole basis for any decision, action or inaction and are not meant to serve as a substitute for the advice of qualified professionals. See here for the full terms and conditions.