Jurisdiction - Hong Kong
HKMA Report on Sponsor Activities.

15 February, 2012

In November 2011, the Hong Kong Monetary Authority (“HKMA”) published its report on thematic examinations of sponsor activities, which revealed certain common deficiencies in the work performed by some sponsors, as well as areas for improvement in internal controls and management supervision. These findings relate to the following five aspects. 
1. Policies and procedures
Common deficiencies were found among sponsors in:
  1. monitoring the progress of implementing the due diligence plan;
  2. reviewing the standard and extent of due diligence and the performance of the principal and the transaction team; and
  3. guidance on how to deal with due diligence issues such as handling suspicious scenarios.
The HKMA expects that sponsors should be able to demonstrate that the relevant policies and procedures are properly established and effectively applied. The management of a sponsor is ultimately responsible for the supervision of the sponsor work undertaken by the sponsor.
Guidance to the staff performing the sponsor activities should include areas such as handling of questionable information, due diligence on the listing applicant’s major stakeholders and senior management, the scope of due diligence work, and documentation standard and record retention.
2. Management supervision
he HKMA notes that for some sponsors, the supervision of certain key areas, such as the depth of the due diligence review and making critical assessment of the results of the due diligence, appeared to be less than satisfactory. Other management supervision deficiencies noted include:
  • lack of an audit trail to demonstrate management supervision of major issues such as the review of the due diligence plan and actual due diligence work and progress pursuant to plan; and
  • lack of supervisory responses to repeated non-compliance with house rules and regulatory requirements.
3. Standard of due diligence work
Some due diligence deficiencies include:
  1. handling conflicting or suspicious information;
  2. the extent or sufficiency of due diligence work; and
  3. follow-up of due diligence enquiries.
Examples: failure to perform due diligence with the listing applicant’s bankers, key issues such as litigation/disputes not addressed in due diligence questionnaires, only phone enquiry being conducted with key suppliers, conflicting sales figures disclosed in listing applicant’s and customer’s respective prospectuses.
The HKMA expects the sponsor to make such enquiries as may be necessary until the sponsor can reasonably satisfy itself of compliance with regulatory requirements in relation to the disclosure in the listing document. The sponsor should perform additional due diligence work with a questioning mind in response to questionable circumstances.
4. Disclosure in prospectus 
The HKMA examinations found issues of concern in relation to the accuracy and completeness of statements disclosed in the prospectus. The sponsor should demonstrate that it made the necessary enquiries and reasonably satisfied itself about the due diligence conducted on the directors and senior management of the listing applicant. 
Example: non-disclosure of an advisor on the listing applicant’s advisory board: the advisor objected to disclosure as he also sits on a government committee responsible for approving products for the applicant’s industry. The sponsor should have taken steps to address the conflict of interest that might arise from the advisor’s dual position and ensure proper disclosure in the prospectus
5. Audit trail and documentation of due diligence
Record retention is the key to establishing the due diligence audit trail. The HKMA found examples of lack of records to show deliberations on material issues, such as sponsors’ decisions on making disclosure of events and incomplete documentation about enquiries made with relevant counter parties of the listing applicant. 
Examples: No due diligence interview records, unanswered due diligence questionnaires, no evidence that the due diligence plan was critically reviewed and assessed in respect of the adequacy of the work done.
For full details, please follow the link:
For further information, please contact:
Venantius Tan, Partner, Morrison Foerster
John Moore, Partner, Morrison Foerster



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