SFC’s circular on distribution of research reports of eligible ETFs under Stock Connect

View PDF

Authored by: Pinky Siu

On 9 September 2024, the Securities and Futures Commission (SFC) issued the circular on distribution of research reports of eligible Mainland ETFs under Stock Connect (link) (Circular), which sets out the conditions that allow intermediaries to distribute research reports of eligible Mainland exchange-traded funds (ETFs) under Stock Connect in Hong Kong (ETF Connect).

The SFC is of the view that a research report that is distributed in compliance with the conditions set out in the Circular would not be considered an advertisement or invitation prohibited by section 103(1) of the Securities and Futures Ordinance. The arrangement came after the clarification of China Securities Regulatory Commission (CSRC) that Mainland securities companies can forward research reports of eligible Hong Kong ETFs under ETF Connect, with a view to enhance Mainland and Hong Kong investors’ understanding of the products in each other’s market and facilitate trading and liquidity in both Mainland and Hong Kong markets.

According to the Circular, distribution of such research reports needs to meet the following conditions:

1. Distribution party

Only an intermediary licensed or registered for Type 1 (dealing in securities) or Type 4 (advising on securities) regulated activity may distribute such research reports in Hong Kong. For an intermediary licensed or registered with Type 1 regulated activity, distribution must be limited to its clients and be wholly incidental to its securities dealing business.

2. Preparation of reports

When preparing the reports, an intermediary must take responsibility for such reports as well as fulfill the following requirements:-

• Code of Conduct requirements – the intermediary must comply with applicable requirements in the Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct), including General Principles 1 (honesty and fairness), 2 (diligence), 5 (information for clients) and 6 (conflicts of interest) as well as paragraphs 2.1 (accurate representations) and 12.2 (employee dealings).

• Informational requirements – the intermediary must ensure that (i) information in the reports is factual, fair and balanced; and (ii) the reports contain information that is timely and consistent with the offering documents of the subject Mainland ETFs, and satisfy the disclosure requirement as set out below.

Where the reports are prepared by a CSRC-licensed group company of an intermediary, the intermediary must, before distributing the reports:

• exercise due skill, care and diligence in the selection and ongoing monitoring of the CSRC-licensed group company, ensuring compliance with the applicable Mainland laws and regulations by the group company;

• have proper contractual arrangement with the group company to govern the preparation and distribution of the reports, and observe the Principles on Outsourcing issued by the International Organization of Securities Commissions (IOSCO);

• satisfy the applicable requirements in the Code of Conduct; and

• ensure the reports satisfy the informational requirements outlined above, by taking reasonable steps to ensure the quality of the reports.

3. Disclosure requirements

The SFC also requires the relevant reports to contain prominent and adequate disclosures of conflicts of interest and warning statements. Illustrative examples of such disclosures are provided by the SFC in the Circular. The text of disclosure is not prescriptive but an intermediary should ensure that the disclosures are clear and not disguised.

Key Contacts

Pinky Siu

Partner | Financial Services

Email or call +852 2825 9568