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Brokers hit out at Hong Kong Stock Exchange trading proposals

New rules would automatically suspend shares of companies with adverse auditor comments

The Hong Kong Stock Exchange has proposed automatic trading suspensions for companies that have negative opinions from their auditors appended to their financial reports.   © Reuters

HONG KONG -- Hong Kong stockbrokers have raised the alarm over new rules proposed by the city's stock exchange operator that would automatically suspend trading in companies whose auditors have issued unfavorable comments on their financial statements.

The Hong Kong Securities Association, an industry group with more than 1,100 members from roughly 350 companies representing more than 70% of the city's stockbrokers, says the rules would curtail investors' freedom of action, potentially damaging the value of their holdings.

Auditors' opinions or disclaimers are "information that investors should look at and assess for themselves," said Jeffrey Chan, permanent honorary president and a director of HKSA. "It shouldn't automatically be linked up with a suspension."

Hong Kong Exchanges & Clearing has proposed that listed companies with a disclaimer or an adverse opinion -- indicating serious concerns -- from their auditors on preliminary annual results be suspended until the issues have been addressed.

The exchange, which says that 43 listed companies published statements for the 2017 financial year with a disclaimer or adverse opinion, solicited feedback on the proposals for a two-month period that ended Friday.

"The proposed rule changes as set out in the consultation aim to offer enhanced investor protections and form part of the exchange’s ongoing commitment to maintaining the quality and reputation of the Hong Kong market,” a spokesperson for HKEX said on Wednesday.

The stock exchange earlier this year announced new rules to delist companies whose shares have been suspended for 18 months. Some market watchers have warned that the proposed unfavorable comments rules could lead to some companies being delisted. This could harm investors and leave them holding shares of little value.

"The result of this corporate euthanasia is to penalize minority shareholders who might have had at least some recovery of their investment if the company had been able to work through its difficulties," said independent shareholder activist David Webb in a report.

Alexander Que, a partner at law firm Deacons who specializes in corporate finance, noted that the exchange's proposals seek to "improve the reputation and quality of the market," but he questioned the need for the disclaimer rules.

Such disclaimers or adverse opinions, Que noted, become public once they are issued. "So do you really need to protect those investors or potential shareholders in those companies?"

However, Lyndon Chao, managing director of the Asia Securities Industry & Financial Markets Association, said the exchange had "been very proactive in terms of trying to meet market needs.”

The exchange viewed the proposed rules “as protecting investors and keeping the standards high and giving them the confidence to invest,” Chao said.

But Chan and others have suggested that companies may be inclined to hire auditors that are "more user-friendly" in order to avoid a possible trading suspension, but an official with an accounting organization stressed that the proposed changes will not change auditing standards and compliance.

"Despite the potential consequences to listed issuers as a result of the proposed rule changes, auditors' roles and responsibilities do not change," said Paul Lau, chairman of the auditing and assurance standards committee at the Hong Kong Institute of Certified Public Accountants, which has more than 42,000 members. "We will continue to execute the audits with diligence and form our audit opinions in accordance with the auditing standards."

Chan also notes that an auditor's report is just one piece of information that investors use when making investment decisions. Others include a company's fundamentals, its sector, and the investor's own appetite for risk.

If a stock is suspended and eventually delisted, the exchange is "depriving investors this right to make an investment decision," Chan said.

"Hong Kong is a fairly mature market -- we call ourselves an international financial center," he said. "I think we do not need this kind of parental regulation. I think the investors should be able to make the decision themselves."

The proposed rules will apply to preliminary results announcements for the financial year ending on or after Dec. 31, 2019.

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