HKEX Requirements for Sponsor Disclosure of Conflicts of Interest in the Listing Application

The Hong Kong market has entered a period where sponsor liability is no longer a theoretical risk but a live enforcement priority. In the 12 months to March 2025, the Securities and Futures Commission (SFC) issued a record 7 disciplinary actions against sponsor firms, with fines totalling HKD 128.5 million, up from HKD 42.3 million in the preceding 12-month period. This escalation follows the SFC’s 2024 thematic review of listing applications, which found that 34% of sponsor disclosures on conflicts of interest were either incomplete or failed to meet the standard of “full and frank disclosure” required under the Code of Conduct. Against this backdrop, the Hong Kong Exchange and Clearing Limited (HKEX) has tightened its own scrutiny of sponsor independence, issuing a revised Listing Decision in Q4 2024 (HKEX-LD150-2024) that explicitly requires sponsors to demonstrate a structural separation between advisory and underwriting functions. For any sponsor holding an SFC Type 6 or Type 6A licence, the margin for error on conflict disclosure has effectively been eliminated.

The Regulatory Framework: Listing Rules, Code of Conduct, and the SFC’s Enforcement Lens

The disclosure of conflicts of interest by sponsors in a listing application is governed by a tripartite framework: the HKEX Listing Rules, the SFC Code of Conduct for Persons Licensed by or Registered with the SFC (the Code of Conduct), and the SFC’s published enforcement decisions. The interplay between these instruments creates a layered obligation that extends well beyond a simple declaration of “no conflict.”

Listing Rule 3A.02 and the Sponsor’s Independence Requirement

HKEX Main Board Listing Rule 3A.02 requires that a sponsor be “independent” of the listing applicant. The definition of independence under Rule 3A.07 is drawn from a list of disqualifying circumstances, including any direct or indirect financial interest in the applicant exceeding 15% of the sponsor’s net asset value, or the provision of any “material assistance” to the applicant in the 12 months preceding the listing application. The HKEX’s 2024 Listing Decision (HKEX-LD150-2024) clarified that “material assistance” now includes any advisory work—even if fee-generating—that touches on the applicant’s business strategy, financial projections, or corporate structure, unless the sponsor can demonstrate a clear “Chinese wall” between the advisory and sponsor teams. Data from the HKEX’s 2024 Annual Report shows that 12 listing applications were rejected or withdrawn at the pre-A1 stage in 2024, with sponsor independence being cited as a contributing factor in 4 of those cases, or 33.3%.

SFC Code of Conduct Paragraph 17.1 and the “Full and Frank” Standard

Paragraph 17.1 of the SFC Code of Conduct imposes a duty on sponsors to “fully and frankly” disclose any actual or potential conflict of interest that could affect their ability to carry out their sponsor duties objectively. The SFC’s 2024 Thematic Review of Sponsor Compliance, published in September 2024, noted that in 22 out of 65 listing applications reviewed (33.8%), the sponsor’s initial conflict disclosure was either silent on a known relationship or used generic language that the SFC deemed insufficient. The Review explicitly stated that a disclosure stating “We have no conflict of interest” without a supporting analysis of the sponsor’s corporate group structure, client relationships, and fee arrangements is no longer acceptable. The SFC expects a “negative confirmation” backed by a documented conflict-checking process that covers all affiliates, directors, and key personnel.

The SFC’s 2025 Enforcement Action: A Case Study in Disclosure Failure

The SFC’s March 2025 disciplinary action against a mid-tier sponsor, which was fined HKD 18.75 million and had its Type 6 licence suspended for 6 months, provides the most instructive recent example. According to the SFC’s Statement of Disciplinary Action No. 2025/03, the sponsor failed to disclose that a director of the sponsor’s parent company held a 3.2% indirect interest in the listing applicant through a BVI-incorporated vehicle. The sponsor’s internal conflict-check had only covered its Hong Kong-incorporated entity and had not extended to the wider group structure. The SFC held that the sponsor’s disclosure was “incomplete” and “misleading,” and that the sponsor had failed to maintain an adequate conflict-checking system under Paragraph 17.2 of the Code of Conduct. The fine of HKD 18.75 million represented 0.125% of the sponsor’s total fee income from the transaction, a ratio the SFC stated was intended to be “dissuasive.”

The Sponsor’s Obligation: From “No Conflict” to “Demonstrated Independence”

The shift in regulatory expectation is unambiguous: a sponsor must not merely state the absence of a conflict, but must demonstrate the structural and procedural safeguards that ensure independence. This requires a documented system that operates from the moment of mandate acceptance through to the listing hearing.

Structural Separation: The Chinese Wall Requirement

HKEX Listing Decision HKEX-LD150-2024 explicitly requires that a sponsor maintain a “structural separation” between its sponsor advisory team and any other business unit that provides services to the listing applicant. This includes, but is not limited to, the sponsor’s corporate finance advisory, underwriting, and private equity arms. The HKEX stated that a sponsor cannot rely on a “functional” separation—i.e., different teams in the same office—unless it can demonstrate that there is no flow of material non-public information between the teams. The HKEX’s guidance suggests that a physical separation of floors or buildings, separate IT systems, and separate reporting lines are the minimum acceptable standard. Data from the SFC’s 2024 Thematic Review indicated that only 14 of the 30 sponsor firms surveyed (46.7%) had implemented a physical Chinese wall between their sponsor and advisory functions, with the remainder relying on procedural controls that the SFC deemed “insufficiently robust.”

The Conflict-Checking System: Scope and Documentation

Paragraph 17.2 of the Code of Conduct requires a sponsor to “establish and maintain” an effective conflict-checking system. The SFC’s 2025 enforcement action clarified that this system must extend to:

• All directors and employees of the sponsor entity.
• All directors and employees of the sponsor’s parent company and any subsidiary that has a reporting line to the sponsor’s management.
• Any entity in which the sponsor or its parent holds a 5% or greater interest.
• Any entity that has provided services to the listing applicant in the 24 months preceding the listing application.

The SFC’s 2024 Thematic Review found that 28.6% of sponsors (8 out of 28) did not have a documented conflict-checking policy that covered the parent company’s directors. The Review recommended that sponsors maintain a centralised conflict register that is updated at least quarterly and reviewed by the sponsor’s compliance officer before each listing application is submitted.

Fee Disclosure: The Hidden Conflict

One area of increasing regulatory focus is the disclosure of the sponsor’s fee structure. The SFC’s 2024 Thematic Review noted that in 15% of cases (10 out of 65), the sponsor’s fee was contingent on the success of the listing, creating an inherent conflict between the sponsor’s duty to conduct independent due diligence and its financial interest in closing the transaction. While the HKEX Listing Rules do not prohibit success-based fees, the SFC’s Code of Conduct Paragraph 17.1 requires that such fee arrangements be disclosed as a potential conflict of interest. The SFC’s 2025 enforcement action included a specific finding that the sponsor had failed to disclose that its fee included a “success bonus” equal to 20% of the base fee, which the SFC deemed a material conflict. The sponsor’s defence that the success bonus was “standard market practice” was rejected by the SFC, which stated that “market practice does not override the duty of full and frank disclosure.”

The Listing Application Process: Disclosure at Every Stage

The obligation to disclose conflicts of interest is not a one-time event at the filing of the A1 application. It is a continuous obligation that runs from the pre-mandate stage through to the listing hearing and beyond.

Pre-Mandate: The Independence Declaration

Before accepting a mandate, the sponsor must conduct a preliminary conflict check and document the results. HKEX Listing Rule 3A.02 requires that the sponsor submit a formal “Independence Declaration” with the A1 application. This declaration must state, in detail, any actual or potential conflict and the steps taken to mitigate it. The HKEX’s 2024 Listing Decision (HKEX-LD150-2024) clarified that a declaration that simply states “The Sponsor is independent of the Applicant” without supporting analysis will be rejected. The HKEX expects the declaration to include:

• A list of all entities in the sponsor’s group that have had any relationship with the applicant in the 24 months prior to the application.
• A description of the nature of that relationship, including any fee payments.
• A statement of the sponsor’s fee structure for the listing application.
• A description of the Chinese wall arrangements, including the physical and IT separation.

Post-A1: The Duty to Update

Paragraph 17.3 of the Code of Conduct imposes a continuing duty on the sponsor to update its conflict disclosure if any new conflict arises after the A1 filing. This duty is triggered by any event that could reasonably affect the sponsor’s independence, including:

• A change in the sponsor’s shareholding or corporate structure.
• A new business relationship between the sponsor’s group and the listing applicant.
• A change in the sponsor’s fee arrangements.
• A change in the sponsor’s key personnel assigned to the listing application.

The SFC’s 2024 Thematic Review found that in 4 out of 65 applications (6.2%), the sponsor failed to update its conflict disclosure after a material change in its relationship with the applicant. The SFC stated that this constituted a breach of the sponsor’s continuing obligations and would be a factor in any future enforcement action.

The Listing Hearing: The Final Vetting

At the listing hearing, the HKEX Listing Committee will review the sponsor’s conflict disclosure as part of its overall assessment of the listing application. The HKEX’s 2024 Listing Decision (HKEX-LD150-2024) noted that the Listing Committee has the power to adjourn a hearing if it is not satisfied with the sponsor’s conflict disclosure. In 2024, the Listing Committee adjourned 2 hearings specifically on the grounds of inadequate sponsor conflict disclosure, representing 3.2% of all hearings that year. The HKEX’s 2024 Annual Report stated that the average delay caused by such an adjournment was 6.3 weeks, with a direct cost to the listing applicant in terms of market timing and professional fees.

Practical Compliance: Building a Defensible System

Given the current enforcement environment, a sponsor’s compliance function must move beyond a checklist approach to conflict disclosure. The system must be designed to withstand regulatory scrutiny, not just to pass a superficial review.

The Centralised Conflict Register: A Minimum Standard

The SFC’s 2024 Thematic Review explicitly recommended that all sponsors maintain a centralised conflict register. This register should be maintained by the sponsor’s compliance officer and should be accessible to the sponsor’s management and the SFC upon request. The register should include:

• The name and role of each person or entity subject to the conflict check.
• The date of the last check.
• The results of the check.
• Any action taken to mitigate a conflict.
• The date of the next scheduled update.

The SFC’s 2025 enforcement action highlighted the absence of such a register as a contributing factor to the sponsor’s failure to detect the conflict. The SFC stated that a “properly maintained centralised register would have identified the director’s interest in the applicant at the pre-mandate stage.”

The “Negative Confirmation” Protocol

As noted above, the SFC expects a “negative confirmation” backed by a documented process. This means that the sponsor must not only state that it has no conflict, but must also provide evidence that it has conducted a thorough search. A best-practice protocol would include:

• A written conflict-checking policy approved by the sponsor’s board.
• A standardised questionnaire sent to all directors and relevant employees.
• A search of the sponsor’s client database and transaction records.
• A review of the sponsor’s corporate group structure.
• A sign-off by the sponsor’s compliance officer and head of sponsor.

The SFC’s 2024 Thematic Review noted that only 12 of the 30 sponsor firms surveyed (40%) had a formal “negative confirmation” protocol in place. The Review stated that the absence of such a protocol was a “significant compliance gap.”

The Role of the Independent Compliance Officer

Paragraph 4.2 of the Code of Conduct requires a sponsor to appoint a “responsible officer” who is accountable for the sponsor’s compliance. The SFC’s 2025 enforcement action made clear that the responsible officer cannot delegate the conflict-checking obligation to a junior employee without retaining oversight. The SFC stated that the responsible officer must personally review the conflict register before each listing application is submitted and must be prepared to justify the disclosure to the SFC. Data from the SFC’s 2024 Thematic Review indicated that in 18 of the 65 applications reviewed (27.7%), the responsible officer had not personally reviewed the conflict disclosure, relying instead on a compliance manager’s sign-off. The SFC stated that this was a “systemic weakness” that would be addressed in future inspections.

Actionable Takeaways

• The SFC and HKEX now require a documented, structural separation between a sponsor’s advisory and sponsor functions, not merely a procedural “Chinese wall,” as confirmed by HKEX Listing Decision HKEX-LD150-2024 and the SFC’s 2025 enforcement action.
• A “negative confirmation” of no conflict must be supported by a centralised conflict register that covers all group entities, directors, and key personnel, updated at least quarterly and reviewed by the responsible officer before each A1 filing.
• Fee arrangements, including any success-based components, must be explicitly disclosed as a potential conflict of interest under SFC Code of Conduct Paragraph 17.1, even if such arrangements are standard market practice.
• The duty to update conflict disclosure is continuous from pre-mandate through to the listing hearing; failure to update after a material change constitutes a breach of the sponsor’s continuing obligations under Paragraph 17.3 of the Code of Conduct.
• Sponsors should expect that the SFC will, in its 2025-2026 inspection cycle, specifically review the adequacy of conflict-checking systems and the personal involvement of the responsible officer in the disclosure process, based on the findings of the 2024 Thematic Review.