(Adds details of proposal, background)
* SFC says Hanergy must appoint a financial adviser - source
* Says company-appointed auditor must submit "clean report"-source
* Shares suspended since May 2015
By Clare Jim
HONG KONG, Oct 7 (Reuters) - Hong Kong's securities watchdog will allow Chinese solar company Hanergy Thin Film, the subject of a high-profile investigation for alleged market manipulation, to resume trading provided it meets certain conditions, a source with direct knowledge of the issue told Reuters.
Hanergy asked the Hong Kong stock exchange to suspend trading in its shares on May 20, 2015, after the company lost half its $40 billion market value in just 24 minutes.
The Securities and Futures Commission (SFC) announced eight days later it was investigating Hanergy's "affairs" and subsequently directed the bourse to extend the suspension indefinitely.
The 1-1/2 year investigation into Hanergy, among the most high-profile ever conducted by the SFC, has raised fears over widespread market manipulation in Hong Kong, denting the city's reputation as a global financial centre.
The SFC has told Hanergy that in order to resume trading, the company must appoint a financial adviser to draw up and submit a resumption proposal, the source said.
A company-appointed auditor must submit a "clean report" signing off on the health of the company's accounts, the source said.
Ernst & Young, Hanergy's external auditor, has issued a so-called "qualified opinion" on the 2015 accounts, according to Hanergy's 2016 interim report filed with the exchange in September. Auditors typically issue a qualified opinion when they believe the financial information is not complete.
SFC declined to comment. Hanergy Thin Film did not respond to calls and emailed requests for comment. The source declined to be named because of the sensitivity of the issue.
Ernst & Young did not immediately respond to requests for comment.
The chairman of parent Hanergy Holding, Li Hejun, was also required to resign from the Hong Kong-listed arm as a condition for resuming trading, the source said. Li stepped down in May.
It was unclear if Hanergy would be able to meet the conditions, the source said.
"It'll be difficult for them to find a financial adviser that satisfies the SFC - some major international and Chinese banks have rejected them," the person said.
Reuters was unable to ascertain if the discussions meant the SFC had closed its investigation.
The SFC and Hong Kong exchange are under growing pressure from investors to speed up the resumption of suspended stocks. Hong Kong's rules allow shares to be suspended indefinitely, meaning investors can be trapped in bad companies for years.
The watchdog's new head of enforcement, Thomas Atkinson, is also keen to wrap up many of the more than 1,000 investigations the SFC opened in the years prior to his appointment in March, said two lawyers briefed on the matter.
The Hong Kong Stock Exchange last year asked Hanergy to hand over the accounts of its parent company before it would let the suspended stock trade again, but Hanergy rejected the request.
The company early this year appointed China International Capital Corp (CICC) to find a strategic investor, a move it had hoped would shore up its finances and help its shares resume trading, Reuters reported in March. (Reporting by Clare Jim; Additional reporting by Michelle Price; Editing by Kim Coghill and Muralikumar Anantharaman)