7. ANALYST REPORTING LINES, COMPENSATION AND PARTICIPATION IN OTHER FUNCTIONS (Paragraph 16.6)
The Guidelines prohibit:
- analysts reporting to the investment banking function;
- linking analysts’ compensation to any specific investment banking transaction;
- the pre-approval of analyst reports or recommendations by the investment banking function except in circumstances overseen by the compliance or legal function where the investment banking function reviews a research report for factual accuracy prior to publication; and
- analysts participating in business activities designed to solicit investment banking business, such as sales pitches and deal roadshows.
Company Visits in the Course of Investment Research
There is no restriction on analysts making company visits in the course of their research. Firms and analysts should however ensure that there are measures in place to shield analysts from improper influences which may affect the objectivity of their work.
8. FIRMS’ FINANCIAL INTERESTS AND RELEVANT RELATIONSHIPS (Paragraph 16.5)
Firms are required to disclose the following in their research reports:
- Financial Interests – where the firm has financial interests which amount in aggregate to 1% or more of the market capitalisation of a listed corporation whose securities have been reviewed by the firm;
- Market Making Activities – where the firm makes a market in securities of the listed corporation;
- Relevant Relationships – where an individual employed by or associated with the firm is an officer of the listed corporation; and
- Relevant Business Relationships – where a firm has an investment banking relationship with the listed corporation. Any compensation or mandate for investment banking services within the preceding 12 months is taken to constitute an investment banking relationship.
The Guidelines contain the following additional restrictions:
- Improper Dealing – a firm should not improperly deal or trade ahead in the securities of a listed corporation covered by its investment research;
- Firms not to Provide Assurances – firms should not, with a view to commencing or influencing a business relationship with a listed corporation, provide any promise or assurance of a favourable review or a change of coverage or rating in its investment research;
- Quiet Periods – a firm that acts as a manager, sponsor or underwriter of a public offering is prohibited from issuing investment research with respect to the relevant listed corporation for:
- in the case of IPOs, 40 days after the day of pricing; and
- in the case of a secondary offering, 10 days after the day of pricing.
The day of pricing means the day when the specific price of the offering is determined. There are 2 exceptions to the quiet period prohibition:
- for firms that have been issuing investment research on the listed corporation with reasonable regularity in their normal course of business; and
- where a major, publicly known event occurs that would affect the price of the relevant securities.
The question of whether “pre-deal research” (ie. investment research issued before the public offering of securities that are covered in the research) should be allowed which was raised in the March Consultation Paper will be examined in a separate consultation in the context of the regulatory framework for public offers.
9. OUTSIDE INFLUENCE (Paragraph 16.8)
Where a listed corporation or other third party provides or agrees to provide any compensation or other benefits in connection with investment research, this fact must be disclosed in the research report.
10. ANALYST APPEARANCES IN THE MASS MEDIA (Paragraphs 16.9(a) and (b))
With the exception of the disclosure requirements (which are simplified as described below), all provisions of the Guidelines including the trading blackout periods apply to an analyst who makes an appearance in the mass media. Making an appearance includes appearing in broadcasting programmes and writing articles, reports or comments in the print media.
Analyst Disclosure Requirements for Mass Media Appearances
Simplified disclosure requirements apply to analysts who analyse or comment on securities in the mass media. An analyst need only disclose:
- his name;
- the fact (but not the details) that he is licensed; and
- the fact (but not the details) that he and/or his associate (but not his firm) has a financial interest in the listed corporation.
These disclosures must be made at the time the analyses or comments are provided.
Where unsolicited questions regarding specific securities are raised with an analyst by the audience during a media appearance, the analyst may respond and give analyses and comments, notwithstanding that he and/or his associate(s) may have traded those securities during the preceding 30 days. The analyst is however required to make the disclosures referred to above before commenting on the securities.
Analysts should disclose their real names (and not pseudo names) when publishing their analyses or commentaries in the mass media.
11. FIRMS’ APPEARANCES IN THE MASS MEDIA (Paragraph 16.9(c))
A firm that communicates its investment research through the mass media, such as disseminating its research reports in whole or in part in a sponsored programme, must comply with the Guidelines and, in particular, make full disclosures as required by Paragraphs 16.4, 16.5 and 16.8.
12. REQUIREMENTS FOR DISCLOSURE (Paragraph 16.10)
Disclosures are required to be clear, concise, specific, given adequate prominence and released in a timely and fair manner. The method of disclosure should be commensurate with the medium through which the investment research, or analyst’s advice or comments, is being delivered. The required disclosures are limited to the fact of the matter and need not give details of the amount or its nature.
Provided that analysts and firms make the disclosures required by the Guidelines, they will not be held responsible if their investment research or recommendation is published or otherwise reproduced in whole or in part by the mass media without the relevant disclosures.
13. FINANCIAL JOURNALISM
The SFO has made it clear that persons who publish research or recommendations in the media do not fall within the SFC’s licensing regime if they do not conduct regulated activities. The definition of “advising on securities” in Schedule 5 to the SFO does not include a person giving advice or issuing analyses or reports on securities through a newspaper, magazine, book or other publication which is made generally available to the public or through a television or radio broadcast for reception by the public, whether on subscription or otherwise. However, while such commentators are not required to be licensed and therefore need not comply with the Code of Conduct, they are subject to the SFO’s provisions relating to Hong Kong market misconduct, including the criminal offences under Sections 298 and 300 of the SFO and to the imposition of civil liability under Section 277 SFO (as described under paragraph 2 above). Section 279 SFO further requires every officer of a corporation to take all reasonable measures to ensure that proper safeguards exist to prevent the corporation perpetrating any market misconduct.
While the mass media is not subject to the Guidelines’ requirements, it is encouraged by the SFC to disclose the source (ie. name of the firm and date of issuance of the original research report) of extracts or summaries of research reports published.
The purpose of this note is to summarise the principal features of the SFC’s Guidelines on Analyst Conflicts of Interest. Specific legal advice should be sought in relation to any particular situation.
SFC’s Guidelines to Address Analyst Conflicts of Interest
Securities and Futures Ordinance
Analysts’ financial interests
Analyst disclosure requirements
Analyst appearances in the mass media
Hong Kong market misconduct
Code of Conduct for Persons Licensed or Registered with the Securities and Futures Commission
Hong Kong Stock Exchange
International Organisation of Securities Commissions (IOSCO)
Prevention of Bribery Ordinance
The Independent Commission Against Corruption of Hong Kong
Conflict of interest policies
Investment research firm
Investment research analyst