Survey to examine broker conflicts

PUBLISHED : Saturday, 11 January, 2003, 12:00am
UPDATED : Saturday, 11 January, 2003, 12:00am

Hong Kong's brokerage industry will have to answer searching questions about potential conflicts of interest in its stock research as the Securities and Futures Commission (SFC) moves towards tightening regulations covering analysts.

The SFC yesterday unveiled a survey, which will be circulated to SAR securities houses in the wake of Wall Street's US$1.4 billion settlement of claims that research from many of its leading houses had been slanted.

The questionnaire is a first step towards possible new regulations intended to protect Hong Kong investors from biased research. A survey of investors' views on analysts' research is also to be carried out.

'The SFC will take into consideration the results of these surveys and other factors in formulating policy proposals most suitable for Hong Kong,' a commission spokesman said.

'We will consult the public on any proposed regulatory measures that may be formulated.'

The questions address many of the problems that emerged on Wall Street after the end of the tremendous bull run in the 1990s.

Securities executives will be asked about methods used to remunerate analysts.

Some Wall Street analysts were given financial incentives for bringing in investment-banking business, leading to candy-coated reports on potential corporate clients.

There are also questions in the SFC survey on whether analysts have to report to investment bankers or sales and marketing departments, rules on disclosure of conflict of interest and restrictions on personal trading by analysts.

Securities houses will also have to reveal the proportion of positive ratings they give companies.

Analysts were divided on the SFC's initiative. Some saw it as an essential step to restoring the trust that was shaken last year by accounting scandals at several companies, including orchid grower Euro-Asia Agriculture, which had been highly rated by analysts.

'I think what they are trying to do is restore investors' confidence in the market,' said Dao Heng Securities head of research Eric Yuen.

'I agree the government should have some controls or guidelines on research analysts.'

Other industry insiders worried the regulations that eventually emerged would be too heavy-handed.

'If you have too much regulation, if you are too tight, then you will have the same problem [of poor research],' said Rexcapital Asset Management director Alex Wong. 'Nobody will take any risks . . . the information flow will be less efficient.'

The research departments at securities houses were already bearing the brunt of cost cuts as the industry struggled with a three-year bear market, Mr Wong said. New regulations could lead some firms to shut down their research departments altogether, he added.

Wall Street reached an agreement with regulators just before Christmas after investigations into whether analysts' research reports had been tailored to keep investment-banking clients happy.

As part of the deal signed by 10 investment banks, about US$450 million was earmarked for funding independent research and another US$85 million was set aside for the purpose of investor education.


Surveys are to be conducted of both investors and brokers

They are the first step in what may lead to stricter regulation of Hong Kong's securities industry in the wake of accounting scandals both here and abroad

Analysts are divided as to whether the outcomes from the process will be positive