SFC lukewarm on report ban

PUBLISHED : Thursday, 01 April, 2004, 12:00am
UPDATED : Thursday, 01 April, 2004, 12:00am

Analysts call for flexibility over international rules on issue of pre-IPO research

Hong Kong may not adopt controversial international rules banning investment banks from issuing research reports before share offerings, according to a consultation paper issued by the Securities and Futures Commission yesterday.

Analysts welcomed the possibility that Hong Kong might adopt a more relaxed means to control analysts' conflicts of interest, saying a degree of flexibility better suited local needs.

Confirming a South China Morning Post report on Wednesday, the SFC yesterday started a one-month consultation on a code of conduct for analysts aimed at avoiding such conflicts.

An SFC survey last year showed that 44 per cent of stock investors relied on celebrity analysts' comments in making investment decisions, but only 10 per cent believed analysts and their firms made sufficient disclosures about conflicting interests.

The arrest of a UBS analyst by the Independent Commission Against Corruption last month put analysts' conduct under the spotlight, the SFC said.

The International Organisation of Securities Commissions (IOSCO) issued a set of principles on analysts' conflicts of interest last year, while 10 investment banks were penalised by US regulators last April for misconduct arising from the conflicting interests of analysts.

Merrill Lynch's former top technology analyst, Henry Blodget, privately lambasted stocks that he recommended publicly to investors, while former Credit Suisse First Boston banker Frank Quattrone faces retrial next month on charges he obstructed investigations into IPOs handled by his bank.

Banning pre-IPO reports is a controversial topic. The US bans all sponsors or underwriters from issuing reports before the deals to prevent analysts' reports from being used as marketing tools, while IOSCO recommends similar treatment.

However, the SFC is only seeking views on the subject. It said some participants considered 'it should allow the sponsors to issue the reports' because other firms might not be interested or able to obtain information on 'less well-known listing candidates'.

Also, in contrast to IOSCO principles and US regulations which ban analysts from involvement in roadshows and sales pitches, the SFC suggests allowing analysts to conduct company visits for due diligence and to offer information requested by clients.

'We are ... mindful any overly restrictive measures may hinder the free flow of information and fetter legitimate marketing activities, as analysts are viewed as experts in their sectors,' the SFC said.

Richard Mak Kan-chong, president of the Hong Kong Society of Financial Analysts, agreed with the SFC: 'Every market has its own situations and one can't transfer all the IOSCO rules to Hong Kong.' He said many pre-deal reports were only summaries of prospectuses without buy or sell recommendations.

Also, many European countries still allowed such reports to be issued before IPOs, he said.

Another SFC recommendation is to ask analysts to stop using pseudonyms when writing for the Chinese press. In interviews and in their columns, they must give their names, licensing status and the name of their employer.

code of conduct

Survey finds 44pc of investors guided by celebrity tipsters

Arrest of UBS analyst puts conflict issue in the spotlight

US analysts banned from roadshows, sales pitches