The Securities and Futures Commission is to tighten regulation of analysts' research reports as part of a co-ordinated reform drive with overseas regulators. The move comes amid mounting criticism of the role played by research analysts during the technology bubble that burst early last year. A number of lawsuits brought by investors in the United States have been settled. SFC executive director Andrew Procter said litigation was having an impact but it 'does not look as if market forces will be sufficient to drive the quality of change that regulators need'. Mr Procter told a one-day SFC conference on the 'Future of Equity Research' yesterday: 'It is necessary for regulators to step in and raise standards and make clear what our standards are in this area.' The Hong Kong regulator has joined a task force with other members of the International Organisation of Securities Commissions (Iosco), including the United States, Britain, France, Germany, Japan and Ontario, Canada. The task force will conduct a survey in January next year with recommendations to be sent to Iosco's technical committee in March. Mr Procter said the group would look to develop uniform requirements that could be applied internationally. In Hong Kong, research reports are governed only by Section 79 of the Securities Ordinance, described by Mr Procter as inadequate, and the SFC's code of conduct. An SFC survey discovered most firms either were completely ignorant of Section 79 or failed to comply with it. The section deals mainly with conflicts of interest but SFC concern has focused on a 'creeping use' of pre-prospectus research and advertising. Prospectuses for initial public offerings (IPOs) are subject to stringent regulation but pre-IPO research reports can escape the regulatory net. SFC executive director Ashley Alder cited the case of PetroChina's US$2.9 billion IPO in April last year. Pre-offering research reports contained three-year profit forecasts, whereas the PetroChina prospectus contained only a one-year forecast. Since PetroChina was also offering shares in the US, the company and its underwriters had to put the three-year forecast in the prospectus but the projection appeared with disclaimers warning investors not to rely on the information. 'This obviously is a bad result,' Mr Alder said. The integrity and independence of equity research has come increasingly into question since the technology-stocks bubble burst, with analysts facing allegations of conflicts of interest and over-optimism. Some banks have changed their practices in an attempt to restore investor confidence. HSBC has said it will balance the number of 'buy' and 'sell' recommendations it produces, while Merrill Lynch and Credit Suisse First Boston have banned analysts from investing in stocks they cover. Morgan Stanley Asia managing director Peter Churchouse said analysts faced a 'much more demanding and complex environment' today. 'Investment banking is much more competitive. Analysts are required not just to analyse companies, they must play a very big role in corporate business for their firms, in marketing IPOs and other deals,' he said.