Under the law, not all financial analysts are required to be licensed with the SFC. For example, financial journalists and columnists giving investment recommendations for the public's reference via the mass media are not regarded as carrying out the regulated activity of "advising on securities". As such, they are not required to hold an SFC licence. You can check whether an individual is an SFC licensee on the Public Register of Licensed Persons and Registered Institutions on the SFC website.
Where an analyst is licensed, he must comply with the SFC's Code of Conduct, which includes provisions for addressing the issues arising from conflicts of interest. These requirements are applicable to analysts' research on shares, stock warrants and options listed in Hong Kong, although analyses of macro-economic views, bonds, funds and currency trends are not covered. According to the Code, licensed analysts are required to make a number of disclosures when they comment on certain investment instruments.
Although the Code does not apply to non-SFC licensees, any person who disseminates false or misleading information on securities for the purpose of inducing transactions or manipulating the market commits an offence.
The Code requires a licensed analyst to disclose his name to the relevant media and declare that he is licensed by the SFC when he writes for a newspaper, or gives comments on stocks on radio or television broadcasts. If he or his associates (e.g. his spouse or children under 18) holds the stock on which he is commenting, he should also disclose this holding to the relevant media.
The Code also restricts licensed analysts from trading stocks on which they comment. If an analyst takes the initiative to comment on a stock, he should not have traded that stock in the previous 30 days. However, if an analyst is asked incidentally by the audience about a particular stock, he can still answer the question even if he has traded in that stock during the preceding 30 days, provided he discloses the trade. This measure is designed to minimise conflicts of interest.
Regardless of whether a licensed analyst has traded in the stock on which he has commented during the preceding 30 days, he cannot trade that stock during the following three trading days. In addition, an analyst cannot contradict himself by trading contrary to his outstanding recommendations. However, even if an analyst holds a certain stock, he is still free to make a "sell, hold or buy" recommendation.
Although the Code mandates licensed analysts to make certain disclosures to the relevant media, it does not compel the media to publish such information and, if the media does not do so, no analyst will be held responsible for the non-disclosure.
Responsibilities of intermediaries employing analysts
On the other hand, licensed investment banks and brokerages must establish written policies and control procedures governing their analysts' trading of stocks under review. Moreover, an analyst's remuneration cannot be linked directly to any corporate finance services (e.g. seeking of a listing) that his employer intermediary has provided to other companies. Also, an analyst cannot participate in activities soliciting investment banking business. An intermediary should not arrange for its analysts to report to a department that is responsible for services related to corporate financing activities, or allow that department to pre-approve analysts' reports.
An intermediary (e.g. an investment bank) compiling a research report is required to disclose in the report its holding if it equals to or is more than 1% of the market capitalisation of the listed company under review. Furthermore, an intermediary must disclose other relationships in the report, e.g. whether it is the stock's market maker; whether it provides corporate finance services (e.g. seeking of listing) to a listed company it has researched within the preceding 12 months; and whether any of its staff is an officer of that listed company.
Where an intermediary recommends that investors buy a stock, it cannot front run, i.e. it cannot buy the stock before issuing the report and then sell the stock when the share price increases after the report is released.
If an intermediary is the sponsor of an initial public offering by a newly listed company, neither the intermediary nor its licensed analysts can issue any investment research covering or giving comments on that listed company for 40 days following the pricing of the offering. If the offering is a secondary public offering (e.g. a rights issue), the period is 10 days. Moreover, analysts cannot participate in any promotional activities of a listed company it reviews.
Should a licensed intermediary, such as a stockbroker, organise a seminar for its clients, the comments and recommendations made by its analysts in the seminar are also subject to the requirements of the Code. However, the intermediary can choose how it wants to disclose conflicts of interest information, e.g. by telling the audience the required disclosure information verbally on the spot, or printing the information in advance for distribution on site.