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The Securities and Futures Appeals Tribunal (SFAT) today affirmed the decision of the Securities and Futures Commission (SFC) to reprimand FT Securities Limited (FTSL) and fine it $3.5 million for regulatory breaches and internal control failures in relation to preparation and publication of research reports (Notes 1 to 3).
FTSL published three equity research reports on its website between July 2012 and April 2013. The SFC found that, during the relevant period:
- FTSL’s research reports, which were published in the name of its research analyst, were in fact prepared and written by two unidentified individuals who were not its employees. FTSL did not know their identities, background or contact details, nor did it take any steps to ascertain whether they were related to or had any financial interests in the companies covered in the research reports;
- FTSL falsely disclosed in one of the research reports that it did not provide any investment banking services to the company covered in the research report in the 12 months preceding the publication of the report when in fact it had been appointed as the placing agent for the placing of the company’s convertible bonds (Note 4);
- FTSL had no formal policies or procedures governing the preparation and publication of research reports;
- FTSL did not segregate its research and corporate finance functions to avoid any actual or apparent conflicts of interest. Staff members responsible for handling the placing activities of the company covered in the research report were concurrently involved in the preparation and publication of the report (Note 5); and
- FTSL failed to demonstrate that there was a reasonable basis for the analyses and recommendations in the research reports (Note 6).
The SFC concluded that FTSL had failed to supervise its staff members diligently in relation to the preparation and publication of the three research reports, and its internal systems and controls were seriously deficient.
The SFAT accepted that FTSL was culpable of egregious failures to comply with the regulatory requirements addressing analyst conflicts of interest, and its failure to ensure independence and objectivity of research reports might damage investor confidence in the research sector and in the financial services industry more broadly.
Notes:
- FTSL is licensed under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities.
- The SFAT was presided over by the Hon Justice Lunn, Chairman of the SFAT. The SFAT’s reasons for determination is available on its website at www.sfat.gov.hk.
- The SFC has also suspended the licences of Ms Chan Ho Wai and Mr Lam Wai Kit, former responsible officers of FTSL, for nine months. Chan was responsible for preparing and issuing the three equity research reports whilst Lam was responsible for approving the research reports. Please see the SFC’s press release dated 10 December 2018.
- Paragraph 16.5(d) (disclosure by firms of relevant business relationships) of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct) provides that a firm that has an investment banking relationship with the issuer or the new listing applicant should disclose that fact in the research report. Any compensation or mandate for investment banking services received within the preceding 12 months would constitute an investment banking relationship.
- Paragraph 16.6(a)(i) of the Code of Conduct provides that a firm that has an investment banking function should not arrange for its analysts to report to such function. Paragraph 2 under Part II (segregation of duties and functions) of the Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the SFC further provides that a firm should take special care to ensure that the sales and dealing functions should be segregated from the research function where possibility of potential conflicts of interest exists, and where practicable, the research and the corporate finance functions should be segregated to ensure the objectivity of the research function.
- Paragraph 16.11(a) of the Code of Conduct provides that an analyst should have a reasonable basis for his analyses and recommendations.
