Unidentified Research Analysts

On 24 Jun 2019, Securities and Futures Appeals Tribunal (SFAT) affirmed the decision of 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.

FTSL published 3 equity research reports on its website between July 2012 and April 2013. 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 2 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;
• 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; and
• FTSL failed to demonstrate that there was a reasonable basis for the analyses and recommendations in the research reports.

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.

Para. 16 of SFC Code of Conduct has taken effect for over 10 years, but many firms are yet to establish effective compliance monitoring on the research function. This case is remarkable that unidentified research analysts were used.