Survey Reports on Investment Research Activities

The SFC today releases reports of two surveys of securities firms and investors on investment research activities, which outline respondents’ views concerning the investment research industry in Hong Kong and in particular analysts’ possible conflicts of interest.

The SFC has been actively monitoring the development in the area of analysts’ possible conflicts of interest and examining policy proposals to address the issue.  To obtain a balanced view from the market, the SFC asked all securities firms to respond to a questionnaire in January 2003, and collaborated with the Consumer Council to survey retail and institutional investors in April. A total of 365 securities firms and 403 investors responded to the surveys (Note 1).  Key findings of the two surveys are summarised as follows:

Securities Firm Survey

• 62 firms, employing 529 analysts in aggregate, state that they have been conducting investment research and publishing reports on Hong Kong equities.  For analysis purposes, they are further divided into Group 1 and Group 2.  Group 1 comprises 30 larger firms that are engaged in investment banking and other regulated activities, whereas Group 2 comprises 32 smaller firms that do not have an investment banking function and whose core business is securities dealing and advising.
• The investment research industry in Hong Kong is concentrated in Group 1 firms, which employ 84% of the analysts and mainly service institutional clients.  63% of them state that their analysts are involved in investment banking activities while 87% state that their analysts have reviewed companies which they or their groups have had investment banking relationships in the previous two years.
• Group 2 firms mainly service retail investors.  Analysts in these firms engage in a wide variety of duties, which may include providing commentaries or articles to the media.
• Most analysts tend to assign more positive than negative ratings to their subject companies.  In 2002 alone, over 56% of the ratings of both Groups were positive. 
• Over 90% of Group 1 firms have established various internal control measures to address analyst conflicts of interest.  These include requirements for analysts to disclose possible conflicts, restrictions on personal trading, and procedures for analysts participating in investment banking functions.  Similar internal control measures are less common among Group 2 firms. 

Investor Survey

• Of the 403 investors responding to the Survey, 361 were retail investors and 15 institutional investors.  27 gave no indication.
• A clear difference exists between retail and institutional investors in how they access research reports (Note 2).  Retail investors usually read research reports indirectly from the print media (75%) and broadcast media (58%), whereas most institutional investors directly from securities firms (93%).
• 55% of retail investors consider that analysts’ recommendations are occasionally not substantiated with sufficient analyses and 49% state that the basis and methods used by analysts are occasionally unclear and inconsistent.  A number of retail (34%) and institutional (21%) investors tend to disregard the risk warnings or disclaimers contained in research reports, as they find the disclosure not useful.
• Few retail (10%) and institutional (14%) investors think that analysts and their firms have made sufficient disclosure about their conflicts of interest in research reports or at public appearances.   The majority would like to see improved disclosure on analysts’ and their firms’ interests in the subject companies, the firms’ relevant investment banking relationships, and the analysts’ real names, licence status and specific qualifications or experience. 

In general, the Securities Firm Survey finds that analyst conflicts of interest is considered as an issue in Hong Kong and should be addressed by strengthening regulations and investor education.  The Investor Survey shows that investors support stepping up enforcement actions and investor education in this area.

The SFC will take into account the findings of the surveys, together with the regulatory developments in other jurisdictions as well as a recently published IOSCO Statement (Note 3) in formulating policy proposals most suitable for Hong Kong.  The SFC plans to release the policy proposals for public consultation in the first quarter of 2004.

Copies of the survey reports are available at the SFC office and on the SFC website.
 
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Notes:

1. For more background information on the Securities Firm Survey and the Investor Survey, please refer to the SFC press releases issued on 10 January and 15 April 2003 respectively.

2. In the Investor Survey, a research report includes any investment recommendation on listed stocks in Hong Kong. A research report in the Securities Firm Survey refers to a report published by the firms.

3. In September, the Technical Committee of the International Organization of Securities Commissions (IOSCO) published a Statement of Principles for Addressing Sell-side Securities Analyst Conflicts of Interest to guide securities regulators in addressing the conflicts of interest faced by sell-side securities analysts and the firms that employ them. The SFC participated in the work on the Statement. The Statement is available on the IOSCO website at www.iosco.org.