Securities Commission issues Guidelines for Investment Analysts and Their Analysts
03 January 2023
The Securities Commission Malaysia (‘
SC’) issued a new set of
Guidelines on Market Conduct and Business Practices for Investment Analysts and Their Analysts (‘
the Guidelines’) and a corresponding set of
Frequently Asked Questions (‘
FAQ’) on 8 December 2022. The Guidelines will come into effect on
8 June 2023.
The Guidelines set out the core principles and minimum standards to be observed by Investment Analysts and their Analysts towards maintaining fair, efficient and transparent markets by ensuring objectivity, quality and transparency of their research and recommendations.
For the purposes of the Guidelines:
- ‘Investment Analyst’ means a holder of a Capital Markets Services Licence (CMSL) for the regulated activity of investment advice, either as a sole regulated activity or in addition to other regulated activities, who issues or promulgates analyses or reports concerning securities or derivatives, whether electronically, in print or any other form; and
- ‘Analyst’ means a holder of a Capital Markets Services Representatives Licence (CMSRL) for the regulated activity of investment advice, who issues or promulgates analyses or reports concerning securities or derivatives, whether electronically, in print or any other form.
The Guidelines set out four core principles that apply to Investment Analysts and their Analysts, namely to:
- ensure that they exercise reasonable care, skill and diligence in providing research-related services;
- manage, including avoiding and mitigating, actual and potential situations of conflict of interests appropriately, adequately and fairly;
- conduct their research-related services in a manner which contributes to the maintenance of a fair and orderly market; and
- exercise reasonable care and communicate in a way which is clear, fair and not misleading so that the informational needs of investors are met.
In addition, a fifth core principle requires Investment Analysts to establish and maintain an adequate supervisory system to ensure their research related services are managed responsibly and effectively.
The FAQ provides non-exhaustive examples of the SC’s expectations in respect of each of the five core principles.
The Guidelines also contain detailed provisions that seek to regulate the conduct of Investment Analysts and their Analysts in the following areas:
- integrity and ethical behaviour;
- management and disclosure of conflict of interests and potential conflict of interests;
- maintenance of confidentiality of unpublished and proposed research reports and recommendations; and
- research quality and content.
Among the noteworthy provisions in the Guidelines are:
- a requirement for an Investment Analyst to prohibit its Analysts from trading in a manner that is contrary to their most recent recommendations, except in circumstances determined to be acceptable by the Investment Analyst’s conflict management policies and procedures;
- a requirement for an Investment Analyst to structure its Analysts’ remuneration in a way to avoid any bias in their research analyses and recommendations or any incentive that may compromise the independence of the Analyst or the objectivity of his research;
- a requirement for an Investment Analyst to supervise and restrict the participation of its Analysts in business activities which could reasonably jeopardise the objectivity of the research-related services or cause conflict with their duties to investors, including but not limited to ensuring its Analysts are not officers or directors of subject companies under their coverage, and restricting its Analysts from participating in activities designed to solicit corporate finance advisory businesses;
- a requirement for an Investment Analyst to establish, maintain and enforce policies and procedures to ensure that its Analysts abstain from influencing or participating in the preparation of the research-related services including the content of the report, particularly where the Analyst owns securities of the subject company or its related entity, has recent employment or other significant business relationships with the subject company or its related entity, or had, has or is aware of any other relationship with the subject company or its related entity, which compromises or has potential to compromise the independence of the Analyst or the objectivity of his research;
- a requirement for an Investment Analyst and its Analysts to disclose all actual and potential conflict of interests in respect of a research report;
- guidance on communications with the subject company or any third party on the contents of a proposed research report and any amendments thereto; and
- a provision that any disclaimers in relation to the research and recommendations in a research report will not preclude or absolve an Investment Analyst or its Analysts from the obligation of responsible provision and dissemination of research.
Comment
Investment Analysts have until 8 June 2023 to review and resolve any identified deficiencies in their current business practices before the Guidelines come into force.
Alert by Phua Pao Yii (Partner) and Vanessa Ho (Associate) of the Corporate Practice of Skrine.
This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.