Name: Interim Provisions on the Securities Investment Advisory Business (Draft for Consultation and Interim Provisions on Publication of Securities Research Reports (Draft for Consultation) collectively the “Draft Provisions”)
Issuing authority: China Securities Regulatory Commission (the “CSRC”)
Consultation period: ending on 15 August 2010
Subject: Securities investment advisory, research reports
The CSRC has published for public consultation Draft Provisions which seek to regulate further securities investment consultancy businesses. The Draft Provisions introduce a new distinction between the preparation and issue of research reports (“Research Business”) and securities investment advisory services. In particular, the Draft Provisions impose stricter segregation requirements between Research Business and other securities businesses which may prompt securities firms to consider moving their Research Business into separate companies.
Highlights
Interim Provisions on Publication of Securities Research Reports (“Research Provisions”)
- The Research Provisions introduce a concept of “securities research reports”, essentially documents, in electronic or written form, containing valuation analysis and investment rating advice in relation to specific securities and securities-related products, such as valuation analysis reports on listed companies, industry research reports and investment strategy reports. Analysis on the macro-economy, laws and regulations, industry conditions and the securities markets in general which do not refer to any specific security or securities-related product, fall outside the scope of the Research Provisions.
- Securities research reports may only be issued by securities investment consultancy companies and those securities companies who have been approved by CSRC to conduct securities investment consultancy business (the “Companies”). A new requirement has also been introduced, requiring any research analyst who signs off a securities research report to be registered with the Securities Association of China (the “SAC”) as a securities analyst, in addition to the existing requirement to have a securities investment consultancy practicing certificate.
- Companies engaging in Research Business are required to set up a “relatively” independent research department or subsidiary. No guidance, however, has been given as to what “relatively” means. Senior management responsible for the Research Business will not be allowed to be responsible for, and similarly, all employees who engage in Research Business will not be allowed to engage in, any other securities business where there may be a possible conflict of interest, such as proprietary trading and asset management.
- Companies are required to maintain effective Chinese walls between their Research Business and other securities businesses, and to establish a conflict checking system with a view to effectively managing any conflicts between the Research Business and other securities businesses.
- For the purposes of quality control and compliance monitoring, Companies must establish a review system for all securities research reports. Review of the reports is restricted to a Company’s quality control and compliance teams; other employees, such as investment banking staff, are prohibited from having sight of the report prior to issue. In addition, issuers, fund management companies and securities asset management companies are expressly prohibited from reviewing reports prior to issue. It is unclear whether or not quality control services provided by parent companies would be allowed.
- Where a securities research report includes a clear and definite valuation or an investment rating for a named security, the report must include details of the Company’s holding at the date of the report, including market value.
- A Company is prohibited from engaging in proprietary trading that is inconsistent with the views set out in a securities research report either on the day of issue of the report or the following trading day.
- A sponsor, lead underwriter or financial advisor to an issue is prohibited from issuing a securities research report in relation to the issuer for a 40-day period (in the case of an IPO) or a 10-day period (in the case of a further equity issue by a listed company, such as an issue of new shares, convertible bonds or a rights issue) from the date of determination and public announcement of the offering price.
- Securities analysts may comment or provide their views on specific securities through public media such as radio, TV, the internet and newspapers, provided broadly that such comments and views are consistent with those contained in any securities research reports issued by their employing Company and they make no direct or indirect indication of a guaranteed return on any securities.
Interim Provisions on the Securities Investment Advisory Business (“Advisory Provisions”)
- The Advisory Provisions refer to “securities investment advisory business”, the provision of investment advice in relation to securities or securities-related products by a Company to its clients in connection with which a Company obtains some form of compensation (direct or indirect). This would include selection of investment products and investment portfolio and wealth planning advice. Note that investment advice provided by a securities company to its brokerage clients free of charge will also be subject to the Advisory Provisions.
- Companies must have in place written advisory agreements with their clients.
- Employees who provide securities investment advisory services to clients are required to (i) have a securities investment consultancy practicing certificate and (ii) be registered with the SAC as a securities investment advisor. Securities investment advisors cannot also be registered with the SAC as a securities analyst.
- The Advisory Provisions encourage securities companies to purchase securities research reports issued by other Companies when formulating their investment advice.
- Securities investment advisors are expressly prohibited from providing investment advice about any specific securities through any form of public media (e.g. radio, TV, the internet or newspapers).
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