Research analysts: SECP’s latest guidelines ruffle a few feathers

Industry insiders term proposed regulations a non-starter

Kazim Alam May 31, 2015
Industry insiders term proposed regulations a non-starter. CREATIVE COMMONS


Some call it the sell side, others refer to it as the backbone of the financial services industry. It is the research segment in the equities business: professionals with prowess in finance, statistics and economics – all at once.

These research analysts dig into company financials and economic data to prepare in-depth analysis, stock recommendations, target prices and opinions for institutional and retail investors. In short, investing is reduced to a wager absent the input from an informed sell side.

This is why the Securities and Exchange Commission of Pakistan (SECP), the apex regulator of the capital markets, has decided to issue a separate set of regulations for equity research analysts.

The SECP invited comments from the brokerage industry on the proposed set of rules, called the Research Analyst Regulations, 2015, in March and subsequently held a meeting with its representatives in Karachi.

While the industry welcomed the SECP’s initiative to bring out a separate set of regulations for research analysts, its proposed contents seem to have ruffled some feathers.

In background conversations with The Express Tribune, research analysts have termed the proposed regulations a non-starter in their present form.

“We’ve given the regulators our feedback in writing. They promised to get back to us after considering our suggestions and recommendations regarding the proposed law,” one sell-side professional said.

First of all, the proposed law entails that a research entity will ensure the compensation of a research analyst is neither determined by nor based on any other services that the research entity is offering. According to the proposed law, a research analyst will not be subject to the supervision or control of any employee of the brokerage’s non-research departments. No personnel engaged in providing non-research services may have any influence or control over the compensatory evaluation of such individual, the proposed law says.

This begs an obvious yet fundamental question: who will conduct the performance appraisal of the research department? Clearly, few research analysts own their own brokerage houses.

The proposed law also restricts a research analyst from participating in business activities designed to solicit non-research business – such as sales pitches and deal road shows. Many research analysts are upset about this clause, as it takes away a lot of charm from their jobs. Understandably, a lot of the work that the sell side does constitutes marketing. Brokerage houses that employ research analysts are always on the lookout for buyers for the stocks they have recommendations on.

Research analysts are the ones who know the fundamentals of a stock through and through. Who will explain the merits/demerits of buying/selling a stock if the SECP bars research analysts – presumably the most knowledgeable about the company – from speaking to the clients?

Of course, research analysts are not supposed to solicit trade deals, industry officials admit. But making a sales-pitch is part of an analyst’s job, they claim, because ‘business development’ has traditionally been the responsibility of the senior members of the equity research team.

The proposed law restricts an analyst from trading securities that are covered in his/her research report in 30 days prior to – and five days after – its publication. But many research analysts believe that disclosures about the holding and trading activity of the last 30 days should suffice instead. Moreover, some analysts say small trading should be allowed because it cannot manipulate the market or front-run the clients.

Asking the SECP to come up with a set of regulations that is in consonance with ground realities, industry professionals said the regulator should stop looking eastward for guidance when it comes to drafting new rules.

An online service that compares two documents for likeness ( revealed major similarities between the SECP’s proposed regulations and the comparable law enacted by the Securities and Exchange Board of India last year.

The extent of likeness on chapters on registration, conflict of interest and inspection was 25%, 35% and 90%, respectively.

The writer is a staff correspondent

Published in The Express Tribune, June 1st,  2015.

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