RESEARCH ANALYST REGULATIONS, 2015
[Gazette of Pakistan, Extraordinary, Part-II, 17th March, 2015]
S.R.O. 232 (I)/2015.–In exercise of powers conferred by Section 40 of the Securities and Exchange Commission of Pakistan Act, 1997 (XLII of 1997) read with clause (d) of sub-section (4) of Section 20 thereof and sub-section (4) of Section 15-E of Securities and Exchange Ordinance, 1969 (XVII of 1969) the following draft Regulations are hereby published for the information of all persons likely to be affected thereby and notice is hereby given that objections and suggestions, if any, received within thirty days of this publication in the official Gazette will be taken into consideration.
Any objection or suggestion which may be received from any person before the expiry of the said period shall be taken into consideration by the Commission.
1. Short title and commencement.–(1) These Regulations shall be called the Research Analyst Regulations, 2015.
(2) They shall come into force at once.
2. Definitions.–(1) In these Regulations, unless there is anything repugnant in the subject or context,–
(a) “Act” means the Securities and Exchange Commission of Pakistan Act, 1997 (XLII of 1997);
(b) “Associate” means any partner, employee, officer or director of a Research Analyst;
(c) “Commission” means the Securities and Exchange Commission of Pakistan established under Section 3 of the Act;
(d) “Independent Research Analyst” means a Research Analyst whose only business activity is preparation and/or publication of Research Report;
(e) “Inspecting Authority” means any one or more persons appointed by the Commission to exercise powers conferred under Regulation 19;
(f) “Investment Advisor” means an NBFC licensed by the Commission to provide investment advisory services;
(g) “Non-banking finance companies (NBFCs)” means the companies as defined in Section 282-A(a) of the Companies Ordinance, 1984;
(h) “Ordinance” means Securities and Exchange Ordinance, 1969 (XVII of 1969);
(i) “Person” shall have the same meaning as defined in the Section 2(1)(j) of the Ordinance;
(j) “Price Target” means the fundamental value of the company derived by the Research Analyst;
(k) “Public Appearance” means any participation in a conference call, seminar, forum (including interactive and non-interactive electronic forum), radio or television or internet or web or print media broadcast, authoring a print media article or other public speaking activity in public media in which a Research Analyst or its Associate makes a recommendation or offers an opinion, concerning listed securities or a public offer;
(l) “Public media” means any media source available to the general public and includes a radio, television, internet, web or print media;
(m) “Research Analyst” means a Person who is involved in the preparation, writing and/or publication of a Research Report or the substance of a Research Report, or who makes a “buy/sell/hold” recommendation or gives a Price Target or offers an opinion (including an opinion or recommendation made in a Public Appearance by such Person or its Associate) concerning securities that are listed or to be listed at a stock exchange registered in Pakistan, whether or not any such person has the job title of Research Analyst, and includes any other entities engaged in issuance of Research Report;
(n) “Research Entity” means a Research Analyst who is an intermediary and also provide the following services along-with the issuance of a Research Report in its own name through the individuals employed by it as Research Analyst, and includes any other intermediary associated with the securities markets in any manner, also engaged in the issuance of Research Report:
(a) acting as an underwriter;
(b) participating in a selling or an offering for the issuer or otherwise acting in furtherance of a public offer of the issuer;
(c) acting as an adviser in a merger or acquisition;
(d) providing or arranging venture capital or equity or debt;
(e) serving as placement agent for the issuer or otherwise acting in furtherance of a private offering of the issuer;
(f) offering brokerage services; and
(g) any other services as specified by the Commission.
(o) “Research Report” means a written or electronic communication which includes an analysis or opinion concerning listed securities or a public offer providing information reasonably sufficient upon which to base an investment decision, but does not include the following communications:
(i) comments on general trends in the securities market;
(ii) commentaries on economic, political or market conditions;
(iii) periodic reports or other communications prepared for unit holders of Mutual Funds or Collective Investment Schemes or clients of Investment Advisors;
(iv) internal communications that are not given to current or prospective clients;
(v) communications that constitute offer documents or prospectus that are circulated under a specific regulation;
(vi) statistical summaries of financial data of the companies;
(vii) technical analysis relating to the demand and supply in a sector or the index; and
(viii) any other communication which the Commission may specify from time to time.
(p) “Subject Company” includes the issuer or company whose securities or public offer are the subject of a Research Report or a Public Appearance; and
(q) “Third Party Research Report” means a Research Report produced by a person or entity other than the Research Analyst or Research Entity.
All other words and expressions used but not defined in these regulations shall have the same meanings as assigned to them under the Ordinance and the Act.
3. Prohibition.–No Person shall act as a Research Analyst or hold itself out as a Research Analyst unless such Person has obtained a certificate of registration as a Research Analyst from the Commission under these regulations:
Provided that a natural person performing functions of a Research Analyst under employment of a Research Entity shall not be required to be registered as Research Analyst under these regulations, but shall be subject to compliance of all the conditions and requirements applicable to a Research Analyst under these regulations:
Provided further that the credit rating companies, all non-banking finance companies with the exception of entities falling under the definition of Research Entity under these regulations, which issue Research Reports and circulate or distribute Research Reports to the general public or whose Associates make Public Appearance(s), shall not be required to seek registration under these regulations, subject to compliance of Chapter III of these regulations:
Provided further that a credit rating company or any non-banking finance company which prepares Research Reports with regard to the specific investment objectives, financial situation and the particular needs of any person or client shall not attract any provisions of these regulations.
Provided further that nothing contained in these regulations shall exempt any Person which is required to obtain a license of Investment Advisor under the Non-Banking Finance Companies and Notified Entities Regulations, 2008 and/or Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003:
Provided further that any person or entity located outside Pakistan and engaged in the issuance of Research Report in respect of securities listed or proposed to be listed on a stock exchange registered in Pakistan, shall enter into an agreement with a Research Analyst registered under these regulations and it will be deemed that such Report has been issued by the Research Analyst and the Research Analyst will be responsible for the contents of the Research Report.
4. Eligibility criteria for registration.–(1) For the purpose of granting registration to a Research Analyst, the Commission shall take into account all matters which are relevant to the grant of such registration and in particular the following, namely:–
(i) in case the applicant is an individual, he/she is appropriately qualified and certified as specified in Regulation 5;
(ii) in case the applicant is a firm, partners engaged in issuance of Research Report are appropriately qualified and certified as specified in Regulation 5;
(iii) in case the applicant is a body corporate, all the individuals employed as Research Analyst with the applicant are appropriately qualified and certified as specified in Regulation 5;
(iv) the applicant has the necessary infrastructure to effectively discharge the activities of Research Analyst;
(v) the applicant has not been convicted of an offence involving fraud by the Court;
(vi) the applicant has not been penalized by the State Bank of Pakistan and/or the Commission for an amount of
Rs. 100,000/- or above; and
(vii) the applicant has satisfied the Commission that the reasons for an earlier refusal for grant of registration as a Research Analyst, if any, are no longer applicable; and
(viii) the applicant complies with, or meets, any other conditions or requirements imposed by the Commission as it deems necessary.
5. Qualification, experience or certification requirement.–An individual registered as a Research Analyst under these regulations, individuals employed as Research Analyst and partners of a Research Analyst, if any, engaged in preparation and/or publication of Research Report shall have the following minimum qualifications, at all times:
(a) A professional qualification or post-graduate degree in finance, accountancy, business management, commerce, economics, capital market and financial services provided by a university/institution/association recognized by the Higher Education Commission of Pakistan or by a university/institution/ which is recognized by a foreign government; or
(b) three years of relevant experience which includes working in the research department of a company operating in the financial sector or capital market or experience in activities relating to securities or fund or asset or portfolio management; or
(c) any specialized certification covering the areas of capital market, as may be specified by the Commission through notification.
6. Application and procedure for registration.–(1) An application for obtaining a certificate of registration under these regulations shall be made to the Commission in Form I as specified in these regulations and shall be accompanied with:
(a) receipt evidencing payment of non-refundable fee as may be specified by the Commission through notification; and
(b) such other documents as may be required by the Commission.
(2) Any subsequent change in the information provided to the Commission at the time of filing of application under sub-regulation (1) shall be intimated to the Commission within a period of seven working days from the date of such change.
7. Grant of registration.–(1) The Commission oh being satisfied that the applicant complies with the requirements specified in Regulations 4 and 5, may grant certificate of registration to the applicant in Form II, subject to such conditions as the Commission may deem fit and appropriate.
(2) The certificate of registration shall remain valid for a period of five years from the date of issue unless it is restricted, suspended or cancelled earlier by the Commission.
8. Renewal of registration.–(1) A Research Analyst shall, three months prior to the date of expiry of its registration, apply to the Commission on the form specified by the Commission for renewal (Form I) of its registration along with receipt evidencing payment of a non-refundable renewal fee as may be specified by the Commission through notification, and such documents as the Commission may require in this regard.
(2) The Commission upon being satisfied that the applicant continues to meet the requirements for registration and is eligible for renewal shall renew the registration of the Research Analyst and issue a certificate to the applicant.
(3) Where the application for renewal of registration is made within such time as specified in sub-regulation (1) but has not been decided by the Commission, the certificate of registration shall continue to be valid until the application for renewal is decided by the Commission.
(4) While granting renewal of registration to a Research Analyst, the Commission may, in addition to the criteria laid down for grant of registration, also take into account the past performance of the Research Analyst.
9. Procedure where registration is not granted or renewed.–(1) The Commission, after giving a reasonable opportunity of hearing to the applicant, may refuse to grant or renew registration if in the opinion of the Commission such applicant does not fulfill the requirements specified in these regulations or where the Commission after taking into account the facts, is of the view that it is not in the public interest or in the interest of the capital market to grant or renew such registration.
(2) The Research Analyst whose application for renewal of registration is refused by the Commission under sub-regulation (1) shall, from the date of receipt of the decision of the Commission, cease to act as or perform the functions of Research Analyst.
CONFLICT AVOIDANCE AND DISCLOSURE REQUIREMENTS
10. Establishing Policies and Procedures.–(1) The Research Analyst shall have written internal policies and control procedures governing the dealing and trading by the Research Analyst or its Associates for:
(i) addressing actual or potential conflict of interest arising from such dealings or trading in securities of the Subject Company;
(ii) promoting objective and reliable research that reflects the unbiased view of Research Analyst; and
(iii) preventing the use of Research Report to manipulate the securities market.
(2) The Research Analyst shall have in place appropriate mechanisms to ensure independence of its research activities from its other business activities.
11. Limitations on Trading by the Research Analyst.–(1) Personal trading activities of the individuals employed as Research Analyst by a Research Entity shall be monitored, recorded and wherever necessary, shall be subject to a formal approval process.
(2) Independent Research Analysts, their Associates, individuals employed as Research Analyst by a Research Entity and their Associates shall not deal or trade in the securities which are covered in the Research Report, within thirty days before and five days after the publication of such Research Report.
(3) Independent Research Analysts, their Associates, individuals employed as Research Analysts by a Research Entity and their Associates shall not deal or trade directly or indirectly in securities that such Research Analyst reviews in a manner contrary to its given recommendation.
12. Restrictions on Research Analyst Compensation and Conduct of Business etc.–(1) The Research Entity shall ensure that compensation of the individual employed as Research Analyst is neither determined nor based on any other service(s) that the Research Entity is offering. This includes bonus, salary or any other form of compensation.
(2) An individual employed as a Research Analyst by the Research Entity shall not be subject to the supervision or control of any employee of its non-research departments, and no personnel engaged in providing non-research services may have any influence or control over the compensatory evaluation of such individual:
Provided that the factual accuracy of the information in the Research Report or potential conflict of interest may be reviewed by non-research personnel.
(3) The Research Analyst shall not provide any promise or assurance of favorable review in its Research Report to a company or industry or sector or group of companies or business group as consideration to commence or influence a business relationship or for the receipt of compensation or other benefits.
13. Limitations on Publication of Research Reports and Restrictions on Public Appearances by Research Analyst.–(1) The Research Analyst shall not submit a Research Report to the Subject Company before its publication:
Provided that some Sections of such a Research Report may be submitted to the Subject Company before its publication for review as necessary only to verify the factual accuracy of information in those Sections.
(2) The Research Analyst shall not issue Research Reports and it or its Associates shall not make Public Appearance(s) regarding a Subject Company for which the Research Analyst acted as a corporate advisor, underwriter or lead manager in a public offer from the date of its appointment till a period of 60 days from the date of completion of such offering.
(3) With the exception of Research Entities, the Research Analyst or individuals employed as Research Analyst by a Research Entity shall not participate in business activities designed to solicit non-research business, such as sales pitches and deal road shows.
14. Content in Research Reports.–(1) The Research Analyst shall have adequate documentary basis, supported by research, for preparing a Research Report.
(2) The Research Analyst shall ensure that facts in the Research Reports are based on reliable information and the source of such information is disclosed. Further the Research Analyst shall define the terms used in making recommendations and these terms should be used consistently.
(3) The Research Analyst shall disclose in the Research Report the valuation methods used to determine the Price Target, if any, that has a reasonable basis and shall be accompanied by a disclosure concerning the risk that may impede achievement of the Price Target.
(4) The Research Analyst that employs a rating system must clearly define in each Research Report the meaning of each rating in the system, including the time horizon and any benchmarks on which a rating is based.
15. Disclosures in Research Reports.–(1) If the Research Analyst acts as a market marker in the securities of a Subject Company, the fact shall be disclosed.
(2) The Research Analyst shall disclose:
(i) if the Research Analyst or any of its Associates or a close relative of the Research Analyst has a financial interest in the debt or equity securities of the Subject Company and the nature of such interest, provided such interest (actual/beneficial) aggregates to an amount exceeding 1% of the value of the equity or debt securities of the Subject Company at the time of issuance of the Research Report;
(ii) if the Research Analyst or any of its Associates or a close relative of the Research Analyst serves as a director or executive of the Subject Company;
(iii) if the Research Analyst or any of its Associates received compensation from the Subject Company in the previous 12 months;
(iv) if the Subject Company currently is, or during the 12-month period preceding the date of publication or distribution of the Research Report, was, a client of the Research Analyst;
(v) if a Research Analyst has managed or co-managed a public offering or any takeover, buyback or delisting offer of securities for the Subject Company in the past 12 months and/or received compensation for corporate advisory services, brokerage services or underwriting services from the Subject Company in the past 12 months;
(vi) if a Research Analyst expects to receive or intends to seek compensation for corporate advisory services, brokerage services or underwriting services from the Subject Company in the next three months;
(vii) any other material conflict of interest of the Research Analyst which has the ability to influence the content of a Research Report, that the Research Analyst knows or has reason to know at the time of the publication or distribution of a Research Report.
Explanation; For the purpose of this regulation, the term “close relative” shall mean the spouse(s) and lineal ascendant(s) and descendant(s) of the Research Analyst.
(3) All the disclosures under these regulations shall also be made by a Research Analyst and its Associates in Public Appearance(s).