SFC clarifies analyst insider information ruling

Officials from the Hong Kong Securities and Future's Commission (SFC) yesterday clarified their recent, controversial ruling on analysts abusing insider information to a lunch audience of investment analysts and other industry players hosted by the Hong Kong Society of Financial Analysts. Although never referring to individuals or firms by name, it was widely if informally understood this referred to Goldman Sachs analyst Ting Chuk-kwan, who the SFC found had distributed within her firm information from a company that could impact its share price.

Alan Linning, executive director of enforcement at the SFC, says the industry's shock at the ruling had taken authorities by surprise, and made them aware that their legal position was not clear.

He says the SFC accepted the analyst and the firm had not acted dishonestly, but felt the case warranted a public reprimand for spreading insider information. The recent Securities and Futures Ordinance as well as the previous legislation from 1991 - based on British regulation - have a broader definition of insider information than is found in the United States.

Therefore the extent of the law comes as a surprise to certified financial analysts, because the CFA is an American-centric examination.

Linning gave the audience several examples of cases in which Hong Kong law would find fault, but not US law.

Richard Mak, president of the HKSFA, noted these examples are not included in Hong Kong securities' exams. He suggested the SFC include case studies as well as testing people about its rules, to help alleviate this sort of misunderstanding.

Eugene Goyne, director in the SFC's enforcement division, counselled fund managers that come across insider information by accident to sit on it, rather than trade, even if their trades would be also affected by other factors. He said the only thing a fund manager could do would be to ask the company to make a stock exchange announcement - as it should do anyway. Failing that, a fund manager could bring the leak to the stock exchange.

Although fund managers in the audience weren't happy to hear this, Linning says there are examples where companies will take the necessary precautions. He cited Standard Chartered Bank, which made a stock exchange announcement before briefing analysts.

The SFC wants to get the word out that analysts or fund managers must be careful in handling price-sensitive information that they hear even accidentally. You have been warned.