The Legal Regulation Of Securities Analysts' Conflicts Of Interest

The main work of securities analysts is to dig and analyze all kinds of information in the securities market.Based on such information,they can make recommendations and adjust ratings about securities or issuers.Such information and research conclusions are disseminated to investors via research reports or oral statements in public appearances.They are not only important professional information intermediary in the securities market,but also helpful for enhancing of the transparency in the securities market,balancing the disadvantaged position of the investors,as well as improving market efficiency.They can even play a special role in fraud detection.However,securities analysts are facing the the impact of conflicts of interest from security companies,issuers,institutional investors,and analysts themselves.With the presence of these complex interest conflicts,analysts who lose objectivity and independence may publish biased,misleading and false information in research reports and public statements.These misconducts will seriously damage the stability of the security market and violate the interest of investors.Therefore,it is an important aspect for the healthy and stable development of a country's securities market that to conduct reasonable legal regulation for securities analysts and promote their objective research.Since the beginning of 2000,the United States had started a comprehensive legal regulation for securities analysts'conflicts of interest.In the past decade,these rules had undergone several modifications which have made them more comprehensive both in concept and content,and as a result can more effectively supervise the analysts.By contrast,due to the relative youth of Chinese security market,the legal regulation of analysts is far from mature and effective.Therefore,based on the analysis and research of the rules and regulations of American securities analysts,combined with the characteristics of the analysts themselves,as well as on the current situation of Chinese securities market,this dissertation puts forward suggestions for improving and revising the legal regulation system of Chinese securities analysts.This dissertation consists of six chapters.The introduction first lays down the background and significance of the research,as well as offers the literature review and conclusion of related research both domestic and abroad.It then introduces the research ideas,methodology,and possible innovations and shortcomings of this dissertation.The first chapter focuses on the concept and the values of securities analysts,as well as the manifestation and the detriment of the securities analysts' conflicts of interest.This chapter makes clear the connotation and scope of the subjects to be investigated,and makes a theoretic base for the dissertation.According to their practice institutions,securities analysts can be traditionally classified into sell-side analysts,buy-side analysts and independent analysts.Based on their research scope,they can be classified into stock research analysts and debt research analysts.This study mainly targets at the sell-side analysts and independent analysts.Their common feature is to publish research reports to investors in the market,which can affect the information in the whole securitis market.The influence on the investors is the core element of the definition of the security analyst in the American law,but the current definition of the security analyst in China takes administrative registration as the core element,which has no correspondence to the essential characteristics of the security analyst industry.Combining the essential characteristics of the analyst industry and the current rules of our country,this dissertation holds that the securities analysts refer to the market professionals who take the qualification of securities analysts,work in security companies,security investment consulting institutions or other independent security research institutions,and are responsible for the main contents of the research reports.The value of the securities analysts lies not only in the prediction and rating of securities,but also in the whole process of discovering and analyzing information.The work of analysts has improved the transparency and the efficiency of the market,and meanwhile they also play an important role in finding fraud and protecting investors.At present,there are many kinds of misconducts in the security analyst industry,such as overoptimism,misrepresentation,insider trading and disclosure of inside information.These misconducts disrupt the market order,affect the healthy development of the stock market,and damage the integrity and investors' confidence of the market.The reason behind the chaos is the fact that the securities analysts are influenced by the complex interest conflicts in the market.The second chapter analyzes the manifestation?sources and characteristic of the conflicts of interest of the analyst industry.There are four main sources of conflicts of interest for securities analysts,which are the other business departments of the security companies,issuers,institutional investors and analysts themselves.The root of these conflicts is the independent financing predicament of securities analysts,which is caused by the attributes of public goods of the information.They must rely on outside financial support.Therefore,under the premise that the public goods attribute of information will not change,the financing difficulty of securities analysts can hardly be fundamentally changed.Consequently,the conflicts of interest cannot be eliminated.This is the biggest feature of the conflicts of interest of the securities analysts.The third chapter introduces the basic principles and methods of the legal regulation.Starting from the characteristics of analyst's industry and the current situation of Chinese securities market,the legal regulation of analysts' interest conflicts needs to focus on the three basic principles of humanization,marketization and sinicization.And there are mainly three basic regulation methods including the interdiction of conflicts of interest,the information disclosure of conflicts of interest and the legal liability of securities analysts.The fourth,fifth and sixth chapter present the basic approaches of the legal regulation of the securities analysts.The fourth chapter gives a comprehensive study of the managing and interdicting rules of conflicts of interest of securities analysts.Based on the idea of reducing conflicts of interest,managing and interdicting the conflicts of interest themselves is one of the most important approaches of the legal regulation of analysts.The first section analyzes all the relevant rules of the United States since 2000.In American law,it mainly relies on the Regulation FD,"the Globe Settlement",the Sarbanes-Oxley Act,the Dodd-Frank Wall Street Reform and Consumer Protection Act,the Jobs Act and the Self-Regulatory Organization Rules to identify,manage and interdict the conflicts of interest of securities analysts.The core concept of the American rules is to reduce the impact of the conflicts of interest while ensuring that analysts can exert their professional value,and reasonably reduce the burden of issuers,security companies and analysts under the premise of protecting investors' interests.The second section studies the current laws and regulations of Chinese securities analysts and the ways to improve.China's existing managing and interdicting rules of conflicts of interest of securities analysts have formed into a basic institutional framework,but the understanding of regulatory concepts is not clear and deep enough.On the one hand,some rules are too strict,such as prohibiting analysts'personal securities trading,long-time silence period,and no corresponding exemption rules for small sized security companies and issuers,etc.,which seriously affect the information intermediary value of analysts.On the other hand,there are still some deficiencies and shortcomings in the construction and implementation of a part of the current rules in China,such as lacking attention to some sources of the conflicts of interest from institutional investors,lacking supervision of the issuer's selective information disclosure,and so on.These deficiencies and shortcomings are affecting the objectivity and independence of Chinese analysts.Based upon the thorough analysis the current situation,this section also puts forward some suggestions on the identification and regulation of the conflicts of interest of securities analysts in China.The fifth chapter is about information disclosure rules of the conflicts of interest of securities analysts.Base on the studies of the second chapter,the conflicts of interest of analysts cannot be eliminated.Therefore,relying solely on the managing and interdicting rules of interest conflicts can never completely block the impact of interest conflicts.The rules of disclosure of analyst conflicts of interest is more comprehensive and market-oriented,which plays an irreplaceable role in investor protection as well as legal regulation of analysts.In the long-term,the comprehensive disclosure of the conflicts of interest is also conducive to the construction of securities analyst's reputation feedback mechanism,and to promote the healthy development of the industry.The stipulation of disclosure rules in the US legal system can be found in Regulation AC,"the Globe Settlement",the Sarbanes-Oxley Act and the Self-Regulatory Organization Rules.The scope of disclosure is reasonable;the system is complete and the content is comprehensive.These rules effectively reduce the overoptimistic trend of analysts in the US,protect investors' right to learn the truth,and urge analysts to publish predictive ratings more cautiously.In contrast,China's securities market has always been dominated by administrative supervision,ignoring the information disclosure as a market-oriented regulation,and the relevant disclosure rules are also very imperfect.Based on the status quo of China,we need to modify the rules in two main aspects,namely,the subjects and occasions of disclosure,and the contents of disclosure.And we also need to strengthen the supervision and punishment of the information disclosure violations of the analysts'conflicts of interest.The sixth chapter mainly studies the legal liability of the securities analysts.The managing and interdicting rules of conflicts of interest and the information disclosure rules of the conflict of interest can be divided into the pre-regulation of the conflicts of interest,and the sixth chapter is the post-regulation for the misconducts of the securities analysts.The First section studies the administrative and criminal liability of securities analysts both in the United States and China.In comparison with the American analysts'administrative liability,the current rules in China need to increase supervision of the securities company internal policies and procedures and make a clearer definition of misleading statements.The second section studies the civil liability of the securities analysts.In the United States,both the SEC and investors can bring civil actions against securities analysts.In civil suits,the SEC seeks injunctions,civil money penalties and the disgorgement of illegal profits,thus to penalize analysts' illegality.American investors can bring civil actions against securities companies and securities analysts for violations of Rule 10b-5 for material misstatements and omissions concerning both the ratings and reports.But analysts should not be responsible for all the losses of all investors.So,the plaintiff must be a purchaser or seller of the securities,and he or she must allege that the defendant made a materially misrepresentation or omitted a material fact with scienter,as well as the plaintiff's reliance on defendant's misrepresentation caused the plaintiff's injury.Different courts in the United States have different standards in the securities analysts' misrepresentation civil actions.These different standards reflect the thinking and balancing among American judges in protecting analysts' industry,setting reasonable litigation gate and safeguarding investors' interests.At present,there is no civil compensation lawsuit against securities analysts in China,which is also an important direction for us to perfect the legal regulation system of securities analysts.In the current academic field,the nature of the civil liability of securities analysts has three different theories:the liability for breach of contract,the independent responsibility and the tort liability.From the background of the current tort law and the elements of the tort liability,the tort liability theory is more reasonable.About the doctrine of liability fixation,base on the differences between analysts and other parties in the securities market,the presumption of fault liability may make the analysts to take over the unreasonable heavy responsibility,and the actual effect may not be beneficial to the realization of the ultimate goal of investor protection.Meanwhile the fault liability will not increase the burden of proof for investors much no matter under the current rules or under the future possible rules modification background,and it can be used as a "litigation gate" to balance the development of analysts and investor protection.In the end,this dissertation analyzes the three elements of the civil liability of securities analysts,which is the fault,the damage and the causation.