B/S/H calls and TP projections: SECP appellate bench dismisses IRA's appeal

The Buy/Sell/Hold (B/S/H) or projecting a Target Price (TP) of certain securities listed on Pakistan Stock Exchange (PSX) was not done merely for education purposes, but it was a research report to determine and influence the investment decisions of the investors/users of the online portal.

An Appellate Bench of the Securities and Exchange Commission of Pakistan (SECP) Tuesday conveyed to the research analysts that the B/S/H or TP of certain securities was not only for education purposes, rather it was a research report to determine and influence the investment decisions of the investors/users of the online portal.

The SECP Appellate Bench has dismissed the appeal filed by an independent research analyst before the bench. The SECP Appellate Bench endorses the Appellant's (Independent Research Analyst) assertion that the regulations do not require the appellant to incorporate a company to provide written calls. The Bench accepts the appellant's argument that he is not registered or licensed under the Act; however, it does not exempt the appellant from compliance of the regulations. In view of the aforesaid, the Bench believes that the Independent Research Analyst was a regulated person who was carrying out a regulated activity as an IRA under the Research Analyst Regulations, 2015. "Therefore, in our view, while acting as an IRA, the appellant was bound to follow the procedure and requirements of the regulations." Furthermore, the appellant was also required to issue its research reports as per the requirements of the regulations but the appellant failed to do so. "In the circumstances, we are of the view that the appellant had not only violated Regulation 7 of the regulations but also violated the requirement of the regulations."

Brief facts of the case are that the appellant is an Independent Research Analyst (the IRA) in terms of Regulation 2(d) of the Research Analyst Regulations, 2015 (the Regulations) and he was providing calls in writing for Buy/Sell/Hold (B/S/H) or projecting a Target Price (TP) of certain scrips listed on the Pakistan Stock Exchange (the PSX) through his online portal. The written calls were Research Reports in terms of the Regulation 2(h) of the Regulations. The Securities and Exchange Commission of Pakistan (the Commission) examined some Research Reports issued by the Respondent. The review of the following Research Reports revealed that the Appellant had contravened Sub-Regulations (2), (3) and (4) of Regulation 7 of the Regulations.

In view of the above, a Show Cause Notice (the SCN) dated May 31, 2017 was served on the Appellant under Section 159 of the Act. The SECP officials being dissatisfied with the response of the Appellant, imposed a penalty of Rs 1,000,000.

The SECP officials (Respondent) has rebutted the grounds of Appeal and stated that as per Regulation 2(h) of the Regulations, written communication in any form, which includes a TP or B/S/H recommendation is termed as a Research Report. The contention of the Appellant that his written calls fall under the exception given in the proviso of Regulation 2(h) of the Regulations is not tenable as the calls referred in the SCN does not exclusively include contents referred in Regulations.

The SECP officials clarified that the Research Reports generated by the Appellant and referred in the SCN had been thoroughly examined, which revealed that the Appellant had either provided a TP or B/S/H or both in the mentioned scrip. 8. The Respondent further stated that the Appellant is not engaged in any other regulated securities activity and has been performing the functions of the research analyst by issuing the Research Reports; therefore, the Appellant is undoubtedly functioning as an IRA. The Respondent stated that a 'call report' commonly means B/S/H and is considered as a Research Report. The Respondent stated that the Appellant cannot be let 'scot-free' by merely pretending to be a teacher while offering the services of a Research Analyst.

The SECP Appellant Bench is of the view that before proceeding with the case it is most important to determine whether in terms of Regulation 2(d) of the Regulations, the Appellant is an IRA or not. As per record, the Appellant was not involved in any other regulated activity except research analysis through written calls; therefore, he is an IRA in terms of the Regulation 2(d) of the Regulations. The Bench has also carefully gone through the contents of the Appellant's written calls whereby, he rendered B/S/H or projected TP of certain securities listed at the PSX through online portal and, therefore, his calls were Research Reports in terms of Regulation 2(h) of the Regulations.

The Bench has no reason to accept the Appellant's assertion that his written calls fall under the scope of exceptions provided under the Proviso of Regulation 2(h) of the Regulations because, in all written calls he either suggested B/S/H or projected TP of certain securities. Therefore, the Appellant's assertion does no hold any merit. Furthermore, due to suggested B/S/H or TP instances in the written calls, the Bench is not inclined to accept that Research Reports were merely a comment on general trends in the securities market or on economic, political or market conditions, the SECP bench observed.

"In the circumstances, we find no reason to interfere with the merits and imposed penalty of the Impugned Order, therefore, bench hereby dismisses this appeal," added the SECP Appellate Bench.