ISLAMABAD, Sept 12: A preliminary draft prepared by the Securities and Exchange Commission of Pakistan (SECP) has laid down a number of terms and conditions and a strict code of conduct for company analysts.

The commission, which is presently seeking public comments on the draft, has asked firms to develop detailed, written guidance for analysts, supervisory analysts and review committees.

In case of a breach in the code of conduct, the SECP will have the powers to impose a penalty between Rs5,000 to a maximum of R1 million based on the nature and gravity of the breach.

The draft has defined “analyst” as a person, who is primarily responsible for preparation of the substance of written reports/presentations, public appearances, or the basis for a recommendation, for distribution to clients or prospective clients of the firm or the investing public.

An analyst can be a partner, director, officer, employee or an agent of a financial institution, independent research firm, brokerage firm, fund management house or institutional investor, as long as the research and/or recommendation prepared is disseminated to clients or investing public.

Individuals engaged in the analysis process should possess relevant academic and professional qualifications along with relevant work experience. Analysts holding graduate degrees should possess a minimum of three years, and analyst holding masters degrees must possess two years of experience working as an analyst. They must be able to prepare and sign off research reports, or in the case of experience of less than one year, reports should be jointly signed by head of research.

Analysts should have a continuing duty to maintain professional knowledge and skills consistent with latest procedures, practices, legislations and financial techniques. Analysts should abide by the code of ethics and the standards of professional conduct of a professional accounting body.

According to the draft, each analyst shall define in the research report the meaning of each rating used in the rating system. The definition of each rating of the company must be consistent with its plain meaning.

When research analysts are permitted to invest and trade in the securities of the companies they cover, it is critical that firms prohibit them from trading contrary to the published recommendations of the firm on these companies. There is one instance in which research analysts may be permitted to sell contrary to their recommendation. This is the case where the analyst would suffer “extreme financial hardship”, if he/she could not liquidate these securities.

The draft states that analysts shall strive for investor education at personal, firm and association level. They shall maintain website giving at least following information: Definition of the terms they use in reports and recommendations; a breakdown comparison (in percentage or proportion terms) of the number of the different types of recommendations (e.g. buy, hold or sell) they make over a given time period; a comparison of the target price forecast in the past versus the actual price of a covered security over a period of time from the date of the forecast.

The 16-page preliminary draft will be finalised after the SECP receives public comments.