[Inside Chodong] The FSS Must Take the Lead in Standing Firm on "Sell Reports"

Concerns Over Side Effects of FSS's Push for More Sell Reports
Self-Regulation by Securities Firms Is Crucial,
But Joint Efforts Needed to Foster a Healthy Market

The Financial Supervisory Service (FSS) has taken a strong stance against the securities industry's practice of issuing overwhelmingly "buy-only reports." This move comes as trust has deteriorated due to analysts exploiting buy reports for illicit gains through front-running trades. However, blindly pushing for an increase in sell reports could potentially cause greater side effects.

On the 5th, Ham Yong-il, head of the FSS, held a "Securities Industry CEO Meeting for Improving Sales Practices" and urged improvements in the issuance practices of research reports. Although the meeting was not presided over by FSS Governor Lee Bok-hyun, all securities company CEOs attended in person without sending representatives. This indicates the urgency to discipline the securities firms.

The decline in report credibility stems from the entrenched practice of issuing predominantly buy recommendations. Among 14,149 corporate analysis reports with investment opinions issued by domestic securities firms last year, only 6 reports (0.04%) contained sell opinions (including reduced weight). In contrast, foreign securities firms are relatively more active in issuing sell opinions, which account for over 10% on average.

Securities firms protest that the market environment is different. Domestic research centers function as support departments for wholesale (institutional sales) and corporate finance (IB). Can an analyst at Securities Firm A write a sell report without considering the sales department or Company B? It is not easy. Moreover, if institutions hold large positions in that stock, they are likely to stop trading with that securities firm for a while. Company B is also likely to turn its back on Securities Firm A and withhold corporate finance business. Analysts inevitably have to consider the interests of the departments that generate revenue for their own company.

The problem does not end there. The only parties welcoming sell reports might be the "big players" institutions conducting short selling. This raises suspicions of possible collusion between analysts issuing sell reports and institutions. In April, an analyst from Securities Firm H who issued a "sell opinion" on Ecopro was subject to a written inquiry from the FSS due to complaints from individual investors alleging collusion with short-selling forces. This is a clear example. In a situation where analysts must consider not only their own company's sales department but also the supervisory authorities, can they truly call for a "sell"? Overcoming an environment where issuing sell opinions invites criticism from investors and requires explanations to the FSS is difficult.

The FSS's actions within just a few months appear contradictory. Although complaints were dismissed, the written inquiry was enough to pressure the analyst. Afterwards, the FSS summoned securities CEOs and warned them about the absence of sell reports. It is said that at a closed task force (TF) meeting on improving securities report practices, a plan was proposed to set a fixed proportion for sell reports. For example, if set at 10%, sell reports would have to be issued annually to meet that quota. There are concerns that efforts to improve practices might only increase side effects. If the proportion of sell reports must be raised, the total number of reports may decrease, making it harder for individual investors to access reports. In that case, as the supervisory authorities fear, the phenomenon of investors relying on indiscriminate and rampant information could worsen.

The FSS sharply criticized securities firms for blaming only the market environment without self-reflection. This is a valid point. The self-regulatory ability of securities firms is paramount. However, before applying pressure blindly, the supervisory authorities themselves must work to create a better market environment. The movements of institutions holding stocks and individual investors sensitive to sell reports are key variables. The FSS must take a direct and proactive approach.

This content was produced with the assistance of AI translation services.