FSC moves to allow anonymous research notes, mandate small-cap coverage as 'buy-only' culture persists

South Korea's financial regulator plans to allow analysts to publish research notes anonymously and require large brokerages to cover small- and mid-cap stocks, in a bid to break the industry's entrenched "buy-only" culture.

The measures aim to lower the barrier for analysts to issue sell recommendations while broadening research coverage beyond large-cap stocks to small and venture companies, with the twin goals of improving the reliability of capital market information and boosting venture capital supply.

The Financial Services Commission announced the steps Thursday as part of a broader package addressing venture capital supply by major investment banks and the independence and credibility of research reports.

The initiative seeks to improve the credibility of research reports skewed toward buy recommendations and to expand information access for smaller-cap stocks, which have been largely overlooked in favor of top-tier companies by market capitalization. Greater information access for small- and mid-cap stocks is also intended to channel more venture capital toward smaller and emerging companies.

Of the 85,030 research reports published over the past three years, only 17.2 percent covered companies ranked outside the top 300 by market cap, while 48.5 percent focused on the top 100. Sell recommendations accounted for less than 1 percent of all domestic brokerage research.

To ease the pressure on analysts issuing sell calls, the FSC said it will allow analysts to choose whether to attach their names to research reports.

While anonymous authorship will be permitted, reports will still be required to go through internal procedures including prior approval by a compliance officer, and all related records — including the approval process, content and the author's identity — must be maintained internally.

The regulator also plans to strengthen safeguards for research department independence. The existing prohibition on undue influence over research departments, currently set out in Korea Financial Investment Association rules, will be elevated to a formal regulatory requirement under the Financial Investment Business Regulation.

Performance evaluations for analysts will also be reformed to reduce excessive influence from sales divisions, with objective metrics such as the gap between target prices and actual share prices to be used as key assessment criteria.

Disclosure requirements for research reports will be tightened as well. Brokerages will be required to periodically publish data on their report output and to name the top five analysts with the smallest gap between target and actual share prices. When a brokerage stops covering a particular stock, it must clearly state the reason; if coverage resumes, the firm must disclose the original suspension, its reason and the rationale for resuming.

Mandatory quotas and incentives for small-cap coverage will also be introduced. The FSC plans to set a minimum small-cap coverage ratio for comprehensive financial investment business operators and to factor small-cap research plans into the evaluation criteria for designating such operators or approving their issuance of promissory notes.

As an example of how the minimum ratio might work, at least one-quarter of a firm's annual research output would need to cover stocks ranked outside the top 300 on the Kospi by market cap or outside the top 150 on the Kosdaq, with more than half of that portion devoted to stocks outside the Kosdaq's top 150.

Comprehensive financial investment business operators with high small-cap coverage ratios will receive incentives in the calculation of their venture capital supply performance. One proposed example would allow firms whose small-cap coverage ratio exceeded 40 percent in the prior year to add a 5 percentage-point bonus to the amount counted toward their small- and venture-company supply obligations in the current year.

Venture capital supply has been growing. The combined venture capital supply balance of the seven comprehensive financial investment business operators subject to mandatory supply requirements reached 11.6 trillion won ($8.56 billion) at the end of the second quarter, up 2 trillion won, or 20.4 percent, from the end of the previous quarter. The figure reflects a 30 percent recognition cap applied to investments in A-rated bonds and mid-sized companies. Samsung Securities and Meritz Securities, which received promissory note issuance approval last month, were excluded from the tally.

Financial authorities have also been stepping up efforts to stamp out stock price manipulation. A joint task force comprising the FSC, the Financial Supervisory Service and Korea Exchange said it had uncovered a case in which a group of self-styled financial elites — alumni of business clubs at top universities — formed an information cartel, sharing undisclosed merger and acquisition information for years to reap more than 20 billion won in illicit gains.