Regulatory Control in Hong Kong? Moody’s Loses Appeal on ‘Red Flag’ Research

Hong Kong’s Court of Appeal on Thursday rejected Moody’s Corp.’s appeal against a decision that found it broke the territory’s regulatory code of conduct.

The Hong Kong court ruled in favor of a March 2016 ruling by the Securities and Futures Appeals Tribunal which fined the rating agency for HK$11 million (US$1.4 million) fine and affirmed an action against it by the city’s Securities and Futures Commission.

A first of its kind in Hong Kong, the tribunal’s decision was seen as having wide-ranging implications for how ratings companies operate in the former British colony.

Code breach

According to the SFC, a 2011 report on public companies breached the code by failing to provide sufficient explanations for its judgments and not ensuring the accuracy of its claims.

However, the judges did agree with some of Moody’s arguments, reports Bloomberg. The tribunal was wrong to call the research note a credit-rating report, they said, because it did not meet the necessary criteria.

“The SFC considers that responsible research, including those issued by credit rating agencies and research houses, can all contribute to the overall market quality and price discovery process,” Ashley Alder, chief executive officer at the regulator, said in a statement. The agency, he said, “has no intention to suppress legitimate commentaries on listed companies, whether positive or negative.”

'Considering its options'

Bloomberg reports that the 2011 Moody’s note highlighted warning signs about weak corporate governance, opaque business models and unclear financial reporting at dozens of Chinese companies. The tribunal said in March last year that the note qualified as a ratings notice, which meant it should be held to higher standards.

“Moody’s did not engage in misleading conduct and disagrees that the Securities and Futures Commission should be able to regulate the content of research publications,” Donough Foley, senior vice president for government and public affairs, said in an emailed statement. “Moody’s is reviewing the court’s opinion and is considering its options.”

 

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