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 The Hong Kong Securities and Futures Appeals Tribunal (SFAT) said
Moody's did breach the Securities and Futures Commission (SFC) code
of conduct through the publication of a July 2011 report that raised
corporate governance concerns over 49 Chinese companies,
contributing to a fall in their share prices.
Lawyers said the decision, which marks the first disciplinary action
against a credit rating agency since the activities of such firms
became directly regulated by the SFC in June 2011, would act as a
roadmap for future regulatory action.
"Given this decision, credit rating agencies will generally have to
exercise more caution, as it seems the court agrees with the SFC
that these type of research activities are within its remit," said
Michael Cheng, a consultant solicitor at law firm Andrew W Y Ng & Co
in Hong Kong.
The tribunal did not uphold all of the SFC's claims against Moody's,
more than halving the regulator's proposed HK$23 million ($2.97
million) fine to HK$11 million and directing the SFC to re-draft its
public reprimand against the agency.
Moody's will also be required to pay 60 percent of the SFC's legal
costs.
"As one of the three largest credit rating agencies in the world,
Moody’s must have appreciated that the report would carry
considerable weight in the market," the tribunal noted in its
ruling.
"Yet, despite internal concerns as to the accuracy of the red flag
framework, Moody’s persisted in the publication."
Moody's so-called Red Flag report devised a framework for
identifying governance and accounting risks when investing in
emerging market fixed income securities.
Following an inquiry into the report, the SFC attempted to fine and
reprimand Moody's in November 2014, but Moody's appealed against the
action.
The SFC alleged during a September appeals tribunal that Moody's
broke a code of conduct by publishing what its counsel, Benjamin Yu,
described as a "half-baked" idea that had not been properly tested
and which contained mathematical and input errors.
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As such, the report fell short of the SFC's required due diligence
requirements, the SFC said.
Moody's disputed the SFC's power to sanction it and argued the
report was merely a useful "screen" for analyzing companies and was
not part of its regulated credit-rating activities.
It also contested the proportionality of the fine.
The tribunal found, however, that the report did constitute Moody's
regulated activity as a rating agency, and was within the SFC's
jurisdiction, a finding that could force ratings agencies and banks
to review their research strategy.
The tribunal did not agree with the SFC's claim, however, that
Moody's acted dishonestly, and did not uphold the SFC's assertion
that Moody's did not have adequate internal controls and procedures
in place.
Moody's said in a statement it appreciated the SFAT's decision to
reduce the penalty.
"However, Moody’s does not believe that research reports such as the
one Moody’s published back in 2011 fall within the ambit of the SFC.
Moody’s is considering its options."
(Reporting by Michelle Price; Editing by Ryan Woo, Robert Birsel)
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