SFAT affirms SFC decision to reprimand and fine Moody’s over Red Flags Report 


The Securities and Futures Commission (SFC) has reprimanded Moody’s Investors Service Hong Kong Limited (Moody’s) and fined it $11 million for various failures relating to its preparation and publication of the special comment report entitled “Red Flags for Emerging-Market Companies: A Focus on China” published on 11 July 2011 (the Report) (Notes 1, 2 & 3).

The SFC’s action against Moody’s follows the determination of the Securities and Futures Appeals Tribunal (SFAT) which confirms the SFC’s jurisdiction over Moody’s in this case (Note 4).

The SFAT has affirmed the SFC’s findings that, Moody’s, in preparing and publishing the Report which purportedly identified risk factors of Mainland rated issuers:

  • failed to provide sufficient explanations for the red flags assigned by it to the rated companies and to set out relevant justifications to the red flags in the Report, and had, as a result, painted an unfair, unclear and misleading picture of the companies;
  • chose to list the red flags assigned to each company and to highlight six companies with the largest number of flags in the Report as “negative outliers” to make the Report “actionable” despite the assessment performed by its analysts showed that there was no significant correlation between the number of red flags and the companies’ credit risk; and
  • failed to ensure the accuracy of the red flags assigned to the companies.

The SFAT found that in the preparation and publication of the Report, Moody’s was carrying on its regulated activity of providing credit rating services.  The SFAT also found that there were substantive breaches of General Principles 1 and 2 of the Code of Conduct (Notes 5 & 6).  The SFAT has determined that Moody’s should be subject to a public reprimand and a pecuniary penalty of $11 million (Note 7).

The SFC’s Chief Executive Officer, Mr Ashley Alder, said, “The Code of Conduct sets general principles and standards of conduct that all licensed or registered persons, including credit rating agencies, must follow.  The purpose of the Code of Conduct is to maintain high standards of conduct by intermediaries and to ensure intermediaries remain fit and proper.”

Source: SFC

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