Japanese Brokers Moving to Ban Analysts From Earnings Previews

Japan’s brokerage industry is moving to prevent analysts from getting early peeks into companies’ earnings, formalizing guidelines after major firms took steps to curb the practice.

The Japan Securities Dealers Association will ask its members not to seek unpublished earnings figures from companies they cover, according to draft guidelines released Wednesday. The practice had spurred criticism that some investors were given access to results before earnings were released, creating the possibility of unfair trading advantages.

“We’ve been moving closer toward U.S.-style fair disclosure rules,” said Yoshihiro Okumura, general manager at Chiba-Gin Asset Management Co. The JSDA “banning analysts from gaining undisclosed information is a completely natural development. Most brokerages have already stopped engaging in this for compliance reasons.”

Japan has yet to put into law fair disclosure rules like those in the U.S. that would require companies to publicly disclose material information. For years in Japan, investors had access to early peeks into companies’ undisclosed earnings information, as companies were free to selectively share material information, allowing analysts to write up ”earnings preview” reports that informed clients.

Official Censure

At least five major brokerages including Credit Suisse Group AG this year have banned analysts from talking to companies for preview notes, jolted into action by an official censure of Deutsche Bank AG’s local research unit in December and a regulatory report in April that called for new disclosure rules.

Selective disclosures of material nonpublic information by companies are legal in certain circumstances in Japan. In its censure of Deutsche Bank the FSA cited a rule banning researchers from using material nonpublic information to solicit client trades.

The JSDA guideline bans analysts from talking to companies in order to gain data on undisclosed profits, sales, order numbers, and any qualitative information on changes in earning trends.

The increased regulatory scrutiny of selective disclosures comes as Prime Minister Shinzo Abe’s administration tries to lure more individuals to the stock market and improve Japan’s corporate governance. The change in practice among brokerage firms is having an impact on the stock market. The lack of preview notes on corporate earnings has resulted in more volatile stock moves after earnings are formally published, and a wider dispersion of analyst forecasts.