"Increase Small- and Mid-Cap Coverage": Financial Authorities Overhaul Securities Firms' Large-Cap-Focused Reports

Minimum Small-Cap Coverage Ratio Introduced for Nine Major Investment Firms
Anonymous Reports Permitted; IPO Research Requirements Also Strengthened

Financial authorities have decided to introduce a minimum small-cap coverage ratio for domestic major securities firms, aiming to address the prevalent practice of research reports being overly concentrated on large-cap stocks. Going forward, nine major securities firms classified as comprehensive financial investment business entities (so-called 'Comp. Investment Firms') must ensure that at least one-quarter of their annual reports cover small- and mid-cap stocks.

On October 1, the Financial Services Commission and the Financial Supervisory Service announced that they had discussed a plan to mandate research reports on small- and mid-cap stocks at the “Task Force for Strengthening Venture Capital Competency in the Financial Investment Industry” held on September 30.

This measure is intended to enhance the credibility and quality of research reports and to stimulate the provision of venture capital to small- and mid-cap stocks, as well as KOSDAQ-listed companies. Over the past three years, only 17.2 percent of a total of 85,030 published research reports targeted companies ranked below 300th by market capitalization. In contrast, reports on companies ranked 1st to 1,100th by market cap accounted for 41,239 reports, or nearly half (48.5 percent) of the total.

Accordingly, the financial authorities have decided that the comprehensive investment firms — namely Korea Investment & Securities, Mirae Asset Securities, NH Investment & Securities, KB Securities, Hana Securities, Kiwoom Securities, Shinhan Investment & Securities, Samsung Securities, and Meritz Securities — must ensure that at least one-quarter of their annual reports cover stocks ranked below 300th by KOSPI market capitalization or below 150th by KOSDAQ market capitalization. More than half of these reports must be dedicated to KOSDAQ stocks ranked below 150th by market capitalization. Based on the current criteria, this includes companies with a market capitalization of under approximately KRW 600 billion.

In addition, incentives will be provided to comprehensive investment firms with high small-cap coverage ratios, such as giving additional credit for their performance in providing venture capital. When designating comprehensive investment firms or reviewing applications for issuance of promissory notes, the plan for publishing small-cap research reports will also be included as an evaluation criterion by the external review committee.

The requirements for research reports on initial public offering (IPO) companies will also be strengthened. Currently, securities firms are obligated to publish reports at least twice during the first year after IPO. This will be expanded to at least twice per year for three years after listing. To alleviate the burden on analysts regarding issuing sell recommendations, the proposed plan includes allowing them to choose whether to include their names in the report. This comes in response to concerns over the credibility of domestic securities firms’ research, as less than 1 percent of reports have issued sell ratings, indicating a clear bias towards buy opinions. However, procedures will be established to ensure that anonymous reports are not issued excessively, including requiring pre-approval and management by compliance officers.

Furthermore, to boost the credibility of research reports, the excessive influence of the sales division will be excluded when evaluating analysts’ performance, and the five analysts with the lowest gap between target price and actual price will be regularly disclosed. When a securities firm suspends the publication of a research report, it will be required to provide more detailed reasons for the suspension.

On the same day, the task force also reviewed the venture capital provision performance of the seven comprehensive investment firms subject to mandatory venture capital supply (Korea Investment & Securities, Mirae Asset Securities, NH Investment & Securities, KB Securities, Hana Securities, Kiwoom Securities, and Shinhan Investment & Securities). In the second quarter, the total amount of venture capital supplied was KRW 11.6 trillion, an increase of about KRW 2 trillion (20.4 percent) from the previous quarter.

The ratio of venture capital supply to the funds raised through promissory notes and integrated investment accounts (IMA) was 19.5 percent, up 2.7 percentage points from the first quarter. All seven comprehensive investment firms exceeded the mandatory ratio.

Meritz Securities and Samsung Securities, which received new approvals for short-term financial business (promissory note issuance) in September, also announced plans to pursue bolder venture capital provision strategies in the future. The mandatory venture capital supply ratio for comprehensive investment firms, currently at 10 percent this year, will be gradually raised to 20 percent next year and to 25 percent by 2028.

A financial authority representative stated, “We will continue to discuss key issues related to expanding the provision of venture capital,” adding, “We will closely communicate and refine measures to ensure the comprehensive improvement of the research report system is implemented smoothly and firmly established in the field.”

This content was produced with the assistance of AI translation services.