ASIC puts bankers, analysts on notice with new guidelines

Australian Financial Review Jun 30 2017 5:21 PM

Joanna Mather, Joyce Moullakis

Sweeping new guidelines being proposed by the corporate regulator to bolster Chinese walls and prevent conflicts between bankers and research analysts look set to be introduced in December.

The Australian Securities and Investments Commission (ASIC) released on Friday a consultation paper that outlined how investment banks and stockbrokers should handle insider information, or so-called "material non-public information".

The detailed guidance comes after several high-profile incidents and follows ASIC uncovering "poor" performance in the domestic market during its surveillance activities.

The regulator is worried that the integrity of sell-side research is being eroded as analysts may confront pressure to provide more favourable research on companies during capital raisings and other deals.

The ASIC guidance covers conduct during each stage of an IPO, including pre-solicitation, vetting, pitching and the post-mandate period and preparation of the investor education report. A series of checks and controls on analysts' interaction with others are canvassed.

"When a firm is involved in a capital raising and a researcher is there doing their job, then we have concerns that the corporate advisory team may want to influence what the research analyst is saying about valuations in particular," ASIC head of market integrity Greg Yanco said.

"That is where it gets really tricky to manage conflict. In the work we did last year it wasn't just a perceived conflict, there were actually conflicts that we didn't think were being managed very well."

ASIC has invited industry feedback on the proposals over coming months and expects to have the guidance finalised before the end of the year.

Moves by the regulator follow a probe into Chinese walls at UBS after a headline on a research report relating to its advisory role in NSW energy privatisations was changed.

The UBS report, originally titled Bad for the budget, good for the state, was later reissued with the new title Good for the state. ASIC finalised its response to the matter almost 18 months ago after UBS agreed to remedial measures.

Among proposals outlined in the ASIC consultation paper were that research budgets should be determined by management with no input from corporate advisory bankers and that analysts only attend briefings with companies that are raising capital after a mandate has been signed. ASIC also wants stricter procedures in place around communication between deal and research teams and compliance officers.

But Stockbrokers and Financial Advisers Association chief Andrew Green said his members were already bound by the association's best-practice guidelines for research integrity.

"They are pretty committed," he said. "We have guidelines to make it very easy for people to do the right thing."

Mr Green said he welcomed consultation by ASIC.

But he also warned guidelines that were too prescriptive could have "unintended consequences", including less research on Australian companies and stocks.

"We need to be mindful as an industry, and as a nation, that we don't become overzealous on regulation," Mr Green said. "It's a very fine balancing act and we take this whole question of integrity very seriously."

A fund manager, who declined to be named, said any professional investor should take a buy or sell recommendations with a grain of salt.

"Real estate agents promote houses in their listings and brokers are no different [with IPOs].

"We always take the view that if ECM (equity capital markets) have a mandate to raise money, research would be positive on the stock and it would be naive to think otherwise.

"The retail end of the market do need to be protected because often retail investors are filling a gap in dud deals."

Between September 2014 and June 2016, ASIC reviewed a sample of transactions including initial public offerings and secondary offerings.

The review came after monitoring and surveillance work that indicated "some poor research practices" in the management of confidential insider information and conflict of interests involving research.

ASIC also wanted to see whether conduct witnessed overseas was occurring here.

The US Financial Industry Regulatory Authority identified misconduct by 10 investment banks pitching for the Toys 'R' Us IPO.

FINRA found that these investment banks, eight of which had affiliates with a presence in the Australian market, had managed poorly conflicts when they used their research analysts to help solicit an IPO mandate and explicitly or impliedly offered favourable research coverage to Toys 'R' Us.

"We identified instances where pressure was placed on research analysts, either by corporate advisory staff or the company intending to raise capital or its other advisers, about their valuation or approach to valuation," the consultation paper says.

"This was in relation to IERs distributed to potential investors in advance of a capital-raising transaction on which the licensee was also mandated to manage the transaction.

"Where a research analyst's objectivity is compromised leading to a research report that is not based on 'reasonable grounds' the research is likely to be misleading or deceptive within the meaning of the [law]."