ASIC Market Supervision Update Issue 41
Use of research surveys
ASIC recently conducted a review into the increasing incidence of fund managers and hedge funds in Australia sending surveys to research houses, in particular whether such surveys increase the potential for the improper use of analysts' forecasts on Australian stocks.
The review was initiated following approaches to ASIC by some research houses in Australia, which were concerned about the potential improper use of their research surveys by fund managers and hedge funds. This was identified as a problem in the US – and highlighted in an article in The New York Times on 15 July 2012. The article, by Gretchen Morgensen, suggested that fund managers and hedge funds had been surveying research houses to obtain information that may be non-public, and as such, provide an early indication of an analyst's intention to upgrade or downgrade a stock. For example, some surveys asked research analysts to provide their views, on a scale of 1-5, on the likelihood that particular stocks would provide a negative or positive surprise at the next earnings reporting date.
ASIC's Market and Participant Supervision team conducted a review of the use of research surveys in Australia.
The review found that:
- All research surveys reviewed specifically requested only published information.
- Most research houses receive and complete research surveys.
- Some research houses had recently decided to discontinue participating in research surveys.
- Research houses that participate in research surveys advised that they have strict policies prohibiting research analysts from providing information that is non-public when responding to the surveys.
- At least one research house publishes all survey responses on the research portal on its website, which can be accessed by all of its research clients.
- The original questions may be seen to be seeking non-public information; the revised questions are less likely to be seen to be seeking non-public information.
- At least one research house negotiated changes to questions before agreeing to participate in research surveys.
ASIC recommends that research houses:
- consider whether they can appropriately answer the questions in the research surveys they receive
- have someone other than research analysts critically review responses to any research surveys, to ensure that no non-public information is disclosed
- consider publishing any survey responses for the benefit of all research clients.
ASIC will continue to monitor the use of research surveys as part of its business as usual surveillance.
FAQs: trade notification
ASIC has provided additional information to market participants on the new trade confirmation rule, which came in to effect as part of the suite of rules relating to dark liquidity.This obligation, arising out of Market Integrity Rule 3.4.1 (ASX & Chi-X) requires a market participant to provide trade confirmation to its clients. MIR 3.4.3 provides an exception for clients other than retail clients.
The FAQ relates to the requirement in MIR 3.4.3(b), which comes into effect on 10 May 2014, and is in relation to a market participant notifying a client if the market participant has entered into the client's transaction as principal.
End of year 'window dressing'
ASIC reminds market participants to be alert to unusual trading associated with the year end, which can impact share price valuations and end of year performance figures. Often known as 'window dressing', it refers to orders placed at, or near, the close of trading, or on days leading up to the end of a reporting period, seeking to increase prices of a particular share.
Window dressing is a form of market manipulation, and is generally conducted by parties who have an incentive to manipulate prices in or around reporting periods and benefit from this practice. These include investment managers, fund managers, MDA service providers and other portfolio managers, who report to clients in relation to investment performance on a periodic basis. As such, market participants should be alert to orders placed near the close on trading days leading up to reporting periods, that may impact the end of day price of securities.
ASIC's Market Surveillance team monitors trading of securities which increase in price near the end of reporting periods, which may be indicative of market manipulation. Previous surveillance activity has resulted in referrals to ASIC's Enforcement division for formal investigation. Market participants ought to be aware of their obligations as gatekeepers, and should take active steps to identify possible misconduct, both by way of system controls and filters, as well as reviews of anomalous trading by designated trading representatives (DTRs) and compliance staff. ASIC also reminds market participants of their obligation to report suspicious activity to ASIC under ASIC Market Integrity Rule 5.11. Should ASIC uncover evidence of window dressing, ASIC's Enforcement team will investigate further, which may result in ASIC Market Integrity Rule or Corporations Act penalties being imposed.
For further information, market participants should consider previous public statements made by ASIC and the ASX:
Market participants should contact ASIC for market integrity issues and ASX and Chi-X respectively for operational issues. Contact ASIC’s Market and Participant Supervision group on 1300 029 454 and you will have these voice menu options:
- Option 1 for real time market matters
- Option 2 for other market related matters
- Option 3 for Participant enquiries or matters
- Option 4 for Market wide announcements.
Or you can reach the Market and Participant Team by email firstname.lastname@example.org, or through your relationship manager.
For more information
Please see www.asic.gov.au/market-supervision