ASIC has released updated policy guidance to improve the quality and reliability of research reports.

Regulatory Guide 79 Research report providers: Improving the quality of investment research (RG 79)has been updated to help research providers better comply with their legal obligations and to complement reforms under the Future of Financial Advice (FOFA) legislation aimed at improving the quality and accessibility of financial advice.

ASIC’s guidance applies to a broad range of research providers on investment products, such as research analysts, securities analysts or research houses.

The guidance includes measures to address:

• management of conflicts of interest, particularly business model conflicts among research report providers;
• quality and robustness of the research process including the need to allocate appropriate resources and expertise to the research task;
• transparency of the research process including the way products are selected for research, what ratings mean and how they are applied; and
• the ability of users of research to form a view about the quality and reliability of the research.

To assess industry’s compliance with the guidance, ASIC will conduct targeted surveillance of research report providers.

ASIC Commissioner, Peter Kell, said ‘In recent times, there have been serious concerns about the quality of research issued by research providers, particularly in light of various investments failures that had been rated highly.

‘Research report providers are important gatekeepers in the financial services industry, standing between product issuers and the investors who purchase investment products either directly, through advisers or through their super fund.

‘It is particularly important for research providers to manage conflicts of interest that may affect the ultimate research rating.

‘We have undertaken extensive consultation with the industry and broader investment community to produce guidance that will facilitate credible and reliable research but also makes clearer its limitations to the user’, Mr Kell said.

ASIC expects research providers to give clients or subscribers information to help them understand the research service. This includes the:

• methodology applied and any limitations that apply to it;
• process by which products are selected for coverage and filters applied; and
• spread of ratings (how many products or what percentage each type of rating received over the past year, for example).

This information is designed to help users determine the quality of the service and therefore, the extent to which the research report can be relied upon.

RG 79 also sets out ASIC’s expectations that research providers effectively manage conflicts of interest so as to limit their impact on the integrity of investment research.

Conflicts of interest that may affect investment research include:

• business model conflicts associated with, for example, an issuer pays business model; and
• conflicts arising from research providers' other commercial activities. This includes non-research services provided to product issuers such as consultancy services, cross subsidisation arrangements, ancillary business units or funds management business arms.

In some cases, conflicts can be managed with robust processes and controls while in others, the conflict is so significant that it cannot be managed. In such circumstances, ASIC expects the conflict to be avoided entirely.

ASIC will conduct targeted surveillances of research report providers to assess compliance with this updated guidance, measuring both broad compliance as well discrete issues such as conflicts management.

‘If standards do not improve, ASIC will revisit the regulation of research report providers and consider whether specific law reform is needed’, Mr Kell said.

Background

ASIC recognises that licensees who prepare research will need to make some changes to comply with the updated guidance. ASIC will therefore allow a transition period until 1 September 2013 for licensees to make the necessary changes to comply with RG 79.

Today’s release of RG 79 is an updated version of original guidance published in 2004 to deal principally with the impact of conflicts of interest in research prepared and distributed by investment banks and stockbrokers.

Since then, research business models have changed and the role of research houses in preparing research on managed funds has come into focus. This research is also relied upon by financial advisers and dealer groups in preparing advice.

Research that rated products highly and were subsequently the subject of a number of corporate collapses occurred across investment classes, including:

• agribusiness schemes;
• debenture issuers;
• hedge funds investing in structured products;
• other managed or superannuation funds; and
• property investment schemes.

In November 2011, ASIC released Consultation Paper 171 Strengthening the regulation of research report providers (including research houses) (CP 171). The proposals in CP 171 were informed by our review of practices in the research sector. ASIC received 27 submissions to CP 171 of which 13 were confidential.

On 16 May 2012, the Parliamentary Joint Committee on Corporations and Financial Services published the final report from its Inquiry into the collapse of Trio Capital which considered among other issues the role of investment research. ASIC lodged its submission to and appeared at hearings of the Inquiry in September 2011. Download ASIC's submission to the Parliamentary Joint Committee.

Download:

• Regulatory Guide 79
• Report 318 Response to submissions on CP 171 Strengthening the regulation of research report providers