ASIC has today accepted an enforceable undertaking (EU) from Foster Stockbroking Pty Limited (FSB) over the stockbroker's capital markets and research businesses, following an ASIC investigation into conflicts of interest.
FSB is an Australian financial services licensee based in Sydney that provides investment banking and traditional stockbroking (including research) services to its clients. It was the Sole Lead Manager for an initial public offering of Reffind Limited (RFN), a small cap technology company in July 2015. The RFN IPO was oversubscribed by at least 385%.
ASIC found that FSB scaled back IPO subscription bids made by FSB's directors disproportionately less than subscription bids made by other investors, including FSB retail clients, and did not fully disclose to RFN the shares allocated to FSB directors. ASIC is concerned that by FSB giving preferential treatment when allocating shares to its directors that it failed to adequately manage conflicts of interests.
ASIC also found that:
- there was no effective separation of FSB's research function from its other functions and a research report about RFN was written by the Head of Investment Banking at FSB, who had an ongoing corporate advisory role with RFN;
- at the time of the publication of the report, both the Head of Investment Banking and associates of FSB had significant holdings in RFN that were not adequately disclosed in the research; and
- statements contained in the research in relation to its objectivity were potentially misleading.
ASIC is concerned that conflicts between the commercial and personal interests of FSB and its directors and the interests of FSB's clients to receive independent and objective research were not appropriately managed by FSB in relation to the report.
ASIC Commissioner Cathie Armour said, 'ASIC considers the process of allocating securities by stockbrokers in capital markets raisings should be efficient, honest and fair, and the publication by those stockbrokers of sell-side research on securities should be independent and objective. Ensuring this conduct meets these standards directly is necessary to ensure the integrity of financial markets and investor confidence in those markets.'
FSB has undertaken to implement a number of changes to its systems and controls, including:
- Implementing physical information barriers between research and other functions of FSB;
- Ensuring only research staff write research;
- Ensuring disclosures on its research include prominent, specific and meaningful disclosures of the interests of the research analyst and FSB;
- Introducing longer 'restricted trading' periods, when directors and staff cannot trade in certain securities, and ensuring those restricted trading periods apply to securities allocated in a capital raising as well as publication of sell-side research with material changes to price targets or ratings changes;
- Implementing new procedures requiring specific disclosure to and consent from an issuer before allocating securities to its directors and staff in a capital raising it is managing.
FSB will appoint an independent expert to assess and evaluate the adequacy and implementation of the policies and undertakings of FSB.
FSB will also make a community benefit payment of $80,000 to The Ethics Centre.
Background
Market participants are required to adhere to high standards of market practice. These standards are, in part, set out in Regulatory Guide 79 Research Report Providers: Improving the Quality of Investment Research (RG 79); Regulatory Guide 104 Licensing: Meeting the General Obligations (RG 104); and Regulatory Guide 181 Licensing: Managing Conflicts of Interest (RG 181).
Earlier this year, ASIC sought submissions on Consultation Paper 290, with a view to publishing a new regulatory guide on sell-side research.
Editor’s note 1:
On 22 May 2024, ASIC accepted a variation to the original court enforceable undertaking dated 24 November 2017.