Improving the integrity of sell-side research

Published by the Stockbrockers and Financial Advisers Association of Australia in the Stockbrokers and Financial Advisers Monthly, August 2017.

The integrity of sell-side research directly affects the integrity of financial markets, particularly during the capital raising process.

Where material, non-public information is mishandled or conflicts involving research are not managed appropriately, there is an increased risk of information inequality. This can increase the risk of insider trading and damage investor confidence.

‘Sell-side research is general financial advice prepared and distributed by Australian financial services (AFS) licensees to investors to help them make decisions about financial products’

We have recently published Consultation Paper 290 Sell-side research, setting out proposed guidelines to manage conflicts of interest at each stage of a capital raising transaction. Consultation Paper 290 also sets out general guidelines for the structure and funding of research teams and for the identification and handling of material, non-public information.

Our proposals follow an ASIC review of the handling of confidential information and conflicts of interest by market participants. Published last year, Report 486 Sell-side research and corporate advisory: Confidential information and conflicts raised concerns about current market practices.

The review showed that AFS licensees involved in providing research would benefit from more detailed guidance on managing material, non-public information and conflicts of interest. While ASIC Regulatory Guide 79 Research report providers: Improving the quality of investment research  sets out a framework for a range of research issues – including the proper management of conflicts – the proposed guidance updates and supplements Regulatory Guide 79 in its application to sell-side research.

Our proposals are designed to help AFS licensees who provide research and corporate advisory services to comply with their obligations under the Corporations Act 2001. It also aims to address instances where the objectivity and independence of research analysts may be compromised at various points in the capital raising process.

To help us settle our final guidance, we want your feedback to our proposals on the following three areas.

1. Research analysts and material, non-public information

We propose to give guidance to help staff identify and manage material, non-public information in the context of sell-side research. This includes specific policies, procedures and training for research analysts – and approval and review processes for identifying material changes to research.

2. Managing research conflicts during capital raising

We propose to issue specific guidelines on how AFS licensees can manage conflicts between research and corporate advisory teams throughout a capital raising transaction. The proposed guidelines cover the pre-solicitation, transaction vetting, transaction pitching and post-mandate periods of a capital raising.

We also propose controls to prevent corporate advisory from:

  • putting pressure on research analysts to help an AFS licensee secure a mandate to manage a corporate advisory transaction, and
  • persuading research analysts to confirm their support for a transaction.

3. Structure and funding of research

We propose to provide guidance to ensure research independence is not compromised by the structure of business models or the funding of research teams. The proposed controls include:

  • physical and technological segregation of research from sales and corporate advisory staff
  • guidelines on the decision-making process for stock coverage, and
  • disclosure of AFS licensees’ conflicts in research.

What’s next?

We want to hear from users and providers of sell-side research, including market participants, investment banks, independent corporate advisers, buy-side investors and other interested parties.

Comments on Consultation Paper 290 are due by 31 August 2017.The final regulatory guide is expected to be published by December 2017.

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Last updated: 20/09/2017 10:57