Download: 2016 PUB BC ASIC on sell-side research and corporate advisory - 10 August.pdf

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The Australian Securities and Investments Commission (ASIC) has reviewed how investment banking and sharebroking firms handle confidential information and conflicts, including in the context of initial public offerings (IPOs) and secondary capital raisings.

We look at the key findings and recommendations.

Key findings

The report, based on a detailed review in the Australian market of a range of transactions and advisers between September 2014 and June this year, came up with four broad conclusions.

  • Many firms have policies and procedures to address the handling of confidential information and conflicts.
  • Some firms did not have appropriate arrangements to handle scenarios where staff had confidential information. The deficiencies identified included inadequate use or supervision of restricted trading lists and information barriers.
  • Conflict management practices were inconsistent. Firm structure contributed to this, particularly where there was inadequate physical and electronic separation between the investment banking and research team. Remuneration policies and supervision lines could also increase the risk of conflict.
  • In mid-sized firms, it was common for staff to receive allocations and trade in securities of issuers where the firm was acting as a manager for the capital raising. This created a risk that personal interests may prevail over the interests of clients, particularly if appropriate controls and approval processes are not in place.

The Financial Markets Authority (FMA) could undertake a similar investigation in New Zealand, drawing upon the guidance it has published in relation to producing research reports for IPOs under the Financial Markets Conduct Act ( available here).

This also recommends a range of controls to reduce the risk of conflicts of interest, a key focus of ASIC's review. This approach is particularly appropriate for the smaller New Zealand market where avoiding conflicts entirely is problematic so the challenge becomes one of appropriate management.

Mixed practices identified

Some of the less appropriate conduct identified by ASIC included:

  • an issuer stating it could not provide prospective financial information in its prospectus because the directors did not have reasonable grounds to sign it off. Shortly after the IPO, the lead manager released a research report that included prospective financial information, and the company then released the report on its website and through ASX
  • a heavily oversubscribed IPO being scaled back to enable staff at one of the firms managing the IPO to receive an allocation of approximately 10%
  • staff marketing research to clients with a "buy" recommendation while concurrently selling their personal holdings in the company, and
  • sizeable allocations under an IPO being provided to senior managers and directors of other companies from which the firm managing the IPO was seeking to secure business in the future, as well as allocations being made to "make good" or compensate clients for earlier trading losses with the firm.


ASIC has developed a multi-faceted framework of controls that reflect the better practices they found in their review.

  • Behavioural – these controls include training programmes, ensuring consistency between research analysts' internal and external communications and published research by the firm and ensuring meaningful consequences are imposed for breaches of internal policies and procedures.
  • Structural controls – these include research department independence (i.e. separate reporting lines as well as physical and electronic separation), keeping unpublished research confidential within the research department and controlling staff trading (particularly in relation to staff involved in research).
  • Procedural controls – these relate to the manner in which research is approved and published, as well as effective use of information barriers.
  • Disclosure and certification – ensuring the criteria firms use to decide whether to provide or cease research coverage are published and considering the disclosure of independence of research and allocation policies. ASIC also recommends a range of other internal controls, such as certification by research analysts and senior management as to compliance with the firm's policies.
  • Monitoring and review – ASIC suggests a range of controls for reviewing communications, resourcing of compliance and reviewing trading around the publication of research.

These recommendations are broadly consistent with the guidance published by the FMA, although they go into more detail. There is also some overlap with the good conduct guide on which the FMA is now consulting (Chapman Tripp commentary available here).

Other comments on allocations

Much has been written in New Zealand about the "dark art" of bookbuild processes. To date, the FMA has not reviewed allocation practices or provided any specific guidance, although with an increasing focus on good conduct it may do so at some point. In the meantime, firms should heed the comments from ASIC.

ASIC has recommended that firms should implement an allocation policy and place client interests ahead of staff and principal participation in capital raisings. ASIC also encourages issuers to understand and be involved in the allocation process.

Unsurprisingly, ASIC has recommended that firms should not provide investors with larger allocations on the understanding that they will place buy orders in the after-market or provide allocations to senior executives or directors of companies from which the firm is seeking to secure business.

From here

ASIC will provide individual feedback to the firms that participated in the review and will also follow up the report with industry consultation on proposed guidance to ensure good research practices are followed.

ASIC has also flagged that it is undertaking a review of the practices used by firms to market IPOs to retail investors, including the use of social media and other platforms. We await this report with interest.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.