The Australian Securities and Investments Commission (ASIC) has found inconsistency in how conflicts of interests are managed when research analysts become involved in seeking business during the initial public offering (IPO) process.
A review of the handling of confidential information and conflicts of interest by sell-side research and corporate advisory found inconsistencies within the structure and funding of research, and inadequate separation of research and corporate advisory activities, especially during the IPO process.
The report said corporate issuers were increasingly depending on independent advisers to aid in the selection and supervision of large investment banks as offering managers when pitching for transactions.
“We observed one instance where an independent adviser communicated an expectation, before the award of an IPO mandate, that the mandated firms’ research analysts would provide research, assist in marketing the offering, and share un-redacted research with the corporate issuer and the independent adviser before the research was published,” the report said.
“The independent adviser also required the mandated firms to explain their policies and procedures should a research analyst’s research ‘not be supportive of the IPO for valuation, timing or other issues’.”
Some research analysts were also involved in marketing transactions their firms were advising on through distribution of “investor education” research, where research analysts met with around 320 potential investors across four continents.
“‘Investor education’ may also provide potential investors with an indication of the research analyst’s approach to valuation and likely (post-IPO) initiation research valuation,” the report said, adding it could potentially give an upper hand to these investors over others because they gained insight into the analyst’s approach to valuation and the valuation range.
ASIC Commissioner, Cathie Armour, said managing conflicts of interest was vital to maintaining market integrity, enhancing market efficiency, and boosting investor confidence, as well as avoiding breaches of financial services laws.
“All firms should review this report and consider whether their controls — including policies, procedures, training and monitoring — are appropriate and sufficiently robust to meet legal and regulatory requirements,” Armour said.
