‘Inconsistent’ practices, ‘inadequate’ barriers and varying degrees of control failures; ASIC’s recent review of corporate advisory research activity was certainly to the point.
As such, teams within investment banks, securities dealers, independent research houses, corporate advisory organisations and other market participants are on notice. Organisations holding an Australian Financial Services Licence (AFSL) must ensure their management of material non-public information (MNPI) and conflicts of interest practices meet the legal and regulatory requirements imposed upon them.
In August, ASIC released a report following a review of industry practices. It focused on broker research and corporate advisory activity. While ASIC found many firms had policies in respect of MNPI and conflicts of interest management, its review uncovered practices and inadequate barriers that could compromise the intent of those policies. ASIC will now undertake further reviews and will seek enforcement outcomes to address any unlawful behaviour.
Common failings with the handling of MNPI included:
poor processes to identify MNPI leading to this being passed from the research side of a firm to the trading side;
inadequate checking for this information across all communication channels including flash notes, internal chat messages, and emails;
ineffective barriers (both physical and technological);
inadequate monitoring and ineffective controls when implementing physical separation such as by ‘wall crossing’ and the use of ‘restricted lists’;
poor training evidenced by staff not following policies; and
providing research analysts’ models to clients.
Areas of concern raised by ASIC in respect of managing conflicts of interest included:
research independence being compromised by the funding structure established to resource the research departments and/or remunerate individual researchers;
inadequate separation of research, corporate advisory and sales teams (both physical and technological);
senior staff inappropriately trying to influence research decisions;
poor internal structures and reporting lines;
single corporate advisory teams producing research reports on a company while simultaneously holding a corporate advisory mandate from that company; and
poor training of staff in the identification and management of conflicts of interest.
During the review, ASIC also uncovered instances where:
undue pressure for favourable coverage was placed on research teams in order to secure capital raising mandates;
the objectivity and independence of research reports being compromised in IPO and other corporate transaction processes by involving researchers in client and investor meetings;
joint lead managers including their respective research teams in joint briefing sessions with the client, sales and corporate advisory staff and/or agreeing a common valuation approach which could compromise the independence of each research team;
poor disclosure of conflicts by using boilerplate clauses and a failure to disclose them in some instances;
prospective information being included in research reports released shortly after a prospectus that indicated no such material existed;
staff participating in capital raisings they were managing;
differential treatment of clients and/or staff in respect of share allocation processes; and
directors of clients being given access to benefits such as office space and secretarial services at no or little cost that could create a sense of obligation.
ASIC have included better practice guidelines for both handling MNPI and management of conflicts of interest within the Report. Institutions that have research and corporate advisory teams should review their current policies and practices to ensure they meet these better practice standards.
This report builds upon ASIC’s earlier report on the management of conflicts of interests in vertically integrated businesses in the funds-management industry which was released in March 2016 and featured in our earlier article: ASIC puts its regulatory spotlight on conflict of interest management. In this latest Report, ASIC foreshadow releasing a further report in respect of managing conflicts of interests associated with an IPO.
Clearly, ASIC have a very sharp focus on whether financial services businesses are meeting their licence obligations in respect of ensuring they have adequate arrangements for the conflicts that may arise. While this Report is focussed on corporate advisory sell-side research, the findings, concepts and better practice guidelines have a much broader application.
All AFSL holders should take this opportunity to review their confidential information and conflict policies and practices to ensure they incorporate ASIC’s better practice guidelines (where applicable) and are meeting their regulatory obligations. Failure to do so could result in clients and other impacted parties bringing claims for misleading and deceptive conduct as well as ASIC taking administrative action, which can include suspending or cancelling your AFSL or imposing additional licencing conditions.
 Sell-side research and corporate advisory: Confidential information and conflicts: ASIC August 2016
 Section 912A of the Corporations Act 2001 (Cth)
 Section 1041H, 915C and 914A Corporations Act 2001 (Cth)
The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.