The role of equity research analysts, commonly known as “sell-side analysts” or just “analysts”, is to provide potential investors with an unbiased opinion on a company’s securities based on independent research. The integrity of such research is fundamental to investor confidence and an efficient financial market.
The organisational structure, policies and practices of some financial services firms however can result in an actual or apparent lack of research independence. The potential for conflicts of interest are particularly pronounced in those firms with both corporate advisory and research arms, where the interests of corporate advisory clients may not be aligned with the interests of investing clients.
Recognising the need to preserve the integrity of research, ASIC has released detailed guidance on research practices, governance and control frameworks aimed at minimising the risk that an analyst may be pressured into providing a favourable valuation of a company and minimising the reliance on staff integrity to achieve such objectives. In providing this guidance, ASIC has divided the capital raising life-cycle into three stages.
1. Pre-solicitation – before a firm pitches for a potential capital raising transaction
During the pre-solicitation phase when a firm is still deciding whether or not to pitch on a transaction, analysts are generally free to provide their opinion on the relevant company or transaction (including as to value, provided they are wall-crossed from corporate advisory). If the analyst comes into possession of inside information in this process, strict procedures should be in place for the handling such inside information, including wall-crossing and restrictions on the production of research on the particular company until the information is generally available to the public.
Analysts may also interact with the relevant company, so long as the firm has not made a decision to pitch (or it is not less than 7 days before a pitch presentation is to be made). However, analysts should not volunteer, nor should the company request from the analyst, valuation information.
2. Transaction pitching – firm begins actively seeking a mandate for a capital raising transaction
During this phase, unless an analyst has been wall-crossed, or does not produce research about a potential transaction or company, they should not communicate with either the relevant company or the relevant corporate advisory team. Specifically, robust controls should be established to ensure that corporate advisory and analysts are not made aware of the other’s opinion on valuation information, and that neither corporate advisory nor the company are in a position to influence the analyst’s assessments or valuations.
3. Post-appointment – after a firm has secured a mandate for a capital raising transaction until settlement of the transaction
During this period, the key role of an analyst is to prepare an investor education report (IER) on the relevant transaction or company for dissemination to its investing clients. Until the IER has been widely distributed to potential investors, research staff should not communicate directly or indirectly with corporate advisory about the relevant company, nor should the analyst’s data be made available or shared outside the research team. If input is required from analysts as to whether a firm should underwrite a potential transaction, ASIC suggests that this occur after dissemination of the IER.
In preparing the IER, the analyst may attend a briefing with the company to obtain more information about the company’s business and operations. Beyond this however, any additional information required should be requested by compliance or another control function. The company should also be advised that it may not ask the analysts questions, or seek comment, on valuation information. Further, the company should not pass on its own views on valuation information to analysts.
In a nutshell, ASIC’s message to the financial services community is that research should not be written in the interests of the broker, the analyst or the company raising money. To assist financial services firms with complying with ASIC’s new guidance, AFMA has produced a ‘Notice on Research Independence’ that firms may issue to the issuer company in connection with a potential initial public offering, which is available at:
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