An ASIC review of risks related to the handling of confidential information and conflicts of interests, particularly in the provision of sell-side research and corporate advisory services, has found that most firms have policies and procedures in place to deal with these risks. However, there remain instances of poor and inconsistent practice in their application.
Report 486 Sell-side research and corporate advisory: Confidential information and conflicts of interest details the review's findings and highlights areas of concern requiring a greater focus and care.
Between September 2014 and June 2016, ASIC conducted reviews of the policies, procedures and practices of a range of investment banks and brokers active in the Australian market and reviewed a sample of transactions, including initial public offerings (IPOs) and secondary offerings. This review followed on from previous monitoring and surveillance work undertaken by ASIC that had indicated some poor practices in these areas.
While most firms have specific policies and procedures in place, the review found considerable variation in the following market practices:
- Identification and handling of confidential information: Some organisations do not have appropriate arrangements to handle situations where staff members come into possession of confidential information. This includes the inadequate use or supervision of information barriers and restricted trading lists.
- Management of conflicts of interest: There is an inconsistency in how conflicts of interest are managed. This includes the structure and funding of research, insufficient separation of research and corporate advisory activities (particularly the involvement of research in soliciting business during the IPO process), decisions about share allocations in capital raisings, and mixed practices in relation to the disclosure of conflicts of interest.
- Staff and principal trading:
- There is also considerable variation in the strength of controls to manage staff trading, including trading by corporate advisory and research staff. In particular, some questions remained as to whether the approval process adequately addressed the conflicts of interest, and whether a staff member might be in possession of confidential information.
- In mid-sized firms, it is more common for staff to participate in capital raising transactions that the firm is managing. This presents an increased risk of unacceptable or questionable activity that firms need to be aware of and manage.
ASIC Commissioner Cathie Armour said the purpose of the review was to understand current market practices and identify areas of particular concern.
'The proper handling of confidential information and the management of conflicts is a key element in preserving and promoting market integrity, improving market efficiency and increasing investor confidence,' she said.
'Where confidential information is mishandled or conflicts are not managed appropriately there is a risk that a breach of financial services laws may occur. This may include insider trading, market manipulation, misleading and deceptive conduct, and breaches by Australian financial services licensees of their general obligations.
'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', Ms Armour said.
Background
This report builds on previous work by ASIC on the handling of confidential information and the management of conflicts of interest.
ASIC is also undertaking a review of the practices used by firms to market IPOs to investors other than institutions. This includes the use of social media and other platforms. This review will form the basis of a separate report, to be released later this year.