ASIC releases its guidance on sell-side research

In December 2017, ASIC issued Regulatory Guide 264 Sell-Side Research (RG 264) following a comprehensive examination into the management of inside information and conflicts of interest during the conduct of sell-side research activities. Specifically targeted at financial services licensees, RG 264 seeks to ensure that sell-side research is safeguarded from the influence of both issuing companies and the licensee’s corporate advisory team. With the guide recently taking effect on 1 July 2018, a discussion of its key features and expectations is timely.

Licensees must ensure they have appropriate policies and procedures for the identification and management of inside information. RG 264 has envisaged a compliance/control function (compliance) that will monitor or regularly review the effectiveness of these policies and procedures.

RG 264 regulates how interactions between research analysts (analysts), corporate advisory and issuing companies should be governed during three distinct capital raising stages: pre-solicitation, transaction pitching and post-appointment. Echoed throughout is the need for analysts to follow licensee procedures after encountering inside information and the requirement for compliance to review the adequacy of those procedures.

Pre-Solicitation

Analysts should be wall-crossed before discussing a listed companies’ valuation information or potential capital raising transaction with corporate advisory. If aware of a potential transaction, analysts should only interact with the issuing company if the licensee has not decided to pitch for the transaction, or if it is a week prior to a pitch presentation (whichever is earlier). Analysts should not volunteer valuation information on the issuing company.

Transaction Pitching

Analysts should not communicate about the transaction with corporate advisory or communicate with issuing companies unless they have been wall-crossed and they are not producing transaction-related research when the transaction is not yet completed. Analysts and corporate advisory should not become aware of each other’s opinions in relation to research analyst models or valuation information. Corporate advisory should not represent to issuing companies that analysts are involved in or endorse the pitch evaluation, or that favourable research, or any research at all, will be provided to them.

Post-Appointment

Prior to the wide distribution of Investor Education Reports (IER), analysts should not communicate their views on valuation information, the issuing company or the transaction to anyone (except compliance and legal counsel). Similarly, corporate advisory should not access an analyst’s data, files or correspondence with the issuing company. Discussion between analysts and corporate advisory regarding the transaction should be limited to administrative issues. Physical and electronic information barriers should exist between them and their interaction should be subject to compliance oversight.

Analysts may attend a briefing with the issuing company to obtain company information, but must allow further requests to be managed by compliance. Licensees should also keep a log of the meetings that occur. Analysts should not participate in due diligence prior to IER distribution, nor should they attend management road shows.

Draft IER release to the issuing company for fact and legal checking should only occur upon appointment of the licensee’s corporate advisory team. Even then, the draft IER must be confidential and all valuation information must be redacted. Compliance should manage the communication from then onwards.

IER valuation information should only be expressed as an enterprise or total value and be based upon financial information that will be in the prospectus. Licensees should take note that valuation information and assumptions in the IER should be based on the financial information to be included in the prospectus.

Only analysts or sales staff should be allowed to attend IER meetings with potential investors. Analysts are limited to the discussion of factual information that is consistent with information generally available or reasonably expected to be contained in the prospectus.

An IER can be withdrawn where errors or new information would render it materially false, misleading or deceptive.

Upon research report completion, analysts should convey to compliance that, to their knowledge, they and their research were not exposed to inside information or influenced by other licensee staff.

Further details

A copy of RG 264 can be accessed here.

We look forward to seeing whether the practical effects of RG 264 strike an appropriate balance between the imposition of a greater regulatory burden and the preservation of integrity in sell-side research.

This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.