ASIC grilled Canaccord Genuity over conflicts of interest, but didn’t act

The corporate regulator raised conflict of interest issues with investment bank Canaccord Genuity almost 12 months ago – but appeared to take no action despite its concerns.

Canaccord is forcing analysts to sell holdings in stocks they cover as part of a recent overhaul. Picture: NCA NewsWire/David Swift

The corporate regulator raised conflict of interest issues with investment bank Canaccord Genuity almost 12 months ago – but appeared to take no action despite its concerns.

Canaccord Genuity, one of the country’s most active investment banks, undertook a significant overhaul of its sell-side research earlier this year after an investigation by The Australian revealed it held millions of options in companies it was spruiking to clients as investment opportunities.

That investigation found research notes and purchase recommendations circulated by Canaccord to clients about the companies the investment bank had provided services to gave little clear disclosure that some of the payments it received were tied to share performance.

Internal Australian Securities & Investments Commission memos, obtained through a freedom of information request, show the regulator had raised this issue repeatedly with the bank as early as March 2021 – singling out small-cap companies Bellevue Gold and Audinate Group in particular.

“We consider clarification is required to enquire about the share ownerships of (Bellevue) by Canaccord and relevant staff of Canaccord (Research Analyst, ECM staff etc) in relation to companies (in) which research is undertaken,” one market conduct file note ­created after a telephone discussion with the bank on March 9, 2021 states.

“We note that an extract of the research analyst declaration was provided in the cover letter to the production rather than in the production as requested … from this extract it appears that the content requirements of the research analyst declaration could be enhanced to ensure consistency with the guidance in RG264,” it reads. “We consider a review of the research analyst declaration is required to ensure consistency with RG264, specifically RG 264.50 (a).”

RG264 is the corporate regulator’s guide for the issuing of sell-side research – recommendations to buy or sell various companies – and notes that the quality of that work “is important to the integrity of financial markets, and to the quality of financial advice provided to investors”.

In particular, RG264.50 reads: “Before the publication and ­release of research, the research analyst(s) who prepared the report should provide a declaration to the licensee’s compliance or another control function that … to the best of the research analyst’s ­knowledge, they are not in receipt of inside information and the research does not contain inside ­information”.

Illustration: Tom Jellett

Canaccord had acted as the lead manager in two capital raisings for Bellevue, which is developing several gold projects in Western Australia, ahead of the ASIC call. Canaccord in November 2020 recommended clients purchase Bellevue shares as a speculative play, and suggested its share price could rise to $1.45. It subsequently lowered that target to $1.25. The company again used Canaccord – alongside Goldman Sachs and Macquarie – to raise $131m in September 2021.

The ASIC notes are heavily redacted, but the March memo concludes that ASIC investigators “identified material findings which require further enquiry with Canaccord”.

“We therefore recommend that the following actions be taken prior to consideration of closure of the matter … issuing of a letter to Canaccord’s Head of Compliance … the matters raised in the letter need to be adequately addressed by Canaccord prior to the closing of the matter,” it reads.

In February, Canaccord said it would overhaul disclosures in its equities research to explicitly say whether it held options in companies that it spruiked as buy opportunities. As part of the overhaul, Canaccord will also force analysts to sell holdings in stocks they cover.

The bank’s chief executive, Marcus Freeman, told staff the change had followed a 10-day review of its disclosure practices following reports in The Australian that it had repeatedly failed to tell clients it had an interest in stocks that it was recommending.

The Australian’s investigation reported that Canaccord had, on several occasions, issued bullish research notes to clients recommending they buy shares in various companies shortly before it undertook capital raising activities for the same groups.

In particular, Canaccord told clients in a note titled “Trusting the Oracle” on September 16 that copper explorer Eagle Mountain could be worth some $1.70 per share. The company’s Arizona copper project was located in a “mining-friendly jurisdiction with infrastructure providing a head start” and “exciting early stage targets add some spice”, the equities analysis read.

Eight days later, Eagle Mountain asked the ASX to halt trade in shares pending an update relating to a proposed capital raising. The $16m placement was to sophisticated and professional investors identified by Canaccord and PAC Partners, the joint lead managers.

The Australian did not suggest Canaccord broke rules, only that more explicit disclosure of its relationship with the companies it covered would have benefited clients using the research to inform investment decisions.

In a second instance, Canaccord recommended clients buy shares in Alcidion, an ASX-listed healthcare systems provider, less than a fortnight before it was named as the lead manager of the company’s $55m capital raising. The equities research note – titled “Finger on the digital pulse” – was distributed to clients on November 24, placing a 42c per share price target on the health technology company and flagging the potential for “new contract announcements and expansions”.

According to an Alcidion spokesman, its corporate advisers at Henslow suggested a second broker be brought on “given the size of the raise”. Henslow introduced Alcidion to Canaccord on November 8, two weeks before the bank recommended clients buy stock in the company.

Canaccord maintains its research analysts are completely independent from its sales and investment banking operations, and that the authors of those reports would have no knowledge of any discussions that the investment banking team would have on a proposed capital raising.

Documents produced by ASIC in response to The Australian’s request show the regulator had particular interest in how the research team at Canaccord obtained information used in analyst reports. One email sent in May 2021 said ASIC was “looking into research reports whereby prospective information (e.g. mineral resources or reserve estimates, estimates of project NPVs) is disclosed by research analysts”.

“We would like to understand how firms approach valuations of pre-resource mining companies and how these firms approach mining research reports when they provide cash flow forecasts/projections and projected NPVs for companies that are yet to release a resource estimate themselves,” the email from ASIC’s market conduct team reads.

ASIC investigators, according to a review note dated June 2021, said they expected Canaccord “to extend disclosure of interest to include people within the licensee who have involvement, influence or input into research decisions”.

In particular, it noted Canaccord held 10 million share options with a strike price of 25c, 30c, 35c and 40c – none of which had been disclosed in any of the research reports.

The corporate regulator has long had its sights on equities research and brokers’ notes circulated by companies that are also in the advisory and capital markets business.

In 2016, an ASIC review found “some instances of firms’ corporate advisory staff seeking to influence their research team to cover particular companies or to adjust their approach to valuation”.

That review, however, was focused on the possibility that material, non-public information could end up in the hands of only a small number of investors – those that subscribed to the analysis.

“Conflicts, whether real or potential, may adversely affect the independence and reliability of research reports.

“If these conflicts are too difficult to manage they should be avoided,” the review concluded.

An ASIC spokesman declined to outline what steps, if any, the regulator had taken to resolve the issues raised by its compliance teams.

In a statement, the regulator said it “welcomed Canaccord’s decision to improve transparency in its research of its holding, and also their call to limit holdings by analysts in stocks they provide research on”.

“It’s important to note we continue to monitor broad market practices around sell-side research and capital raisings to see how RG264 is being applied,” it read.