‘Genuine’ opinions critical in broker research, warns ASIC

The corporate regulator says it is ‘critical’ that equities research ­released by brokers represent ‘genuine’ opinion and are not swayed by commercial decisions,

In a statement ASIC said: ‘Securities market participants play a key role in the market’s overall performance and reputation – which is critical for Australian markets to retain respect and confidence.’ Picture: NCA NewsWire/Nikki Short

The corporate regulator says it is “critical” that equities research ­released by brokers represent “genuine” opinion and are not swayed by commercial decisions – warning it conducts spot checks of capital market transactions to ­review how conflicts of interest are handled.

In a lengthy statement, the Australian Securities & Investments Commission told The Australian that misleading behaviour could “have a significant impact, and not just on the client or the general investor”. It said: “Securities market participants play a key role in the market’s overall performance and reputation – which is critical for Australian markets to retain respect and confidence.”

However, the regulator said it could not comment specifically on Canaccord Genuity, one of the nation’s most active investment banks, which The Australian reported this week owned millions of options in companies it spruiked to its clients but regularly failed to provide clear disclosures about the potential for conflicts of interest.

The bank insists the research is independent of its commercial ­arrangements with the companies covered, and says it has significant policies in place to ensure that there can be no influence on the recommendations made.

The Australian on Tuesday reported that in one case, Canaccord had issued a bullish research note about Eagle Mountain Mining less than a fortnight before it became public that it was involved in raising capital for the company.

In a research paper released on September 16 titled “Trusting the Oracle”, Canaccord put a price ­target of $1.70 on Eagle Mountain shares. The company was trading at 83c at the time.

The note did not explicitly disclose that Canaccord had been ­issued 2 million options in May as payment for services. It received 2 million more in October “at a nil issue price as part consideration for a corporate advisory mandate”.

The Australian is not suggesting 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.

ASIC, in its statement, said: “Decisions about research coverage should be made by the research team and not be subject to input or influence by other parts of the licensee.

“This would include corporate advisory or staff holding an investment in the company that is the subject of the research.

“Conflict-management obligations apply to all licensees, including those who provide research.

“Firms involved in capital raising and research must manage the conflicting interests of their issuing and investing clients.

“If a research analyst obtains inside information (for example, about an upcoming capital raising) they should follow the licensee’s internal procedure for handling inside information, including wall-crossing and not producing research or providing commentary on the listed company until the ­information is generally available to the market.”

The regulator last made a concerted push to strengthen the so-called Chinese Walls separating capital markets and research at investment banks and brokers in 2017. It has also previously taken action against companies over conflicts of interest in sell-side research, including against Foster Stockbroking after an investigation found there was “no effective separation” of its research function from its other functions.

ASIC had also previously investigated UBS after two research reports – one on Newcrest Mining and another on the NSW government’s electricity privatisation plans – appeared to be informed or altered after a confidential briefing and pressure from a client.

Adam D’Andreti, a partner at Gilbert + Tobin, said regulations “make it very clear” that ASIC’s view was that any holder of an Australian financial services licence “is to have structural separation between the research team and the corporate finance division”.

Mr D’Andreti, who said he could not speak specifically about Canaccord, said many smaller brokers had done “a lot of work at the time (new rules were being introduced in 2018) to ensure that the arrangements were able to meet the standards that were ­expected”.

“Information barriers have such critical importance for virtually all financial services organisations,” Mr D’Andreti said.

Canaccord, in a statement this week, said it had “always been transparent in our disclosures related to analysts’ ownership of certain equities under coverage”.

“Analysts’ ownership in the companies they cover is permitted, subject to requirements that they may not trade against their rating (unless they can prove fin­ancial hardship), and that they ­receive prior approval from compliance,” the bank said.

The Australian has reported a number of instances where Canaccord did not clearly disclose it had options or other potential conflicts of interest in the companies it was recommending to clients. In September 2020, Rox Resources quietly issued 60 million options to Canaccord in exchange for services and assistance “with its ongoing capital markets strategy”. They expire in 2023. Six months later, with shares at 3.4c, Canaccord published its first research on Rox Resources. It rated the company a “speculative buy” and gave it a price target of 10c.

The report’s cover page noted Canaccord had received a fee for a capital raising conducted in May.

However, the research had no clear mention of any options.