IDA unveils new disclosure guidelines for brokerages
Crackdown on conflicts: Proposal aims to restore confidence in equity research
Sinclair Stewart
Financial Post
The Investment Dealers Association of Canada has unveiled a host of proposals designed to crack down on perceived conflicts of interest between analysts and investment bankers, and restore public confidence in the independence of financial research.
The new measures would require firms to disclose in research reports whether they based an analyst's pay on investment banking fees in the past year, and would prohibit dealers from compensating analysts on the basis of a specific corporate financing deal.
Member firms would also have to declare their holdings in a company, along with the stakes of their officers and associates, and if they acted as an underwriter or advisor for the issuer in the past two years.
Meanwhile, any analyst that is a director or employee of a company would be barred from issuing a recommendation on the stock.
Joe Oliver, president and chief executive officer of the IDA, conceded the proposed rules will "impose a burden" on analysts and brokerage houses, but insisted they were necessary to repair the damaged confidence of investors in the wake of the dot-com collapse and the Enron Corp. scandal.
"I don't need to tell this audience that conflicts are a long-standing reality for research analysts," he told a lunch gathering of the Toronto Society of Financial Analysts yesterday. "I think, however, you would agree that today's environment has heightened the potential for some conflicts."
Those long-simmering perceptions of conflict have bubbled over in recent weeks, after Eliot Spitzer, New York's Attorney-General, accused Merrill Lynch & Co. of using favourable analysts recommendations to win lucrative investment banking fees, even though the analysts themselves were sneering at the stocks in private e-mail correspondence. Mr. Spitzer has railed against the notion of linking analyst pay to investment banking fees, and has demanded structural changes to research practices on Wall Street.
The National Association of Securities Dealers has recently issued a number of recommendations that address concerns over analyst independence. The IDA has consulted with its U.S. peer, and Mr. Oliver said the two self-regulatory bodies are crafting fairly similar standards. The IDA board is expected to approve its standards next month, after which they will go to the Canadian Securities Administrators for public comment.
Although firms will be forced to disclose certain relationships under the new regime, many of the new standards are simply guidelines that suggest -- rather than stipulate -- ways to supervise analyst conduct and manage interactions with investment banking operations. Mr. Oliver said the IDA opted mainly for guidelines since firm rules can be difficult to enforce and may be "impractical" for smaller dealers.
He also admitted the retrospective nature of the disclosure requirements, in which firms are forced to disclose their prior relationships with issuers, may not be enough to eliminate conflicts in which analysts are pressured to inflate recommendations as bait for possible banking fees.
"The rules can't cover everything. You can't cover absolutely every situation -- you have to deal with the most likely and most egregious problems and rely on the integrity of the market participants to some degree."
Mr. Oliver said the IDA did consider barring analysts from trading the stocks they cover, but decided such a rule would be "draconian."
Instead, it is proposing analysts be required to gain approval from a director of the firm before trading in these stocks and, except for "special circumstances," not be allowed to trade against their recommendation.
Ian Rossa O'Reilly, managing director of institutional equity research at CIBC World Markets, predicted the standards would be well-received in the analyst community, and said many of the safeguards are already in place at the bank-owned dealers.
"I think analysts are very supportive of regulatory measures that make it easier for them to be objective, and that's the thrust of these regulatory proposals."
sstewart@nationalpost |
