Post on 17-Jan-2016
Regulatory Issues in Investment Research
Brian McDonnellAssociate
bmcdonnell@hunton.com020 7246 5761
850 Attorneys, 18 offices, Since 1901
Investment Research – Areas of Regulatory Concern
Issue of regulatory focus Conflicts with investment banking
Producing favourable research to maintain/win business Involvement in sales pitches/roadshows Management structure and analyst remuneration Editorial control and timing of publication
Conflicts with trading desks Dealing ahead
Personal account dealing by/financial interests of analysts
850 Attorneys, 18 offices, Since 1901
COI and Investment Research
The regulatory response Many sources of regulation - rule development Senior management responsibility – CEO letter – 17/9/4
850 Attorneys, 18 offices, Since 1901
Regulation of Investment Research
Principles Rules
Principle 1 (integrity) COB 5.10 (conflicts in the context of corporate finance business) (1 May 2004)
Principle 2 (due skill, care and diligence)
COB 7.1 (fair treatment)
Principle 3 (management and control) COB 7.3 (dealing ahead of investment research) (changed 1 May 2004)
Principle 5 (market conduct) COB 7.13 (personal account dealing) (changed 1 May 2004)
Principle 6 (customers’ interests) COB 7.16 (investment research) (1 July 2004)
Principle 7 (communications with clients)
COB 7.17 (required disclosures) (1 July 2005)
Principle 8 (conflicts of interest) COB 7.18 (bundling) (1 Jan 2006)
850 Attorneys, 18 offices, Since 1901
Regulation of Investment Research
“Investment research” is defined as:
“a document … or material the substance of which is common to a number of documents although worded as though they are personal recommendations, which contains one or more of the following:
the results of research into a designated investment or its issuer
analysis of factors likely to influence the future performance of a designated investment or its issuer”
Held out as “impartial” What does this cover?
850 Attorneys, 18 offices, Since 1901
COI and Investment Research: COB 7.16
Identification of conflicts
Use of investment research to maintain and win business Firms duty to investment trading clients as against that to
corporate clients (eg. book building) Firms role as proprietary investor and underwriter Dealing ahead of investment research
850 Attorneys, 18 offices, Since 1901
COI and Investment Research: COB 7.16
COB 7.16.5
Establish and implement a management policy in relation to conflicts which may affect the impartiality of investment research
Record the policy and retain for at least three years Take reasonable steps to ensure compliance Make written copy available on request Take reasonable steps to ensure the policy remains
appropriate and effective Disclosure – necessary but not sufficient
850 Attorneys, 18 offices, Since 1901
COI and Investment Research: COB 7.16
The policy must: Identify types of investment research to which it applies Provide for systems, controls and procedures which identify
COI affecting the impartiality of investment research and manage those COI effectively in relation to at least: supervision and management of investment analysis remuneration of investment analysis extent to which investment analysts may become involved
in other activities extent to which inducements may be accepted by
investment analysts/senior employees timing and manner of publication and distribution appropriate information/disclosures to be included
850 Attorneys, 18 offices, Since 1901
COI and Investment Research: COB 7.16
Policy contents: supervision and remuneration of analysts
Those with responsibilities that might conflict with interests of those to whom the research is published/distributed should not be responsible for: day to day supervision/control of analysts decisions on content or timing of publication determining remuneration of analysts
Remuneration structure should not create an incentive inconsistent with the provision of an impartial assessment
Remuneration not to be linked to a specific transaction or recommendations in research
850 Attorneys, 18 offices, Since 1901
COI and Investment Research: COB 7.16
Policy content: involvement of analysts in other activities
No involvement in activities likely to appear to be inconsistent with the provision of an impartial assessment e.g.:
soliciting corporate finance business attending roadshows relating to issues/allocations
Can be used to: research corporate finance business opportunities provide ideas to sales/trading staff provide information and advice to investment clients
850 Attorneys, 18 offices, Since 1901
COI and Investment Research: COB 7.16
Accepting inducements to provide favourable research Giving editorial control to someone whose role/commercial
interests might conflict with interests of those to whom research is published/distributed
Policy content: avoiding inappropriate influences e.g. prohibition on:
850 Attorneys, 18 offices, Since 1901
COI and Investment Research: COB 7.16
Policy content: means and timing of publication
Investment research to be published/distributed in an appropriate manner, e.g.: through usual channels prohibition on communication of the substance of the
research except as set out in the policy Consider whether other business activities create a
perception that research may not be impartial e.g. restrict publication of relevant research around the time of an investment offering
850 Attorneys, 18 offices, Since 1901
Required Disclosures: COB 7.17
“Research recommendation” is defined as: “Research or other information concerning one or
several financial instruments admitted to trading on regulated markets … accessible by a large number of persons (not including informal short-term personal recommendation or advice given in the context of a takeover bid (rule 3) …) … which recommends … an investment or ... expresses an opinion as to the present or future value … of such instruments”
850 Attorneys, 18 offices, Since 1901
Required Disclosures: COB 7.17
Fair presentation Disclosure
Identity of producers of research All relationships and circumstances that may reasonably
be expected to impair the objectivity of the research recommendation
All substantially material sources Whether research recommendation disclosed to issuer
and amended following disclosure The methodology for any valuations Mutual shareholdings – 5%> Other financial interests That firm is market maker
850 Attorneys, 18 offices, Since 1901
Required Disclosures: COB 7.17
Disclosure (… cont) That firm was lead (co-lead) manager in previous 12
months (or other agreement for the provision of investment banking services)
Any agreement relating to the production of the research The organisational arrangements to manage conflicts of
interest Details of the receipt/purchase of issuer’s shares by the
firm/analyst prior to offering Quarterly disclosure of buy/sell/hold recommendations
850 Attorneys, 18 offices, Since 1901
Current and Future Developments
UK
Recent analysis of the impact of the FSA’s rules on conflicts of interest and dealing ahead
EU
Markets in Financial Instruments Directive (“MiFID”) – Nov 2007
US
Gone further in many respects than UK analyst training and self-certification requirements funding of independent research quiet periods detailed disclosure requirements
850 Attorneys, 18 offices, Since 1901
Issues in Analyst Research
Relationship with corporate finance Future role of analysts Usefulness of non “impartial” research Pre IPO research - timings Investor/issuer education