Published by the Stockbrockers Association of Australia in the Stockbrokers Monthly, September 2016.

ASIC recently released two reports relevant to SAA members:

• Report 486 Sell-side research and corporate advisory: Confidential information and conflicts of interest, and
• Report 487 Review of Australian equity market cleanliness.

This work provides a positive picture of the overall cleanliness of the Australian equity market, which has improved over the past decade. However, we also identify some areas where continued review and improvement is required in the handling of confidential information and the management of conflicts of interest. 

Confidential information and conflicts

Report 486 involved a review of risks related to the handling of confidential information and conflicts of interests, particularly in the provision of sell-side research and corporate advisory services. We found that most firms have policies and procedures in place to deal with these risks. However, there remain instances of poor and inconsistent practice in their application.

We reviewed policies, procedures and practices of a range of investment banks and brokers active in the Australian market and a sample of transactions, including initial public offerings (IPOs) and secondary offerings.

Whilst most firms have policies and procedures in place, we found considerable variation in how these are applied. For example, we found variation in:

• Identification and handling of confidential information: Some organisations do not have appropriate arrangements to handle situations where staff members come into possession of confidential information. This includes the inadequate use or supervision of information barriers and restricted trading lists. This can result in material, non-public information being handled inappropriately, including by being passed to the sales desks or to preferred clients.
• Management of conflicts of interest: There is an inconsistency in how conflicts of interest are managed. This includes the structure and funding of research, insufficient separation of research and corporate advisory activities (particularly the involvement of research in soliciting business during the IPO process), decisions about share allocations in capital raisings, and mixed practices in relation to the disclosure of conflicts of interest. This can affect the independence and quality of research and increase the risk of undue influence from corporate issuers, their advisers, or the firm’s own corporate advisory team.
• Staff and principal trading: There is also considerable variation in the strength of controls to manage staff trading, including trading by corporate advisory and research staff. In mid-sized firms, it is more common for staff to participate in capital raising transactions that the firm is managing. We have concerns that staff trading can lead to personal interests taking precedence over client interests, which can result in poor advice and poor outcomes for clients. This risk is heightened around the release of research and capital raising transactions.

All firms should review this report and consider whether their controls, including policies, procedures, training and monitoring are appropriate and meet legal and regulatory requirements. Firms should give careful consideration to the handling of material, non-public information and conflicts to ensure they are adequately managing the risk of insider trading.

ASIC will consult with industry over the next six months on current regulatory guidance for sell-side research and assess whether further guidance is required.

Market cleanliness

Report 487 has found an overall improvement in the cleanliness of the Australian listed equity market over the past decade.

The review looked at possible insider trading and information leakage ahead of material, price-sensitive announcements by looking at price movements or shifts in trading behaviour before these announcements.

The results suggest that insider information and the loss of confidentiality ahead of material announcements has declined over the decade. This is consistent with independent international research that ranks Australia favourably among a number of major development markets.

The review used an established measure of market cleanliness and a new measure developed by ASIC. The new measure compares the trading behaviour of individual accounts to their historical trading behaviour and the trading of others in the market, using advanced surveillance system capabilities.

Based on the new measure, 95% of material announcements exhibited no (or negligible) anomalous trading patterns ahead of an announcement in the period 1 November 2014 to 31 October 2015.

Commenting on the report, ASIC Commissioner Cathie Armour said 'We have seen a gradual improvement in market cleanliness indicators over time and across different segments of Australia’s listed equities market. ASIC will continue to monitor macro-level market cleanliness and enhance our surveillance and enforcement capabilities against market misconduct.'