In December 2017, ASIC released Regulatory Guide 264 Sell-side research (RG 264). This new guidance will affect the extent to which research analysts of financial licensees, including investment banks, will be allowed to interact with companies over the course of a capital raising transaction (and in other transactions where there is a risk of a conflict of interest for an investment bank in having its research team produce research). As investment banks start to implement new compliance measures to conform to the guidance, companies can expect to see changes to their interactions with research teams. Here are some key takeaways from RG 264 to prepare companies for the changes coming on 1 July 2018:
Guidance relevant in the context of any capital raising transaction and in the ordinary course of business
- Where no specific transaction is being contemplated (ie in the ordinary course), there are no restrictions on companies meeting with research analysts, though if a research analyst becomes aware of inside information, it will be prevented from publishing research until that information is generally available (since they are now required to give an internal declaration that they are not in possession of inside information before publication may occur). Care must be taken by companies to ensure that inside information is not selectively disclosed in this way. Of course, a general discussion about operations and strategic plans can still be had.
- Any attempt by the corporate advisory side of the investment bank to influence a coverage decision or the content of a research report will prevent a research analyst from being able to publish. Companies should be mindful of this in their interactions with their investment bank advisers.
- Companies should not expect research analysts to discuss or comment on their valuations at any stage.
- If the company gives an analyst information to support a forecast, be prepared to make that information public.
- In the context of proposed capital raising transactions, companies can expect investment banks to place more emphasis on staging their mandating into three formal phases: pre-solicitation, the decision to pitch and post-appointment / starting work. This is because each phase changes the level of interaction that companies can have with research analysts who are made aware of a potential transaction.
- The “pre-solicitation phase” is triggered when the investment bank becomes aware of or makes an approach in respect of a potential capital raising.
- Companies are able to meet with analysts at any time if the analyst is not wall-crossed. During pre-solicitation, if the analysts have been wall-crossed in respect of a proposed transaction, discussions between analyst and company regarding information which will become public can still occur.
- The “pitching phase” is triggered either when the investment bank decides to pitch for a transaction or 7 days before the pitch presentation, whichever is earlier. The analyst can no longer interact with the company unless publication is delayed until the information becomes public. Investment banks cannot represent that their pitch valuation is supported by the analyst.
- A mandate letter cannot include any commitment or inducement to commence research coverage as this is required to be an independent analyst decision, separate from the decision to engage the investment bank. The corporate advisory side of the investment bank cannot commit to provide research coverage (even impliedly).
- Mandates will state that the company cannot take into account an analyst’s valuation when determining whether to pay a discretionary fee.
- The “post-appointment phase” is triggered when the company formally engages the investment bank, or it begins work, whichever occurs first.
- During the pitching and post-appointment phases, companies may only meet with analysts if they are wall-crossed (at which point the analyst cannot publish research until after all relevant information is public, which, in the case of capital raisings by ASX listed companies, may lead to the announcement of transactions at the beginning of a trading halt becoming more common in those parts of the Australian market where this is not already standard).
- In all capital raising transactions there will be more separation between the analyst and the investment bank’s corporate team — for example, the corporate team will not be able to fact check the analyst’s research.
Guidance that is only relevant in the context of analyst interactions on IPO transactions
- At an analyst’s briefing before the IER is prepared, the company should only disclose information which is generally available or is reasonably expected to be included in the prospectus. The company cannot ask the analyst about their views on valuation.
- Whilst it is still possible for analysts from each investment bank to be briefed together, those analysts cannot interact (directly or indirectly) on the merits of the company or on valuation information relating to the issuing company or the transaction.
- Research analysts of an investment bank may only attend a research analyst briefing after the investment bank has been appointed to the capital raising transaction.
- When a draft report (e.g. an investor education report (IER)) is distributed to the company for fact checking, valuation information will be redacted. Companies will only be able to provide comments on legal and factual information. Neither the company, nor the corporate advisory side will get the final report or know the valuation in an IER until it is public.
- Companies should not expect that an initiating coverage value will be consistent with a valuation in an IER, or that it will be the mid-point in the IER’s valuation.
- The compliance team will act as a “middle man” between the analyst and the company for info requests and fact checking of reports — expect to see more of them.
- While it is permissible for research analysts to undertake “investor education” (with sales staff but without the company or corporate advisory representatives present), analysts will not be permitted to attend management roadshow meetings with investors.