On 18 September 2018, the International Organisation of Securities Commission (IOSCO) published a final report on conflicts of interest and associated conduct risks during the equity capital raising process (the Report). The Report follows the IOSCO Board’s August 2017 mandate for Committee 3 on Regulation of Market Intermediaries (C3) to examine conflicts of interest and associated conduct risks in the capital raising process.
A survey of C3 members identified the following key risks:
- conflicts of interest and pressures on ‘connected analysts’ during the formation of their views on an issuer in the pre-offering phase of a capital raising;
- the prominence of conflicted connected research during investor education and price formation in equity initial public offerings (IPOs); and
- conflicts of interest during the allocation of securities.
The Report sets out IOSCO’s guidance to address the identified risks. The key guidance for regulators to consider includes:
- in the context of pitches to secure mandates to manage equity securities offerings – requiring firms to take steps to prevent analysts from coming under pressure to take a favourable view on the offering from the issuer’s representatives;
- once an underwriting or placing mandate has been awarded – requiring firms to take steps to prevent a connected analyst’s views and research on the equity securities offering from being improperly influenced;
- requiring firms to maintain records of the allocation decisions made in an equity securities offering to demonstrate that any conflicts of interest are appropriately managed; and
- requiring firms to prevent any employees from entering into personal transactions where such transactions would otherwise give rise to any conflicts of interest.
The guidance is not binding, however IOSCO members are advised to consider them carefully given the significant potential risk and harms they intend to address.
