Without such a policy firms would not be allowed to claim or even imply that they were producing objective, unconflicted research. This policy would apply to all research on designated investments, including shares, fixed income and derivatives. Senior managers of regulated firms would be responsible for developing and implementing appropriate conflict management policies.
Such policies would have to meet certain core standards, recently finalised by the FSA. A key standard is that analysts should not be involved in any activity that could conflict with their ability to produce objective research. In particular, analysts should not attend road shows or pitches. Other standards include not allowing someone with conflicting responsibilities to:
* Supervise an analyst; or
* to decide on the content of research; or
* to decide the remuneration of an analyst — for example, analysts should not remunerated from the proceeds of specific investment banking deals.
Gay Huey Evans, director of the Markets and Exchanges Division of the FSA, comments:
"We and the regulated community agree that to preserve confidence in the integrity of the UK’s financial markets, the standards applied to investment research and new issues of securities should be higher than they have been in the past. We have today finalised the standards we expect the industry to deliver and have published proposals that put the responsibility for delivering these standards fairly and squarely on the senior management of firms. For the industry, flexibility can be exercised in how exactly to manage conflicts of interest. But there will be no regulatory boxes to tick and senior managers will have to be able to demonstrate to us that their procedures are up to scratch. Flexibility is not the easy option."
The paper also includes final rules that limit the situations in which firms can deal ahead of publishing investment research. Analysts’ personal dealings in investments they write about — and related investments such as derivatives - are similarly limited to dealing in accordance with their recommendations.
Conflicts of interest also arise during the process of issuing new securities. Such conflicts are also covered in today’s paper, which gives guidance on how to deal with the allocation and pricing of securities.
The consultation period runs until 24 December 2003, with the aim that firms will have implemented the new rules by the summer of 2004.
