FR16/2018 Conflicts of interest and associated conduct risks during the equity capital raising process

Conflicts of interest and associated conduct risks during the equity capital raising process Final Report The Board OF THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS FR16/ 2018 SEPTEMBER 2018 ii Copies of publications are available from: The International Organization of Securities Commissions website www.iosco.org © International Organization of Securities Commissions 2018. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. iii Foreword On 21 February 2018, the Board of the International Organization of Securities Commissions (IOSCO) published a Consultation Report, Conflicts of interest and associated conduct risks during the equity capital raising process, with the aim of proposing guidance to help IOSCO members address the potential conflicts of interest and associated conduct risks in the equity capital raising process. Comments were requested by 4 April 2018. Ten comment letters were received and considered by IOSCO as it prepared this Final Report. The feedback statement in Annex 3 describes and addresses the major comments. This Final Report sets out guidance to IOSCO members in the form of a package of measures (hereinafter ‘Guidance’) and reflects an expectation of high standards of conduct by market intermediaries in the equity capital raising process. Although the Guidance is non-binding, IOSCO encourages its members to consider the extent to which this guidance should be implemented in the context of their legal and regulatory framework, given the significance of the associated risks. iv Contents CHAPTER Page CHAPTER 1 – Executive Summary 1 CHAPTER 2 – Background And Scope 4 CHAPTER 3 – Description Of The Equity Capital Raising Process 6 CHAPTER 4 – Potential Risks And Harms Identified In The Equity Capital Raising Process 10 CHAPTER 5 – IOSCO Guidance 16 CHAPTER 6 – Conclusions And Next Steps 23 ANNEX 1 – Participants In The Equity Raising Process 24 ANNEX 2 - Legal And Regulatory Frameworks Governing the Capital Raising Process and Controls and Policies within Firms to Manage Conflicts of Interest 25 ANNEX 3 - Feedback Statement 29 1 Chapter 1 - Executive Summary Capital markets play a vital role in the global economy. Effective capital markets are dependent on high standards of conduct within intermediaries. However, in the capital raising process itself, intermediaries may encounter conflicts of interests which, if not appropriately managed, can compromise the integrity and efficiency of the process. This can make capital markets a less effective route for issuers to raise finance. In August 2017, the IOSCO Board approved a mandate for Committee 3 on Regulation of Market Intermediaries (C3) to examine conflicts of interest and associated conduct risks in the capital raising process. The work to be undertaken under the mandate is divided into two stages. The first stage focuses on the equity capital raising process, which is the subject of this Final Report. The second phase will consider conflicts of interest and associated conduct risks during the debt capital raising process. The mandate was a recognition that in some member jurisdictions, notwithstanding existing IOSCO guidance and existing rules, poor conduct practices may still exist, potentially impairing the integrity and efficiency of capital markets. Conflicts of interest and associated conduct risks identified A survey of C3 members reflected that conflicts of interest and associated conduct risks in the equity capital raising process were present in some jurisdictions.1 The following key risks were identified: • Conflicts of interest and pressures on 'connected analysts’2 during the formation of their views on an issuer in the pre-offering phase of a capital raising; • The prominence of conflicted connected research3 during investor education and price formation in equity initial public offerings (IPOs); and • Conflicts of interest during the allocation of securities. The following additional ri sks were also present in some C3 jurisdictions: • Management of underwriting risk by firms managing the offering and associated conflicts of interest in the pricing of securities; and • Conflicts associated with personal transactions by staff employed within firms managing the offering. IOSCO Guidance This Final Report sets out Guidance to IOSCO members to address the identified risks. The Guidance reflects an expectation of high standards of conduct by market intermediaries in the equity capital raising process. Although the Guidance in the box below is not binding, given 1 Some members reported that they have existing controls for