Market Intermediary Management of Conflicts that Arise in Securities Offerings - Final Report

Market Intermediary Management of Conflicts that Arise in Securities Offerings Final Report TECHNICAL COMMITTEE OF THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS NOVEMBER 2007 1 Part 1: Background A. Purpose of this report This report sets out guidelines for regulators and market participants when considering how to address conflicts of interest that may arise when market intermediaries are involved in securities offerings, and, in particular, how to address the management of information flows in conflicted situations. These guidelines have been developed pursuant to IOSCO Core Principle 23, which recommends: Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters.1 IOSCO has also released Principles for Addressing Sell-side Securities Analyst Conflicts of Interest2, which address conflicts arising from the individual capacity of the analyst. It is important to note at the outset that the purpose of this report is to set out general guidelines to be taken into account by market participants and regulators when dealing with the issue of conflicts or possible conflicts in securities offerings. The purpose of this paper is not to impose prescriptive or inflexible rules. The examples that are given are for illustrative purposes only. The guidelines in this report must be placed in the context of the regulatory regime applicable in each individual jurisdiction. It is also important to recognise the differences between wholesale and retail investors and between debt and equity markets. Approaches to addressing conflicts should take these differences into account. B. Rationale for this report The drafting of this report was prompted by the report of the IOSCO Technical Committee entitled “Strengthening Capital Markets Against Financial Fraud,” dated February 2005.3 That report referred to a series of high profile financial scandals that appeared to raise doubts in the minds of investors about the integrity of global capital markets and highlighted areas of securities market regulation requiring review. 1 Under section 12.5 of the IOSCO Objectives and Principles of Securities Regulation (May 2003)(http://www.iosco.org/library/pubdocs/pdf/IOSCOPD154.pdf), it is stated that “[a] firm should try to avoid any conflict of interest arising but, where the potential for conflicts arise, should ensure fair treatment of all its customers by proper disclosure, internal rules of confidentiality or declining to act where conflict cannot be avoided.” “A firm should not place its interests above those of its customers.” 2 <http://www.iosco.org/library/pubdocs/pdf/IOSCOPD150.pdf> 3 <http://www.iosco.org/library/pubdocs/pdf/IOSCOPD192.pdf> 2Market intermediaries were involved in the transactions referred to in the report. Some of them were investment banks that acted as underwriters for public equity and debt issuances and brokered private loan arrangements, while others were broker-dealers who marketed securities to institutional and retail investors. In some cases, market intermediaries that arranged loans or other transactions were accused of misusing material non-public information about the issuer. Among other action items for priority work, the report recommended that the Technical Committee examine the role of market intermediaries in the offering process. The Technical Committee mandated its Standing Committee on Intermediaries (SC3) to undertake some work on this area and that it focus on: (a) Information flows within market intermediaries as well as between them and issuers and investors to identify (1) potential conflicts of interest; (2) how information is managed within market intermediaries involved in securities offerings; and (3) the possible inappropriate use or withholding of relevant information related to those conflicts; and (b) How inappropriate uses of information and possible conflicts of interest related to a securities offering could be addressed by information management arrangements within the market intermediary. It is essential that investors have confidence that market intermediaries act with integrity and with appropriate regard to their interests, whether they are clients of the market intermediar