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ASIC report finds analyst reports dodgy.

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Senator Stephen Conroy Deputy Opposition Leader in the Senate Shadow Minister for Financial Services


The Australian Securities and Investment Commission’s (ASIC's) surveillance report on independence of research analysts shows that research reports from investment banks are dodgy and that self-regulation of the investment banking industry has been a comprehensive failure.

ASIC found that the research processes at the investment banks were indefensible:

“In the worst instances research recommendations can be overridden or subjectively re-weighted by an analyst and publicly released without review. From a market integrity and consumer protection perspective, such a deficiency in practice is entirely unacceptable or indefensible.”

Investment banks also failed to disclose conflicts of interest. ASIC said that:

“We do not regard the extent of disclosure (as opposed to content) to be adequate. Disclosure at an analyst level did not appear to be utilized by ANY firm and not all firms had enforceable trading restrictions for their analysts.”

ASIC’s report found that there was a risk that analyst remuneration was more aligned with banking revenues than research performance, and that the self-regulation of the industry has failed:

“..the industry guidelines developed by the SDIA and SIA have not been adopted as closely as intended and there is still significant room for conflicts of interest to occur and to remain unmanaged.”

As a result of ASIC’s findings, Labor believes that guidance from ASIC alone will not be sufficient to crack down on the dodgy practices within the investment banking industry.

At a minimum, ASIC Guidelines on managing conflicts of interest must be mandatory. In addition, Labor is considering whether to:

• require analysts to disclose any interests they may have in the analyst report; • require companies to establish "quiet periods" prohibiting the publishing of any reports for a period after the analyst firm has acted in an Initial Public Offering (IPO) for the company that is the subject of the report; and • prohibit “spinning” - the practice whereby investment banks allocate shares in company floats to

clients (or potential clients) as an inducement for business.

ASIC’s report shows that investment banks are promulgating marketing documents that masquerade as independent research. Yet investors rely on this “research” when making investment decisions. It’s time that the Howard Government admitted that self-regulation has been a green light to corporate greed and cracked down on the investment banking industry.

Friday, 22 August 2003

Further information: Stephen Conroy 0418 383 965 / Amber Hawkins 0407 434 523