ASIC‘s review of allocations in equity raising transactions underscores the potential impact of conflicts of interests in allocation decisions. ASIC highlights areas of improvement for both financial services licensees (licensees) and issuers when raising equity on our listed markets.
ASIC Commissioner Cathie Armour said, ‘The fair and efficient allocation of securities in equity raising transactions promotes market integrity, improves market efficiency and increases investor confidence.
‘Issuers should be engaged with their capital raising transactions with particular focus on raising funds on the best terms possible. The licensees appointed to manage these transactions for the issuer must appropriately manage conflicts of interest and confidential information about transactions. Otherwise, there is a risk that a breach of financial services laws may occur. This may include misleading and deceptive conduct, breaches by licensees of their general conduct obligations, insider trading and market manipulation’, Ms Armour said.
ASIC’s review of a range of large and mid-sized Australian-based licensees found a range of discretionary factors are taken into account in an allocation recommendation, including the objectives of the transaction, investor types and the investor bidding into the bookbuild. The issuer’s objectives should be the primary driver of allocation recommendations.
ASIC makes recommendations on improvements to licensee practices in the conduct of allocations. These include:
- improving the documentation, accuracy, timing and delivery of messages (including updates) to investors during equity raising transactions to ensure they are not misleading and deceptive. This includes reviewing whether information previously provided, particularly about the level of demand for a capital raising, is correct
- engaging with issuers at various stages during a transaction (issuers are also encouraged to take an active interest in the allocation process)
- reviewing the adequacy of their allocation policies and procedures, compliance arrangements and record keeping for allocations;
- avoiding allocations to connected persons as they can present a significant conflict of interest, and
- identifying and managing potential conflicts of interest when making allocation recommendations, for example, disclosing the conflict to the issuer with an explanation of how it is being managed.
Ms Armour said, ‘All licensees should review this report and consider whether their controls for the allocation process in equity raising transactions– including policies, procedures and monitoring – are appropriate and sufficiently robust to meet legal and regulatory requirements.’
ASIC will continue to monitor selected transactions to test that allocation decisions are being made consistently with financial services laws.
Background
The purpose of this review was to understand current market practices and identify areas of concern.
ASIC reviewed the policies, procedures and practices of a range of licensees, and a range of primary and secondary transactions, to understand how allocation processes are managed and decisions made. We also reviewed messages provided to investors and the involvement of issuers in the allocation process.
Report 605 Allocations in equity raising transactions details the findings from our review and highlights areas of concern requiring greater focus and care.To increase accessibility, ASIC has also published a summary version of the report, Report 606 Allocations in equity raising transactions (summary version).
The review follows the release of Regulatory Guide 264 Sell-side research (RG 264) in December 2017 which looks at the key stages of a capital raising transaction and provides specific guidelines on how licensees should appropriately manage conflicts of interest and earlier, Report 486 Sell-side research and corporate advisory: Confidential information and conflicts (REP 486), in August 2016. REP 486 set out observations from our review of how material non-public information and conflicts of interest are handled in the context of sell-side research and corporate advisory.
