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News — ASIC warns of conflicts of interests when raising equity

The Australian Securities and Investments Commission (ASIC) has reminded licensees appointed to oversee equity raising transactions to ensure they appropriately manage conflicts of interests and confidential information about transactions.

‘Otherwise, there is a risk that a breach of financial services laws may occur,’ says ASIC Commissioner Cathie Armour. ‘This may include misleading and deceptive conduct, breaches by licensees of their general conduct obligations, insider trading and market manipulation.’

Her comments follow the release of Report 605 in December which details the findings of an ASIC review into allocations practices in equity raising transactions and highlights areas of concern requiring greater focus and care.

One area raising significant conflicts of interest concerns in this review were allocations to parties connected to the licensee, including related investment managers, employees and principal accounts.

‘Licensees are gatekeepers paid by issuers to manage transactions. In this role, licensees obtain significant information advantages over investors who bid for securities in transactions,’ says ASIC.

‘Allocations to employees and principal accounts can influence licensee decisions, which may result in advice to investors that may not be in investors’ best interests.’

ASIC’s review found that large licensees did not allow allocations to employees and limited allocations to principal accounts to subscribing for shortfalls in transactions that the licensee had underwritten.

At mid-sized licensees, however, allocations to employees occurred in most of the transactions ASIC reviewed and there was limited disclosure to issuers about these allocations. Allocations to principal accounts were less common.

ASIC recommends that allocation recommendations to employees and principal accounts be avoided and that licensees allowing such allocations introduce robust policies and procedures to manage conflicts.

ASIC’s review found that 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. But ASIC says the issuer’s objectives should be the primary driver of allocation recommendations.

It adds that an area in need of improvement was in the messages licensees and issuers provided to investors. Mixed practices were identified here.

ASIC’s Report 605 makes several recommendations on how licensee improve their practices in the conduct of allocations.

‘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,’ says Armour.

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