(June 5, 2003) IDA president Joe Oliver faced some tough questions yesterday as he presented the latest version of his association’s proposed policy on research analyst standards at a luncheon held by the Toronto Society of Financial Analysts.

Policy 11 has been revised in response to 18 recommendations from the Securities Industry Committee on Analyst Standards and to reflect developments in the U.S.

The policy has been a work in progress since 2001 and this latest version is set to be passed by the IDA board at a meeting complete with final amendments later this month. It will then be sent on to the Canadian Securities Administrators for public comment. Oliver is confident that Policy 11 will be implemented in no more than a “couple of months.”

The rules are designed to govern the integrity and independence of research analysts — a subject that has ranked high on agendas aimed at boosting investor confidence. “Conflicts are not new,” said Oliver, “but the relative increase in investment banking revenues is.” Sell-side analysts face conflicts of interest when it comes to maintaining independence, and the IDA wants to manage that through the new regulations and guidelines.

However, some industry members such as Brendan Caldwell, president and CEO of Caldwell Securities, aren’t sure the new rules will to lead to positive change. “They’ve taken four years to come up with some guidelines that are not much beyond basic common sense,” he said. “I don’t know whether you can legislate morality. You either create an environment where folks want to do the right thing, or you don’t. Disclosing it in the research in six- or eight-point type does not help.”

Disclosure is key to many of the IDA’s new proposals. For example, there’s now an added requirement that investment firms disclose whether they own more than 1% of any class of an issuer’s common equity securities. This is a change from a previous proposed requirement that firms report “Pro Group” holdings of over 5%. Such a wide net, said Oliver, was deemed to be impractical and unnecessary. The new rule follows the U.S. lead and allows for research on Canadian companies to be published in the U.S.

To manage external conflicts, Policy 11 has included a “basket clause.” This requires firms to identify relationships that might point to a conflict of interest. However, lending relationships with members or their affiliates are not mentioned in the new rules.

This was a bone of contention with at least one small-firm analyst in the audience, who believes that big banks with investment and commercial banking interests have been let off the hook when it comes to disclosing information. While she wouldn’t give her name on the record, she did share her view that the rules simply accommodate bank-owned firms that dominate the industry here in Canada.

But Oliver denied this, saying that requiring such disclosure from banks would simply be too burdensome and difficult to follow due to the complex nature of commercial banking relationships that exist with many investment banking clients.

Related News Story
  • IDA beefs up proposed disclosure requirements for research analysts

    • “Our guidelines do have teeth,” Oliver told the audience, assuring them that rules will be enforced. “We expect that firms that have the capability to comply will do so, first by including the guidelines in their internal policies. If they do not, our compliance reviews will require that they do.” Any violation of those rules will lead to investigation and disciplinary review by the IDA.

    When asked whether or not the IDA is ready to tackle the extra work, Oliver assured wary analysts that the IDA is ready with the necessary staff and resources to do the job.

    Caroline Cakebread is a Toronto-based investment writer.

    (06/05/03)