ASIC is turning its attention to capital raising allocations, signalling to firms the need for clear policies to ensure that all allocations are fair and in the best interests of their clients.

The Australian Securities and Investments Commission is scrutinising the capital raising allocation process and is focussed on, and taking action against, what it perceives to be various shortcomings in the market. ASIC is reviewing both primary and secondary market transactions and is consulting with a range of stakeholders, including corporate advisers, investors and foreign regulators.

According to recent reported statements from an ASIC Commissioner, ASIC “want[s] to see fair allocation processes” and “expect[s] firms to be able to demonstrate how the allocation process reflects the interests of their issuer client”. ASIC is flagging potential site visits and reviews, as well as engaging in investor feedback. As part of this, ASIC may ask firms for evidence regarding how their book was built, what communications were made to investors, and how conflicts between the firm’s clients and personal interests were managed.

How did this come about?

In 2016, ASIC released Report 486 entitled Sell-side research and corporate advisory: Confidential information and conflicts of interest. Report 486 reflects ASIC’s review of the policies, procedures and practices of various investment banks and brokers active in the Australian market between September 2014 and June 2016, including ASIC’s review of a sample of initial public offerings and secondary market transactions. Many of ASIC’s observations in the report have been addressed in its recent regulatory guide, RG 264 Sell-side research.

Report 486 recognises that the allocation process is a complex one and that various factors are taken into account. However, it also identifies several shortcomings observed by ASIC when firms were building a book for the purpose of a capital raising. ASIC perceived that firms were:

  • providing larger allocations to key institutional clients of the firm; to investors who commit to engage in after-market buying; to investors in compensation for earlier trading losses; and to senior management or directors of other companies that the firm was seeking to secure as a client; and
  • scaling back allocations depending on the status of the investor (for instance, scaling back certain hedge funds) or in favour of allocations to themselves or their staff.

Report 486 also identifies an instance where inconsistent and misleading information was provided to potential investors during a secondary market bookbuild (which focused on the level of demand) and highlights that firms should take care not to engage in misleading and deceptive conduct when advising potential investors that a book has been covered (ie when bids sufficient to cover the amount being raised have been received).

ASIC’s recent public statements, as well as an article authorised by ASIC and published earlier this year in the Stockbrokers and Financial Advisers Monthly, highlight that this issue remains on ASIC’s agenda, as well as that of other regulators (such as the ACCC).

What can you do?

Make sure you have a formalised policy to determine the allocation of shares in capital raising transactions. Your policy should take into account a range of factors to ensure that the ultimate allocation is fair and in the best interests of your client, which essentially requires your policy to minimise all potential conflicts. ASIC has broad information-gathering powers and its recent reported statements indicate it intends to use them.

A few other tips:

  • Ensure that you have a clear paper trail setting out the allocation process undertaken (including how any conflicts were dealt with).
  • Make sure your clients’ interests are put ahead of your staff’s interests when considering your allocations. This may require that no shares are allocated to your staff.
  • Don’t let the possibility of future business with investors affect your allocation decision-making.
  • Make sure there are clear processes in place on who can send messages regarding the status of the raising and how such messages are verified (which includes ensuring that words like ‘covered’ and ‘cornered’ are used appropriately). This will ensure that any such messages are not misleading or deceptive.