Preserving Market Integrity

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1. Introduction

The bull market of the 1990s both encouraged and concealed analyst misbehaviour. Never before had research analysts received so much negative media attention. At the centre of the media’s attention were the revelations of serious misconduct by some high profile analysts1: namely Henry Blodget and Mary Meeker. While the majority of the allegations of analyst misconduct occurred overseas, mainly in the United States of America (USA), there were also allegations in Australia that conflicts of interest had compromised analyst research at one of Australia’s most prominent investment banks2. Numerous press reports about a distinct lack of independence of research analyst recommendations resulted in overseas and local governments instigating investigations into the investment banking industry3. In Australia, the Australian Securities & Investment Commission (ASIC) launched a surveillance report on research analyst independence predominantly in response to public criticism and research by the International Organization of Securities Commission (IOSCO) . The aim of this report was to provide an overview of the regulatory and compliance issues affecting research analyst and investment bank relationships in Australia and to work as a factual basis for policy guidance in relation to the Government’s CLERP 9 legislation.

This paper investigates the role of analysts, factors that influence analyst independence, examples of analyst misconduct, and subsequently the current regulations and compliance policies recently implemented and put forward in Australia and overseas to deal with these issues. Next, this paper examines how several investment banks operating in Australia have sought to improve their research reports in response to the new regulations. To conclude, the paper offers suggestions to enhance further regulation of research analysts.

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