The Committee, formed in late 1999 by the Toronto Stock Exchange, the Canadian Venture Exchange and the Investment Dealers Association of Canada, was set up in response to concerns about the supervision of research analysts, the standards of practice and how analysts deal with potential conflict of interest situations. The TSE/OSC Mining Standards Task Force had also recommended the creation of such a Committee.
The Committee, chaired by Purdy Crawford with membership drawn from investment dealers, institutional investors, listed companies and self-regulatory organizations, consulted widely in its review of securities research analysts' practices, standards of conduct and supervision. While most analysts are well qualified and highly regarded, the Committee concluded that analysts and member firms have not always effectively managed the potential and actual conflicts of interest that arise when corporate issuers and employers pressure analysts and try to influence their opinions and published research.
Most of the Committee's recommendations focus on mandatory disclosure of conflicts of interest in research materials, to enable investors to effectively judge the objectivity of research. When disclosure is not sufficient to mitigate a serious conflict of interest, the Committee has recommended other solutions, including the prohibition of certain practices entirely.
Mr. Crawford said, "Frank and open disclosure enhances the credibility of a public company and its stock in the minds of investors. Those same disclosure principles must be applied to analysts that are looked upon to provide research and advice to Canada's growing number of shareholders. We will only be able to make progress, however, if industry leaders 'walk the talk' and prove they are serious about independent research."
The 28 recommendations include: 14 on disclosure, 6 which advocate the setting of standards, 4 recommending changes within dealer firms and their policies, two which recommend registration of supervisory analysts and one each on education and prohibited relationships between analysts and companies that they are researching.
The Committee worked hard and considered 17 written submissions before debating and agreeing on the 28 recommendations in this draft report. "We believe these proposed standards will ensure disclosure of conflicts of interest and will establish a Canadian standard of practices," added Mr., Crawford.
"It was clear to us that some sell-side analysts had to balance significant conflicts of interest and we are recommending changes to help them mitigate and disclose conflicts. We urge the regulators, exchanges and industry participants named in this report to act expeditiously to approve these proposals. We believe our recommendations will strengthen our vibrant capital market and improve the confidence of investors both here at home and abroad," said Mr. Crawford.
The Committee recommends that the Investment Dealers Association (IDA) ensure its members establish and enforce conflict of interest policies that adequately address the conflicts of interest faced by analysts and that these conflicts should be disclosed prominently in any research report. In particular, analysts will be required to disclose any corporate finance or advisory work that their employer firm has done for the company who is the subject of a research report.
The Committee also encourages dealers to require that analysts become Chartered Financial Analysts and endorses the use of the AIMR Code of Ethics and Standards of Professional Conduct as the standard of practice for Canada. "Our committee didn't find a lack of training or of competence of our analysts," added Mr. Crawford. "But we do believe it is important that when any analyst does not adhere to the AIMR ethics and standards, then there should be appropriate penalties in place."
The draft report has been released for a 60-day comment period before a final report is issued in the fall.
