ASIC’s increasing focus on equity allocation policies and practices

ASIC recently issued Report 605 Allocations in Equity Capital Transactions (Report) and a summary version of the Report, Report 606, following a review of allocation processes in primary and secondary market transactions.  The purpose of ASIC’s review was to consult with Australian financial services licensees (licensees), corporate advisers, corporate issuers, investors and regulators to understand how licensees make allocation recommendations.  The review focused on the allocation of securities to parties connected to the licensee, the management of conflicts of interest and investigated processes for approving messages sent by licensees and issuers to investors.

The Report seeks to provide ‘better practice’ recommendations to licensees and listed entities, or entities seeking to list on an exchange, for the allocation of securities in equity raising transactions in the Australian market.

Allocation recommendations

Many licensees have policies and procedures that outline criteria for making security allocation recommendations to issuers.  ASIC observed that when firms were building a book for the purpose of a capital raising, allocations were made based on the status of the investor or favoured allocations to themselves or their employees.  ASIC recommended that licensees should have clear policies and procedures in place for managing allocation recommendations for transactions.  A fair and efficient approach to the allocation of securities encourages market integrity and efficiency, and increases investor confidence.

Allocations to parties connected to the licensee

Given their role, licensees have significant information advantages over investors who seek an allocation of securities in transactions.  Licensees obtain an indication of the level of demand for transactions, the interest expressed by investors and the likely after-market demand for an issuer’s securities. Allocations to licensees themselves, their employees or related entities of the licensee can influence the advice provided by the licensee, resulting in advice which is not in the investors’ best interests.

ASIC recommends that allocations to licensees themselves, employees or related entities of licensees should be avoided, as they present a risk of conflict of interest to issuers and investors.  The Report noted that ASIC considers it is better practice to avoid such allocations, except where an offer is undersubscribed and the allocation is limited to the extent necessary to raise the funds sought.

It was also recommended by ASIC that licensees that propose to allocate securities to their employees, themselves or related entities of the licensee should have formal policies and procedures to minimise potential conflicts of interest.  Such policies and procedures should address (amongst other things) the following:

• the appropriateness of the proposed allocation;
• disclosure to the issuer of the proposed allocation;
• the timing and process for submitting bids;
• appropriate minimum holding periods for securities allocated to licensees themselves, their employees, or related entities of the licensees; and
• internal approval processes.

Other steps suggested by the Report include:

• having a paper trail setting out the allocation process undertaken, identifying any conflicts of interest and how the conflicts of interest were dealt with;
• putting clients’ interests ahead of employees’ interests when considering allocation recommendations; and
• not allowing potential future business with investors to affect allocation recommendations.

Messages to investors by licensees and issuers

Messages about the level of demand and likely price at which securities will be issued are often provided by licensees to investors.  Licensees should ensure that messages contain statements which are accurate, not misleading and that avoid the use of overly expressive language.  ASIC recommends that licensees implement processes regarding who can send messages about the status of the raising and how such messages are verified. This ensures that messages do not contain misleading and deceptive information.

Further details

The Reports demonstrate an increasing focus by ASIC in relation to matters which (from a company’s perspective) have historically operated, in large part, in the background.  Both companies and licensees should be mindful of the concerns raised by ASIC and consider carefully when settling an allocation policy for a fundraising round.

It is certainly an area that McCullough Robertson will continue to watch with interest.

A copy of the Report can be accessed here.

This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.