ASIC targets mid-tier brokers on how they are managing conflicts of interest 

The financial regulator is worried about how mid-tier research and broking firms are managing conflicts of interest.

Australian Securities and Investments Commission chairman Greg Medcraft has told a large gathering of stockbrokers the regulator has concerns about how some research and broking firms are making sure their clients’ best interest are protected in transactions, and guarding against leaks and insider trading.

“The handling of confidential information and the management of conflicts of interest are both ongoing areas of interest,” Mr Medcraft said.

How firms guard against leaks is a topical issue with the case against alleged insider trader Oliver Curtis regarding tip-offs he may have received from his former best friend John Hartman making headlines. Mr Curtis was found guilty on Thursday.

An ASIC taskforce to investigate how firms are handling confidential information and managing conflicts of interest was launched last year after the regulator released a report with update guidance on these issues in 2014.

“The taskforce identified a number of risk areas. These risks are being investigated through a review of policies and procedures and meetings with intermediaries as well as a review of specific transactions.”

Mr Medcraft told the gathering that the regulator had found problems with how some firms are managing conflicts of interest and handling of confidential client information.

“Clearly the leakage of confidential market sensitive information about listed entities threatens market integrity by creating selective access to information,” Mr Medcraft said.

“That may damage investor confidence and increase the risk of insider trading.”

Mr Medcraft also raised concerns that the “Chinese walls” in some firms were not as strong as they should be. The term “Chinese wall” refers to the segregation of information between the analysts in research teams and the brokers in sales teams designed to protect clients from potential conflicts of interest.

ASIC’s head of markets supervision Greg Yanco said the regulator’s investigations were particularly focused on mid-tier firms.

“We have identified mid-tier firms that probably don’t have appropriate levels of management for conflicts of interest.”

Mr Yanco said a particular area of concern was whether brokers were always putting their clients’ interests first when deciding allocations in capital raisings and other deals.

“We are seeing pockets of concerns that will have to be addressed. Particularly where research and capital rasings are probably getting a bit too close.”

Mr Yanco said the regulator’s review had also identified some good practices across most of the industry.

The focus on the conduct of mid-tier brokers follows the recent collapse of BBY. ASIC has been criticised for not doing more to identify problems within the firm earlier to prevent the collapse.

Mr Medcraft said the final report from the review could be expected around August and that new guidance would be issued to the market later this year.

“Where clearly we see serious misconduct has been identified we will refer those matters to our enforcement team.”

Mr Medcraft and Mr Yanco made the comments at the Stockbrokers Association of Australia conference in Melbourne on Thursday.

Source: SMH

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