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ASIC, IOSCO report on debt capital raisings

The corporate watchdog has released a report into its findings on debt capital raisings following two years of surveillance of market practices.

ASIC's 668 Report noted that while a properly functioning debt capital market (DCM) is vital for the real economy, poor conduct in the industry can reduce both the confidence of issuers as well as investors, resulting in reduced participation and increased funding costs.

In light of this, the regulator argues that the management of risks associated with allocation of debt securities is essential; as is managing conflicts of interest and insuring information provided to investors is not misleading.

ASIC commissioner Cathie Armour recommended that "all licensees should review ASIC's findings and consider whether their controls for the allocation process in DCM transactions - including policies, procedures and monitoring - are appropriate and sufficiently robust".

As part of its surveillance, ASIC engaged with a range of industry participants, including institutional investors, licensees, issuers, industry bodies and international regulators.

It also reviewed 12 DCM transactions, some before and some during the COVID-19 pandemic.

Notable transactions include Virgin Australia's $250 million B-rated issue in March 2019, a $2.5 billion AAA-rated issue from the Treasury Corporation Victoria in March 2019, the Commonwealth Government's $19 billion AAA-rated transaction in May this year, and Woolworths Group's $1 billion -BBB-rated issue, also in May.

The report found that some licensees have overly generic arrangements to manage conflicts of interest, with ASIC recommending that licensees "have effective controls to identify and manager or avoid conflicts of interest for each DCM transaction".

It also found there were mixed approaches for identifying and managing inside information, and noted it was important that licensees have clear policies, procedures and training to identify and manage confidential and market-sensitive information that arises from a transaction.

During the course of its surveillance, ASIC also observed instances in which inflated bids were not identified as such. It also identified differing methods for disclosing the interest of joint lead managers to investors.

ASIC said information provided to issuers and investors must be accurate in all stages of the DCM transaction.

It also observed instances of "light touch" or reactive oversight, and encouraged licensees to ensure that DCM transactions were adequately and demonstrably supervised and monitored on a timely basis.

The watchdog also noted that investors are seeking more meaningful post-transaction information on how securities were allocated.

"This would improve investor understanding and confidence in allocations," ASIC said.

ASIC said licensees need to insure that the objectives of issuers are their primary focus in DCM transactions.

The regulator found that while licensees generally have policies and procedures in place which cover allocation recommendations, these policies typically did not adequately cover all aspects across the lifecycle of the DCM transaction.

It also found there to be strong competition between licensees for DCM transactions, often proactively marketing to issuers to receive mandates.

As part of ASIC's better practice recommendations, it encouraged licensees to develop procedures that cover the whole lifecycle of a DCM transaction, as well as documenting the issuer's expectations about the role of the licensee in managing the offering, engaging with the issuer throughout the transaction, and adequately demonstrating that the interests of issuers are their primary focus when conducting a transaction.

"We encourage issuers to engage with licensees throughout the transaction, including understanding how conduct risks are managed and ensuring the allocations are consistent with their objectives," ASIC said.

The report noted there were several practices within the DCM market which could breach prohibitions of various sections of the Corporations Act.

These include "laddering"; providing a preferred allocation in exchange for agreement to place orders in the after-market, which it argued could breach part 7.10 of the Corporations Act and prohibitions against market manipulation.

ASIC also noted that poor conduct surrounding the messaging or marketing of the offer, or feedback to clients after the offer on its level of demand or the extent of any scale-backs, could also breach prohibitions 7.10 of the Corporations Act and part 2 of the ASIC Act.

Transactions undertaken alongside or ahead of a DCM transaction may also breach prohibitions in part 7.10 of the Corporations Act in relation to insider trading, ASIC said.

ASIC said it would continue to monitor DCM transactions, as well as risk management activities; the management of information, conflicts of interest and control rooms; and transaction reviews.

It comes as the International Organization of Securities Commissions (IOSCO) also released a report into conflicts of interest and associated conduct risks during debt capital raisings.

The report helps regulators to identify and address conflicts of interest and associated risks from the role of intermediaries in raisings, which can impact market integrity and investor outcomes.

IOSCO identified key areas where conflicts of interest may arise, including in the pricing of debt securities and related risk management transactions, as well as in the quality of information provided to investors and the allocation of securities.

"The IOSCO Report provides guidance for IOSCO member organisations and sets out nine measures to address conflicts of interest that arise in the key stages of debt capital raising transactions," ASIC said.

"The guidance reflects an expectation of high standards of conduct by market intermediaries in the debt capital raising process."

ASIC noted the practices outlined within its 668 Report were consistent with the measures recommended in the IOSCO report.

Read more: ASICIOSCOdebt capital marketsCathie Armour
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