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Regulators reviewing the role of research

“By definition the regulators are fairly reactionary. The legislation tends to follow behind,” Mr Falkiner said.

The guidelines recommend the establishment of separate and distinct reporting structures.

“Analysts should report directly to the head of research and should not submit research reports or investment recommendations to the firm’s other corporate or trading units for approval,” the guidelines say.

Firms also should have in place well-defined separation of functions, also known as Chinese walls, restrictions on trading, disclosures of interests and a severing of the link between remuneration and revenue.

“Remuneration shouldn’t be linked to the equities side, but the reality of the world is that investment banks aren’t not-for–profit organisations,” Mr Falkiner said.

He said research departments normally were subsidised by the other activities of an investment bank or stockbroker. He said it cost some of the large investment banks between $10 million and $20 million a year to run their research departments.

Transparency, dissemination of research, and clear statement of firms’ policies and procedures also were outlined in the guide-lines.

Mr Strachan said the guidelines were very important as a means to protect investors.

“If you don’t have these guide-lines and rules you would have unscrupulous players. It would be a jungle otherwise,” he said.

Ironically, however, it is the increasing regulations that are causing analysts to play a greater role in stockbroking firms.

Mr Strachan said the days of stockbrokers advising clients on a hunch or market speculation ended in the 1980s.

Today, stockbrokers are required to back trading advice with hard research to avoid the prospect of legal action as a result of a failure of due diligence. Specialised researchers, there-fore, had become essential.

“In the old days there was good luck or bad luck. These days it is good luck or grounds for suing,” Mr Strachan said.

“The regulations being put in place are being done with the best intent, but at the end it could stifle things.”

Regulations and increasing transparency also come at a cost.

If stockbrokers are held back from offering certain services to companies wishing to raise capital, those companies may need to look elsewhere, either overseas or by raising money through debt.

ASIC acting executive director, policy and markets regulation, Malcolm Rodgers, said he welcomed the guidelines but believed that the current regulations under Corp-

orations Law were adequate.

“The answer to some of these problems is not always rules,” he said.

“We have said there is scope for improvement. We think these guide-lines are a good start but I don’t think is this the end of the matter.”

Australian Shareholders Association WA chairman Anne Pryor said it remained important for investors to do their own research rather than relying just on stockbrokers’ advice.

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