IDA beefs up proposed disclosure requirements for research analysts

(May 9, 2003) The IDA has revised its proposed policy on research analyst standards, increasing the levels of disclosure required. The changes reflect comments received from securities regulators across the country and amendments to similar rules in the U.S.

Policy 11, which the IDA has been working on since 2001, deals with conflicts of interest faced by analysts. The policy was first submitted to the Canadian Securities Administrators in June 2002. Although the basic principles have not changed, a new version with a number of revisions was approved by the IDA board and published for comment last month.

“There is an increased level of disclosure,” says IDA senior vice-president Paul Bourque. “There is a general requirement to disclose all relationships that have conflict built into them,” he told Advisor.ca. “Then there are more detailed requirements that set out particular situations where we require disclosure.”

For example, all member firms must have written conflict of interest policies and procedures, which must be submitted to the IDA for approval. And firms must approve analyst’s outside business activities to reduce any potential conflicts.

The policy also includes a number of prohibitions, Bourque says, such as compensating research analysts directly from investment banking revenues and barring analysts from serving on the boards of companies that they cover.

“It’s a combination of disclosure and prohibitions,” he says.

In addition, a number of the specific policies have been upgraded from “guidelines” to “requirements,” Bourque explains. “Everyone has to follow a requirement, but a guideline is like a best practice, you should follow it unless there’s a good reason not to.”

The guidelines include a recommendation that analysts obtain the Chartered Financial Analyst (CFA) designation, although the IDA adds it’s up to member firms to decide if other accreditations may also be appropriate.

Last year, the U.S.-based National Association of Securities Dealers (NASD) issued its own rules for research analysts. Although the two polices are similar, IDA president Joe Oliver noted in a speech last month that the Canadian version does go further in certain areas.

“Policy 11 prohibits a research report prepared by an analyst who is an officer or director of the company, while U.S. rules merely require disclosure,” Oliver said. “We cover the fixed income market, in addition to equity markets. The U.S. rules do not.”

Bourque says some outstanding issues remain, such as what kind of reporting the IDA will require for members firms that own stock in a company about which a research report is being drafted.

The policy has been published for comment on the Ontario Securities Commission Web site. Once the 30-day comment period is over, it will go back to the CSA for approval.

Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca