A recent article in The Australian announced that the Australian Securities Exchange (ASX) is piloting a one-year program to fund research for firms that may not otherwise attract attention from traditional research outlets.
Designed to provide “high quality, independent research” of ASX-listed companies with a market cap below 1 billion Australian dollars, the $1 million (AUD) program joins similar initiatives underway at the Securities Investors Association Singapore and other exchanges to help smaller companies access research coverage.
Anytime research is conducted for a fee — whether an exchange or the actual covered company funds the cost — there are several ethical concerns to address. The CFA Institute Standards of Practice Handbook outlines some of the necessary considerations to ensure that reports represent the objective and independent research of the author.
Let’s start with how the researcher gets paid. Research should be conducted strictly on a fee basis, without consideration for the final report recommendation or the potential issuance of future shares of the firm.
The research and recommendations are to be based on a diligent and thorough review of the facts of the company as well as comparisons to appropriate industry benchmarks. This allows the analyst to demonstrate a reasonable and adequate basis for the recommendation.
Finally, the report must disclose all actual and perceived conflicts of interest, such as prior ownership of shares of the company and the actual party paying for the research. Adhering to these principles will help avoid misleading investors.
In the U.S., the 2003 global settlement with large investment banks provided funding for independent research. While not exclusively targeted at small companies, it opened the door to greater research coverage. The ASX and other exchanges are looking to serve a similar purpose by expanding research within their respective markets. We look forward to hearing of the results of the ASX trial in 2013.