Table Of ContentSICAS covers.final 11/14/01 9:25 AM Page 1
setting analyst standards: F I N A L
recommendations for the supervision and
s REPORT
e practice of canadian securities industry analysts
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securities industry committee on analyst standards october 2001
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o toronto stock exchange • investment dealers association • canadian venture exchange
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SICAS covers.final 11/14/01 9:25 AM Page 2
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setting analyst standards:
recommendations for the supervision and
practice of canadian securities industry analysts
securities industry committee on analyst standards
final report
toronto stock exchange • investment dealers association • canadian venture exchange
table of contents
committee membership
letter from the chairman and committee
executive summary
preface
Establishment of the Committee
Analyst Committee Mandate
Process of the Analyst Committee
Comments on the Draft Report
Options Considered by the Committee
1.0 introduction
. Background
. Fundamental Principles of the Stock Market
2.0 analysts
. The Role of the Analyst
. Pressures and Conflicts faced by Sell-side Analysts
. Market Perception of Analysts
3.0 current supervision of analysts
. Background
. Regulation of Analysts
. Regulation of Analysts by
. Assessment of the Current Supervision of Analysts
2
4.0 key issues and recommendations
. Overview
. Potential Conflicts of Interest
. Recommendations
. Disclosure in Research Reports
. Prohibited Relationships for Analysts
. Disclosure of Relationships between Dealer Firm Principals and the
Company Covered by Research Recommendations
. Disclosure by Independent Analysts and Newsletter Writers
. Best Practices for Research Reports
. Disclosure of Sources of Information
. Disclosure of Site Visits
. Standards for Recommendations
. Continuing Analytical Coverage
. Media Interviews
. Price Targets
. Use of Specific Terminology for Some Sectors
. Dissemination of Research Reports
. Role of Institutional Investor
. Registration and Supervision of Analysts
. Registration of Supervisory Analysts
. The Importance of Corporate Governance to Analyst Independence
. Trading Ahead of Research
. Compliance and Corporate Governance in Dealer Firms
. Public Company Interaction with Analysts
. The Importance of Education in the Marketplace
5.0 conclusions
appendix i:
appendix ii:
appendix iii: ,
;
appendix iv:
appendix v:
3
committee membership
chairman
Purdy Crawford
Counsel
Osler, Hoskin Harcourt
Chairman
Canada
representatives of self-regulatory
members
organizations
Gordon Cheesbrough
Maureen Jensen
President and Chief Executive Officer
Director, Strategic Development
Altamira Financial Services Ltd.
Toronto Stock Exchange
Leo G. Ciccone
Gerald Romanzin
Vice President, Compliance
Executive Vice President
Griffiths McBurney Partners
Canadian Venture Exchange
Michael Jalonen
Ian Russell
First Vice President, Research Analyst
Senior Vice President, Capital Markets
Merrill Lynch Canada Ltd.
Investment Dealers Association of Canada
Claude Lamoureux
Maryn Sigurdson
President and Chief Executive Officer
Vice President, Regulatory Affairs and
Ontario Teachers’Pension Plan Board
Corporate Secretary
Canadian Venture Exchange
Deborah Leckman
Vice President, Public Markets Equities Branch
csa observer
Peggy Dowdall-Logie
Brian F. MacNeill
Manager, Registrant Regulation
Chairman
Ontario Securities Commission
Petro-Canada Inc.
James B. McLeod staff
Vice President and Director, Research
Nean Allman
Dominion Securities Inc.
Ian Ferguson
Alice Janisch
Joan C. Smart
Managing Director, Head of Compliance
Scotia Capital
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letter from the chairman and committee
We are pleased to present the final report entitled and high standards of professional conduct. These
Setting Analyst Standards: Recommendations for standards are necessary to enable analysts to work
the Supervision and Practice of Canadian Securities in environments where serious conflicts of interest
Industry Analysts. The Committee has reviewed are common and where these conflicts must be
the current practice of Canadian securities industry effectively managed or avoided in order to maintain
analysts, consulted widely and received a number the independence of research.
of submissions on the Draft Report that was pub-
We believe that most securities industry analysts
lished in April .
try to conduct independent research and that most
During our deliberations the Committee spoke abide by the Code of Ethics and Standards of
with or received submissions from representatives Professional Conduct mandated by the Associa-
of dealer firms, professional associations, academia, tion for Investment Management and Research
dealer-employed analysts, independent analysts, . Unfortunately, this is not always the case.
institutional investors, retail investors, public We reviewed several situations where it appeared
companies and securities regulators. Seventeen that research and the ensuing recommendations
written submissions and presentations were were far from independent and where it appeared
received to help formulate the Draft Report. A that the investment dealers’needs superceded
further written comment letters were received those of their investor clients. It is precisely these
on the Draft Report. All comments were consid- situations that illustrate the need for the changes
ered and certainly helped in the formulation of that we recommend.
the final recommendations.
We offer recommendations for changes to
It was evident throughout this process that the both the standards of practice for analysts and
public is very interested in what influence analysts the standards of supervision for analysts within
have in the marketplace. In the United States, the Canadian marketplace. There is no question
reviews of analysts’practice by both the financial that analysts work in a complex environment and
industry and the Securities and Exchange Commis- that any change to their practice will be assisted
sion () testify to the same investor interest. by the support of the companies for which they
We are also aware that, since the Committee work and the companies that their research covers.
was formed, some investment dealers have made Many of our recommendations therefore focus on
changes to their internal policies and practices the supervision of analysts and standards for their
that address some of our concerns. We applaud business relationships, rather than merely on rules
these moves, and encourage more to follow suit. for the analysts themselves.
This report contains our final recommendations Our recommendations also include mandatory
for industry-wide initiatives we believe should disclosure of conflicts to ensure that investors have
be undertaken to improve the independence and enough information to understand the basis for
professionalism of Canadian securities industry an analyst’s research recommendations and to be
analysts. There is no question that analysts play aware if either analysts or their employers are in a
a fundamental role in the capital markets. We position of conflict. In cases where we believe that
believe that in order to maintain the integrity of disclosure of conflicts is not enough to mitigate
the marketplace securities industry analysts must the conflicts, we have recommended that those
operate effectively and efficiently while maintaining particular conflicts or associations be prohibited
the highest standards of ethical behavior. To achieve completely.
this, all analysts must adhere to a code of ethics
5
letter from the chairman and committee
We would like to comment on the importance of Institutional investors play a major role in the
good corporate governance for public companies market place, and have the power to influence
and how this impacts analysts. This subject is of analysts’practice strongly. As indicated on page
significant importance to the marketplace and one of this report, some are starting to play a signifi-
which we have referred to the Joint Committee on cant role in assessing the quality of security analysts.
Corporate Governance (the Saucier Committee) This is a development that we applaud. We would
for consideration. The relationship between com- like to see institutions continue this practice and,
panies and analysts who write research on these to the extent feasible, allocate commission business
companies should be of concern to the entire based upon the quality of research.
business community, since it affects the value of
In drafting these recommendations we have been
research in the market. It is important that public
very sensitive to the need for balance. We endeav-
companies do not put pressure, either directly or
ored to propose recommendations that are in
indirectly, on analysts in an attempt to influence
the best interests of investors and weighed them
the outcome of research. Ensuring that this type
carefully against the costs that would be imposed
of pressure is not applied to analysts who cover a
by their implementation. We tried to recommend
company is not only important to the market but
the least intrusive market solution for the issues.
also to the company and its reputation. It is the
We are confident that the implementation of our
duty of the board of directors to monitor a com-
recommendations will improve the marketplace.
pany’s communications policy and how that policy
We believe our proposals will support a vibrant
is applied in that company. We encourage the
capital market and will command the confidence
Saucier Committee to address this concern during
of investors both at home and abroad.
its deliberations and to ensure that its final report
includes a recommendation to address this issue. Our report is the result of a great deal of time and
effort by many people. I would like to thank the
Good corporate governance is also important
members of the Committee for providing their
within investment dealer firms. When the day
time, experience and critical reasoning to this
is done, the most effective way to develop the
process, and the representatives of the Toronto
independence and professionalism of analysts
Stock Exchange, the Investment Dealers Association
employed by dealer firms is for the dealers’boards
of Canada, the Canadian Venture Exchange and
of directors and chief executive officers to “walk
the Canadian Securities Administrators who have
the talk”of good governance and strong ethics.
worked so hard to support this project. In particular
Boards and s of sell-side companies who want
I would like to thank Nean Allman, Ian Ferguson
their analyststo be independent and to maintain
and Alice Janisch who all worked hard to support
high professional standards will make it happen.
the Committee.
While some of our recommendations deal specif-
ically with these matters it will be the leaders who We urge the financial industry including the
set the toneand vision for the independence and regulators, exchanges and industry participants
professionalism of their analysts. We believe it is cited inour recommendations to act expeditiously
imperative that they do so to protect the standards in making the changes suggested in our recom-
of the marketplace. Similarly, independent analysts, mendations.
namely those not employed by corporations, and
The implementation process will require our spon-
newsletter writers should operate under similar
soringorganizations, in particular the Investment
high standards.
Dealers Association of Canada, to draft changes to
6
regulations that will then be forwarded to the
Ontario Securities Commission and Canadian
Securities Administrators for approval. We urge
all involved to work together to implement these
recommendations expeditiously. While the
Committee has fulfilled its stated purpose by
producing this Final Report, members of the
Committee intend to monitor the progress of
the implementation of the recommendations.
Yours truly,
Purdy Crawford James B. McLeod
Chairman
Gordon Cheesbrough Joan C. Smart
Leo G. Ciccone Maureen Jensen
Michael Jalonen Gerald Romanzin
Claude Lamoureux Ian Russell
Deborah Leckman Maryn Sigurdson
Brian F. MacNeill
7
executive summary
preamble Committee’s final recommendations for changes
to the practice of securities industry analysts and
The Toronto Stock Exchange (), the
standards of supervision for these analysts.
Investment Dealers Association of Canada ()
and the Canadian Venture Exchange () The Committee strove to understand the issues
established the Securities Industry Committee on and underlying causes presented to its members,
Analyst Standards () in September , in and has endeavored to strike a balance in its recom-
response to a number of concerns that were being mendations that will allow for the protection of
raised about the role that analysts play in promot- investors and foster a fair and efficient capital
ing stocks in the marketplace. In particular, the market. In formulating the recommendations in
Final Report of the Mining Standards Task Force response to each issue or concern, the Committee
released in January had recommended that attempted to choose the least intrusive option that
an industry committee be formed to establish would both allow firms to operate efficiently on a
minimum industry standards governing the super- cost-effective basis and permit analysts to operate
vision and conduct of all securities research analysts as independently as possible. The objective of the
since that committee established that analyst Committee’s recommendations is to foster market
recommendations are as important to investors integrity, and to strengthen the ability of analysts
as information released by public companies. to give objective, independent, opinions without
suffering deleterious consequences.
The Committee’s mandate was to:
Please note that in this report, unless otherwise
•review the practices and activities of securities
noted, the words “conflict”or “conflicts”refer to a
research analysts (analysts) in Canada;
conflict of interest or conflicts of interest. Conflicts
•review the standards of conduct and supervision of interest may be potential, perceived or real, but
of analysts; and for the purposes of this report, the Committee
addresses them all as conflicts of interest.
•report on securities industry standards governing
the conduct and supervision of analysts, and
the analyst’s role
make appropriate recommendations regarding
the conduct and supervision of analysts to The generic term “analyst”applies to several dif-
preserve the integrity of the capital markets. ferent functions within the securities industry.
Analysts working at full-service investment dealers
The Committee membership was drawn from
are typically referred to as “sell-side”analysts, while
different sectors of the securities industry, and
those employed by institutional investors are on
included representatives of investment dealers,
the “buy-side.”Other analysts selling their research
institutional investors, listed companies and self-
on a subscription or other basis are often classified
regulatory organizations. After soliciting input
as “independent.”While many of the Committee’s
from the public, the Committee received
recommendations apply to all analysts, the Com-
written submissions and presentations from
mittee’s report focuses principally on sell-side
organizations that provided valuable input to the
analysts, because of their potential influence on
draft recommendations. The Draft Report, con-
retail and small institutional investors.
taining preliminary recommendations, was
published in April and a total of letters Most sell-side analysts appear to play a multi-
were received commenting on its draft recom- faceted role for their firms. In general terms,
mendations. This Final Report presents the analysts in a full-service investment dealer
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Description:Research, which outlines “best practices” for dealer firms who .. the implementation and enforcement of standards by the regulators. • Imposing certain .. analysts in detail. This review was considered a crucial step in order to provide relevant context for the Committee's investigations into
