Pitt Street Research’s bread and butter is issuer-sponsored research of companies that are publicly traded on the ASX. We are big believers in the power of issuer sponsorship to enlarge the pool of quality, widely accessible research on ASX-listed companies, and thereby contribute to the overall efficiency of the Australian equity market. As such, we are very encouraged by the May 2018 publication by the ASX of an amendment to its Guidance Note 8, which expands the ASX’s ‘Continuous Disclosure’ rules to cover the way in which listed entities are allowed to use equity research that has been written about them.
The evolution of GN 8
Continuous Disclosure, as laid out in the Exchange’s Listing Rule 3.1, basically means that as soon as a listed entity is in possession of ‘market sensitive’ information – the kind of thing that could move a share price – it must disclose that information to the ASX. Listing Rule 3.1A lays out the exceptions to that general rule, such as where the information pertains to trade secrets or incomplete proposals, while Listing Rule 3.1B covers situations where the ASX, in seeking to ‘correct or prevent a false market’, can require companies to disclose certain information.
Guidance Note 8 was first issued by the ASX in late 1998 to clarify the Continuous Disclosure obligations of listed entities and the Exchange has, over the years, amended the Note as new Continuous Disclosure issues arise. The most recent of these amendments came out on 11 May and is, in our view, the most important regulation concerning equity research ever to be issued in Australia.
Raising the bar for independent research providers
The 11 May amendment rules that listed entities aren’t allowed to use the ASX’s Market Announcements Platform to submit an analyst report, to quote from that report, or to announce that the report has been published and where to find it. The reason the ASX is making this change is that it doesn’t want the Market Announcements Platform used for promotional purposes, and any market sensitive fact-based material in such a report should already have been disclosed to ASX beforehand under Continuous Disclosure.
We think the ASX has made a good decision here. Historically, producers of issuer-sponsored research were open to the charge that they were publishing mere promotional material or ‘advertorials’ on companies rather than genuine, objective, independent research. ASX’s decision now raises the bar and makes it more likely that research being commissioned by listed companies will adhere to the kind of quality standards Pitt Street Research has set for itself.
Clarity for analysts and investors
Importantly, Guidance Note 8 doesn’t mean that equity research can’t be disseminated as widely as possible by companies outside of the Company Announcements Platform. Footnote 117 notes that the research can go on the company’s web site, so long as the report ‘does not otherwise contain material that ASX considers objectionable’…the word ‘objectionable’ here meaning material that would be subject to Continuous Disclosure.
The ASX does suggest in Footnote 117 that ‘in the absence of a suitable disclaimer, the publication of the report may imply that the entity endorses the contents of the report’. Say, for example, a piece of research is predicting a large earnings increase between year 1 and year 2 of the analyst’s estimates, but the company itself hasn’t issued an earnings upgrade.
A ‘suitable disclaimer’ would be required before that research could be published on the company’s web site. Again, we think the ASX’s policy is the right one, preserving an appropriate nexus between the independent view of the analyst and the company he or she has been commissioned to cover.
Also, it puts the onus on companies to keep the market informed rather than analysts who, not being insiders, can’t and shouldn’t perform this vital function of information integrity and consequent market efficiency.
Allowing us to do what we do best
The ASX’s May 2018 amendment to Guidance Note 8 is, in short, a great reform. It allows quality producers of independent research like our firm to do the thing they are best at – providing long-dated ‘deep dive’ research on companies and their operating environment that investors and issuers alike can benefit from – while discouraging the production of low grade promotional material that would be better substituted with a press release or PowerPoint presentation.
It’s another example of the kind of regulatory oversight that has made ASX one of the best exchanges in the world for small and mid-cap companies and a market of choice for investors across the spectrum of listed companies.
We think the May 2018 amendment is a big step forward in the evolution of issuer-sponsored research in Australia and we wish to thank ASX for providing clarity around the way in which companies can make use of issuer sponsorship as part of a well-crafted investor relations strategy.
On 4 July 2018 Marc Kennis and I launched our new equity research firm, which we're calling Pitt Street Research. The new firm will do for the entire market what our current firms, NDF Research and TMT Analytics, have done for the Life Sciences and the Tech Media and Telco sectors respectively. We think our timing couldn't have been better thanks to a valuable suite of Continuous Disclosure reforms which the Australian Securities Exchange (ASX) has just enacted.
To read the Compliance update please click HERE.
I am an equity research professional who worked in stockbroking from 2001 to 2015. After 15 months doing investor relations I returned to equity research with the founding of NDF Research. With Marc Kennis I founded Pitt Street Research in July 2018.