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Consultation responses

FCA: Availability of information in the UK Equity IPO process

Markets Policy Department
Financial Conduct Authority
25 The North Colonnade
Canary Wharf
London E14 5HS

July 12, 2016

Dear Sir / Madam,

Re: Availability of information in the UK Equity IPO process

Thank you for giving us the opportunity to comment on your discussion paper: Availability of information in the UK Equity IPO process.

The Investor Relations Society’s mission is to promote best practice in investor relations; to support the professional development of its members; to represent their views to regulatory bodies, the investment community and government; and to act as a forum for issuers and the investment community. The Investor Relations Society (IR Society) represents members working for public companies and consultancies to assist them in the development of effective two way communication with the markets and to create a level playing field for all investors. It has over 760 members drawn both from the UK and overseas, including the majority of the FTSE 100 and much of the FTSE 250.

On review of the discussion paper - availability of information in the UK equity IPO process - the IR Society supports the FCA’s review of the current system, to promote an efficient and well-informed IPO process. This includes supporting reform for fostering a higher standard of conduct, allowing equal access to information during the IPO process, and promoting conditions for unconnected research to exist.

Q1: Having regard to the typical UK IPO timetable, do you agree that it is in principle a cause for concern that in most cases a draft prospectus is available two weeks after the ITF and a final prospectus is only available after pricing? Please state reasons.
Yes, the IR Society believes the current process is too long and there is not sufficient availability of information for investors between the ITF and a draft prospectus. Furthermore, this process often disadvantages smaller institutional investors and excludes retail investors. Both institutional and retail investors need sufficient time to make investment decisions.

Q2: Do you have concerns about connected research? If so, please describe those concerns.
The IR Society understands there is a valid place for connected research within the IPO process. While there is an external perception that connected research has an inherent bias, we believe sophisticated investors should be able to exercise their own judgements in the IPO process. Furthermore we don’t believe there should be an outright ban on connected research. From an issuer perspective, those smaller-cap companies with less potential analyst coverage may rely on connected research to ensure correct market valuation upon pricing.

Q3: What is the basis on which you consider legal liability may attach to the publication of research in close proximity to the publication of an approved prospectus? Please explain, by reference to the current legal framework. It would be helpful if you could consider the question from the perspective of both issuers and research publishers.
The IR Society believes there is the capability within the current legal framework to allow the publication of connected research in close proximity to the publication of an approved prospectus.

Q4: Do you have any comments on regulatory or other possible drivers of the existing blackout period?
We have no further comment, other than we believe it is hard to see the justification for the existing blackout period in the current regulatory environment.

Q5: What do you think are the main barriers to more unconnected research on IPOs? Do you think fostering the conditions for more unconnected research is a suitable objective to improve further the UK process?
Within the current process, we believe the main barriers to more unconnected research on IPOs is lack of access to management and company information. If conditions for more unconnected research were fostered then this would allow for more transparency and more timely access to information, as well as the potential for higher quality research from more providers. This would also prove more beneficial for corporate issuers who, with broader research coverage, would be assured a fairer market valuation in the long-term. Finally, allowing unconnected research to be produced earlier ahead of the IPO, will make for a better informed market following listing.

Q6: Do you agree with the concerns that we have set out in Chapter 3?
Yes, the IR Society agrees with those concerns as outlined in Chapter 3.

Questions on the proposed options for reform
Q7: Do you agree with our conclusion that a regulatory intervention is required to achieve reform? If not when and how do you believe a market-led solution could be secured?
Yes, the IR Society firmly believes that regulatory intervention is required to achieve reform.

Q8: Do you support these high level aims for reform of the UK IPO process? If not, please set out concerns and/or alternatives.
Yes, we broadly support these high level aims for reform of the IPO process. Regarding the last point in section 4.6 we would support the approach of allowing unconnected analysts access to the prospectus and issuer’s management, but would suggest a ‘town hall’ meeting be held much earlier and closer to the timeline of publication of the approved prospectus. 
We would however like to mention that we do not agree with the US approach where research does not feature in the IPO process at all. (see answer to Q9).
In reference to point 4.7 in the discussion paper, we don’t believe it is a viable goal to make changes to existing practices which increase the risk of bias in research (including analysts in syndicate banks). Corporate issuers are likely to know a number of research analysts through the course of their market interactions, and it is not practical to stop analysts interacting with IPO clients. From a corporate issuer perspective we would encourage analysts to meet non-listed companies. As previously mentioned, broader research coverage could create a fairer market valuation for companies in the long-term.

Q9: Do you agree that a ban on (i) all research and (ii) only connected research in the IPO process would not be a suitable option for reform? If not, why not?
We agree with both of the above points (i) and (ii). From a small- to mid-cap issuer perspective a ban on all or unconnected research in the IPO process would not be a suitable option. Such companies may have a lower profile and rely on connected research.

Q10: Do you agree that simultaneous publication does not represent a suitable or practical basis for reformed market practice?
The IR Society agrees that simultaneous publication does not represent a suitable or practical basis for reformed market practice. Research analysts would be prevented from publishing good quality and well thought-through research as they would be competing to publish their views. 

Q11: Do you agree that requiring publication of the registration document component of the prospectus prior to the publication of research would improve the IPO process? If not, why not?
Yes we agree with this requirement.

Q12: Do you agree that requiring issuers to open the presentation to analysts to unconnected research analysts would improve the IPO process? If not, why not?
Yes we agree. Opening the presentation to analysts to unconnected analysts would mean more equal dissemination of information, more informed and better quality of information, as well as full transparency for all market intermediaries.

Q13: Which of models 1 to 3 do you think would provide the best basis for reformed market practice?
We believe that Model 2 would present the fairest option for reformed market practice. Model 2 presents the best option for both connected and unconnected research to be published with no rush, thereby offering issuers high quality and well thought-through research. We would however want clarity on when unconnected research can be published.

Q14: For each model (1 to 3), please consider
• Are there any practical issues that we need to consider?
• Would it lead to an increase in the length of the IPO process?
• Would it create conditions for unconnected research to be produced?
• Would it lead to any increase in costs or risks for the issuer, investors or intermediary firms?

We have summarised our comments to the above points in Q14 as follows:
Model 1: This model would be the least costly to implement, with the least amount of changes to both investment banks and issuers. The IPO process could be shortened.
Model 2: This appears to the fairest option, as it offers increased transparency, simultaneous access to management for connected and unconnected analysts, and overall equal availability of information to all parties. There would be additional costs and management time resources in implementing an analyst presentation to both connected and unconnected research analysts but these would be manageable. This model we feel would produce the most considered, quality research.
Model 3: This option offers equality in access to information to all parties, but the simultaneous publication of the approved prospectus and an analyst presentation would present a rush for analysts to produce research which may not be well thought-through.

Q15: Are there any other options you think we should consider?
No, but we would like further clarification on Model 2 and the option to publish unconnected research at the same time as connected research. This is currently unclear in the discussion paper.

Q16: Do stakeholders have concerns with how conflicts of interest are managed when investment banks’ analysts meet an issuer and/or their advisers as part of premandate IPO pitching process? If so, do stakeholders have suggestions on how this could be improved, for example by firms establishing best practices or clarification of our regulatory expectations in this area?
The IR Society believes that investment banks are capable of managing conflicts of interest during the IPO pitching process. It should be a natural part of an analyst’s job to be meeting with companies and it would be unhelpful for issuers not to have relationships with analysts ahead of an IPO process.

Q17: Would the models of reforms considered above also be appropriate as the basis for reformed practice in IPOs on non-regulated markets?
We would consider companies listed on AIM to be different. There would be very little unconnected research coverage, so these models for reform would present an additional cost for very little return. We feel market reform for smaller companies with limited research would not be viable.

In summary, we welcome the FCA’s review and believe it is important that the industry is promoting transparency and high standards of conduct during the IPO process. 

We hope you find these comments useful and we look forward to how we can assist the FCA going forward.
Kind regards

Emma Burdett
Chair of The Investor Relations Society’s Policy Committee
020 7379 5151 / eburdett@maitland.co.uk

Published: 12 July, 2016