I
read with fascination Stephen Mayne’s article in Friday’s Crikey –
‘Time for some real reform on the Chinese walls that aren’t’ – that
followed revelations by a former Deutsche Bank analyst of some of the
very real conflicts that exist in the traditional broker
research/corporate finance symbiosis.

At the outset, let me make
the following full disclosure: my business, Aegis Equities Research,
makes a living by producing independent equities research, so I have a
vested interest in the promotion of independent research.

But
let me also be absolutely clear: the problems Stephen Mayne highlights
are the elephant in the sitting room no-one has been prepared to
acknowledge and address, and this situation has existed for years.

The
example cited in Crikey is the second recent illustration of this
epidemic; several weeks ago ASIC charged a broking firm for breaches
that in essence relate to the very same conflicts of interest. A recent
survey of analysts, stockbrokers and fund managers by the Securities
Institute of Australia concluded that more than half of respondents
believe that such conflicts happen “a lot.”

This situation is
patently unacceptable and contrary to the efficient operation of our
capital markets, creating added hidden costs and threatening to
undermine the confidence that is so critical to our equities markets.
It is time for more realistic measures to be implemented to ensure the
independence of stockbroker research to protect Australia’s 8 million
individual investors from the prospect of biased research.

Independent
research which is demonstrably free from actual or perceived bias is
the only way to provide investors with 100% confidence. Independent
research, if coupled with high standards of quality and
professionalism, provides investors with a reality check. This lesson
has been clearly learned in the US where, to quote New York Attorney
General Eliot Spitzer, “Real reform is the key to restoring confidence.”

Recent
lapses demonstrate that the Federal Government’s CLERP 9 approach
relying on ‘managing’ conflicts of interest are not enough and measures
such as the physical separation of research and corporate finance
activities should be back on the drawing board.

While the howls
of self-interest will continue to echo from the corridors of our
largest broking firms, let’s at least have a genuine debate in the hope
that our system will be better off for it. It might mean more
competition for my business, but ultimately that is a good thing.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey

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