Simple background to this resolution
A quick explainer of what this resolution does (as it's admittedly a very technical topic although it concerns one of the few areas of securities law that is implemented globally - a bit of background to those who don't work in finance:
1. Investment banks publish what is called "investment research", which recommends that investors buy or sell stocks (or other financial instruments). (This is what you hear on news channels saying that "XYZ Bank recommends a BUY on a stock!" These are called "ratings".
All of these are written by investment analysts employed by investment banks and distributed globally. Investors anywhere in the world can receive ratings on US stocks, for example. There are also other ratings on bonds, funds and other financial instruments, or the direction of markets in general.
2. There are rules to ensure that the investment analysts are separated in their work from other departments in the same bank.
This was a direct result of the Enron scandal in 2000, when several banks vying for business with Enron were accused of pressuring their analysts to put "Buy" ratings on Enron stock, even as Enron was teetering towards collapse.
3. As a result, reforms were put in place to safeguard the independence of analysts, so that banks cannot pressure their analysts to put a favorable view on a stock to try to win business.
Indirectly, this proposal protects investors (from small to large investors) from getting biased or misleading opinions on stocks and other investments.
It also has a technical requirement applicable when analysts behave like journalists and write widely distributed that the standard of proof for libel is legally tightened, to make it harder for rich companies to sue to silence analysts.
Globally, the rest of the world adopted the principles called "IOSCO Statement of Principles for Addressing Sell Side Securities Analyst Conflicts of Interest", published by the International Organization of Securities Commissions, which is the global coordinator for securities regulators. This resolution basically imports the principles from the IOSCO Statement into the World Assembly (although the text is conceptually closer to Sarbanes-Oxley). It is a global issue as investment research is largely distributed globally.
Technical background to this resolution
This is a fairly technical proposal and assumes some background knowledge in governance requirements in independence in investment research.
Clause 1 is based off the Global Analyst Research Settlements in 2003 and it is also very roughly based on Title V of the Sarbanes-Oxley Act). It is significantly less stringent than the EU rules known as MIFID.
Globally it is a derivative of the IOSCO Statement of of Principles for Addressing Sell Side Securities Analyst Conflicts of Interest from the International Organization of Securities Commissions, although the US rules came earlier (largely due to the Enron and Worldcom scandals).
https://www.iosco.org/library/pubdocs/p ... OPD150.pdf
Clause 2 is based on the imposition of the US Supreme Court New York Times Co. v Sullivan standard on published opinions in research and basically requires an extremely high standard of proof for issuers from suing analysts for a negative opinion. (For those familiar with the topic, this is broadly similar to preventing SLAPP suits, but this time against analysts, not journalists).
Clause 1(c)(i) and Clause 2(c) together restrict short-sellers from being sued on the grounds that their analysis is taking the same direction as their proprietary position although they can still be sued on the grounds of actual malice. Clause 1(c)(ii) covers research published by nominated brokers in the UK and other jurisdictions that permit some form of indirectly paid research.
Why is this an international issue
I strongly consider this an international issue given that most investors (effectively, anyone with a retirement savings (or 401(k), occupational pension, superannuation) have some exposure to international bonds, equities, derivatives etc indirectly through their savings schemes and therefore benefit from global regulations on investment research, which significantly influences decisions made by investment managers on their behalf.
This issue is globally regulated in real life through MIFID II (for any institution doing business in the EU) and Global Analyst Research Settlements (and Series 16) for anyone doing business in the US. Indirectly it is globally recommended practice from the International Organization of Securities Commissions.
For our non-capitalist role regions
IC: I also consider this issue to be worthy of commendation to our democratic socialist/communist colleagues in WA since this imposes an additional burden of honesty on the part of investment banks, and that even if your WA member state is socialist, you may still have investments in other capitalist states and this will still indirectly protect you from investment banks playing games with ratings.
Category: Free Trade/Mild.
The World Assembly,
Acknowledges previous resolutions to protect the interest of investors (GAR#474);
Recognizing the reliance of investors on investment research written by analysts for decisions on financial instruments, especially on securities from jurisdictions outside of their own state or nation;
Noting that the views of analysts are not always favorable to particular stakeholders;
Anxious to protect the opinions of analysts for their independence, both from undue intervention by their employers and from frivolous or strategic litigation by other stakeholders;
Hereby defines:
"Analysts" as regulated and qualified financial analysts employed by a research department of an institution;
"Financial instruments" to include all securities, currencies, futures, options and all their respective derivatives traded in any WA member state;
"Institution" to mean a financial institution regulated by at least one member state;
"Investment research" as any written opinions and reports on financial instruments published by analysts under their own name on behalf of an institution in a member state and distributed to investors.
Hereby requires that:
- Institutions must:
- Impose information barriers, controlled by qualified staff, between their research department and any other department(s) that may have a material actual or potential conflict of interest with their research unit;
- Prohibit linking the compensation of analysts to the performance of any specific banking activities conducted by that institution;
- Prohibit any threats, or perceived threats, by another department of the institution against the analyst(s) or their research department(s) (or their respective compensation) over the contents of any investment research;
- Prohibit clearance or approval of investment research by persons employed by the institution who are not directly responsible for the research department, other than legal or compliance staff;
- Purchase adequate directors' and officers' liability insurance from a reputable insurer against any litigation directed at the institution, their research department(s) or their analysts.
- A published "investment research" report must disclose, in a very clear and legible font:
- Any material potential or actual conflicts as specified in clause (1)(a);
- Historical ratings and historical performance data pertinent to each of the said analysts who authored this report;
- If an entity that is the subject of the investment research has been provided with a copy the report prior to publication;
- Specifically disclose on the front page if (i) the investment research is published to support a client or proprietary position taken by that institution and/or (ii) is sponsored by any organization(s) with a material interest in the instruments covered;
- Any position(s) in any of the financial instruments mentioned in a report held by the analyst(s) who authored the report;
- Any other disclosures required by the competent authority of a member state with jurisdiction on the said report.
- In any litigation pending before any member state involving any published investment research:
- A petitioner against an analyst, a research unit, or the institution itself must prove beyond reasonable doubt of actual malice in any analysis and opinions published therein;
- The burden of proof is on the petitioner(s) in demonstrating actual malice and/or a reckless disregard for unambiguous factual statements published therein;
- The direction of any proprietary or client positions taken by any institution may not be admitted as evidence in any such litigation.
- A competent authority of a member state with jurisdiction is responsible for the implementation and interpretation of Clauses 1 and 2, and for any penalties that may be imposed.
Previous draft.