CIBC World Markets Inc. Brookfield Place 161 Bay Street, 4th Floor Toronto, ON M5J 2S8
October 26, 2015 Marina Ripoche Senior Policy Counsel, Member Regulation Policy Investment Industry Regulatory Organization of Canada Suite 2000, 121 King Street West Toronto, ON M5H 3T9 Email:
[email protected] Manager of Market Regulations Ontario Securities Commission th 20 Queen Street West, 19 Floor Toronto, ON M5H 3T9 Email:
[email protected] RE: REQUEST FOR COMMENTS - RESEARCH REPORT QUIET PERIODS CIBC World Markets Inc. (“CIBC”) thanks you for this opportunity to comment on the proposed Amendments to Research Report Quiet Periods (“Amendments”). CIBC is supportive of industry initiatives that promote better markets. We define better as the introduction of increased efficiency and/or competition, which provides benefit to the Canadian capital markets and ultimately the investor community. We note that the purpose of the Amendments is to: a) foster fair, equitable and ethical business standards and practices; and b) prevent a substantial risk of material harm to investors, market participants, and Dealer Members. As noted in the request for comment, the current time frames for quiet periods were designed “to allow independent analysis to reach investors before dissemination of research reports by Dealer Members who participated in an offering by acting as manager or co-manager.” We are requesting that IIROC adjust the current rule to reflect a 25 day quiet period post IPO, up from 10 days. This would generally allow all potential investors to have fair access to unbiased and accurate information when making investment decisions. We see two outcomes: 1. alignment with the current U.S. practice for a 25 day quiet period post IPO to allow for the expiry of the “post-effective period” during which the SEC governs communication for 25 days after a registration statement has been declared effective; and 2. ensuring investors get access to thoroughly researched and vetted company research given a materially truncated Canadian IPO filing process/timeline relative to the U.S. We believe that the Canadian IPO process is unique from that of U.S. markets. Where Canadian markets operate in a distinct manner, as with the IPO process, market policy should be adapted to best serve Canadian practice, recognizing there is a distinct need for harmony of the rules on cross-border transactions to ensure we do not disadvantage our investor base relative to U.S. investors. Background to our Views: Alignment with U.S. Practice: While FINRA has implemented rule 2241 to reduce the quiet periods post IPO to 10 days from 40 days it has become clear that U.S. dealers have responded to the shortened quiet periods for IPOs by operationally restricting the underwriting group. It has become common practice in the U.S. for the lead underwriters to impose, by contract, a research quiet period on members of the underwriting syndicate, typically lasting 25 days. This ensures that no research is issued during the “free-writing prospectus” period highlighted by the SEC and also reflects the view of
many industry participants that covering analysts require adequate time to prepare their research reports and conduct analysis. Conclusion: We believe Canada should be aligned with this 25 day period. Because there is no similar governing SEC legislation in Canada, we believe IIROC is best positioned to ensure this period is adhered to through rules rather than rely on underwriting syndicates to operationalize the quiet period. Impact on Sound and Comprehensive Research: A primary concern for CIBC is that a shortened research report quiet period may lead to a diminished due diligence process for the creation of research and a dilution in the quality of research product prepared for the investing public–institutional and retail. Given differences in the cross-border IPO processes that we highlight below, it is our opinion that shortening the quiet period in Canada poses greater potential for harm to the investor through the release of research reports that may not be adequately vetted and are not subject to a fulsome due diligence process. A key component to the creation of research is access to issuer management, who are generally unavailable through the IPO process. By shortening the quiet period this will further limit access to management’s time. Conclusion: A 25 day window affords a research analyst between 55-65 days to conduct a full review of the IPO issuer’s business. While still a significantly shorter period of time than the U.S. process affords a U.S. analyst, we believe it is long enough to ensure that Canadian investors are not disadvantaged through a truncated research review process. Differences in IPO Process and Cross-border IPOs Although we recognize the need for consistency in research dissemination for cross-border IPOs, we consider the requirements of Canadian markets to be distinct in operational scope, regulatory regime, and practice. For Canadian-only transactions we believe the timeline for quiet periods ought to be longer than the proposed 10 day minimum. The fundamental purpose of a longer quiet period is to improve the quality and reliability of research reports communicated to the public. In U.S. markets, trading typically commences the day of filing the final prospectus. By contrast, in Canadian markets, trading typically commences 7-14 days after filing the final prospectus. In Canada, the ten-day quiet period could expire prior to the commencement of trading and thus before the market established a fair value without influence from research product. As a result of longer regulatory review periods for IPOs in the U.S., the common practice is to file a preliminary prospectus a number of months before filing a final prospectus, giving U.S. focused analysts early access to corporate information. As part of Canada’s more expedited prospectus review period, a preliminary prospectus is filed approximately 4-5 weeks before filing a final prospectus. Therefore Canadian analysts have materially less time to do the required research due diligence and during that period the issuer’s management is typically fully occupied with the IPO process and are not available to dialogue with analysts, which is a key component to the research process. As a result of these key differences between Canadian and U.S. operations, we believe Canadian markets are best served by a longer quiet period in order to produce quality research for the benefit of the investing public, while still aligning to the operational practice of the U.S. IPO research quiet period. Effect on the Investing Public The Amendments are intended to allow both institutional and retail investors to learn useful and relevant information in a timely manner. However, research issued without access to fulsome information and produced under a compressed timeline may cause more harm than good to the investing public. Research departments must exercise due process, which includes, but is not limited to, the practice of reviewing information about an issuer, including the creation of valuation and economic models. During the quiet period, there is a substantial amount of time spent performing business and financial due diligence, communicating with an issuer’s management team, performing industry research and ultimately producing a written report. Research is vetted through a research review committee where the analyst defends their investment thesis and typically undertakes
enhancements to the research report following their review. Best practices also include sending a redacted version of this report to issuer management. All of which is performed under the supervision of a Dealer Member’s compliance department. In our opinion, a 10 day period following an IPO will not allow for a thorough review of market information and engagement with issuer management in order to undertake a comprehensive review of information required to create analyst recommendations. CIBC operates a retail brokerage with approximately 1,100 investment advisors as well as an institutional equity sales and trading team. From our perspective as a provider of research to these channels, we strongly support the notion that quality of research is the primary consideration for the retail and institutional investors. Through a reduced quiet period, and the competitive forces of being first to market with research opinions, a likely outcome is a dilution in the quality of research being produced. In our opinion, the consumer most at risk of harm is the retail client as the retail investor may consume a single research product without conducting or having access to any additional research of their own. Institutional investors may have access to other product and their own internal research analysts thereby being in a better position to validate their views of the company. Although we recognize that the recommendation for a 10 day quiet period, following the filing of a final prospectus, is a proposed minimum, market forces will drive this to be the target date for IPO research publication. This will be the industry norm, as the expiration of the quiet period is a fixed date known by all in advance and Dealer Members initiating research coverage promptly will be better positioned for greater trading market share and potentially be viewed more favourably by the corporate issuer. We support the principles of greater disclosure and transparency, but not to the extent that the information being provided to the public has the potential to be incomplete and rushed through a reduced due diligence process. A short quiet period will have a negative impact on the quality of research product of Dealer Members who through competitive forces will be required to shorten due diligence cycles in order to meet newly imposed timelines. Conclusion We are required to compete globally for capital, and this has required Canada to foster, establish and maintain high quality capital markets. We recognize and appreciate the intent of policy changes, to address inefficiencies in the market, in particular when aligning regulatory standards across jurisdictions. We are also sensitive to our markets being inextricably tied to our large U.S. neighbor, in particular for interlisted activities. However, where we have an ability to determine what is in the best interest of Canadian markets, we request that regulatory bodies view our markets as distinct and unique. In the current information age, we recognize that the existing quiet period may be excessive and not in the investing public’s interest for the distribution of timely information. However, quality of research product should be of the utmost importance for Canadian investors and Dealer Members. From this perspective, we believe that for Canadian IPOs, a 25 day quiet period following the filing of the final prospectus allows for the continued creation of quality research product and a more timely dissemination of information to all client channels. This would also provide greater opportunity for independent analysis by dealers. Thank you for the opportunity to provide our comments on the proposed Amendments to research report quiet periods. Please feel free to contact us with any questions or requests for clarification.
“Quentin Broad” Managing Director and Head, Equity Research CIBC World Markets Inc.
