Conviction notes; practical details a problem?

It was a new one on me I have to admit. In discussion with an interesting group this week, we chatted about ‘conviction notes’ from sell side analysts, and whether / how the prop desks of the investment banks issuing them can support the note without crossing the Chinese wall.

Going back one step. By definition, a conviction buy or sell note from an analyst means that that bank’s proprietary trading desk is backing that analysis by buying or selling that stock. The bank is committing its own money, giving the note a more than usual forceful impact on the share price.

For the analyst to give his note a “conviction tag”, he has to know that the prop desk will be supporting the note by trading in line with its recommendation, which surely means that the analyst and the bank’s traders need to discuss the analysis ahead of publication?

And of course, the conviction note itself can have a significant effect on the market, given how much money is invested. And the returns from trading (at least) immediately after the note is much greater, so it must be tempting.

Hopefully, compliance departments are policing any connections between those on the prop desk who agreed the conviction tag with the analyst ahead of publication.

Surely this is not a return to the bad old days? And of course completely unconnected to discussions about trading huddles in the FT back in August.

As always, this highlights again the need for IR teams to follow trading patterns in their stock, and to be aware of those investment banks in the habit of issuing conviction notices, or membership of the highly influential investment banks’ preferred stock lists.

Its guidance, Jim, but not as we know it..

Pity the poor regulator. You go to a nice dinner at the IoD and give a speech, and you have someone like me poring all over it for clues as to the concerns of the UK’s Financial Services Authority. The Manager at Company Monitoring at the FSA had that task last week.

One of the problems is that with the ‘principles based’ regulatory structure in the UK, there is a constant refrain that no one size fits all in compliance terms, and that listed companies are responsible for reporting against their own circumstances. And to be fair, I suspect that the IR community prefers that latitude, and would rail against hard coded regulation.

However, it does on occasion present choices for companies, and so any messages and emphasis that the FSA chooses to give are important. And there are some important emphases in Mike Knight’s speech, well worth reading.

For example, he reminds us of the potential need to respond to rumours, by monitoring the media, and announcing as required. And to judge by the number of regulatory announcements “Statement re press speculation” made- over 30 in the last 3 months alone – there is that need.

There is also comment on a particular hot topic for issuers:
“How far away from market consensus does trading have to be to warrant ad hoc announcement?
It would be difficult for us to answer this directly as our rules are not drafted in this language. We would, though, expect that when assessing disclosure of trading or financial performance, directors will apply the various legs of the definition of inside information; in particular, the likelihood of a significant effect on price should disclosure be required.

We do recognise that in some sectors of the listed community, there are accepted market timings or cycles for the disclosure of trading performance. This should not, though, negate the importance of timeliness of disclosure where an issuer is in possession of inside information.”

This raises the constant debate about judgement of the market reaction, and the word “significant”. Many issuers use a benchmark of 10% price movement, although they face the problem that they are not market professionals, and anticipating market reaction isn’t their job.

Probably the key message in the speech is a hark back to the Wolfson case and intra divisional netting off. He said “We remain to be convinced that balancing positive or negative intra-group trading performance can be achieved legitimately under our rules”. Many companies – and probably much of the market as well - still focuses on the bottom line. A clear steer that this isn’t enough.

And finally, advice. It isn’t mandatory to get advice from a broker or financial PR, but where the company does, they should be appropriately qualified and fully briefed.

IROs need to keep up to date with best practice. While this speech basically reiterates what has already been said by the FSA it is always useful to note any change of tone. Recent activity would seem to indicate that the FSA is looking more closely at the way companies are communicating with the markets.