Britain's securities regulator is reviewing a new way investment banks are hired to sell stock to determine if conflicts of interest are present, according to people familiar with the situation.
The Financial Services Authority is monitoring how investment banks and companies sell shares in an initial public offering called a "competitive IPO." In this relatively new practice, investment banks compete to manage the offering at the same time that bank analysts publish stock research, raising concerns that the research may influence which banks get the business.
Partly driving competitive IPOs are private-equity firms, which are taking companies public and pitting multiple banks against one another without naming the winners until just a few weeks before the offering. This raises the potential for analysts to feel pressure to write favorable reports so their employers win the lucrative bid, say people familiar with the practice.
Traditionally, a company going public has hired one or two banks to take the lead role and named them far enough in advance so that any research on the offering was published after their hiring.
Banks do not engage in competitive IPOs in the United States, and there have been just a handful in Europe.
Conflicts in research at firms has been a white-hot subject since New York Attorney General Eliot L. Spitzer's probe that resulted in a 2002 settlement with 10 major securities firms agreeing to pay $1.4 billion in penalties.
A spokesman for the FSA said the agency would not comment on specific issues it may be reviewing. But a person who has spoken with the agency on the matter said the FSA is proposing to ask banks to tighten their procedures to ensure that they do not fall afoul of conflict-avoidance principles.
The most prominent competitive IPO took place this year with British satellite operator Inmarsat PLC. The company chose the process because it ensured the "maximum of work" from the banks, spokesman Chris McLaughlin said. Nine banks competed for the right to handle the offering, with four winning the coveted slots: Morgan Stanley, Merrill Lynch & Co., Lehman Brothers Holdings Inc. and the J.P. Morgan Chase & Co.-Cazenove Group PLC venture, McLaughlin said. The banks either were not available for comment or said their procedures ensured integrity and independence.
McLaughlin said that Inmarsat explained the competitive process to the FSA and that the company was not asked to make any changes. He said there was no risk of conflicts because the banks were chosen some five weeks before research reports were published.
Unlike the U.S. Securities and Exchange Commission, the FSA generally does not craft specific rules determining how banks and others in the market should act. Instead, it sets out what it calls general principles of behavior. Last spring, the agency updated these principles regarding analysts and conflicts of interest.
The FSA does not specifically prohibit an analyst from producing research ahead of an IPO or from attending a marketing pitch to a potential new issuer. But its handbook says that banks need to consider whether activities "could create the reasonable perception that its investment research may not be an impartial analysis of the market." The FSA's updated handbook also cautions firms to consider possible restrictions on the timing of research and whether banks should label their research "impartial."