Can we talk?

The Sydney Morning Herald reports:

In the wake of its landmark court action against the world's biggest bank, Citigroup, the Australian Securities and Investments Commission has called for submissions to a discussion paper detailing case studies "loosely based on real life examples of conflicts we have seen".

In the paper, [which you can get here] ASIC questions how conflicts of interest are managed by retail and wholesale financial advisers and fund managers, and in research reports.

It gives simple examples of conflicts faced by financial planners, recommending clear disclosure of fees and commissions. Those are likely to be welcomed by an industry still reeling from the Westpoint collapse.

But more controversial are proposals to change disclosure practices in the stockbroking industry, including in the daily research notes on investment strategies and recommendations brokers send to clients.

In one case study typical of current disclosure practices, ASIC highlights that: "The disclosure is a lengthy attachment to the report, is non-specific, written in dense legalese and in smaller font than the rest of the document.

"Empirical evidence suggests that clients almost never read the disclosure. In fact, most clients who print out the research put the attachment straight in the bin."

The regulator said research reports "should clearly and concisely disclose the actual relationships and fees associated with those relationships and the disclosure should be prominent and in the same size font as the body of the research report."

That would force stockbroking firms to significantly change their disclosure notices, giving more specific information about clients and fees.

The Investment and Financial Services Association's chief executive, Richard Gilbert, welcomed ASIC's recommendations but said "commercial confidentiality considerations must also be taken into account".

"We have to be careful not to throw the baby out with the bathwater," he said yesterday.

The head of the Securities & Derivatives Industry Association, David Horsfield, said "the cost of implementing this [new disclosure system] could be quite high".

ASIC said in its paper that brokers should disclose if they were a company's house broker, or responsible for floating a company, even after it had been listed on the stockmarket.

It said conflicts could occur where a fund manager "is obliged or expected to use other members of [a] corporate group as service providers". Such corporate structures could be likened to the Macquarie and Babcock & Brown specialist fund models.

The release of the discussion paper comes after ASIC launched civil proceedings in the Federal Court alleging Citigroup engaged in insider trading and breached its fiduciary duty to its client, Toll Holdings, which it was advising in the takeover of Patrick Corp.

ASIC is seeking feedback on its paper by June.