Crawford Committee Sees Role for Institutional Investors
Caroline Cakebread

The Securities Industry Committee on Analyst Standards, led by Purdy Crawford, has released its final report aimed at improving the professional practice of securities analysts in Canada. The main focus of the report is the protection of retail investors - but it also calls on institutional investors to help raise the bar for the practice of sell-side analysts.

The report looks at the significant conflicts of interest that can arise for sell-side analysts and makes recommendations for improving standards of practice. Most of the Crawford committee's recommendations focus on protecting retail investors through mandatory disclosure of conflicts of interest in research materials.

But one recommendation urges institutional investors to use best practices to measure the value added by analyst research and, where possible, to use these criteria to allocate trading business. This would be a major economic incentive to bring about change.

That recommendation represents a significant opportunity for institutional investors to positively influence the practice of analysts and, ultimately, improve the integrity of the market.

At present, many institutional investors don't publicize their methods of allocating business to brokers - they do so privately, sidelining or simply not using more self-serving research. In the future, what steps can they take to support the Crawford committee's recommendations?

At the moment, no one has specific answers, but there are other examples of how this could work. Claude Lamoureux, a Crawford committee member and president and CEO of the Ontario Teachers' Pension Plan Board (OTPP), talked about how OTPP is trying to give business to firms whose research reports best serve them. "We can make sure that good work gets rewarded as opposed to work that makes money for the corporation for whom the analyst works," says Lamoureux.

Another committee member spoke of the Caisse de dépôt et placement du Québec as a pension fund that has developed a very transparent means of allocating fees. It pays more to firms that give it good research and use best practices than it pays to others. Moreover, the Caisse allocates in its fee structure what it pays for research. The Crawford committee believes that this could become a more common practice.

Ultimately, the report's recommendation means that institutional investors could, one day, be asked to publicize their allocation criteria and go on record about their decisions. But this will be up to the industry to decide, with the help of organizations such as the Pension Investment Association of Canada (PIAC).

"At the end of the day the role of the analyst is to help their clients to make money," Lamoureux points out. "Maybe down the road, the best thing that can be done is to separate the cost of trading from the cost of research."

That seems far down the road, but perhaps institutional investors can help to pave the way to a better system for all market participants.

Caroline Cakebread, Editor

Contex Group