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James Langton
In an effort to expand the availability of investment research, the European Securities and Markets Authority (ESMA) is proposing requirements designed to inspire investor trust in research coverage that’s paid for by the company that analysts are covering.
The regulator launched a consultation on proposed standards that would establish a code of conduct for investment research funded by issuers. The proposals aim to set standards of independence and objectivity for providers of issuer-sponsored research, and specify measures to address conflicts of interest.
In the consultation, ESMA said that the proposals are designed to “enhance investor protection by setting standards of independence and objectivity, and specify procedures and measures for the effective identification, prevention and disclosure of conflicts of interest,” without introducing requirements that discourage issuer-sponsored research coverage.
Among other things, the proposals would require agreements between issuers and research firms to run for at least two years, mandate that at least half the annual cost of the contract is paid upfront, and require that any variable compensation cannot be tied to the content of the research.
The proposed two-year minimum for issuer-sponsored research, is intended to ensure that coverage is “provided over a longer term for the purposes of continuity and consistency so as to improve the attractiveness of the issuer-sponsored research and incentivizing its use by investors,” the consultation said.
Similarly, the requirement that half the value of the contract be paid upfront is intended to enhance the trust that investors can have in such research, by structuring compensation arrangements in a way that doesn’t compromise the objectivity and independence of the research firm.
It would also require research firms to adopt and adhere to policies and procedures for identifying, preventing, and resolving conflicts. The proposed code also sets disclosure requirements for conflicts of interest, and requires immediate disclosure when research is financed by the issuer that’s covered in a report.
The consultation stems from an effort by European policymakers to revitalize the market for investment research.
There are currently no specific requirements for issuer-funded research, so regulators are seeking to set some standards that will inspire investor trust in this sort of analyst coverage, enabling it to grow.
The proposed standards primarily target research providers, rather than issuers, as the research firms, “are responsible for producing the research and ensuring its quality, independence, and objectivity,” the paper said. “This approach is also intended to avoid deterring issuers from commissioning issuer-sponsored research.”
The proposals are out for comment until March 18, 2025. The regulator aims to finalize its standards by Dec. 5, 2025.
