Investment banks want longer ‘quiet period’ blocking reports after IPO

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In a world where market news zips around at lightning speed with a click or a tweet, there is at least one anachronism: The delay in analyst research on companies that have just completed an IPO. Analysts who work for the investment firms that have taken the companies public have been blocked from issuing reports for 40 full days after the stock's debut.

Regulators have now moved to shorten that period. FINRA, the U.S. body that governs its investment dealers, cut the IPO "quiet period" to 10 days this fall. And IIROC, the Investment Industry Regulatory Organization of Canada, followed quickly with a rule that harmonized the Canadian rules with the U.S. so as not to disadvantage this country's investment dealers.

The biggest Canadian investment banks have now responded to this liberalization with a universal position: We want no part of this. Instead, they say, they want the quiet period extended to a full 25 days.

Part of the reason, they say, is to have the time to produce better research that will benefit the average Canadian investor. The other part of it, however, is that Canadians are getting tangled up in the complex and litigious world of U.S. sell-side research.

Let's take a step back: Why is there any kind of quiet period in the first place? The rules exist because the research divisions of the investment banks that take a company public have often been positive on the shares. (Rules prohibit promises of favourable research as an inducement to win investment-banking business, it should be noted.) By restricting the firms from publishing immediately after an IPO, it allows research from independent firms with alternate opinions to get their views to investors in the first days or weeks of trading.

IIROC, in explaining why it changed its rules to match U.S. regulations, recognized "the importance of timely dissemination of information" and says it believes the new, reduced quiet period will not harm investors.

The Canadian investment banks, however, seem to disagree, based on their comment letters to IIROC.

They argue there's a difference in the two countries' IPO markets that can make it more difficult for Canadian analysts to produce research. In the United States, a company files a preliminary prospectus and waits for months while the U.S. Securities and Exchange Commission examines the document. This gives analysts ample time to do their due diligence. In Canada, however, the typical review time (by the applicable provincial securities regulator) between a preliminary prospectus and the offering is roughly four to five weeks. With a new publication schedule of 10 days post-IPO, analysts won't have enough time to meet with management and produce a robust report, the firms argue.

If firms compete to be first to market with their reports, just 10 days after the IPO, "a likely outcome is a dilution in the quality of research being produced," Quentin Broad, the head of equity research at CIBC World Markets Inc., said in that firm's comment letter to IIROC. And the most likely investor to be harmed, Mr. Broad says, are retail investors who "may consume a single research product without conducting or having access to any additional research of their own."

There's something else at play, however, and that's the U.S. firms' own regulatory issues. The reason that the Canadians suggest a 25-day wait is because the U.S. firms have adopted that as an industry practice. The American firms are ignoring the 10-day rule because they're afraid that if their research arms issue reports within the first 25 days of an IPO, the reports will be considered part of the formal offering documents under SEC rules. (The SEC has never actually said that they are, however.) If an analyst report is treated like a legal offering document, the firms' reasoning goes, it opens up liability issues that won't exist if the first bit of research comes out on the 26th day or later.

And Anna Pinedo, a partner at Morrison Foerster in New York, says that several major U.S. investment banks are still part of the 2003 legal settlement with the New York Attorney-General over conflicted analyst research. They're prohibited under that settlement from releasing research sooner than 25 days after the IPO – and they force all the other banks in their IPO underwriting syndicates to hold to that quiet period, as well.

There are no such problems for the Canadian investment dealers, and for now, despite protestations from bank-owned firms, they seem to be following the new IIROC rule for IPOs that trade only in Canada. Hydro One, which made its trading debut Nov. 5, was the first IPO covered by the change, and half a dozen analysts debuted their ratings on Nov. 16, according to Bloomberg. However, CPI Card Group Inc., a U.S.-based credit card maker that listed on both the Nasdaq and the TSX due to its Canadian ownership, saw its first analyst reports come out a month after its debut, suggesting the Canadian firms are following U.S. market practice when needed.

So much for harmonization of the Canadian and U.S. IPO quiet period rules.