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The Evolving Regulatory Compliance Environment for Equity Capital Markets

The Evolving Regulatory Compliance Environment for Equity Capital Markets

The need to more accurately and appropriately justify how allocations in primary markets transactions are made, is strongly related to the primacy of the issuer as the central client of a primary market transaction from a bank or broker perspective.

The central question that needs to be answered is: “How is allocation being used in the issuer’s best interest”. There are two facets to this question to be answered:

To what extent is this holder of the security the most optimal holder of this security from a suitability perspective?

To what extent has any given investor been constructive in the way that they have approached their participation in this transaction.

Constructiveness relates to order giving, including timing of orders, but also relates to the level of intelligent and helpful qualitative and valuation driven feedback that an investor offers through the price discovery process. This is imperative in helping to set the price range before book-building can effectively begin. If the range itself is wrong, it can lead to mispricing and aftermarket volatility. Numerous high profile IPOs, from Royal Mail to Aston Martin have reflected this. This also adds to the notion that the investor will be constructive in the long term with respect to ongoing engagement with the company.

The issue of justifying how allocations are made to different investors in primary markets transactions has been one of the main focal points of the evolution of regulatory compliance thinking in this sector. MiFID II in particular, seeks to improve the rigour by which the ultimate allocation and pricing execution decision is made.

At the end of the day, even though the issuer is the ultimate beneficiary from the perspective of a well thought out and planned transaction pricing and allocation, an issuer’s syndicate advisors have a duty of care to make sure that this happens properly, given that the relative expertise resides there.

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