Analyst Objectivity: Managing the Research Process:

Maintaining Research Objectivity

 

Analyst Certification of Their Research

Position: Investment research should reflect the opinions of the author; and analysts should self-certify their research.

Rationale: Self-certification is a fundamental tenet of being a Chartered Financial Analyst. Analysts should exercise diligence and thoroughness and have reasonable bases for investment recommendations or investment actions. They should diligently avoid material misrepresentations and they should keep adequate records to support their reports or actions.

Where stated: Letter to FSA on CP171 "Conflicts of Interest: Investment Research and Issues of Securities" 3 June 2003; Letter to SEC on Regulation Analyst Certification 30 September 2002

 

Internal Safeguards

Position: Investment firms that publish investment research should a) take steps to segregate research analysts from non-research departments; b) create reporting structures that ensure research analysts do not report to or are supervised by departments that might compromise their analysts’ independence; and c) take steps to prevent investment banking, corporate finance, or trading departments from reviewing, modifying, approving, or rejecting research reports.

Rationale: These policies and procedures will help prevent the kind of collaboration between research analysts and investment banking activities that creates severe conflicts of interest for research analysts.

Where stated: Letter to SEC on NASD and NYSE Analyst Objectivity 6 March 2003; Letter to Swiss Bankers Association: Directives on Independence of Financial Research 7 April 2003; Letter to BAFin on Interpretation of Individual Terms in BAFin 34b 22 November 2002; Letter to FSA on CP171 "Conflicts of Interest: Investment Research and Issues of Securities" 3 June 2003; Letter to SEC on Proposed Amendments to NYSE and NASD 15 July 2003; CFA Institute Research Objectivity Standards

 

Limitations on External Review

Position: Investment analysts and their firms should not disclose the conclusions or recommendations of their research to subject companies prior to dissemination to research clients.

Rationale: Prior disclosure of conclusions and recommendations provides ample opportunities for manipulation by: (a) giving issuers time to pressure analysts to change their conclusions and recommendations; and (b) give individuals receiving the advance notification an opportunity to trade, or at least analyze the information, on the basis of non-public, price-sensitive information ahead of other market participants. Compliance or legal personnel should act as intermediaries for all communications between research analysts and investment banking or corporate finance departments, and between research analysts and companies that are the subject of analysts’ research and recommendations.

Where stated: Letter to Swiss Bankers Association: Directives on Independence of Financial Research 7 April 2003; Letter to SEC on Proposed Amendments to NYSE and NASD 15 July 2003

 

Preventing Retaliation Against Analysts

Position: Investment managers and securities issuers should adopt voluntary rules, or regulators should establish fines and other sanctions, to discourage companies that are the subject of investment research, or investment firms that use that research, from taking retaliatory actions against analysts and firms who write negative reports.

Rationale: Pressure from securities issuers and investment managers as a means to influence analysts can inhibit both the flow of relevant investment information to the market, and could impair the objectivity and accuracy of research. Fines and sanctions might deter such actions.

Where stated: Letter to FSA on Discussion Paper: "Investment Research, Conflict and Other Issues" 30 October 2002; Letter to Swiss Bankers Association: Directives on Independence of Financial Research 7 April 2003; Letter to SEC on Proposed Amendments to NYSE and NASD 15 July 2003