Analyst Research Process

Overview

The way firms manage analyst research has considerable impact on the validity and accuracy of the resulting reports. In order to ensure the independence, transparency, and objectivity of analysts' work, firms must avoid a reporting or compensation structure that might create conflicts of interest for analysts.

Firms also need to empower analysts to exercise diligence and thoroughness, providing a reasonable basis for investment recommendations or investment actions; to self-certify their work; to avoid material misrepresentations; and to keep adequate records to support their reports or actions.

Our work on analyst objectivity is based on our Research Objectivity Standards, which offer specific, measurable standards for managing and disclosing conflicts of interest and recommend specific practices to guide investment firms and their respective employees.

Research Management

The managerial environment in which research analysts operate can create real and perceived conflicts of interest which can affect the quality and independence of the analysts’ reports. Firms must take steps to ensure that these environments are structured in a way that do not impair either the quality or the independence of the research produced by investment analysts.

CFA Institute Viewpoint

Maintaining Research Objectivity

Investment research is used by firms and individuals to improve the performance of their investment portfolios. Because of the importance placed upon this research by these parties, investment analysts and their firms must take steps to maintain the quality and independence of the analyses and recommendations conveyed.

Regulation

We believe there are several areas where investors and analysts may benefit from additional regulation. Topics we've addressed with our codes and standards include:  

  • Opinions and recommendations expressed by analysts on non-equity securities 
  • A consistent definition of research 
  • Labeling research to avoid client confusion with other firm material 
  • Analyst communications prior to IPOs 
  • Research based on insider information 
  • Research on controlled companies 
  • Broker/dealers exemptions to publish research on structured securities

Transparency

Disclosures help investors gauge the usefulness and objectivity of a firm's research. Disclosures can tell investors how thoroughly a firm has analyzed securities; whether the subject company is a client of or in some other way affiliated with an analyst’s firm; the methodologies, definitions, and any third-party research used; and the performance of past research.

Transparency enables investors to determine if investment firms and their employees have a reasonable basis in analysis and research for their views, and reveals existing and potential conflicts of interests.

Our work on analyst objectivity is based on our Research Objectivity Standards, which offer specific, measurable standards for managing and disclosing conflicts of interest and recommend specific practices to guide investment firms and their respective employees.

 

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