The Risks that Securities Analyst Face – Mumbai

The Risks that Securities Analysts Face

August 1, 2012

In today’s world an investment professional is subject to higher scrutiny by the investors, regulators and the society at large; thanks to global financial crisis which has eroded returns. Add to this various kinds of frauds ranging from fudging of accounts to front running to insider trading and so on being periodically reported in the press over the last decade and half and it further shakes investor confidence. Sell side analysts and investment professionals are constantly on radar of the regulator. Conflict of interest, market manipulation and insider trading are the common areas where research analysts can unknowingly fall on the wrong side of the law. Research professionals have to be extremely careful with their research and its distribution. Amidst this background IAIP was fortunate to host Jeremy Bolland to make a presentation on “The Risks that Securities Analysts Face”. While Ethics and Standards of Professions are at the core of CFA designation and members have learned them as part of the curriculum, Jeremy’s presentation was timely, insightful and provided many practical situations particularly from the sell side analyst and portfolio manager’s perspective. It showed some simple ways to the analysts to protect themselves from regulatory oversights and conflicts of interests. Some of them are listed below. The event was very well attended and qualified for SER points.


  • Sell side analysts are subject to three levels of rules
    • research specific rules & regulations comprising of registrations & licenses, disclosure of interest & relationships, reasonable basis for views etc
    • market wide laws formed of illegal use of material non-public information, spreading of rumors and insider trading and,
    • Other society wide laws consisting of defamation & copyrights for example.
  • Securities analysts could protect themselves through first identifying the sources of conflict of interest by always keeping client interest first.
  • Analysts should make sure that that they follow proper due-diligence and make relevant analysis before making a subjective investment decision. This research should then be distributed to all the clients.
  • Client can be clubbed in categories and marketing of the research post distribution can be done accordingly but every client should know which category he stands in. Existence of a proprietary desk has to be disclosed and should be treated equally with other clients.
  • Any wrong doing or doubtful action should be disclosed to the employer and he should be taken into confidence. Moreover it should be made sure that proper checks and procedures are put in place at the firm level to prevent any case of misconduct.
  • Through examples and case studies Jeremy highlighted serious penalties, civil settlements and commercial implications of non-compliance. These included Global Analyst Research Settlements and cases during Global Financial Crisis pertaining primarily to equity research for the former and credit research for the latter.
  • As per CFA Institute definition research is “Written or electronic communication that firms sell or distribute to clients or the general public which presents information about a corporate issuer and may express an opinion or make a recommendation about the investment potential of the corporate issuer’s equity securities, fixed income or derivatives of such securities”. Any recommendation like Buy/Sell/Hold  made by an analyst is believed to be research and it is deemed to be understood that analyst has gone through all analysis before making such an statement even though such analysis is not published/communicated.
  • Analyst should be careful while replying to Emails/Calls to their clients/Sales people. Many times a specific client/sale person asks for additional analysis to substantiate recommendation based on some event which had incurred recently. In order to avoid information available to a select client it should be distributed fairly to all clients.

About the Speaker:

Jeremy Bolland is an Independent Securities Research Consultant and has worked as Head of Research Training and Best Practice, at BNP Paribas Securities (Asia) Ltd Hong Kong. Bolland’s 3Cs cover the compliance, content, and commerciality aspects of securities research. “Compliance” looks at the main legal and regulatory risks faced by research analysts and the firms they work for. The risks include conflicts of interest, front-running, insider trading, defamation, and copyright. “Content” looks at satisfying the need to provide a reasonable basis for recommendations and the need to highlight investment risks to clients. One such risk, which is becoming increasingly important for clients to consider, concerns corporate governance. He also looks at topics such as poison pills, vote-rigging, related-party transactions, independent non-executive directors, the commercial angle of an analyst’s job.

Contributions from: Chetan Shah, CFA, Jignesh Kamani, CFA and Kunal Sabnis  all IAIP volunteers

Photographs from: Santosh Samal

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