Preserving Market Integrity

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2. Research Analysts

The role of research analysts is diverse. Fundamentally, they are a significant component in the operation of informed and efficient markets. The principle role of research analysts is to collect, filter and analyse information about the economy, industries and business trends to assess the potential of various companies4. Research analysts may also assist in securing investment-banking transactions, through ‘road shows’ and other sources of marketing for Initial Public Offerings (IPOs), mergers and acquisitions and other corporate finance projects. Following their analysis, they form and communicate their opinion or recommendation about product issuers and investments to investors and the market in the form of research reports. These recommendations are commonly in the mode of ‘buy’, ‘hold’ or ‘sell’. It is these recommendations or more so the preponderance of ‘buy’ over ‘sell’ recommendations that have been the focus of public scrutiny and concerns of regulatory bodies.

The integrity of investment research and recommendations is critical to maintaining investor confidence and market efficiency. Without the fair, accurate and transparent investment research, the integrity of financial markets and the investment professionals that serve them could be greatly jeopardised. Consequently, it is critical that research analysts, in particular the ‘sell-side’ analysts5, manage the considerable number of conflicts of interest that they face in their day-to-day operations. Sell-side analysts are the people who work for the ‘full-service’ investment banks (i.e. a firm that engages in one or more of the following activities: investment banking, research and trading).
Previously, analysts performed research and analysis on a fee-for-service basis, however with the advent of the internet and the significant public dissemination of analyst reports via various forms of media, the majority of research performed is subsidised by other departments of the relevant organisation, most commonly the investment-banking department. This situation places the research analyst in a precarious position where the employer’s interests may potentially conflict with his or her own. Moreover, a conflict of interest arises between the analyst providing objective and independent research and investment banking revenue.
Research analyst reports, especially from the highly regarded analysts, can significantly influence the prices of securities or other investments and place the analyst in a position of substantial influence6. Accordingly, analysts can use their recommendations to the monetary advantage of their investment banking firm or themselves. In these situations, the pressures from various market participants may unduly affect the independence and objectivity that underpins analytical research.
Importantly, market participants (i.e. investment professionals) have a mutual responsibility to create and maintain an environment that enables research analyst to fulfil their responsibilities with independence and objectivity, exercise due diligence and thoroughness in conducting research and taking investment action on behalf of their clients. Furthermore, research analysts must provide investment recommendations that have a reasonable and adequate basis and fully convey their true opinion. The best interests of the investing client must always take precedence over the needs of research analysts, investment managers, and their employers. Without this, investor confidence will deteriorate.

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