Securities Research: What Every Sell-Side Analyst Should Know


Securities research consultant Jeremy Bolland’s message to delegates at the 66th CFA Institute Annual Conference in Singapore was clear: First, if you treat your clients fairly, then all of your potential “issues” will disappear. Second, if you lose the trust of your clients, then you lose your business model. These two overarching statements are, of course, self-evident, so perhaps Bolland could have spent the remainder of his session discussing good places to have dinner. Sadly, though, a large percentage of sell-side analysts fail to abide by general rules of trust and fairness, and that makes Bolland’s work highlighting the risks that securities analysts face essential.

The first risk that sell-side securities analysts face is making the critical distinction between research and nonresearch. If the commentary is investable, it is research. If the commentary can make your clients money, it is research. If you want to arm your sales staff with information to please your clients, it is research. If your commentary has the potential to move the market, it is research.

Once an analyst determines whether his or her content constitutes research, then it must go through what Bolland calls “hoops of fire.” These include compliance, disclaimer language, and fair distribution channels that do not benefit one client over another. A big risk for sell-side analysts lies in what they do not publish. Information that analysts provide to clients and sales staff through informal channels, including over the phone and via e-mail, yields the largest exposure to potential punitive action.

In contrast, all published research content goes through the hoops of fire, thereby mitigating many of the risks. When in doubt, Bolland counseled, subject your research to the hoops of fire. After all, as he put it succinctly, “if the [expletive] hits the fan, you’ll want your employer with you.”

According to Bolland, analysts can put companies “into play” — meaning certain released information has the power to move prices — in four possible ways:

  • Insider trading
  • Spreading rumors
  • Collusion/racketeering
  • Good research

The first three options carry significant penalties and, of course, analysts need to avoid them at all costs. The clear advice here is to conduct excellent research within the bounds of ethical and fair behavior. In the case of insider information, Bolland suggested that if an analyst encounters material nonpublic information, he or she should encourage the company to go public with the information to eliminate a conflict of interest. Regulators do not need to understand the research — they just need to know whether there is a conflict of interest.

Many of Bolland’s key messages are aligned with the CFA Institute Code of Ethics and Standards of Professional Conduct. Furthermore, there are several ties with the CFA Institute Future of Finance project, a long-term global effort to shape a more trustworthy, forward-thinking financial industry that better serves society.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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