Views on improving the integrity of global capital markets
20 September 2011

FINRA Research Warning: No “Buy” for Investment Banking

If the 2003 analyst independence legal settlement wasn’t deterrent enough, FINRA recently issued a regulatory notice reminding firms to maintain a firewall between research and investment banking.

More warning than guidance, Regulatory Notice 11-41, released by FINRA on 14 September, cautions against offering positive research perspectives to earn valuable investment banking business. “It has come to FINRA’s attention that certain issuers may be attempting to extract implicit promises of favorable research by suggesting publicly or directly to potential deal participants in advance of an anticipated offering that positive research coverage will be an implicit or explicit condition to selection as an underwriter or selling group member,” the notice states.

A Wall Street Journal article on the same day linked AIG CEO Robert Benmosche to the FINRA notice. With an estimated $40 billion in potential offerings over the next 18 months, according the article, Benmosche has highlighted the need for firms involved with the deals to have “a clear understanding of who AIG is and our trajectory, and why AIG is a stock that investors should own.” This clearly puts pressure on research firms to act if their banking divisions hope to secure part of the deals.

CFA Institute members and investment firms that comply with the CFA Institute Asset Manager Code of Professional Conduct have specific requirements to protect the independence and objectivity of their research and investment recommendations. Caving to such pressure is a violation of the ethical expectations set by our standards.

To further assist our members and help the industry as a whole understand the myriad conflicts surrounding this topic, CFA Institute has published a set of Research Objectivity Standards. The publication provides a specific set of benchmark standards applicable for managing and disclosing conflicts of interest that may impede the objective release of analysts’ research. Pressure can come from either within a firm or from the corporate issuer, but the analyst must make his or her recommendation in the interest of the investor reading the report. The Research Objectivity Standards provide firms with a tool to ensure employees who create and utilize the research of the firm embrace the commitment to ethical conduct.

Research should primarily serve the interest of investors. Thus, it is critical that the research be fair, objective, and not influenced by the company or the banking team.

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About the Author(s)
Glenn Doggett, CFA

Glenn Doggett, CFA, was a director of professional standards for CFA Institute. His responsibilities included providing member guidance in applying the ethics and standards of practice policies, supporting related educational and public awareness activities, and working with the Standards of Practice Council of CFA Institute on its initiatives. He was a co-host of the free, live, interactive webinars used by CFA Institute to promote ethical decision making and global best practices. Previously, Mr. Doggett, as a member of the CFA Institute Financial Reporting Policy Group, represented membership interests regarding reporting and disclosures initiatives, including XBRL. Prior to joining CFA Institute, he worked in the financial information sector with SNL Financial, where he focused on the real estate and energy industries, directing the development and maintenance of a financial data storage system. Mr. Doggett holds a BA in economics from the University of Virginia. He was awarded the CFA charter in 2006 and is a member of CFA Society Virginia.

1 thought on “FINRA Research Warning: No “Buy” for Investment Banking”

  1. Samuel B. Jones, Jr. CFA says:

    Not to be overlooked is a 2004 publication, “Best Practice Guidelines Governing Analyst/Corporate Issuer Relations” that also covers in considerable detail a corporation’s responsibilities, especially with regard to not discriminating against analysts (or any recipients of information from the issuer).

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