Reaffirming the Value of Independent Research for Trustworthy Capital Markets
The recent firing of a Banco Santander employee in Brazil has raised important questions around the issue of maintaining independence in investment research. The employee was dismissed after publishing comments “critical of Brazilian President Dilma Rousseff’s economic policies” in a letter to firm clients, according to the Wall Street Journal. Rousseff and her Workers Party were quick to criticize the report as politically motivated. The scenario highlights that when either side impinges on the independence and objectivity of the analysis, the marketplace may be negatively affected, leading to a further loss in investor confidence.
Every investment professional is personally responsible for ensuring that his or her independence and objectivity are maintained when preparing research reports. The CFA Institute Code of Ethics and Standards of Professional Conduct embody several principles directly applicable to the research process.
Through the requirement to maintain independence and objectivity, investors benefit from a report free of potential conflicts of interest or other factors adversely affecting analytical judgment. Lapses may be caused by external sources offering gifts or incentives to achieve a desired but potentially undeserving recommendation from the research. Additionally, the conflict for the analyst may be internal because the policies or actions of the entity may not align with his or her personal beliefs. Regardless of the source, the analyst must refrain from allowing these internal and external factors to influence the independence and objectivity of the research.
The analytical process requires an analyst to do more than maintain independence and objectivity. When conducting the analysis for a research report, the analyst must display diligence, while developing a reasonable basis for the recommendation. The requirement would include gathering sufficient material to support the recommendation. A reasonable basis is formed through a balanced review of the resources available and appropriate for the security or entity under analysis.
Once the research has been completed, the report must be effectively communicated to interested investors. It is important for the report to include the relevant factors that led to the recommendation. Important factors may include the future prospects of a company’s products, the general economic outlook for the sector, or the political environment of a country. Through clear communications of the relevant facts of the analysis, the reader of the report is able to make well-informed investment decisions.
A second important consideration is to clearly distinguish between facts and opinions when communicating the recommendation. The recommendation will reflect the investment opinion of the analyst based upon the outcome of the research conducted. It is when developing the final opinion that the analyst may be susceptible to allowing a personal bias or conflict of interest to negatively affect the conclusion. When one’s personal opinion overshadows the analytical rigor of the research, the independence of the report falters.
The research process may lead to positive or negative recommendations. Thus, it is important for the covered entity to be accepting of an analyst’s independent recommendations. To assist in developing strong relationships between analysts and the target entities, CFA Institute collaborated with the National Investor Relations Institute in 2004 to publish Best Practice Guidelines Governing Analyst/Corporate Issuer Relations. The best practices cover the same principles previously discussed regarding the analyst’s obligations.
Additionally, this report addresses practices for target firms to ensure the openness and independence of the analytical process. The guidelines state that an entity should not discriminate against, deny access, or threaten individual analysts because of the research opinion developed. The analyst may have legitimate reasons for offering a negative opinion in the recommendation. As long as the analyst had a reasonable basis and the opinion displays independence and objectivity, entities should recognize the analyst’s right to offer the recommendation.
When a research product is neither independent nor unbiased, investor confidence is hurt. Therefore, investors, issues, and even politicians must respect analysts’ duties to ask hard questions, point out potential risks, and make fair, unbiased assessments based on facts and their own forecasts. In addition, analysts must only develop and publish research that is based on sound, competent analyses.
Information is the lifeblood of global financial markets and the billions of investment decisions that play a critical role in those markets. Without information, individual investors and the professionals managing pension and saving portfolios would have to invest blindly. All market participants, including those with political influence as well as those rendering analysis of the investment landscape, must take responsibility for ensuring that investment research remains independent for the benefit of society.
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