Research Reports

If you're a big Wall Street broker-dealer the research reports your analysts put out encouraging customers to buy or sell a security can have an impact on the price of the stock. So, if your research department is about to issue a "strong buy" recommendation and a glowing report on Google tomorrow morning, why not buy a boatload of Google shares today, and then release the report tomorrow? Won't that be fun? Your customers will want to buy the stock tomorrow at higher and higher prices and, heck, you'll be right here to sell it to them, at higher and higher prices. FINRA defines a research report as:

any written (including electronic) communication that includes an analysis of equity securities of individual companies or industries, and that provides information reasonably sufficient upon which to base an investment decision.

FINRA states:

Trading Ahead of Research Reports
The Board of Governors, under its statutory obligation to protect investors and enhance market quality, is issuing an interpretation to the Rules regarding a member firm's trading activities that occur in anticipation of a firm's issuance of a research report regarding a security. The Board of Governors is concerned with activities of member firms that purposefully establish or adjust the firm's inventory position in NASDAQ-,listed securities, an exchange-listed security traded in the OTC market, or a derivative security based primarily on a specific NASDAQ or exchange-listed security in anticipation of the issuance of a research report in that same security For example, a firm's research department may prepare a research report recommending the purchase of a NASDAQ: listed security. Prior to the publication and dissemination of the report, however; the trading department of the member firm might purposefully accumulate a position in that security to meet anticipated customer demand for that security. After the firm had established its position, the firm would issue the report, and thereafter fill customer orders from the member firm's inventory positions.

The Association believes that such activity is conduct which is inconsistent with just and equitable principles of trade, and not in the best interests of the investors. Thus, this interpretation prohibits a member from purposefully establishing, creating or charging the firm's inventory position in a NASDAQ-listed security, an exchange-listed security traded in the third market or a derivative security related to the underlying equity seen? in anticipation of the issuance of a research report regarding such setting by the member firm.

In the old days research analysts often functioned as cheerleaders for a company's stock to drum up investment banking business for the firm. Basically, the firms were just drawing in suckers willing to prop up the stock of a company whose CEO would become so giddy he would then do mergers and acquisitions, as well as stock and bond offerings through the firm's investment banking department. To put an end to those days, FINRA now stipulates:

 No research analyst may be subject to the supervision or control of any employee of the member's investment banking department, and no personnel engaged in investment banking activities may have any influence or control over the compensatory evaluation of  a research analyst.

Research analysts cannot participate in efforts to solicit investment banking business. Accordingly:

No research analyst may, among other things, participate in any 'pitches' for investment banking business to prospective investment banking customers, or have other communications with companies for the purpose of soliciting investment banking business.


No member may pay any bonus, salary or other form of  compensation to a research analyst that is based upon a specific investment banking services transaction.

So, the research analysts can't put out positive reports just to help the investment banking or trading departments. Surely, they can buy a few shares of the stock for themselves, their family, and friends, right?


Restrictions on Personal Trading by Research Analysts
(1) No research analyst account may purchase or receive any securities before the issuer's initial public offering if the issuer is principally engaged in the same types of business as companies that the research analyst follows.

(2) No research analyst account may purchase or sell any security issued by a company that the research analyst follows, or any option on or derivative of such security, for a period beginning 30 calendar days before and ending five calendar days after the publication of a research report concerning the company or a change in a rating or price target of the company's securities; provided that:

(A) a member may permit a research analyst account to sell securities held by the account that are issued by a company that the research analyst follows, within 30 calendar days after the research analyst began following the company for the member

So, the research analyst who's working on a "strong buy" research report on XYZ can't receive bonuses if XYZ then does investment banking through the firm, and can't go on the "road shows" for IPOs designed to drum up interest in the new issue. Also, the firm can't establish a large inventory position in XYZ to then sell it to their customers all excited by the glowing research report. And, the analyst can't buy any XYZ ahead of releasing his research report. But, surely, as the guy's golfing buddy, with an office right next door, you can look at it before the firm releases it, right?

FINRA saw that problem coming a mile away and, therefore, now stipulates that:

Non-research personnel may review a research report before its publication as necessary only to verify the factual accuracy of information in the research report or identity any potential conflict of interest, provided that (A) any written communication between non-research personnel and research department personnel concerning the content of a research report must be made either through authorized legal or compliance personnel of the member or in a transmission copied to such personnel and (B) any oral communication between non-research personnel and research department personnel concerning the content of a research report must be documented and made either through authorized legal or compliance personnel acting as intermediary or in a conversation conducted in the presence of such personnel.

But, other than that: employee of the investment banking department or any other employee of the member who is not directly responsible for investment research ("non-research personnel"), other than legal or compliance personnel, may review or approve a research report of the member before its publication.

The research report can also not be sent to the subject company except according to this:

A member may submit sections of such a research report to the subject company before its publication for review as necessary only to verify the factual accuracy of information in those sections, provided that:

(A) the sections of the research report submitted to the subject company do not contain the research summary, the research rating or the price target,

(B) a complete draft of the research report is provided to legal or compliance personnel before sections of the report are submitted to the subject company; and

(C) if after submitting the sections of the research report to the subject company the research department intends to change the proposed rating or price target, it must first provide written justification to, and receive written authorization from, legal or compliance personnel for the change. The member must retain copies of any draft and the final version of such a research report for three years following its publication.

(3) The member may notify a subject company that the member intends to change its rating of the subject company's securities, provided that the notification occurs on the business day before the member announces the rating change, after the close of trading in the principal market of the subject company's securities.

Research reports are subject to a "quiet period," meaning firms cannot publish a research report on a newly public company until 10 days after the IPO. Some smaller firms don't have their own research analysts, so they use third parties to provide reports on various securities and then deliver them to their customers. If that is the case, the member firm needs to disclose that the research was/is provided by someone else and is third-party research. Finally, research analysts are regulated by Regulation AC, which requires them to certify that their research accurately reflects their own objective, non-cash-influenced views. To that end, they also need to disclose if they or any of their immediate family members received any type of compensation (cash, options, warrants, what-have-you) for making this recommendation. This regulation applies to both research reports and public appearances by research analysts.


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