Magazine article The CPA Journal

AIMR Report on Analyst Objectivity Outlines Key Pressures, Calls for Market Support

Magazine article The CPA Journal

AIMR Report on Analyst Objectivity Outlines Key Pressures, Calls for Market Support

Article excerpt

In the late fall, attention focused again on the role that analysts' recommendations play in the volatility of markets. The issue of possible conflicts of interest-analysts' personal investments in companies whose stock they recommend, or their employers' vested interests in companies whose stock they recommend-remains unresolved.

Adding to the discussion, an issues paper released by the AIMR in July examined potential influences on the objectivity of brokerage-firm research and recommended how various market participants could foster a more objective research environment. The paper, "Preserving the Integrity of Research," can be downloaded from www.aimr. org and includes a request for public comment on the concerns identified by the paper. Previously submitted comments can also be viewed on the AIMR website.

The issues paper says that analysts may justifiably fear that if they are too negative about a publicly traded company, the company may retaliate by "denying 'negative' analysts direct access to company management [or] barring them from conference calls and other communication venues." On the buy-side, institutional fund managers might "implicitly or explicitly support sell-side ratings inflation [because] a rating downgrade may adversely affect the portfolio's performance."

According to the issues paper, personal investing, especially in initial public offerings (IPO) sponsored by an analyst's own firm, can be particularly problematic: "Research analysts that follow companies with newly issued shares may have significant influence over the success of these offerings, given the thin analyst coverage, the small flotation and the high price volatility of the issue."

The AIMR paper includes guidelines and recommendations for market participants to encourage objective research, including the following advice:

* Brokerage firm management must provide an environment in which analysts are neither coerced nor enticed into issuing research that does not reflect their true opinions.

* It is appropriate for analysts to work with investment bankers only when certain conflicts are adequately and effectively managed and disclosed:

* Lines of reporting within the research and investment banking functions must be kept separate.

* Investment banking personnel should not have any authority to approve or disapprove research recommendations.

* Compensation arrangements should minimize pressures and reward objectivity. Analyst remuneration should not be linked directly to investment banking assignments on which the analyst may participate as a team member. …

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