Regulatory environment for analysts at international investment banks
Regulatory environment for analysts at international investment banks Dan Harverd, September 2006
Disclaimer - The material in this presentation is based on personal experiences of working in a number of international investment banks and does not represent a comprehensive overview of the compliance policies of my current or former employees.
Some general principles of conducting research - Comply with local regulatory requirements, implement best practise - Analyst reports must be unbiased, accurate, comprehensive, fair and reasonable - Regulation AC (Analyst Conflict) disclosures - publication reflects personal view - no link between recommendation and compensation - moment of reflection - No inappropriate pressure from outside research on coverage or rating - Changes to ratings, price targets, estimates made through public written research, not private communications - Broader view - money laundering training
Content of research report - Opinions separated from facts - Substantiation of valuation technique - Why use DCF? Multiples? Peer analysis - What are underlying assumptions of WACC, terminal growth? - Why should stock trade at discount/premium to comparables? - Analysis of risks - What factors may make rating wrong? - What may prevent achievement of price target? - Macro is fine, but company specific is necessary - Upside risks also assessed on Sell/Hold - Disclosures - Identify where conflicts of interest may exist
Understanding the Chinese Wall – protects analysts from receiving material non-public information – protects investors from potential market abuse Corporates Research Corporate Finance Sales The Chinese Wall Trading Investors
How the Chinese Wall is implemented - Corporates don‘t have Chinese Walls but should act with analyst as if they exist - Research may not report to Banking - Physical separation and restrictions on communications/information - Analyst compensation may NOT be based directly on: - Banking revenues - Analyst contribution to specific transaction - Analyst ability to secure/maintain banking relationship - Any input from banking - Specific recommendation - Different procedures in US and Ro. W e. g. chaperoning of communications - Research production process: supervisory analyst, compliance check
Implications of Wall Crossing - Process managed by Compliance Department and Research Management - While over the wall - No research coverage - No disclosure of information - No encouraging others to deal in the security - Receipt of non-public information makes analyst an insider - Communicates immediately to compliance and above rules apply
Barriers between research and sales & trading - Designed to prevent ‘front running’ - No prior disclosure of view/recommendation change - Simultaneous broad dissemination of research to market - Views communicated to S&T must be consistent with published views - Physical separation between analysts and S&T - Analysts can‘t be used to sell a transaction or security - Trading is treated like any other firm client - Analysts don’t systematically receive customer trade information
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