To address the issue of research reports being favorably biased towards companies n which analysts are invested Smith establishes the following:
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Restricted periods of 30 calendar days before, and five calendar days after report issuance
Prohibitions on analysts from placing trades contrary to the published recommendations of the firm
Question: Are Smith’s second and third recommendations for addressing biases in research reports in line with the requirements of CFA Institutes ROS?
Answer: Yes
What exactly does the restricted period refer to? I had thought it was to stop the analysts from buying or selling securities for 30 days before and 5 days after report issuance. So for example, I saw in a Finquiz item that an analyst was allowed to sell the security he recommended b/c it was 12 days after he recommended it (hopefully the item set was correct). Therefore I thought #2 here was correct but #3 was not as the prohibition ends 5 days after the recommendation.
with reference to IPO for example. analysts cannot buy/sell the securities to mitigate any market manipulation or front running. 5 day after is more on allowing suitable time for clients to act on the research report. they are recommendations for adherance
So in regards to “Prohibitions on analysts from placing trades contrary to the published recommendations of the firm” what is the rule? If an analyst issues a buy rating for a company, is he allowed to sell 6 days after issuance, or is he not allowed to sell for as long as he maintains the buy rating?
If an analyst issues the SELL report, then he is allowed to sell his holding after 5 days. However, it doesnt mean that he can trade contrary to his rating after 5 days. He can only do so if has an extreme financial hardship that is clearly communicated.
SpyAli - Thanks, can you take a look at the below question and answer from Finquiz. I think you are right, the below seems to contradict. Am I missing something or is their answer incorrect? The analyst issued a hold, but the answer seems to be saying that whatever you’re rating you could trade against it after 5 days.
Rodriguez is a research analyst who covers National Mines and issued a hold recommendation_._ Twelve days following the issuance of his research report on National Mines, Rodriguez’s wife, who holds the mining corporation’s stock in her investment portfolio, instructs Rodriguez to sell the stock. She complains that the stock has generated significant losses for her once profitable investment portfolio. She further instructs him to reinvest the stock sale proceeds in non-mining industry stocks.
5. Concerning his wife’s instructions, in order to comply with Research Objectivity
Standards’ requirements and recommendations, Rodriguez’s best of course of action** would be to: A. refuse to sell the securities. B. sell the securities as instructed. **C. receive advance approval from a compliance officer prior to selling the securities.
Correct Answer: B
In order to comply with the CFA Institute Research Objectivity Standards’ requirements and recommendations, Rodriguez may sell National Mines’ stock on behalf of his wife’s portfolio. The standards require firms to adopt policies which prohibit employees and members of their immediate families from trading in a manner that is contrary to, or inconsistent with the employee’s or the firm’s most recent published recommendations or ratings, except in circumstances of extreme financial hardship. However, such a requirement generally applies thirty calendar days before and five calendar days following report issuance. Twelve days have passed since Rodriguez has issued a hold rating on National Mines, therefore he is permitted to sell the securities as requested
I’d have gone with B here. As it concerns his wife not him. Still i think the solution is poorly worded. I just read the standard again and i didnt find anywhere this sentence.
The standards require firms to adopt policies which prohibit employees and members of their immediate families from trading in a manner that is contrary to, or inconsistent with the employee’s or the firm’s most recent published recommendations or ratings, except in circumstances of extreme financial hardship.
The standard says that the analyst cannot trade contrary to his rating except in financial hardship. There is no talk about his immediate family in this case. The only instance where they have mentioned about immediate family is in the second last para of page 210 where it is written that all covered employees should dislose their personal investments in which they or members of their immediate family have a financial interest.
The problem is the gist of their explanation is that they think Rodriguez would be allowed to sell the stock if he owned it (as you mention they do not distinguish between him and his wife). So as far as I see it, if Rodriguez had the stock, they would give the same answer.
Lets suppose today on 30th June, i have issued a BUY report on ABC. Current price of ABC is $30. I have given a 6 month target price of $35. On 6th July, if i sell my holding (contrary to my rating) just because the restriction on trading has been ended, they this would just plain wrong!!
Why don’t you email them and seeknclarification about it?
I agree with you, just hate it when providers are wrong b/c you don’t know who to trust. Email Finquiz? Their response time is not good so I won’t even bother.
By the way immediate family is also prohibited from trading contrary to the recommendation, on p.206 of cfa text under personal trading requirements.