Reading 4 - Research Objectivity Standards

Question 1

Are the CFA Institute Research Objectivity Standards required or voluntary?

Answer 1

Voluntary

Question 2

What are the 11 parts of the Research Objectivity Standards (ROS) ?

Answer 2

1. Research Objectivity Policy
2. Public Apperances
3. Reasonable and Adequat Basis
4. Investment Banking
5. Research Analyst Compensation
6. Relationships with Subject Companies
7. Personal Investments and Trading
8. Timeliness of Research Reports and Recommendations
9. Compliance and Enforcement
10. Disclosure
11. Rating System

Question 3

When a firm is designing policies and procedures for a firm, the firm should strive to achive these 5 objectives while implementing the CFA Institute Research Objectivity Standards?

Answer 3

• Prepare research, making recommendations, take investment actions, and develop policies, procedures, and disclosures that put client interests before employees’ and the firm’s interest
• Faciliate full, fair, meaningful, and specifc disclosures to clients and prospects of possible and actual conflicts of interest
• Promote the use of effective policies and procedures that minimize possbile conflicts that may adversely affect independence and objectivity of research
• Support self regulation by adhering to specific, measurable standards to promote objectivity and independent research
• Provide a work environment cnducive to ethical behavior and adherence to the Code and Standards.

Question 4

When is a firm employee considered a covered employee?

Answer 4

If they:

• Conduct research, writes research reports, and/or makes investment recommendations
• Takes investment action on the client’s behalf or is involved in the decision-making process
• May benefit, either personally or professionally, from her ability to influence research reports or investment recommendations

Question 5

When is some considered in the Immediate Family?

Answer 5

Anyone who lives with the analyst or manager

Question 6

When is some considered an Investment Manager?

Answer 6

Any employee who conducts investment research and/or takes investment action for client accounts or the firm’s accounts

Question 7

What is a Public Appearance?

Answer 7

Any forum in which the analyst or manager makes investment recommendations or offers opinions, including seminars, public speaking engagements, interactive electronic forms, and any kind of media interview

Question 8

When is a firm employee considered a Research Analyst?

Answer 8

Any employee who is primarily responsible for any part of the process of developing a research report.

Question 9

What is a Subject Company?

Answer 9

The company whose securities are covered by a research report or recommendation

Question 10

What are the requirements under the Research Objective Policy of the ROS ?

Answer 10

The firm must have:

1. A formal written independence and objectivity of research polic that is distributes to clients, prospects & employees
2. Supervisory procedures in place to make sure employees comply with the policy
3. A senior officer who attests annually to clients and prospects that the firm has complied with the policy

Question 11

What are the recommended compliance procedures under the Research Objective Policy of the ROS ?

Answer 11

• Identify and describe covered employees, including anyone who would benefit from his ability to influence the recommendations
• Specify whether covered employees are subject to a code of ethics and standards of professional conduct. Fully disclose any conflicts of interest
• Any policy should clearly identify the factors on which research anaylsts’ compensation is based
• Policy should also include terms rearding how research reports may be purchased by clients

Question 12

What are the requirements under the Public Appearances of the ROS ?

Answer 12

Covered employees who make public appearances to discuss research or investment recommendations must disclose any personal and firm conflicts of interest

Question 13

What are the recommended compliance procedures under the Public Appearances of the ROS ?

Answer 13

• Be sure that the audience can make informed judgements and that they consider the investment in the context of their entire portfolio
• Covered employees shold always be prepared to disclose all conflicts
• Firms should require covered employees to disclose all investment banking relationships
• All supporting research reports should be provided at a “reasonable” cost

Question 14

What are the requirements under the Reasonable and Adequate Basis of the ROS ?

Answer 14

Research and investment recommendations must have a reasonable and adequate basis.

Either a single employee or a committee must be charged with reviewing and approving all research reports and investment recommendations

Question 15

What are the recommended compliance procedures under the Reasonable and Adequate Basis of the ROS ?

Answer 15

• Firm must provide guidance on what constitutes reasonable and adequate basis for a specific recommendation
• Offer the provide supporting data to clients, and disclose the current market price of the security

Question 16

What are the requirements under the Investment Banking Standard of the ROS ?

Answer 16

Firms with investment banking operations must have in place policies and procedures that:

• Separate research analysts from the investment banking department
• Make sure anaylsts don’t report to, and are not supervised by investment banking personnel
• Prevent the investment banking department from reviewin, revising, or approving research reports and investment recommendations

Question 17

What are the recommended compliance procedures under the Investment Banking Standard of the ROS ?

Answer 17

• Prior to publication, no part of the report that might indicate the analyst’s recommendation should be shared with the investment banking department
• Inv Banking / Corp Finance personnel may review reports only to verify factual information or to identify possible conflicts of interest
• Firms should have quiet periods for IPOs and secondaries of sufficient length to ensure that research reports and recommendations are not based on inside information
• That analysts are not allowed to participate in marketing “road shows”

Question 18

What are the requirements under the Research Analyst Compensation of the ROS ?

Answer 18

Compensation should be directly related to the quality of the work provided by the analyst and not directly linked to investment banking or corporate finance activities

Question 19

What are the recommended compliance procedures under the Research Analyst Compensation Standard of the ROS ?

Answer 19

• Compensation systems should be based on measurable criteria consistently applied to all research analysts
• Ideally there should be no link between analyst compensation and investment banking and corp finance activities, but firms should disclose to what extent compensation depends upon investment banking revenues

Question 20

What are the requirements under the Relationships with Subject Companies Standard of the ROS ?

Answer 20

Must not allow the subject company, prior to publication, to see any part of the research report that might signal the analyst’s recommendation or rating

Question 21

What are the recommended compliance procedures under the Relationship with Subject Companies Standard of the ROS ?

Answer 21

• should have policies and procedures governing analysts’ relationships with subject companies
• Should be efforts to check facts contained in research reports before publication
• Compliance and legal departments shouuld receive a draft before it is shared with the subject company.

Question 22

What are the requirements under the Personal Investments and Trading Standard of the ROS ?

Answer 22

Firm must institute policies and procedures that:

• address the personal trading of covered employees
• ensure covered employees do not share information with anyone who could use that information to trade ahead of client trades
• ensure covered employees and immediate family can’t trade ahead of client trades

Question 23

What are the recommended compliance procedures under the Personal Investments and Trading Standard of the ROS ?

Answer 23

• place interest of clients ahead of personal and firm interests
• obtain approval from compliance and legal prior to trading in securities in assigned industry
• Firms should have restricted periods when cannot trade. 30 days before and 5 days after recommendations are made
• Is permissable for analyst to sell contrary to their recommendations in cases of extreme financial hardship
• Should require covered employees to provide list of personal holdings, including securities for which they have a beneficial interest

Question 24

What are the requirements under the Timeliness of Research Reports and Recommendations Standard of the ROS ?

Answer 24

Regularly issue research reports on subject companies on a timely basis

Question 25

What are the recommended compliance procedures under the **_Timeliness of Research Reports and Recommendations_** Standard of the ROS ?

Answer 25

* Firms should require regular updates to research and recommendations (qtrly is preferred) * If coverage is discontinued, that analyst should issue a "final" research report

Question 26

What are the requirements under the **_Compliance and Enforcement_** Standard of the ROS ?

Answer 26

Firms must enforce their policies and compliance procedures, asses disciplinary sanctions on employees who violate the policies, monitor the effictiveness of the procedures, and maintain records of any internal audits of the policies

Question 27

What are the recommended compliance procedures under the **_Compliance and Enforcement_** Standard of the ROS ?

Answer 27

Firms should distribute to clients a list of activities which are violations and include disciplinary sanctions for such violations

Question 28

What are the requirements under the **_Disclosure_** Standard of the ROS ?

Answer 28

Firms must disclose conflicts of interest related to covered employees or the firm as a whole

Question 29

What are the recommended compliance procedures under the **_Disclosure_** Standard of the ROS ?

Answer 29

* Disclosures should be complete, prominent, and easy to understand * Investment Banking/Corp Finance should be disclosed * All conflicts of interest must be disclosed * Disclose any statistical or quantitative basis for recommendations and ratings * Disclose valuation methods used to determine specific price targets and include any risk factors

Question 30

What are the requirements under the **_Rating System_** Standard of the ROS ?

Answer 30

the firm must have a rating system that investors find useful for investment decisions and provides investors with information they can use to determine the suitability of the specific investments for their own portfolios

Question 31

What are the recommended compliance procedures under the **_Rating System_** Standard of the ROS ?

Answer 31

* firms should avoid 1-dimensional rating systems b/c they do not give enough information to make informed decisions * Rating systems should include the recommendationand rating categories, time hortizon categories and risk categories * Absolute (buy,hold, sell, etc) and Relative(market outperform, underperform, etc) recommendation categories are permitted * A complete description of the firm's rating system should be provided to clients upon request.