Question

Should Analysts be Separated from Securities Firms to Ensure No Conflicts of Interest? Please elaborate

Answer 1

The analysts have responsibility of providing unbiased, true and correct information about a stock to the investors. When the analysts have personal interests in the securities firm then there has been a number of cases , where the analysts have been found to provide biased recommendations on the stock.

If the analysts have ownership interests in the company then they may want to provide positive reports and recommendations to attract more investors. The salary and bonuses of the clients may also be linked with the performance of the securities firm, so positive reports and recommendations may also attract more clients and bring in higher sales which may provide higher salary for the analysts.

The existing regulations do not prohibit the analysts from holding stocks in the companies they hold stocks in but some firm policies do prohibit them form owning stocks in the companies for which they work as analysts.

Analysts and their employer firms should carefully consider their policies and procedures regarding research and when possible, minimize conflicts of interest that might bias their research and recommendations. Where actual and potential conflicts do exist, they should be clearly and meaningfully disclosed to investors.

So, it is not necessary that the analysts should be separated form investors but they should disclose any conflict if at all any such conflict exists.