Investment Research

Question 1

What is investment research?

Answer 1

Investment research refers to written content or analysis that provides:

1. Recommendations or suggestions about an investment strategy (explicitly or implicitly).
   A. Helps investors buy/ sell/ hold an investment
   B. Should be objective and independent
2. Opinions on the performance or future value of financial instruments (such as stocks, bonds, or funds).
3. Information meant for distribution to the public or clients.

Question 2

For any information to be considered as investment research - what conditions should it meet?

Answer 2

1. It is labeled or described as investment research.
2. It offers an objective and independent explanation of the material.
3. It does not provide personal recommendations tailored to an individual client.

Question 3

When is analysis considered investment research, and when is it not?

Answer 3

1. If an analysis includes specific investment recommendations or suggests a particular investment strategy, it is considered investment research.
2. If the content only provides general economic, political, or market commentary (such as discussions on industries, sectors, or asset classes broadly), it is not considered investment research.
3. If a firm presents information as objective research but actually provides biased recommendations, it must be clearly labeled as non-independent research or marketing communication.

Question 4

What is objective research?

Answer 4

1. When a firm provides neutral, fact-based analysis on broader market or economic trends without recommending specific investments.
2. Purpose: Informs clients about general financial topics without influencing investment decisions.

Question 5

What arrangements should a firm have in place when producing investment research, and what are the rules regarding dealing on the research before its publication?

PART 1

Answer 5

1. MAIN RULE: Financial analysts or anyone with knowledge of the research’s timing or content must not trade based on it before its publication—this is known as “front-running”
2. To ensure fairness:
   A. No one involved in the research process should trade the financial instruments discussed in the research until recipients have had a reasonable opportunity to act on it.
   B. This prevents insider advantages and maintains market integrity.
3. Exceptions to this rule:
   A. Market Makers –
   Can trade if they are acting in good faith and in the normal course of market making (i.e., providing liquidity).
   B. Unsolicited Client Orders –
   If a client independently requests a trade (without being influenced by the research), the firm can execute the order.

Question 6

What safeguards should firms have in place to ensure the independence of financial analysts producing investment research?

PART 2

Answer 6

The key safeguards include:
1. No Inducements:
A. Financial analysts must not accept incentives or payments from individuals or organizations with interest in the subject of the research.

2. Independent Remuneration:
   A. A financial analyst’s salary or bonuses should not be linked to a success of transactions or recommendations in their research.
3. Analysts should be separate from Investment Banking & Sales Teams:
   A. They must not be directly supervised by or report to investment banking or sales and trading personnel.
   B. This prevents pressure to make favorable recommendations for business deals
4. Analysts cannot be used for Marketing:
   A. Firms should not use analysts to promote their investments if its affects their independence
   B. Analysts should only focus on research.
   C. They must not be involved in promotional activities that could create conflicts of interest.

Question 7

When a Firm Shares Research Produced by Others -
A firm is exempt from investment research requirements if:

Answer 7

1. The investment research is from a person outside the firm’s group.
2. The firm does not substantially change the recommendations in the research.
3. The firm does not claim it produced the research.
4. The firm checks that the research producer follows investment research rules or has a policy for it.

Question 9

What should firms ensure in order to take reasonable care about the investment research they produce?

Answer 9

1. Facts are separated from opinions, estimates, interpretations and other non-factual information
2. Sources are reliable (or any doubts about reliability should be clearly stated).
3. Projections, forecasts, and price targets are clearly labelled with assumptions.
4. Recommendations can be proven reasonable if the FCA requests evidence.
5. Firm must make and retain sufficient records to disclose recommendations to the FCA.

These requirements do not apply in the case of non-written research recommendations, to the extent they would be disproportionate.

Question 10

When a firm produces investment research recommendations, what information should it disclose?

Answer 10

1. The name and job title of the person who prepared the recommendation.
2. The name of the firm.
3. If the firm is an investment firm or credit institution, the competent authority responsible for the firm.

These requirements may be met for non-written research recommendations by referring to a place where the disclosures can be directly and easily accessed by the public (i.e. internet site)