4.6. Research Analysts and Research Reports

In 1999 the SEC launched an investigation into possible conflicts of interest within financial firms’ investment banking and research departments. They found that some firms were implicitly or explicitly promising positive research coverage in exchange for investment banking business. This finding threatened the veracity and credibility of research reports. To control these conflicts of interest, FINRA created restrictions on the communications between certain departments within financial firms, specifically the investment banking, research, and trading departments. These restrictions have become much more stringent in recent years, as part of an effort to insulate analysts from potential pressure to alter research reports and recommendations.

Before becoming more familiar with these restrictions, let’s look at some terms that will figure prominently over the next couple of pages.

A research report is any written (including electronic) communication sent to 15 or more persons containing an analysis of an equity security that includes enough information to make an investment decision. Note that this definition is