Writing Securities Research E-Book

Jeremy Bolland

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 609

Veröffentlichungsjahr: 2010

Beschreibung

The book highlights the major risks that securities analysts (and other securities professionals) face. The various laws, rules and regulations that securities analysts are subject to are broadly split into three categories: research-specific rules and regulations; market-wide laws; and society-wide laws and customs. The risks that arise out of these various levels of rules and regulations, insofar as research analysts and other securities professionals are concerned, include conflicts of interest, fair distribution/front-running of research, insider trading, spreading of rumours, not highlighting investment risks (including corporate governance issues), as well as defamation and copyright issues. We see that if an analyst puts a company in play, a regulator would instantly assume that the analyst is trading on inside information (especially if the information turns out to be true) or is spreading a rumour (especially if it turns out to be false). However, we also see that there is a third option - that the analyst might just have come to his or her conclusion through some good research based on verifiable facts and reasonable assumptions. Definitions of research from around the world are examined. After all, research is generally defined by its content, not by the author's job description. As such, non-Research securities professionals such as brokers and marketers of research as well as investors, journalists and even bloggers and twitterers need to understand what constitutes "research" so that they don't fall into the regulators' purview. As regards the risks to investment views that analysts need to highlight to their investors, the book not only examines economic and financial risks but also examines corporate governance issues such as executive compensation, equal treatment of shareholders, related-party transactions and risk management. To demonstrate the risks that analysts, securities professionals and investors face, the book draws on many cases and examples from around the world, including many from the global financial crisis of 2007-2009. From these cases we see how penalties for those involved in the securities markets have become more serious over the years. They range from fines to imprisonment, and even to execution in some markets. To give a light-hearted angle, many of these cases are accompanied by "Alex" cartoons.

Leseprobe

Table of Contents

Praise

Endorsements of the first edition (2007)

Title Page

Copyright Page

Dedication

Foreword

Preface

Background

Introduction

Summar y

Endnotes

Acknowledgments

Abbreviations Used in This Book

Chapter 1 - Principles of Research

Definition and supervision of research

Honesty and fair treatment of clients

Sourcing information

Research integrity and consistency

Coverage universe—initiations, terminations and transfers

Endnotes

Chapter 2 - Reasonable Basis, Valuations and Risk

Consistency of recommendations

Valuation support

Highlighting risks and volatility

Evaluating risks and catalysts

Gauging corporate governance risks

Credit rating risks

Due diligence by investment bankers

Endnotes

Chapter 3 - Independence of Research and Conflicts of Interest

Summary

Separating research and banking

Managing contacts between analysts and bankers

Disclosures of interests and relationships

Writing research on banking clients

“Pre-deal” research

Influencing of analysts by issuers

Independent research firms

Paying for sell-side research

Endnotes

Chapter 4 - Non-research: E-mails, Blogs and Internal Communications

Objective commentary on non-rated companies

E-mails

“Internal Use Only”

Endnotes

Chapter 5 - General Writing, Editing and Publishing Considerations

Introduction

Getting the message across

Writing the text

Clarity, consistency, conformity and continuity

Correcting errors

Index

Book reviews/press comments for the first edition (2007)

“. . . is very timely . . . a good analysis . . . a highly readable and incisive book . . . provides a clear guide to industry insiders . . . and a detailed understanding for those who read research”.

Geoff de Freitas, Shanghai Business Review, May 2008

“. . . sharp, readable and timely book . . .”

The Correspondent, the magazine of the Foreign Correspondents’ Club of Hong Kong, Sept/Oct 2007 issue

“. . . definitive best-practice guide . . . a very readable and engaging book filled with sound advice and workable recommendations”.

Keith Hall, China Daily, April 13, 2007

“. . . excellent book”.

R. Sivanithy, Singapore Business Times, April 2, 2007

“. . . an essential textbook for securities professionals around the world”.

Johannes Ridu, Malaysian Business/New Straits Times, April 1, 2007

“It ought to be mandatory reading for courses focused on securities research”.

MoneyLife, India, July 5, 2007

“Extensive case studies are also well-used and interesting. This is a sound and generally useful piece of work for all investment market professionals and, indeed, investors everywhere”.

James Rose, Corporate Governance Asia

“. . . plenty of practical examples”.

CPA Australia, June 2007

Endorsements of the first edition (2007)

There is a strong need for this book . . . This book is relevant in any setting. It will equip analysts with many useful tools to help them achieve success.

Mark Mobius, President of Templeton Emerging Markets Fund

This guide to doing it properly is an obvious selection for the bookshelf of anyone who aspires to offer investment advice and a fine reference for anyone who receives such advice.

Jake van der Kamp, Financial Columnist of South China Morning Post

At last, here’s a comprehensive yet easy-to-read guide explaining all the best practice principles involved in writing securities research. It is full of useful information . . . I highly recommend it.

Anthony Espina, Chairman of Hong Kong Stockbrokers Association

. . . essential reading for all people involved in writing securities research.

Andrew Leeming, author of The Super Analysts

Copyright © 2010, 2007 Jeremy Bolland

Published in 2010 by John Wiley & Sons (Asia) Pte. Ltd. 2 Clementi Loop, #02-01, Singapore 129809 All rights reserved.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as expressly permitted by law, without either the prior written permission of the Publisher, or authorization through payment of the appropriate photocopy fee to the Copyright Clearance Center. Requests for permission should be addressed to the Publisher, John Wiley & Sons (Asia) Pte. Ltd., 2 Clementi Loop, #02-01, Singapore 129809, tel: [phone], fax: [phone], e-mail: [email protected].

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering professional services. If professional advice or other expert assistance is required, the services of a competent professional person should be sought.

Neither the authors nor the publisher are liable for any actions prompted or caused by the information presented in this book. Any views expressed herein are those of the authors and do not represent the views of the organizations they work for.

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Library of Congress Cataloging-in-Publication Data

ISBN 978-0-470-82602-7

Typeset in 10/12pt Cheltenham by MPS Limited, A Macmillan Company, Chennai, India

Ltd.

To James

Not that you need any incentive to do well at school and not that a career in compliance is to be sniffed at, but sometimes I wish my father had alerted me to the consequences of not concentrating in class . . .

Foreword

Since Jeremy Bolland’s first 2007 guide to writing securities research, there has been a remarkable change in the global financial system. Markets have had the most severe crisis in recent history with major companies failing and many investors suffering substantial losses. These events have underlined the critical importance of high-level securities research and the effective communication of the research. More and more investors now realize the need to understand the risks associated with their investments.

This need to better understand the risks associated with investing is answered by this second edition of Writing Securities Research. In this edition, Mr. Bolland greatly expands the section on investment risk. He includes many new case studies drawn from the financial crisis on various aspects of risk, including—crucially—a whole range of corporate governance issues.

In bull markets, some investors may not be so concerned about corporate governance issues. However, in bear or volatile markets, analysts need to be more specific in explaining the differentiating factors related to their recommendations. A good understanding of how well or badly companies are being managed is becoming increasingly important for both institutional and retail investors. The book therefore examines corporate governance issues such as social responsibility, executive compensation, equal treatment of shareholders, related-party transactions, independent non-executive directors and risk management. As usual Mr. Bolland uses real-life case studies to demonstrate each of these aspects. He rightly concludes that an analyst’s job is not just about analyzing numbers; it’s about assessing people too. More and more securities analysts need to understand this essential requirement.

Whereas the first edition of Writing Securities Research probably appealed more to sell-side equity analysts working in global investment banks and brokerages, this second edition more clearly distinguishes between such analysts and those working on the buy-side such as those working for mutual fund and hedge fund management companies. It also examines analysts’ roles with respect to credit rating agencies, independent research output and sovereign wealth fund investment programs as well as specialized areas such as credit default swaps and investments complying with Shari’ah law.

The book is thus a comprehensive guide for securities research analysts around the world. Analysts who want to write research that is clear, concise and actionable should carefully read and digest the contents of this book. I would say that it should also be compulsory reading for research managers, compliance officers, editors, securities lawyers, securities regulators and students of investment and finance.

Let’s look at a summary of each chapter. The first chapter starts with key best-practice principles related to writing securities research such as fairness, honesty, integrity, transparency, accountability and consistency. An important theme emphasized in the first chapter is the use of publicly available information to avoid accusations of insider trading, rumor-spreading and defamation. Mr. Bolland also defines what would be considered securities research and thus what would fall under securities regulations. As a result of the financial crisis, the regulators’ purview has evidently widened and now encompasses all types of derivatives such as credit default swaps. Mr. Bolland delves into the legal requirements and the correct interpretation of regulations issued by the SEC and other regulatory organizations around the world.

In the second chapter, topics include the proper methodology for disclosing the reasons for valuations, reporting changes in valuations and properly disclosing risks including any perceived corporate governance issues.

The third chapter looks into key issues relating to research independence. Here Mr. Bolland covers the potential conflicts of interest that analysts face. These don’t just include the well-documented conflicts between analysts and their investment banking colleagues, but also potential conflicts between analysts and their sales and trading colleagues, their clients, and the companies they write about.

This is followed in the fourth chapter by a number of important activities surrounding research, such as e-mails, blogs and other communications. Most important here is the discussion regarding how seemingly innocent e-mails can end up in the public domain and, if their content is in conflict with the published research, give rise to potential liabilities.

The final chapter deals with a number of cogent and helpful suggestions on how best to communicate with readers in the securities industry, including tips regarding the careful use of words to prevent misunderstandings. Again, a number of interesting and often comical case studies are used to illustrate the concepts.

While new rules and regulations will inevitably be introduced around the world covering a wide range of topics impacting banks’ capital adequacy, proprietary trading, hedge funds, derivatives, credit rating agencies and executive compensation, Mr. Bolland argues that securities research analysts are already subject to enough regulation. Rather than more regulation for analysts, he advocates the need for more education.

The world of securities research is very dynamic with analysts confronted with new challenges. One key challenge is the need for transparency in the way research is compensated. The shifting resource pool of analyst talent away from the high-cost and highly taxed developed markets to lower-cost emerging markets is another.

One thing is clear: analysts who are able to generate original investment ideas, and satisfy the information and analytical requirements of their client or clients while, at the same time, adhering to the highest ethical standards and stringent compliance rules will be very well placed to meet any new challenges facing them.

Jeremy Bolland’s book helps to equip analysts with many useful tools to help them achieve securities research success.

Dr. Mark MobiusExecutive ChairmanTempleton Asset Management Ltd. Author of Equities: An Introduction to the Core Concepts

Preface

Summary points and recommendations

• Sell-side securities analysts operating in the major markets around the world have to jump through hoops of fire to get their research published. There are research-specific procedures to follow, such as making sure they have the appropriate registrations and licenses, providing the necessary disclosures of interests and relationships, and ensuring their research is distributed to clients fairly.

• Then there are market rules concerning the illegal use of inside information and the spreading of rumors to manipulate prices. There are also other society-wide laws to adhere to, covering for example misrepresentation, defamation and intellectual property rights.

• Brokers, financial advisers, sales, marketers and traders should also appreciate that their own communications with clients might constitute research, and be subject to the same disclosure and distribution standards.

• Even buy-side analysts who prepare research for use only by internal fund managers need to avoid breaching market rules concerning the illegal use of inside information and the manipulation of prices.

• Indeed all investors are subject to the same rules and regulations. Press commentators and independent bloggers are not immune either. It remains to be seen how effectively regulators will be able to police the spreading of rumors by citizen-journalists and twitterers.

• Whatever new regulations are in store for banks, credit rating agencies or hedge funds, and whatever changes are made to accounting standards or executive remuneration practices, I would argue that equity analysts in developed markets don’t need more layers of regulation; but more education and explanation of the underlying principles are evidently needed.

• In terms of research, securities regulators have traditionally been more concerned with equities research. However, they are increasingly turning their attention to research of other asset classes such as bonds. Even credit default swaps (CDSs) and contracts for difference (CFDs) are encroaching into the world of securities from a regulatory perspective.

• Analysts and other securities professionals are the focus of regulators’ surveillance. Those who inadvertently breach regulations should not dig deeper holes for themselves by covering up their mistakes—they should alert their supervisors or compliance officers immediately.

• Analysts who follow the proper procedures and secure the appropriate approvals should have their employers’ support in any investigation by regulators. If they go out on a limb and bypass the approval processes, they’ll be on their own.

• Without the support of the employer, it will be even easier for a regulator to pressure an analyst suspected of wrongdoing into making a settlement.

• Penalties are serious nowadays. They are serious enough for improper conduct, but are even more serious for actual market abuse where illicit trading occurs. Where insufficient evidence is available for a criminal case, a regulator can always bring a civil action.

• It’s not necessarily the published product that represents the greatest risk for analysts and other securities professionals. What they put in e-mails and say on the phone to clients and colleagues may also expose them to risks.

• Regulators and courts don’t even need to understand the complexities in the arguments of analysts’ research or in the products being sold; they merely need to catch inconsistencies in the way they are being brokered or promoted.

• By being the first to identify an M&A target, an analyst would probably be presumed by a regulator or court to be either trading on inside information or spreading false rumors to manipulate the security’s price.

• There is a third possibility—that the analyst might just have arrived at his (or her) conclusions through some good research. Because the analyst runs an especially high risk of attracting the regulator’s attention by putting a company into play, he must be even more meticulous than usual in demonstrating that his research is based on publicly available (and verifiable) facts and reasonable assumptions, and must make sure he has his employer’s full support.