Writing Securities Research – A Best Practice Guide 2e

<p>Foreword xv</p>
<p>Preface xix</p>
<p>Summary points and recommendations xix</p>
<p>Background xxii</p>
<p>Background to the second edition xxii</p>
<p>Background to the first edition xxvi</p>
<p>The changing regulatory environment xxvii</p>
<p>Introduction xxx</p>
<p>More education rather than more regulation xxx</p>
<p>The need to identify investment risk xxxi</p>
<p>Target readership xxxiii</p>
<p>Commercial benefits to compliance xxxiii</p>
<p>Local differences and specific circumstances xxxiv</p>
<p>Summary xxxiv</p>
<p>Case studies and examples xxxv</p>
<p>Themes xxxvii</p>
<p>Research coverage xxxvii</p>
<p>Sourcing information xxxviii</p>
<p>Reasonable basis for recommendations and risk assessment xxxix</p>
<p>Conflicts of interest xl</p>
<p>Writing in general xli</p>
<p>Acknowledgments xlv</p>
<p>Abbreviations Used in This Book xlvii</p>
<p>Chapter 1: Principles of Research 1</p>
<p>Key points 2</p>
<p>Definition and supervision of research 2</p>
<p>Supervision and control of research 2</p>
<p>Marketing research to the U.S. by foreign broker–dealers 3</p>
<p>Stock–picking tips 8</p>
<p>Continuing education 9</p>
<p>Cheating in tests 10</p>
<p>The realm of research 11</p>
<p>Ambit of securities regulations (bonds) 12</p>
<p>Ambit of securities research regulations (equity and credit research analysts) 13</p>
<p>Ambit of securities regulations (swaps and other derivatives) 16</p>
<p>Ambit of securities research regulations (marketers of research, including hedge fund research) 19</p>
<p>Ambit of securities research regulations (analysts as experts on sales desks) 20</p>
<p>Ambit of securities research regulations (stock–tipping bloggers) 21</p>
<p>Ambit of securities research regulations (media commentators) 23</p>
<p>Minimizing approval and publishing risks 26</p>
<p>Honesty and fair treatment of clients 28</p>
<p>Common securities–related violations cited by the SEC and FINRA of the U.S. 28</p>
<p>Regulations tightening up around the world (Hong Kong) 29</p>
<p>Regulations tightening up around the world (China) 31</p>
<p>Regulations tightening up around the world (Japan) 32</p>
<p>Front–running and selective distribution of research 35</p>
<p>Front–running and selective distribution of research (huddles) 35</p>
<p>Front–running of research 36</p>
<p>Selective distribution of research 37</p>
<p>Selective distribution of research (fact–checking) 39</p>
<p>Selective distribution of research (greater conviction of view) 39</p>
<p>Insider dealing and selective disclosure 41</p>
<p>Use/dissemination of price–sensitive information (general) 44</p>
<p>Use/dissemination of price–sensitive information (U.S.) 47</p>
<p>Use/dissemination of price–sensitive information (U.K.) 48</p>
<p>Use/dissemination of price–sensitive information (Hong Kong) 50</p>
<p>Use/dissemination of price–sensitive information (serial insider trading) 53</p>
<p>Use/dissemination of price–sensitive information (pillow talk) 54</p>
<p>Use/dissemination of price–sensitive information (economists) 56</p>
<p>Specific requests and proprietary information 58</p>
<p>Definition of publishing 59</p>
<p>Unfair portrayal of past recommendations 60</p>
<p>Performance of past recommendations 60</p>
<p>Conflicts of interest and disclosure of interests 62</p>
<p>Catering to investors with specific investment criteria 62</p>
<p>Shari ah law implications for securities research analysts (stocks) 64</p>
<p>Shari ah law implications for securities research analysts (bonds) 65</p>
<p>The virtues of a vice portfolio 67</p>
<p>Analyst surveys 67</p>
<p>Playing the voting game 68</p>
<p>Sourcing information 71</p>
<p>Acknowledging the source 71</p>
<p>Gathering confidential information 72</p>
<p>Receiving confidential information 76</p>
<p>Rumors, speculation and M&amp;A 79</p>
<p>Identifying M&amp;A candidates (putting companies into play) 81</p>
<p>Short selling by hedge funds (abusive rumor–mongering) 84</p>
<p>Defamation libel and slander 88</p>
<p>Defamation 89</p>
<p>Intellectual property copyright and plagiarism 91</p>
<p>Intellectual property 91</p>
<p>Research integrity and consistency 95</p>
<p>The problem 95</p>
<p>Disgruntled clients 95</p>
<p>The principles 96</p>
<p>. . . be consistent or explain apparent inconsistencies 97</p>
<p>Sector/country weightings and universes 100</p>
<p>Consistency of views 101</p>
<p>Top picks (research requirements) 102</p>
<p>Consistency of views 104</p>
<p>Technical analysis 105</p>
<p>Useful qualifications (technical analysis) 106</p>
<p>Coverage universe initiations, terminations and transfers 106</p>
<p>Accountability principles 106</p>
<p>Initiation of coverage 107</p>
<p>Transfer or re–initiation of coverage 107</p>
<p>Co–authorship liability 108</p>
<p>Termination of coverage 109</p>
<p> Under review 110</p>
<p>Publishing new research 111</p>
<p>No recommendation? 111</p>
<p>No recommendations 114</p>
<p>Chapter 2: Reasonable Basis, Valuations and Risk 119</p>
<p>Key points 120</p>
<p>Consistency of recommendations 121</p>
<p>Explanation for inconsistencies 121</p>
<p>Following the market 122</p>
<p>Valuation support 122</p>
<p>Forensic analysis of accounts 122</p>
<p>Channel–stuffing and other activities 123</p>
<p>Cross–industry antitrust issues 124</p>
<p>Disclosures and notes 126</p>
<p>Pro–forma accounting and use of selective data 128</p>
<p>Reasonableness of valuations 128</p>
<p>Highlight valuation changes 129</p>
<p>The appropriate valuation methodology 129</p>
<p>Unrealistic expectations or questionable bases for valuation 130</p>
<p>Excessive valuations 132</p>
<p>Highlighting risks and volatility 133</p>
<p>Appropriateness of sell ratings 134</p>
<p>Short–selling by hedge funds (pushing the envelope?) 135</p>
<p>Management s reaction to negative research (legal action) 137</p>
<p>Management s reaction to negative research (restricting information) 138</p>
<p>Mis–selling and not highlighting risks 139</p>
<p>Highlighting investment risks (credit crisis of 2007/08, U.S.) 139</p>
<p>Highlighting investment risks (credit crisis of 2007/08, global) 142</p>
<p>Highlighting investment risks (general) 144</p>
<p>Evaluating risks and catalysts 146</p>
<p>Catalysts and consensus 147</p>
<p>Market liquidity and contagion risks 147</p>
<p>Foreign exchange and interest rate risks 147</p>
<p>Currency risks 148</p>
<p>Earnings risks 150</p>
<p>Brand theft risk 151</p>
<p>Brand theft 151</p>
<p>Brand usurping 152</p>
<p>Cashflow and liquidity risks 153</p>
<p>Valuation risks 153</p>
<p>Modeling and miscalculation risks 154</p>
<p>Modeling risks 155</p>
<p>Mispricing risks 156</p>
<p>Information risk 157</p>
<p>M&amp;A risks 158</p>
<p>Corporate governance risks 159</p>
<p>Gauging corporate governance risks 159</p>
<p>Social responsibility 161</p>
<p>Corporate governance (social responsibility rankings) 161</p>
<p>Durability of brand names 163</p>
<p>Corporate governance (social responsibility the mass–consumer market) 164</p>
<p>Corporate governance (social responsibility corporate governance excellence) 165</p>
<p>Executive remuneration 167</p>
<p>Corporate governance (executive remuneration) 168</p>
<p>Corporate governance (executive remuneration disclosures) 172</p>
<p>Executive insider trading 174</p>
<p>Corporate governance (executive insider trading) 175</p>
<p>Equal treatment of shareholders 176</p>
<p>Corporate governance (equal treatment of shareholders) 177</p>
<p>Corporate governance (related–party transactions) 179</p>
<p>Corporate governance (equal treatment of shareholders related–party transactions) 181</p>
<p>Corporate governance (vote manipulation) 182</p>
<p>Corporate governance (independent non–executive directors) 184</p>
<p>National interest 184</p>
<p>Corporate governance (national interest) 184</p>
<p>Corporate governance (national interest strategic industries) 187</p>
<p>Corporate governance (national interest sovereign wealth funds) 189</p>
<p>Risk management 189</p>
<p>Corporate governance (false statements by issuers) 190</p>
<p>Corporate governance (risk management and rogue traders) 191</p>
<p>Corporate governance (transparency of operations) 196</p>
<p>Ponzi schemes 197</p>
<p>Corporate governance (risk management and money–laundering, bribery and corruption) 199</p>
<p>Credit rating risks 201</p>
<p>Analyzing risk (credit rating agencies) 201</p>
<p>Due diligence by investment bankers 203</p>
<p>Due diligence (failures) 204</p>
<p>Chapter 3: Independence of Research and Conflicts of Interest 209</p>
<p>Key points 210</p>
<p>Summary 210</p>
<p>Separating research and banking 211</p>
<p>Conflicts of interest (global settlements) 212</p>
<p>Conflicts of interest (collateralized debt obligations) 214</p>
<p>Conflicts of interest (auction–rate securities) 216</p>
<p>Managing contacts between analysts and bankers 217</p>
<p>Disclosures of interests and relationships 219</p>
<p>Conflicts of interest (private trading contrary to recommendations) 220</p>
<p>Analyst certification 221</p>
<p>Conflicts of interest (disclosures) 222</p>
<p>Writing research on banking clients 223</p>
<p>Conflicts of interest (watch lists) 225</p>
<p>Conflicts of interest (managing apparent conflicts) 226</p>
<p> Pre–deal research 230</p>
<p>Conflicts of interest (pre–deal research) 231</p>
<p>Influencing of analysts by issuers 234</p>
<p>Conflicts of interest (bribes) 234</p>
<p>Conflicts of interest (favors) 235</p>
<p>Conflicts of interest (issuers guiding analysts) 236</p>
<p>Conflicts of interest (employment) 237</p>
<p>Independent research firms 238</p>
<p>Alleged conflicts of interest (independent research firms) 239</p>
<p>Paying for sell–side research 242</p>
<p>Transparency in paying for research (inappropriate payments) 245</p>
<p>Paying for credit ratings 246</p>
<p>Chapter 4: Non–research: E–mails, Blogs and Internal Communications 251</p>
<p>Key points 252</p>
<p>Approval of e–mail and media appearances 253</p>
<p>Objective commentary on non–rated companies 254</p>
<p>E–mails 256</p>
<p>E–mails as research 257</p>
<p>Retention of e–mails 259</p>
<p> Internal Use Only 261</p>
<p>Chapter 5: General Writing, Editing and Publishing Considerations 263</p>
<p>Key points 264</p>
<p>Introduction 264</p>
<p>Getting the message across 265</p>
<p>Headlines and covers 265</p>
<p>Standards of taste 266</p>
<p>Bullets, key points and executive summaries 267</p>
<p>Publishing and distribution 267</p>
<p>Writing the text 268</p>
<p>Writing rules 268</p>
<p>Use the right word 269</p>
<p>Vocabulary for attributing forward–looking comments (using will ) 269</p>
<p>Measurements and direction/degree of movement 271</p>
<p>Vocabulary for describing movement and performance 272</p>
<p>Words to avoid or use carefully 273</p>
<p>Bullshit Bingo (vocabulary and phrases) 274</p>
<p>Clarity of communication 275</p>
<p>Clarity, consistency, conformity and continuity 276</p>
<p>Be consistent or explain inconsistencies 277</p>
<p>Editorial departments and style guides 277</p>
<p>Translations into different languages 278</p>
<p>Mistranslations 278</p>
<p>Publishing independent yet integrated reports 279</p>
<p>Sensitivity to politics and religion 280</p>
<p>Sensitivity to politics and religion 280</p>
<p>Correcting errors 281</p>
<p>Courses of corrective action 281</p>
<p>Materiality of the error 282</p>
<p>Publishing of out–of–date story 282</p>
<p>Retractions 283</p>
<p>Helping the reader 286</p>
<p>Index 287</p>