What is the main goal of analysts
When you get acquainted with the analytical results obtained by brokerage houses, it means that you will almost certainly get acquainted with the information obtained from analysts representing the interests of stock sellers. These analysts work mainly on brokerage houses and other sources of financial distribution, whose employees sell securities based on the recommendations of analysts.
The main goal of analysts representing the interests of stock sellers is to provide employees of the brokerage house with information that would help them make sales. When the interests of the investor, the broker and the brokerage house are the same, reports from analysts representing the interests of the sellers of stocks can be a very useful source of information. Conflict arises, however, in cases where analysts representing the interests of stock sellers are also obliged to help their brokerage firms receive lucrative orders from investment banks.
Attorney General pcs.New York Eliot Spitzer explained why this conflict is the main cause of the well-known scandals associated with such popular analysts as Henry Blodgett from Merrill Lynch, who, sending e-mail to his good friends, called shares of some companies “junk”, “ garbage "and" garbage ", and in open publications I strongly recommended my clients to buy shares of the same companies. How is this explained? According to information available to Eliot Spitzer, the recommendations of Henry Blodget brought Merrill Lynch $ 115 million in remuneration from investment banks, and Blodget earned $ 12 million on this "little trick".
Merrill Lynch was only the first of the companies that came to the attention of US law enforcement agencies. Similar charges were brought against many other companies, including Morgan tanley, Dean Witter and Credit uie Firt Boton. Several firms that sold shares and had a unit that serves as an investment bank managed to avoid a scandal.
In the past, analysts were separated from investment banks by the so-called "Chinese wall".The work of analysts was completely separated from the transactions concluded in the area of the company's business that was related to the performance of the functions of an investment bank. However, at some point, the dividing lines between these two areas of activity began to blur, and ultimately, analysts were fully involved in the process of entering into transactions involving mergers, acquisitions and issuance of new shares. By making biased reports, analysts helped their companies enter into more profitable transactions related to the provision of investment bank services while exposing small investors to the risk of losing all their money as a result of buying shares recommended by "interested" analysts. When the "market bubble" burst with a bang in 2000, many of the shares recommended for purchase as a result of the conclusion of such transactions, completely depreciated, resulting in investors lost billions of dollars.
Merrill Lynch, trying to settle her problems with Eliot Spitzer, agreed to publicly disclose her connections with investment banks and publish lists of her clients.Since June 2002, Merrill Lynch indicates in all of its research reports whether it receives a reward for providing investment bank services from any company that has been serviced by Merrill Lynch analysts for the previous 12 months. Other companies followed the example of Merrill Lynch in settling the problems that they had with Eliot Spitzer.
Finally, in April 2002, the US Securities and Exchange Commission entered into the business, which announced that it intends to expand the study of the role played by analysts, and begin to develop new rules for ensuring greater transparency of analyst actions. Ultimately, the EC approved changes to the rules recommended by the New York Stock Exchange and the National Association of Securities Dealers.
Structural reforms that increase the degree of independence of analysts. These reforms include a ban on monitoring the actions of analysts on the part of units performing the functions of an investment bank, or mandatory approval of research reports.
The ban on linking the remuneration of analysts with the implementation of specific transactions for the provision of investment bank services.
The ban on conducting research with a predetermined result, contributing to the "pushing" of a particular business.
Ensuring greater transparency of situations when a conflict of interest arises in research reports and public statements. Greater transparency is achieved by including information about business relationships with companies that are the subject of reports compiled by analysts, or whether analysts have private interests in such companies.
Specifying in research reports data relating to firm ratings, such as the percentage of ratings issued in each category of purchase, storage and sale, and a price chart comparing closing prices for the estimated security and company rating or price targets in the process of changing them with over time.
Restrictions on the personal participation of analysts in trading securities of companies that they analyze and / or for which they compile reports.
These changes in the rules should help investors in identifying conflicts of interest that may adversely affect the objectivity of a report compiled by an analyst representing the interests of the seller of shares.Pay special attention to the disclosed information and the relationship between brokerage houses and companies, which are related to reports compiled by analysts of these brokerage houses. These relationships should be remembered if you intend to take into account the recommendations of analysts regarding the purchase / sale of shares in the plans for their future trading operations.
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