Disclose the conflict can remit responsibility ?

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vc

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would anyone like to tell me . if the company hired a research analysts to make the

report to

public .and give the compensation to analysts for flat fee and bonus ( Depend on the

stock price ,say rising 5%,10%....).

If analysts disclose the conflict to his boss , is he still violate any code ?


if he is a independent analysts , discolse the conflict on the report ,the ans is the same ?
 
I think full disclosure to the boss and his permission as well as to the clients (in report) is required.
 
But, isn't it a violation of the standards to take compensation that will in some way be tied to a rise in the stock price regardless of whether disclosed to the boss and regardless of being captured or independent?
 
StealthPlanner Wrote:
-------------------------------------------------------
> But, isn't it a violation of the standards to take
> compensation that will in some way be tied to a
> rise in the stock price regardless of whether
> disclosed to the boss and regardless of being
> captured or independent?


You are correct, I missed the bonus part. My guess is that a bonus linked to stock price increase will be a conflict of interest. But if this is mentioned clearly in the report, then client has enough information to decide how impartial this advice is. In that case, one could argue it is not a violation. May be someone with more experience can shed light.
 
I agree with Atlanta. If he states the additional bonus in his reports, and he isn't biased while preparing the report, one can argue there is no violation.
 
I can see Houston's point that if there is disclosure, then it might be allowed. However, in the CFAI 2006 L1, Vol 1 book, there is a case, Example 9 (page 26) as an illustration for Standard I(B), very similar to the situation vc poises. In the example, the analyst is given an opportunity to write a research report. The firm will pay the analyst a flat fee plus a bonus if any new investors buy stock in the company as a result of the report.

According to the text, the analyst will be in violation of Standard I(B) if he accepts the payment arrangement. The comment continues that the arrangement provides "an overwhelming incentive" to draft a positive report, and the analyst should only accept a flat fee that is not tied to the conclusions or reccomendations.

Now, up to this point the response to the case by CFAI is pretty straight forward (the analyst should only accept a flat fee) until the last sentence, "Issuer-paid research that is objective and unbiased can be done under the right circumstances so long as the analyst takes steps to maintain his or her objectivity and includes in the report proper disclosures regarding potential conflicts of interest." I think this makes the issue as clear as mud.

The way I interpret this is the analyst should only accept a flat fee and disclose the report is issuer paid. However, I think what makes for a violation is having the compensation tied in some way to sales levels or stock prices. Imn other words, I think it is the incentive for the analyst to accentuate the positives and downplay negatives that is the violation.

Am I being overly nit-picky on this?
 
No I think you're correct and that sometimes overanalyzing the question can get you the wrong answer. That's usually what I have a tendency to do. I like to make problems more difficult than they really are.
 
SP, it seems you are correct in view of your reference from the text. But it is certainly muddied. I was thinking even a flat fee arrangement is not that "safe" as there is an expectation of future business as well as the quantum of flat fee that can influence the analyst. That's why I thought the best protection for investor was investor himself once s/he had read the complete disclosure.

But for the purpose of the exam, I agree with you. I wish CFAI had a ethics hotline.
 
Example 9: Javier Herrero recently left his job as a research analyst for a large
investment advisor. While looking for a new position, he is hired by an investorrelations
firm to write a research report on one of its clients, a small educational
software company. The investor-relations firm hopes to generate investor interest
in the technology company. The firm will pay Herrero a flat fee plus a bonus
if any new investors buy stock in the company as a result of Herrero�s report.

Comment: If Herrero accepts this payment arrangement, he will be in violation
of Standard I(B) because the compensation can reasonably be expected to compromise
his independence and objectivity. Herrero will receive a bonus for attracting
investors, which is an overwhelming incentive to draft a positive report
regardless of the facts and to ignore or play down any negative information about
the company. Herrero should accept for his work only a flat fee that is not tied
to the conclusions or recommendations of the report. Issuer-paid research that
is objective and unbiased can be done under the right circumstances so long as
the analyst takes steps to maintain his or her objectivity and includes in the report
proper disclosures regarding potential conflicts of interest.
 
CFAAtlanta Wrote:
-------------------------------------------------------
> StealthPlanner Wrote:
> --------------------------------------------------
> -----
> > But, isn't it a violation of the standards to
> take
> > compensation that will in some way be tied to a
> > rise in the stock price regardless of whether
> > disclosed to the boss and regardless of being
> > captured or independent?
>
>
> You are correct, I missed the bonus part. My guess
> is that a bonus linked to stock price increase
> will be a conflict of interest. But if this is
> mentioned clearly in the report, then client has
> enough information to decide how impartial this
> advice is. In that case, one could argue it is not
> a violation. May be someone with more experience
> can shed light.



my understanding is that once you have proper disclosure, the potential conflict is no longer of revelance
 
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