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A. Diligence and Reasonable Basis.
#analyst-notes #code-of-ethics-and-standards-of-professional-conduct #v.-investment-analysis-recommendations-and-actions
Using secondary or third-party research

Secondary research: research conducted by someone else in the firm.
Third-party research: research conducted by entities outside the member or candidate's firm.

You should check if research is sound. Examples of criteria include the assumptions used, the rigor of analysis, the timeliness of the research, and the objectivity and independence of recommendations. If the research is suspected to lack a sound basis, members and candidates should refrain from relying on it.


  • A quantitative analyst recommends an out-of-favor stock based on analysis of its 3-year records: the recommendation is not based on thorough quantitative work. A longer time period should be covered.

  • Because of restrictions from the firm's executives, an analyst cannot obtain the information necessary to perform analysis: the analyst must let the client know when he/she is "conflicted" or "restricted."

  • Because lack of research resources, an analyst decides to estimate IPO prices based on the relative size of each company and justify the pricing later when she has time: her analysis is not based on thorough research with reasonable basis. She should take on the work only when she can adequately handle it.

  • An investment banker presses a securities issuer to project the maximum production level. He then uses these numbers as the base-case production levels during sales pitches: he misrepresents the chances of achieving that production level. He should have given a range of production scenarios during the pitch.

  • An analyst recommends purchasing what the market, in general, has christened "hot" stocks without further research: conventional wisdom of the markets does not form a reasonable and adequate basis.

  • After a discussion with the vice president, a senior analyst discovers that there is a good chance that this company will be awarded a large contract (thus pushing up the stock price). The analyst then publishes a report to his clients indicating that they must all purchase the stock based on the fact that the company will be awarded the large contract. The manager has violated this standard since he published that the company will definitely be awarded the contract, which is not necessarily the case.

  • An investment analyst publishes a report based on a 5-year history of the PE ratios of a company. This report will materially affect the portfolios of the firm's clients, since the analyst plans to use the results of the report to invest for his clients' portfolios. The analyst is in contravention of this section since he should have done further research prior to publishing and planning to implement such a huge proposal.
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