Association Supports Research Analyst Certifications

While fixed-income research differs from equity research in a number of important respects, and significantly fewer potential conflicts exist there than in the equity arena, the Association noted in a recent comment letter to the Securities and Exchange Commission that it supports the Commission’s proposed Regulation AC and its application to fixed-income research.

    The SEC’s proposal, announced in early August, would require research analysts to certify that recommendations contained in research reports reflect their personal views. Analysts would also have to disclose whether they have received compensation in exchange for expressing a particular view. The SEC had explicitly asked for comment on whether the proposed regulation should apply to fixed-income research.

    “The Association is committed to maintaining the highest standards of conduct in the fixed-income markets, including standards of conduct as they relate to the publication of research,” said John Ramsay, Association Vice President and Senior Regulatory Counsel.

    “The Association and its members believe the proposal establishes reasonable standards to which analysts of all types should be able to subscribe.”

In addition to expressing its support of the proposed regulation, the Association said it would be appropriate to explore whether some of the requirements recently adopted by the National Association of Securities Dealers and the New York Stock Exchange regarding equity research should also be applied to fixed-income research. Ramsay pointed out, however, that since bond market research differs in many respects from equity research, “analyst conflict rules that have been developed in the equity markets should be individually reviewed to determine whether it would be sensible or practical to apply them in the fixed-income markets.”

    In its letter, the Association said it would welcome the opportunity to help analyze the appropriateness of applying the self-regulatory organization rules to fixed-income research, noting its in-depth understanding of the bond markets and the impracticality of some of the proposals, which are very detailed and specific.

    The Association also pointed out important differences between equity and fixed-income research. Because of these differences, fixed-income research does not pose the same potential for conflicts of interest between research and investment banking that may exist when firms issue equity research, the letter noted. For example, equity research is read by individual as well as institutional investors, while the great bulk of fixed-income research is used solely by institutions. And while stock research focuses on individual companies, fixed-income research, particularly in the government, sovereign and mortgage-backed markets, tends to look at macroeconomic issues, such as interest rates or spreads between different types of investments. Institutional investors want this type of information because it helps them manage the composition of their portfolios in terms of average maturity, yield and credit quality.

    As a result, fixed-income research has significantly less potential to influence bond prices, compared to the effect of equity research on stock prices, and firms have less incentive to tailor their research to attract or retain investment banking business, the Association explained.

    A copy of the comment letter is available on the Association’s Web site.

    For more information, contact John Ramsay at 212.440.9404.

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