I am currently working in a merchant bank as a research analyst. Final approval of buying/selling a stock follows three steps in this company -
1st Stage: Buy/Sell recommendation from research dept to portfolio mgt dept, 2nd Stage: Suitablity analysis done by portfolio mgt dept and present to investment approval committee, 3rd Stage: FInal approval for buy/sell or not to buy/sell by the approval committee.
As a research analyst I work in the 1st stage. But my company wants me to include in the investment approval committee (3rd Stage) in addition to the current responsibilities.
I think this will be breach of CFA code of ethics working in two stages simultaneously but just couldn’t get to the right reference of the code.
Guys advise me whether I am right or wrong. Also mention the direct reference to the code.\\\\
Being the head of research dept (simultaneously research analyst), I have already approved/given my opinion in favor of my buy/sell recommendation report. So inclusion of me in investment approval committee to take buy/sell decision is redundant.
The basic reason for which there always should be strong firewall between portfolio management department and the research department also applies here with equal emphasize. As being in the investment approval committee I can also see which shares will be bought or sold and by which quantity which will be definitely a breach of code of ethics.
There may be 4/5 analyst under me. If I do not agree with the buy/sell recommendation of any particular stock may be I will approve it because I can’t force any research analyst to change her recommendation (to protect the independence and objectivity) but being in the investment approval committee I have chance to go to the contrary and thus there may be a potential of conflict of interest.
There are some other points. But I think these three reasons should be enough in favor of my opinion. So guys please rethink your opinion.
As long as the research from your department is generated for the sole purpose of making decisions on which stocks the firm buys, and the research isn’t sold as a seperate product I don’t see a conflict of interest here. I think your position on the approval committee would be to add insight beyond just the written report and put it into context within the entire portfolio. So it could be slightly redundant, but you could still add value.
The only way this could be a conflict was if the research generated by your department was sold to outside clients and used by the portfolio mgmt team of your firm.
Imagine a fund run by one guy, he does all the research and makes the decision to buy or sell. Is he being unethical or losing his objectivity?
I’m absolutely not an expert, just an L2 Candidate.
I also don’t see any conflict. There’s no reason someone making an investment recommendation can’t be further involved in the process. We don’t hold equity positions at my bank, nor do we have an investment committee that makes specific decisions regarding portfolio positioning, only broad sector allocation budgeting. Basically sector PMs make all investments with full discretion within exposure concentration guidelines. If you’re really concerned about it, run it by compliance, but I think it’s probably much ado about nothing. For some perspective, my comments regard balance sheet investments for one of the top 10 US banks by assets.