Create a Restricted List - Standard I(B)

Can someone give a description of what a restricted list is for the standard dealing with independence and objectivity?

A restricted list would simply be a list of stocks that a firm cannot (usually temporarily) make trades in (except for unsolicted trades by customers) because you are in possession of material nonpublic information. For instance, say that you’re an investment firm that is underwriting a secondary offering for company XYZ’s stock. Your firm would be in possession of nonpublic information regarding the company and thus should place XYZ on a “Restricted List” to make sure no one in your firm is taking advantage of this insider information. If/when the information you know becomes public, you would then be able to remove it from the restricted list. Make sense?

So it relates to internal/employee trading at the firm?

Yes, it applies to firm and employee trading, but also to solicted trades for customers. They don’t want brokers (who might be friends with someone in IB or who otherwise somehow find out about it) calling up their clients and telling them to buy/sell shares based on nonpublic information, either.

Thank you Aimee.

What if the broker (assume CFA charterholder), somehow finds out of a negative report being drafted on a particular stock/company, and is called by a client with a buy order for that particular stock? Would the broker execute the order? or advise against?

If the subject is material, then the broker should not advise on such an issue. If the subject could be justified via mosaic theory (with documentation to prove), then such broker could advise against.

The broker can’t let on to the client that he knows anything; until its public, he basically has to act as if he never heard it.

Double post, apologies.

Also for companies that are on a restricted list the company is possession of the material nonpublic info is typically setup to only be able to issue factual reports, i.e. no recommendations or opinions, about the companies that are on its restricted list.

If a client says something you have to act on it, as long as you are convinced that client is not responsible for unlawful things (including exploiting capital markets) and assuming you want their business. If you think client is acting against the recommendations of you/or your firms research and you think client may have missed those updates, then your job is to simply notify them of that. If you think they got the updates last week then still want to continue trading against your advise, then kudos to them. Just do as they. I am sure the clients do their homework too. (ps. clients are usually right these days and research analysts wrong, I saw a BUY on lehman, few months ago). In addition to what aimee said, restricted list can also contain those stocks with which your Investment banking division maintain good relationship and doesn’t want unfavorable research reports for the same company. So in order to not lose the invenstment banking relationship client, the firm may place that stock on restricted list for Analyst coverage. Although such a thing would be rare in practise, more likely is that proper disclosure of conflicts in the reports.