Research Objectivity Standards

Quick question: In the CFAI material chapter end quesions it mentiones that “CVG was part of the selling group, but not an underwriter” for an IPO. Can someone articulate the difference? And since we’re here, can someone explain what it means if your firm is a ‘market maker’ in a security (in relation the Research Objectivity Standards)? I have an idea of what these functions are, but since ethics seems to test the gray areas, I want to make sure I have it down. Thanks!

underwriter means managed or co managed an IPO versus doing plain analysis I think

if your firm is making a market , the other firm is an IB client. in ROS it is recommended to disclose all market making because your firm has a conflict of interest, which arises more in active then passive market making: active market making = earning spreads and being in the business for that reason or maybe for risk arbitrage . your firm is interested in both making market to earn $$ and writing research, ROS needed to ensure indp/objectivity vs passive market making = simply filling unsolicited customer orders

As an underwriter you committ yourself to selling a certain amount of shares for the company that is undertaking the IPO. Basically, you take the shares on your (the investment bank’s) book and guarantee the company going public to sell them. Thus, you have to pay them the value of the shares no matter what. Since one single investment bank cannot/does not want to take the entire risk of underwriting the whole IPO issue (or the IPO firm wants to diversify by hiring several investment banks) and you want to sell the shares to as many investors as possible, the lead underwriting manager forms a group with additional co-lead manager(s), co-manager(s) etc. The “lower” the role of the bank the less fees it receives. This group of banks is called a consortium, or what you refer to as the selling group. Often the lead manager chooses banks with great distribution networks because they have “acces” to many investors.

Banks in the consortium may or may not be an underwriter. The lead manager is always an underwriter, and mainly responsible for the management of the IPO, sort of the project manager…