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 1July 13, 2001
This document includes my comments on the issue of Analyst Independence:Question 1:
a) I think that the most important conflicts and pressures have been adequatelyframed and described.b) I think that we can add other sources of conflicts that I can list as follows:
 Investment banking relationship:
Of course, the paper indicated that the investment banking activity affects theobjectivity of research analysts by impacting the quality of theirrecommendations. I think that we should list different circumstances when suchthings occur. The most usual circumstance is when the research analyst fears toissue a negative recommendation so as not to lose a potential investmentbanking contract with a firm.Another circumstance is when the investment bank department floats acompany and strives to keep the closing price above the initial listing price.Any negative recommendation stemming from the research department isgenerally not welcome by both the issuer and the investment banker.Another circumstance is when there is a pressure from the commercial bankingactivity regarding research recommendations. In some countries, commercialbanks are heavily dominating the investment banking activity. Regulatorybodies are often unwilling to impose clear “firewall” guidelines between thetwo activities due to the heavy lobbying power of the banks. Sometimes, thelisted companies and their major shareholders are clients of the commercialbank which is reluctant to see any negative recommendation on the listedcompanies.
 Buy side clients :
Another source of conflict of interest occurs when a company is doing bothinvestment banking and investment management activities. In fact, still someregulations allow such thing. In that case, the asset management activity isgenerally unwilling to see any negative recommendation regarding its mostimportant portfolio positions.
“Business” conflict:
A major source of conflict is the one that is inherently related to the brokeragebusiness itself. Independently of the investment banking activity, researchanalyst’s compensation package is generally related to the size of the brokerageactivity and hence the size of brokerage fees. An analyst may be deviating from
 
 2an objective recommendation because otherwise his compensation packagemay be affected.
Question 2:
a. Of course, I believe that research analysts should be allowed to collaborate oninvestment banking assignments because their added value is substantial.Generally, those research analysts follow specific sectors (companies) for a longtime. Their involvement in a specified investment banking deal certainly bringsvalue to the quality of deal assessment.b. Stronger policies and procedures will certainly help firms manage these inherentconflicts.
Question 3:
No comment
Question 4:
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Question 5 :
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Question 6:
a. I think that research analysts should be permitted to own the securities of thecompanies they follow becausei. this increases their commitment to research accuracy and bettercompany coverageii. Could improve the potential for a higher personal holding andhence a higher commitment to their job.b. I don’t agree. Because this depends on the personal wealth situation of eachresearch analyst.c. Of course, there are specific issues regarding non public companies. Butresearch analysts should not be limited to invest in such companies. The mostimportant thing is to disclose such holdings to the large investment community.
Question 7:
a. The factors are clear and concise.b. I would add another factor which is the level of education of the researchanalyst. I think that we should put higher standards regarding the level of both technical and financial education of the research analyst.
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