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Tips for Researching Investments: Uncovering Analyst Conflicts of Interest

Sometimes certain conflicts of interest may exert pressure on stock analysts and make them issue positive research reports and recommendations. This article will give you some tips on how to uncover analyst conflicts of interest and assess whether they are too big to ignore.

Uncovering Stock Analyst Conflicts of Interest

Find out whether the analyst's firm is underwriting the recommended company's stock.

You can do that by looking at the prospectus that is part of the registration statement for the public offering. You can find it using the SEC's EDGAR database.

In their research reports firms are required to disclose whether they have managed or co-managed a public offering. A list of the lead or managing underwriters can be found on the front cover of the prospectus. Any other firms that have participated in the deal can be found on the final supplement to the prospectus, in the "Plan of Distribution" or "Underwriting" sections.

Check for ownership interests.

Research reports are required to disclose whether the firm issuing the report owns at least 1% of the securities of the covered company. In addition to the disclosure requirements, you may also find out different beneficial owners by checking the following Sec forms: Form 10-K, 3, 4, 5, and 144, Schedules 13D and 13G.

Check whether lock-up agreements are in effect.

Basically, lock-up agreements prohibit company insiders, such as employees, venture capitalists, and family, from selling shares for a certain predetermined period of time (typically 180 days) without the underwriter's permission. Therefore, if the analyst's firm has acquired ownership through venture investing, the shares owned by it will be subject to such a lock-up agreement. Checking when this lock-up agreement expires is important since the price of the company stock may be affected by the possibility of selling the shares when the lock-up ends.

You can find out about the lock-up agreement in the "Plan of Distribution" or "Underwriting" sections of the prospectus.

Protecting Yourself from Analyst Conflicts of Interest

Here are some tips that will help you protect yourself from analyst conflicts of interest when researching investments.

  • Always read all disclosures about the types of research recommendations that the analyst firm has made and the conflicts of interest.
  • Check whether the analyst's firm has underwritten the company's stock offerings.
  • Check the lock-up agreements and see if the lock-up period is about to expire or has been waived by the underwriter.
  • Research the company's financial reports (you can use the SEC's EDGAR database for this purpose) and if it is hard for you to analyze them turn to a professional for help.
  • Gather as much information as you can about the company you are considering by reading independent news reports, reference books, commercial databases, etc.

Finally, always have in mind that even the most unbiased and sound analyst recommendation may not be suitable for your individual financial circumstances.

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