Uncovering Conflicts With Stock Market Analyst

In addition to paying close attention to the disclosures that firms and analysts make, here are some steps you can take to assess whether and to what extent analyst conflicts may exist:

Identify the Underwriter

Before you buy, confirm whether the analyst's firm underwrote a recommended company's stock by looking at the prospectus, which is part of the registration statement for the offering. Note that firms are required to disclose in research reports whether they managed or co-managed a public offering. You'll find a list of the lead or managing underwriters on the front cover of both the preliminary and final copies of the prospectus. By convention, the name of the lead underwriter, the firm that stands to make the most money on the deal will appear first, and any co-managers will generally be listed second in alphabetical order. Other firms participating in the deal will be listed only in the "Underwriting" or "Plan of Distribution" sections of the final supplement to the prospectus. You can search for registration statements using the SEC's EDGAR database at www.sec.gov/edgar.shtml. The final supplement to the prospectus will appear in EDGAR as a "424" filing.


Research Ownership Interests

A company's registration statement and its annual report on Form 10-K will tell you who the beneficial owners of more than five percent of a class of equity securities are. Research reports on a company must disclose whether the securities firm issuing the report (or any of its affiliates) beneficially owns one percent or more of any class of common equity securities of the subject company. The issuer's registration statement will also tell you about private sales of the company's securities during the past three years. . In addition to the disclosure requirements in the new rules, you may be able to ascertain ownership by checking the following SEC forms:

1) Schedules 13D and 13G: Any person who acquires a beneficial ownership of more than five percent must file a Schedule 13D. Schedule 13G is a much abbreviated version of Schedule 13D that is only available for use by a limited category of "persons," such as banks, broker-dealers, or insurance companies.

2) Forms 3, 4, and 5: Officers, directors, and beneficial owners of more than 10 percent must report their holdings and any changes in their holdings to the SEC on Forms 3, 4, and 5.

3) Form 144: If an analyst or a firm holds "restricted" securities from the company, meaning those acquired in an unregistered, private sale from the issuer or its affiliates, then investors can find out whether the analyst or the firm recently sold the stock by researching their Form 144 filings.

As of November 4, 2002, all statements of beneficial ownership on Schedules 13D and 13G (including those relating to the securities of foreign private issuers) must be submitted electronically using the SEC's EDGAR system.

Unlock the Mystery of "Lock-ups"

If the analyst's firm acquired ownership interests through venture investing, the shares generally will be subject to a "lock-up" agreement during and after the issuer's initial public offering. Lock-up agreements prohibit company insiders, including employees, their friends and family, and venture capitalists from selling their shares for a set period of time without the underwriter's permission. While the underwriter can choose to end a lock-up period early, whether because of market conditions, the performance of the offering, or other factors, lock-ups generally last for 180 days after the offering's registration statement becomes effective.

After the lock-up period ends, the firm may be able to sell the stock. If you're considering investing in a company that has recently conducted an initial public offering, you'll want to check whether a lock-up agreement is in effect and when it expires or if the underwriter waived any lock-up restrictions. This is important information because a company's stock price may be affected by the prospect of lock-up shares being sold into the market when the lock-up ends. It is also a data point you can consider when assessing research reports issued just before a lock-up period expires which are sometimes known as "booster shot" reports.

To find out whether a company has a lock-up agreement, check the "Underwriting" or "Plan of Distribution" sections of the prospectus. That's where companies must disclose that information. You can contact the company's shareholder relations department to ask for its prospectus, or use the SEC's EDGAR database if the company has filed its prospectus electronically. If you can't find a form on EDGAR, please refer to information on "How to Request Public Documents" at http://www.sec.gov/answers/publicdocs.htm. There are also commercial websites you can use for free that track when companies' lock-up agreements expire. The SEC does not endorse these websites and makes no representation about any of the information or services contained on these websites.

How You Can Protect Yourself

We advise all investors to do their homework before investing. If you purchase a security solely because an analyst said the company was one of his or her "top picks," you may be doing yourself a disservice. Especially if the company is one you've never heard of, take time to investigate:

a) When assessing a firm's research report of a company, be sure to read all of the disclosures about the firm and analysts' conflicts of interest and the types of research recommendations that the firm has made.

b) Research the company's financial reports using the SEC's EDGAR database at http://www.sec.gov/edgar.shtml, or call the company for copies. If you can't analyze them on your own, ask a trusted professional for help.

c) Find out if a lock-up period is about to expire or whether the underwriter waived it. While that may not necessarily affect your decision to buy, it may put an analyst recommendation in perspective.

d) Confirm whether the analyst's firm underwrote one of the company's recent stock offerings, especially its IPO.

e) Learn as much as you can about the company by reading independent news reports, commercial databases, and reference books. Your local library may have these and other resources.

f) Talk to your broker or financial adviser and ask questions about the company and its prospects. But bear in mind that if your broker's firm issued a positive report on a company, your broker will be hard-pressed to contradict it. Be sure to ask your broker whether a particular investment is suitable for you in light of your financial circumstances.

Above all, always remember that even the soundest recommendation from the most trust-worthy analyst may not be a good choice for you. That's one reason we caution investors never to rely solely on an analyst's recommendation when buying or selling a stock. Before you act, ask yourself whether the decision fits with your goals, your time horizon, and your tolerance for risk. Know what you're buying, or selling, and why.

Learn more on Stock Market Analyst Recommendations

Although all information has been written in good faith and reviewed, please email us at help@stockmarketbeginnersguide.com to report any inaccuracies.