Does your stock research report comply with SEBI regulations?

There are several individuals / entities who provide stocks or mutual fund advisory to their readers / paying clients. At the outset, such activity is covered under the SEBI (Research Analysts) Regulations, 2014 (“RA Regulations”).

So, you need to have your license in place if you are publishing your views/opinions in the form of research reports.

Chapter III of the SEBI regulations deals with compliance of the regulations. The regulation clearly specifies what needs to be mentioned or disclosed in the research report.

This post highlights the key compliance points with respect to publication of a research report.

But first let us understand what is a research report.

What is a research report?

As per the regulations “research report” means any written or electronic communication that includes research analysis or research recommendation or an opinion concerning securities or public offer, providing a basis for investment decision…”

So a research report includes research analysis or research recommendation or any opinion on any security including a stock or a mutual fund or derivatives. The report can be in print or electronic form. Even if any document or analysis, which may not be a “buy / sell / hold recommendation” but is presented in such a way that it forms a basis for an investment decision, it is considered as a research report.

Now, let us see what are the things that an individual research analyst  or an entity should keep in mind while publishing a “research report”.

#1 – Unbiased view:

A research report should have an unbiased view of the research analyst. It should not be used to manipulate the market. The views / recommendations of the individuals employed as research analyst about the company on which the report is made should be consistent with the view mentioned in the research report.

#2 – Adequate documentary basis

There should be adequate basis for preparing the research report. Such basis needs to be properly documented and supported by information from an authentic source.

If you have a process for recommending the security, such process should be documented for compliance requirements.

#3 – Information about the research analyst / research entity

A research analyst or research entity should disclose in the research report, all material information about itself including its business activity, disciplinary history, the terms and conditions on which it offers research report, details of associates and such other information as is necessary for a client to make informed decision.

E.g.: Name of the entity, the business activities of the company, if there is any disciplinary action action taken by any regulator, the terms of accessing the research report, the limitations of the services, the assumptions, if any, made in the research analysis, etc.

#4 – Facts and terms in research report

Research analyst or research entity should make sure that facts mentioned in its research reports are based on reliable information. As a good governance practice, it is recommended that the source of the information should be mentioned in the research report.

Also, if there are terms used in the research report, such terms should be clearly defined and consistently used in the report. This helps investors understand the report better.

E.g.: If the a term “alpha” is used in a research report, definition or meaning of “alpha” should be mentioned in the research report.

#5 – Rating system

If a research analyst or research entity has used a rating system, meaning of such rating should be clearly defined.

Also, the time horizon and benchmarks on which a rating is based must be mentioned.

E.g. : If five star rating is given to a stock or mutual fund, the report should mention whether it means that stock/ mutual fund is good to invest or should be avoided.

#6 – Price Target

If a research report contains either a rating or price target to the securities for at least one year, such research report should also provide the graph of daily closing price of such securities for the period assigned or for a three-year period, whichever is shorter.

#7 – Ownership and material conflict of interest

While writing a research report about a particular company, the research analyst or the research entity should disclose in the report, whether he / she or the research entity or his / her associates or his / her relatives:

1. Have any financial interest in the subject company and the nature of financial interest
2. Have actual/beneficial ownership of one per cent or more of the subject company at the end of the month immediately preceding the date of publication of the research report
3. Have any other material conflict of interest at the time of publication of the research report

#8 – Receipt of compensation

While writing a research report about a particular company, the research analyst or the research entity should disclose in the report whether in the past 12 months,

1. it or its associate have received compensation form the subject company
2. it or its associates have managed or co-managed public offering of securities for the subject company
3. it or its associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company
4. it or its associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company
5. it or its associates have received any compensation or other benefits from the subject

#9 – RA served as an officer / director / employee

It should be disclosed in the research report whether the research analyst has served as an officer, director or employee of the subject company

#10 – Market making activity

It should be disclosed in the research report whether the research analyst or research entity has been engaged in market making activity for the subject company.

#11 – Distribution of research reports

A research report should be made available to all clients who are entitled to receive the report and not to a particular client or clients or should be shared with select clients in advance..

#12 – Signed and dated

The research report should be maintained in physical or electronic form. The research reports should be signed and dated. If they are maintained in electronic form they should be digitally signed. The reports should be maintained for at least 5 years.

#13 – Including the term “research analyst”

The research analyst or the research entity should always mention that he / she / it is a Research Analyst registered with SEBI under RA regulations along with the SEBI registration number.

#14 – Third party research report

If any research analyst / research entity distributes any third party research report, it is its responsibility to:

1. review the research report for any untrue statement of material fact or any false or misleading information;
2. disclose any material conflict of interest with such third party or provide a link of the website where such disclosure is made.

It is important that you make the necessary disclosures in the research report so that the subscribers / clients know about the conflict of interests as well the independence of the recommendations.

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If you need any help in preparing disclosures for your research report or reviewing the same, you can get in touch with me at kruti@cskruti.com