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The ISA will require analysts to make disclosures pertaining to possible conflict of interests


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The plenum of the ISA had authorized a ruling related to analysis of traded securities issued by public companies. The purpose of the ruling is to bring about disclosure, in cases where there are qualms regarding conflicts of interest, whether on the part of the analyst or on the part of the investment house that employs the analyst – conflicts of interest that might affect the analyst’s considerations.
During recent years, with the development of the capital market and the flourishing of economic websites, more and more economic analyses produced by the annalists’ employed by investment houses and local banks, as well as foreign financial institutions represented in Israel, are being published. In addition, quite a few analyses prepared by private bodies for their own use find their way to the media and the investing public.
The analyst analysis the ongoing activities and/or assesses the company’s assets, as part of his work, using various economic models; following the results of said analysis the analyst proposes certain positive actions pertaining to securities of the reviewed company – buying them when the market price is lower then the price estimated according to applied economic model, or selling them when the market price is higher then the price estimated according to the same economic model.
The analysis is usually performed following a significant event in the company’s life – publication of financial reports, significant transaction, acquisition of activity, etc. As part of their analysis the analysts take into accounts various details related to the company and influencing its financial performance.
During the meeting conducted by the ISA with the representatives of local investment houses, including active analysts, the analysts have stated that in their opinion the work in the field of economic analyses requires licensing. In this context we would like to point out that the US analysts have to acquire license, bestowed following two comprehensive examinations in two areas – analysis and evaluation of a companies and professional ethics.
In light of the importance attached by investors to the information and recommendations presented in the analytical reports, and due to the fact that some of them rely on the aforesaid information at the time of performing securities’ transactions, the ISA is of opinion that the investors have to be supplied with detailed information pertaining to possible conflicts of interest in which the analysts employed by investment houses, banks and foreign financial institutions, might find themselves at the time of preparing their reports.
In most cases, the aforesaid conflicts of interest are expressed in the activities of investment houses and commercial banks, employing the analysts. Both investment houses and the banks provide diverse financial services to clients active on the capital market, which at times create conflicts of interest in regard to the work performed by the analysts.
The apprehension related to the conflicts of interest has risen, during recent years, on world financial market; in the US alone a number of affaires involving serious distortions of data in analytical reports were uncovered. This distortion had originated in the conflicts of interest between the analysts’ field of work and other activities, in which their investment houses were involved. Therefore, some of the henceforth ruling principals are based on the lessons learned form the US affairs; affairs that lead NASD and NYSE to stipulate clear rules pertaining to the work of the analysts.
The need to provide a framework for the work of the analysts stems from the necessity to protect the investors, due to the conflicts of interest and the fact that most of the work, produced by the analysts employed by investing houses and banks, is readily available to the public, whether through publication in financial newspapers or by other distribution channels (such as internet sites run by banks and investment houses).
The ruling stipulates that – an analyst preparing analyses shall make a disclosure regarding all non-negligible conflicts of interest, that and are known to him or that are assumed to be in existence, at the time of the publication of the aforesaid analyses. Inter alia, we are talking about a disclosure pertaining to a relative holding the securities of the reviewed company and/or of the company owning significant holdings of the reviewed company andor owning holdings in a financial asset where a base asset are securities issued by a reviewed company. Also, the analyst will have to disclose whether he, his spouse or relative has business connections or professional relationship with the reviewed company andor significant holdings in the reviewed company andor a connection to the controlling shareholder in the reviewed company; whether he is a spouse or a relative, an office holder, adviser or service provider in the group to which the reviewed company belongs; as well as – whether he has received any kind of remuneration from the aforesaid group for provision of services and the sale of goods during the period of 12 months preceding to the date of publication.
The analyst shall include in his review personal details, including – name, address, particulars of education and professional experience. If he is employed in a licensed company, his name shall be stated on the cover of the review alongside that of the licensed company. In his work, the analyst will also have to include details pertaining to the evaluation system used by him for calculating the target price and various risks that might significantly affect the aforesaid target price and the publication date of the review.
Each analytical review shall include the statement of the preparing analyst, in accordance with the wording that appears in the first appendix of the regulations under section 28(b) of the Regulation of Investment Advice Law, to the effect that the presented information faithfully reflects the analyst’s personal opinion.

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