Conflict of Interest: Security Analyst and the Investment Banker

A security analyst is the individual doing analysis of firms, providing valuations reports, researching portfolios, and able to recommend buy/sell /hold, such individuals work for investment firms, brokerage houses, banks, or investment institutions, they usually cover particular industry or companies that they specialize on.
Investment banker is the individual that acts as an underwriter and serves as a go between an issuer of securities and the investing public, and companies, the investment banker buys the securities from issuer and sells it to dealers and investors, profiting in the middle between the buying price and the selling price (public offering), investment bankers also market securities that has already been sold, and look for securities for private parties, they also serve as brokers for other financial services.
There is a potential for conflict of interest if both the security analyst and the investment banker are working for the same firm, where they always work for the same department, for example if some of the companies in which the analyst covers are marketed by the investment banker where they both know that such company stock is not performing as it appears to the public, in this case if the company that is issuing the securities is being retained as a costumer by the firm, then they can both conspire to push selling such stocks, by getting motivated to make more money for the firm, and for themselves.
In some cases the companies which are issuing the securities may see that their stock is rated negatively, or that they are not recommended as a buy, then that company can exert pressure to the firm, demanding that they start rating their stock positively, or as in some cases, they may threaten that they will take their business to somewhere else. When things like that happen, both the analyst and the investment banker will still keep on working and market that same company’s securities. The analyst’s salary is tied to the companies that they cover and the performance of the investment bankers that they work with, in some cases the analyst reports to the investment banker, many times the analysts have purchased stocks of companies that they have covered, buying it before the initial public offerings, and the firm that the analyst works for took the company to public, then the analyst rates the stocks favorable. Thus, the analyst is profiting from the stocks that he rated, and the investment banker that he reports to underwrote it.
There are some solutions to stop such unethical practice that can be implemented, the SEC have issued that firms provide full disclosers to the investors, also the SEC issued restrictions on analysts pay plan, their personal trading, even though the SEC have issued all of these restrictions still if the firms encourage such practices it is fruitless, the best way could be if the firms separate the analysts and investment bankers or establish two different departments one for the research and the other for the investment bankers.
Dahir Nur.