Investment Advice
The activity and its edges
Investment advice means advising another person about securities or derivatives - recommending, opining or issuing research - for a fee or in the course of business. The exam tests the boundary between advice and information, the statutory exclusions, and the conduct rules for research.
- A CMSL for investment advice plus CMSRs for the individuals are required. Advice given by a dealer or fund manager within its licensed activity is regulated under that licence.
- Exclusions in the CMSA include advice published in a newspaper, magazine, periodical or broadcast to the public generally, and advice in a book; professional advice from lawyers and accountants in their own practice also falls outside. Otherwise a paid newsletter or a subscription group carrying recommendations may be unlicensed advice.
- Research standards: recommendations need a reasonable basis, a clear separation of fact from opinion, disclosed valuation methods and risks, balanced downside treatment, and no misleading omission.
- Conflicts: analysts cannot deal in securities they cover except under pre-clearance and restricted-list rules; holdings must be disclosed; publishing a favourable report while quietly selling is scalping and market misconduct.
- Marketing: no guaranteed returns, no selective presentation of past performance, compliance with the SC's advertising rules.
- Records: retain the basis of each recommendation and the material relied on.
Worked example
An analyst writes a 'buy' note on a stock she personally holds, in a company where her firm also holds a corporate finance mandate. Before publication she must clear her personal dealing, disclose her holding and the firm's mandate in the report, and document the valuation basis. Publishing without those disclosures misleads investors and exposes both analyst and firm to action.
Traps
- Assuming 'general information' always sits outside the licence - a publication that induces buying is advice.
- Thinking the mass-media exclusion covers paid promotions dressed as news.
- Ignoring analyst personal-dealing and pre-clearance rules.