What it means
Research analysts publish opinions on companies, such as whether a share is worth buying, holding or selling. Investors rely on those opinions, so regulators want analysts to be competent and independent.
The two-part exam tests both the skill of valuing a business and the discipline of reporting honestly. Series 86 is the analysis part.
It covers financial statement analysis, valuation methods, forecasting, industry analysis and the preparation of research reports. Candidates are expected to work through numbers and judge a company's value, using techniques such as price-to-earnings multiples and discounted cash flow.
Series 87 is the regulatory part. It covers the rules on conflicts of interest, such as when an analyst's firm is also advising the company being covered, restrictions on trading ahead of a report, the disclosures that must appear in research, and the separation between research and investment banking.
For business readers, the exam signals why research is supposed to be independent. If an analyst was paid by the company being discussed, a positive rating would be worth little.
The rules are meant to protect investors from that risk by requiring disclosures and limits. Finance teams that deal with analysts, for example on earnings calls, should know that analysts operate under these constraints.
They also help explain why research reports include lengthy disclosure sections that most people skip. Quiet periods and timing rules also matter.
Analysts may be restricted from publishing around the time their firm is involved in a securities offering for the company, and they must not trade in the company's shares in ways that conflict with their published view. These rules are meant to stop research being used to move a price for the firm's own benefit.
In practice
Real-world examples.
Example
A brokerage hires a junior analyst to cover consumer goods companies. The head of research schedules both parts of the qualification within the analyst's first year. Until she passes, a senior analyst co-signs her reports. The head of research also checks that the junior analyst's coverage list contains no company in which she holds shares.
Example
A company's investor relations manager notices that several analysts include long disclosure paragraphs in their notes. She asks the legal team to explain them. They show her how the rules separate research from the firm's investment banking. She learns that a longer disclosure section usually means the firm is following the rules carefully, not that anything is wrong.
Example
A fund manager reads two reports on the same company, one from an analyst whose firm is also advising on a pending acquisition. The report carries a disclosure about the conflict. The manager gives it less weight in her decision. She also checks whether the analyst's forecasts have been accurate in the past before relying on them.
Formula
Calculation
Target price = forecast earnings per share x target price-to-earnings multiple
Suppose an analyst forecasts earnings per share of $4.00 for a company over the next twelve months and judges that a multiple of 15 is fair, based on similar firms. The target price = 4.00 x 15 = $60. If the share trades at $50, the potential gain is (60 - 50) / 50 = 20%, which might support a buy rating. If earnings forecasts fall to $3.20, the target price becomes 3.20 x 15 = $48, below the market price.Case study
Seen in the real world.
Stonebridge Research is an illustrative, fictional independent research firm. It published a positive note on a mid-sized manufacturer, and the analyst owned shares in the company without having disclosed the holding. The note had attracted attention because it raised the price target by 25%, and several subscribers had already acted on it.
The compliance officer found the omission during a routine check and withdrew the report. The firm issued a corrected version with the proper disclosure, wrote to subscribers and updated its procedures so every analyst confirms holdings before publication.
The incident cost about $25,000 in time and legal fees, and the illustrative lesson is that the regulatory half of the qualification exists because even small omissions can undermine trust in research.
Watch out
Common mistakes.
- Treating an analyst's rating as a guarantee, when it is an opinion based on forecasts that can be wrong.
- Ignoring the disclosure section of a report, when it can reveal conflicts that change how much weight the opinion deserves.
- Assuming that only the first part of the exam matters, when both analytical and regulatory knowledge are required.
Questions
People also ask.
What does Series 86 test?
It tests the analytical skills of valuing companies, analysing financial statements and preparing research reports.
What does Series 87 test?
It tests the rules on conflicts of interest, disclosures and the independence of research. Candidates need to know when a disclosure is required, what it must say and when a report may not be published.
Do all analysts need both parts?
Generally people who produce research reports for a FINRA member firm need to pass both, subject to the rules and exemptions in force.
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