Risk & Compliance

Deutsche Bank Faulted Over Research Policies

The SEC fines the bank $9 million for failing to prevent improper communications between analysts and customers.
Matthew HellerOctober 13, 2016
Deutsche Bank Faulted Over Research Policies

In another case that highlights the potential conflicts between research and investment banking, Deutsche Bank has agreed to pay $9.5 million to settle charges it failed to prevent analysts from communicating confidential information to traders and customers.

The U.S. Securities and Exchange Commission said the bank had inadequate policies for safeguarding material information that had yet to be published in analysts’ reports, enabling improper communication of changes in estimates and short-term trade recommendations during morning calls, trading day squawks, idea dinners, and non-deal road shows.

Deutsche Bank Securities Inc. (DBSI) barred disclosure of “research in process” to anyone outside the firm’s research department unless the information “did not reflect or signal a material change from the analyst’s prior published view.”

But according to the SEC, “research in process” was “susceptible to differing interpretations” and an estimate change by an equity analyst was considered material only when the change was greater than 10%.

“Information generated by research analysts such as ratings, views, estimates, and trading recommendations can move markets,” Antonia Chion, associate director of the SEC Division of Enforcement, said in a news release. “Broker-dealers must maintain and enforce policies and procedures that are reasonably designed in light of the nature of their business to prevent the misuse of such information.”

In one instance cited in an SEC administrative order, a Deutsche Bank analyst told certain customers that he expected a company’s first quarter EBITDA to be as high as $139 million, representing a 10.6% increase from his earlier estimate.

The analyst “never issued a research report with the revised estimate,” the SEC said.

The agency noted that the compensation of Deutsche Bank analysts was based, in part, on customer satisfaction with their work, as measured by independent surveys of investors.

“This evaluation and compensation structure created a risk that DBSI equity research analysts would share their potentially market-moving nonpublic views about covered companies with DBSI customers,” the SEC said.

In recent years, several other banks have been accused of blurring the lines between research and investment banking, with Citigroup agreeing in 2014 to pay a $14 million penalty.

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