Try 50 free Series 87 practice questions across the official topic areas, with answers and explanations, then continue with the full Securities Prep question bank.
This free full-length Series 87 practice exam includes 50 original Securities Prep questions across the official topic areas.
The questions are original Securities Prep practice questions aligned to the exam outline. They are not official exam questions and are not copied from any exam sponsor.
Count note: this page uses the full-length practice count maintained in the Mastery exam catalog. Some exam sponsors publish total questions, scored questions, duration, or unscored/pretest-item rules differently; always confirm exam-day rules with the sponsor.
For a compact topic review before or after this set, use the Series 87 Cheat Sheet on SecuritiesMastery.com.
| Item | Detail |
|---|---|
| Issuer | FINRA |
| Exam | Series 87 |
| Official route name | Series 87 — Research Analyst Qualification Examination (Part II) |
| Full-length set on this page | 50 questions |
| Exam time | 105 minutes |
| Topic areas represented | 2 |
| Topic | Approximate official weight | Questions used |
|---|---|---|
| Research Reports | 72% | 36 |
| Research Dissemination | 28% | 14 |
Topic: Research Reports
When preparing a rating change note, which set of information should be clearly stated to meet research report preparation expectations?
Best answer: D
Explanation: A rating change note should clearly state what the rating was, what it is now, and the high-level reasons for the change.
A rating change note is meant to communicate the action taken and why. At a minimum, it should identify the new rating, the prior rating, and the primary (high-level) drivers supporting the change. This allows readers to understand both the direction of the change and the rationale without requiring exhaustive detail.
A rating change note is a research report intended to promptly communicate a change in an analyst’s recommendation. To be clear and complete, it should state (1) the new rating, (2) the prior rating, and (3) the primary drivers for the change at a high level (e.g., change in fundamentals, valuation, catalysts, risk profile, or thesis).
These elements provide an audit-friendly record of what changed and the rationale, and they help readers quickly assess whether the change is material to their investment decision. Detailed financial models, exhaustive assumptions, or unrelated regulatory disclaimers may be included when relevant, but they are not substitutes for explicitly stating the rating action and the main reasons for it.
Topic: Research Reports
A member firm is finalizing a written equity research report that will be posted to the firm’s public research portal and emailed to the sales force this morning. The firm’s published ratings system requires (1) a recommendation (Buy/Neutral/Sell) tied to expected 12‑month total return relative to the S&P 500, and (2) a separate risk rating (Low/Medium/High) tied to expected volatility and downside risk. The draft report labels the issuer “Buy” but does not include any rating definitions, time horizon/benchmark language, or a risk rating; the research principal has completed review, but the analyst has not yet signed the required analyst certification.
What is the single best compliant action before dissemination?
Best answer: D
Explanation: A retail-accessible research report must present the firm’s rating system in a way that maps recommendations to expected performance and risk, and it must not be disseminated without the required analyst certification.
Because the report is distributed through retail-accessible channels, it must clearly define the firm’s ratings system so readers understand how a “Buy/Neutral/Sell” maps to expected performance over a stated horizon and how the separate risk rating maps to expected risk. The report also cannot be disseminated until the analyst certification is executed.
Research reports should include rating definitions that allow a reader to interpret the recommendation consistently across the firm’s coverage. Here, the firm’s system explicitly ties the recommendation to expected 12-month total return versus a stated benchmark and requires a separate risk rating tied to expected volatility/downside risk. Disseminating a report that uses the label “Buy” without the required definitions and without the required risk rating fails to communicate how the rating maps to expected performance and risk.
In addition, dissemination controls generally require completion of required approvals/certifications before a report is released through public or broad internal channels. The most compliant step is to delay distribution until both the rating system disclosures (including risk-rating meaning) are included and the analyst certification is signed.
Topic: Research Dissemination
Which interaction by a research analyst is most clearly a public appearance that would trigger the firm’s required research-analyst disclosures?
Best answer: A
Explanation: An open-to-the-public, real-time presentation is a public appearance and requires the applicable analyst disclosures.
A public appearance generally involves a research analyst making a real-time oral statement to the public (for example, via television, radio, or an open webcast). Because the content is being presented publicly, the firm must ensure the required research-analyst disclosures are provided in the manner required for public appearances.
A “public appearance” is typically a research analyst’s participation in a public, real-time oral communication—such as on TV/radio, at a public seminar, or on an open-access webcast—where the analyst discusses an issuer, a security, or the analyst’s recommendation/rating. When an interaction is a public appearance, the firm must provide the applicable research-analyst disclosures (for example, relevant conflicts and other required statements) in a compliant way for that setting (often orally and/or by directing the audience to where the disclosures are available).
By contrast, communications that are not public (internal firm training, private due diligence meetings, or one-to-one client calls) may still be supervised and subject to other policies, but they are not “public appearances” merely because the analyst is speaking.
Topic: Research Reports
A member firm decides to stop publishing research on ABC Corp. because the covering analyst is leaving the firm. Compliance is asked to choose between two proposed ways to notify clients:
Proposal 1: Publish a brief “Termination of Coverage” research note on the firm’s research portal and email it at the same time to all clients who previously received ABC research. The note states the last rating/price target and the effective date coverage ends, includes the firm’s standard research disclosures and analyst certification language, and is approved by a research supervisor before release.
Proposal 2: Send an internal email to the sales desk instructing sales to call their top accounts and tell them coverage has been dropped; no written client-facing notice is distributed.
Which proposal is the more appropriate way to communicate a termination of coverage?
Best answer: D
Explanation: A termination of coverage should be communicated via an approved client-facing research note with appropriate research disclosures and broadly disseminated to prior recipients.
Termination of coverage should be handled as a controlled, client-facing research communication, not as informal word-of-mouth. The appropriate approach is to issue a brief termination note that follows the firm’s research approval process, includes required research disclosures/certification elements, and is disseminated to the clients who previously received the firm’s research on the issuer.
When a firm discontinues coverage, it should provide a clear, client-facing termination of coverage notice through the firm’s research distribution controls. The notice is typically prepared and supervised like other research communications: it should be reviewed/approved under research supervision, include the firm’s standard research disclosures and required certification language used for research publications, and be disseminated in a manner designed to reach the same audience that previously received the firm’s research on the issuer.
Relying on sales calls or other informal messaging creates uneven dissemination, weakens the audit trail, and increases the risk of inconsistent or misleading explanations for why coverage ended. The key takeaway is to use the firm’s established research-report workflow and distribution list when ending coverage.
Topic: Research Reports
Which statement is most accurate regarding past performance language in a research report?
Best answer: C
Explanation: Past performance references require clear context and non-promissory framing so readers are not led to expect similar future results.
Past performance can be misleading if presented without context or in a way that suggests it will repeat. The most accurate statement is the one that requires identifying the relevant period, adding a clear non-guarantee qualifier, and avoiding promissory language that implies future results.
Research reports may include historical performance (for example, stock price or total return over a stated period), but the presentation must not encourage readers to infer that the same results are likely going forward. To keep past performance from implying future performance, firms typically require (1) clear context such as the measurement period and what is being measured, and (2) a prominent qualifier that past performance is not indicative of future results. Separately, the narrative should avoid promissory or predictive phrasing that turns a historical fact into an expectation of continued outperformance. The key is that the disclosure and wording together prevent the reader from treating past results as a forecast.
Topic: Research Dissemination
A broker-dealer is part of the selling syndicate for an IPO. Before a short “IPO preview” research note can be emailed to retail clients on pricing day, Compliance requires a prominent legend stating the note is not an offer and directing clients to the IPO prospectus, and it confirms the firm’s process will deliver the final prospectus to purchasers.
Which control feature/function is being addressed?
Best answer: A
Explanation: When the firm is selling a new issue, research distributed near the offering should not substitute for, and should point investors to, the prospectus and delivery process.
Because the firm is participating in an IPO distribution, research sent to customers near pricing can raise prospectus-delivery concerns and must be controlled so it does not function as offering material. Using a clear legend and directing clients to the prospectus helps ensure the prospectus remains the primary disclosure document. Confirming the delivery process reinforces that purchasers receive the official offering document.
Dealer prospectus-delivery concepts can matter when a broker-dealer is acting as an underwriter or selling group member in a new issue and is distributing written communications (including research) in connection with that offering. The prospectus is the primary disclosure document for an IPO, so firms typically use controls to prevent research from being viewed as a substitute for, or replacement of, the prospectus.
Common high-level controls include:
This is distinct from analyst certification, quiet-period concepts, and general recordkeeping obligations.
Topic: Research Reports
A research analyst has drafted a research report initiating coverage of DeltaBio with a 12-month price target of $48 and a “Buy” rating. During pre-publication review, the supervisor notes the report includes valuation outputs but does not explain the basis for the price target or identify the key assumptions (e.g., revenue growth and margin range) used to derive it.
What is the best next step before the report can move forward in the approval workflow and be disseminated?
Best answer: A
Explanation: A price target must be accompanied by a clear basis and high-level key assumptions before approvals and dissemination.
Before a research report with a price target is approved and distributed, it must disclose the basis for that target and the key assumptions used to develop it at a high level. Here, the supervisor identified that the price target is presented without the supporting rationale and assumptions, so the draft must be updated first. Only then should it proceed through the remaining reviews and required certifications.
A research report that includes a price target should provide readers with enough context to understand how the target was determined. That typically means disclosing, at a high level, the methodology/basis for the target (for example, a valuation approach or framework) and the key assumptions that drive the target (for example, growth, margins, multiples, or other major inputs). If the draft lacks these disclosures, the proper workflow step is to remediate the content deficiency before moving on to later-stage controls (such as final supervisory approval, conflict sign-offs, and the analyst’s certification) and certainly before any dissemination. The key takeaway is that required price-target disclosures are part of the report content and must be complete before approvals and distribution can meaningfully occur.
Topic: Research Reports
An analyst is finalizing a research report on Horizon Co. The narrative section was drafted before Horizon released Q2 results.
Draft narrative (written yesterday): “We expect Q2 revenue of $480 million (down ~5% year-over-year) and EPS of $0.42, reflecting softer demand.”
This morning Horizon reported Q2 results: revenue $505 million (up 3% year-over-year) and EPS $0.46.
Firm research standards require that when incorporating newly released financial results, the analyst must (1) clearly distinguish actual results from prior estimates, (2) describe what changed and why it matters to the thesis, and (3) date-stamp the update so readers are not misled about the basis of statements.
Which approach best aligns with these standards while integrating the new data into the report?
Best answer: D
Explanation: It transparently identifies the new basis (actuals), explains the change versus prior expectations, and updates the text so it is not misleading.
The best practice is to clearly re-base the narrative on the newly released actual results, not yesterday’s estimates. A dated, labeled update that contrasts actuals to prior expectations and revises the surrounding discussion prevents readers from being misled about what changed and why.
Research writing must be fair, balanced, and clear about the basis for statements—especially when a company releases new financial data between drafting and publication. Here, the draft text was explicitly an expectation, but the company has now reported actual Q2 revenue and EPS that differ from those expectations and reverse the year-over-year direction. The appropriate approach is to issue a clearly labeled, date-stamped update that:
Merely swapping numbers or burying the change without rewriting the narrative can leave a materially misleading impression about what changed and the support for the conclusion.
Topic: Research Reports
A research department plans to publish a rating change on Issuer QRS at 9:00 a.m. ET after supervisory approval. Sales asks to email the report to the firm’s “top 20” institutional accounts at 8:55 a.m. so they can “prepare for client calls,” while all other clients will receive it at 9:00 a.m.
Which action is NOT an appropriate practice/control to address timing fairness in disseminating the research?
Best answer: C
Explanation: Providing advance access to select customers creates unequal dissemination and is not an appropriate fairness control.
Firms must avoid selective dissemination of research that gives certain customers earlier access than others. A key control is ensuring research is made available to all entitled recipients at the same time through controlled distribution channels. Giving “top clients” an early copy undermines timing fairness even if the delay is only a few minutes.
Timing fairness means a firm should not provide some customers advance access to a research report or its conclusions before the broader, entitled audience can receive it. Once a report is approved for publication, dissemination should be controlled so release occurs simultaneously (or as close as reasonably practicable) across channels and recipient groups.
Common high-level controls include:
Providing an early copy to a subset of favored clients is the opposite of a timing fairness control and creates an uneven playing field.
Topic: Research Reports
A broker-dealer’s written supervisory procedures state:
A research analyst is training a new associate on these requirements. Which statement is INCORRECT?
Best answer: D
Explanation: The WSPs require principal approval of research reports prior to first use, regardless of the audience.
Under the firm’s WSPs, research reports require documented principal approval before first use, while institutional communications and public appearances generally fall under retention and post-use supervisory review. Limiting distribution to institutional clients does not convert a research report into an institutional communication. Therefore, distributing a research report before approval violates the stated pre-use approval requirement.
The key distinction is whether the communication type triggers a pre-use approval requirement or a post-use review requirement under the firm’s procedures. In the scenario, the WSPs explicitly require documented principal approval before first use for any research report (and for retail communications). By contrast, institutional communications and public appearances can typically be used without pre-approval, as long as they are retained and are subject to documented post-use supervisory review.
A research report stays a research report based on its content and format, not based on whether the recipients are institutional or retail. As a result, distributing it first and seeking approval later conflicts with the WSPs’ pre-use approval requirement.
Topic: Research Reports
Which record most directly documents a firm’s compliance with research report publication timing controls and supports surveillance for trading ahead of the report’s release?
Best answer: B
Explanation: Time-stamped approval and initial distribution records evidence the report’s release controls and enable testing for trading ahead.
Firms should retain records that show when a research report was approved and when it was first disseminated. Those timestamps demonstrate adherence to publication timing controls and provide the key reference point for reviewing employee/firm trading activity for potential trading ahead.
To evidence compliance with trading and timing controls, a firm needs a defensible, time-stamped audit trail showing the research report’s supervisory approval and the report’s first dissemination (and, as applicable, subsequent distribution events). Those records establish when the report became eligible for release and when it actually reached recipients, which is essential for (1) demonstrating required pre-dissemination review occurred and (2) conducting surveillance for trading that occurred before the report’s release.
Documents like certifications, working papers, or source notes may be required to be retained for other reasons, but they do not, by themselves, prove when the report was approved or released. The key takeaway is to retain the approval/dissemination timestamps that anchor both timing-control compliance and trading-ahead reviews.
Topic: Research Dissemination
At 8:30 a.m., a research analyst has a final draft research report that will downgrade ABC Corp from Hold to Sell and lower the price target. The report has not yet received supervisory approval and the analyst has not yet completed the required analyst certification for the report. The firm’s equity trading desk (which makes a market in ABC) asks the analyst to “give us a quick heads-up on the new rating and target before it hits clients” so the desk can adjust its inventory.
What is the single best compliant action?
Best answer: B
Explanation: Pre-publication tipping to the trading desk would be selective dissemination and could facilitate trading ahead, so access should occur only after required approvals/certification and broad release.
A trading desk cannot be selectively tipped about an upcoming rating/price-target change before the report is approved, certified, and broadly disseminated. Sharing the substance early can enable trading ahead and undermines research independence controls. The compliant approach is to withhold the information, involve research compliance/supervision, and permit access only at the same time clients receive the report through normal channels.
The core issue is avoiding selective dissemination of material research conclusions to the trading desk before public/client release, particularly when the desk could trade or adjust positions based on that advance knowledge. In addition, a research report generally should not be disseminated—internally or externally—until required supervisory review and the analyst’s certification process are completed.
A compliant workflow here is:
The key takeaway is that “heads-ups” to trading about pending research changes are improper when they create uneven timing or enable trading ahead.
Topic: Research Reports
A research analyst is finalizing a research report update on ABC Corp. The report includes a “Performance Since Upgrade” line chart showing ABC up 22% from April 1 to today, and a one-line summary stating “strong, steady performance following our upgrade.” The analyst excludes January–March, when ABC fell 38% and experienced large daily swings, because it “clutters the chart.” No other chart or narrative discusses that earlier period.
What is the primary compliance red flag?
Best answer: B
Explanation: Omitting a significant decline and volatility makes the performance chart and summary not fair and balanced.
Research report performance charts and summaries must be fair and balanced and should not omit material adverse periods or volatility. By showing only “since upgrade” performance while excluding a large recent drawdown and swings, the report can create a misleading impression of steadiness and overall performance. The primary risk is cherry-picked performance disclosure.
The core issue is a potentially misleading performance presentation. When a research report includes a performance chart or performance summary, it should not be constructed in a way that cherry-picks favorable time periods while omitting material adverse performance or volatility that would change a reader’s understanding of the security’s risk and recent price behavior.
Here, excluding January–March (a 38% decline with large daily swings) while characterizing performance as “strong, steady” can overstate consistency and understate risk. A more compliant approach would be to show a more representative period (or include additional context) so the presentation is fair and balanced rather than selectively favorable.
Even if “since upgrade” is a relevant frame, it should not be used to obscure material recent adverse performance.
Topic: Research Reports
A research report includes a “Conflicts of Interest” section noting that the member firm’s trading desk regularly publishes bid/ask quotes and stands ready to buy and sell the subject company’s shares for its own account. Which required disclosure feature is being described?
Best answer: B
Explanation: Market making activity in the subject security is a trading-related conflict that must be disclosed in the report when applicable.
A firm that quotes and stands ready to trade for its own account is functioning as a market maker. Because this activity can create incentives affecting trading and liquidity, research reports must disclose market making activity by the member or its affiliates when applicable. The stem is describing that specific required conflict disclosure.
Series 87 research-report rules emphasize clear, prominent disclosure of conflicts that could reasonably be expected to influence the report’s objectivity. When a member (or its affiliates) makes a market in the subject company’s securities, that market making activity is a trading-related conflict and must be disclosed in the research report when applicable. The stem’s description—regularly quoting and standing ready to buy and sell for the firm’s own account—matches the market maker function, so the corresponding required disclosure is the firm/affiliate market making disclosure. Other common research disclosures (such as investment banking relationships, analyst certifications, and rating system information) address different conflict sources or report-standardization requirements.
Topic: Research Dissemination
A research analyst plans to email an updated research report to 40 institutional clients. The firm’s email archiving system retains email text and attached files, but it does NOT capture content hosted on third-party sites unless the link points to the firm’s approved research portal (which archives a static copy of the linked content).
Which action is NOT appropriate under these controls?
Best answer: B
Explanation: A third-party, changeable document link would not be captured and retained in final form by the firm’s archiving system.
Research distributed by email must be supervised and retained, including any material delivered via hyperlinks or attachments. If the firm cannot capture the content behind a hyperlink in a static, retrievable form, using that link undermines books-and-records retention. Using an approved portal link or an attached PDF aligns with supervision and retention controls.
Firms must be able to supervise and retain research communications, including what was actually delivered to customers. With email, retention is not limited to the message body; it also includes attachments and, when hyperlinks are used to deliver substantive information, the linked content must be captured in a way that is static and retrievable. If a hyperlink points to a third-party location that the firm cannot archive (or that can be changed after the email is sent), the firm may not be able to evidence what clients received, creating a supervision and recordkeeping gap. Using firm-controlled systems (archived email and an approved research portal that snapshots content) or attaching the final report are typical compliant approaches. The key takeaway is to avoid delivery methods that bypass capture, supervision, and retention.
Topic: Research Reports
In a research report’s dividend outlook, which approach best supports a conclusion that the dividend is sustainable?
Best answer: C
Explanation: Sustainability is best supported by showing dividend coverage from cash flow and consistency with management’s dividend policy and capital priorities.
A dividend outlook should connect the ability to pay dividends to cash generation and the company’s policy for returning capital. Free cash flow (or other cash flow measures) helps evidence capacity to fund dividends after operating needs and planned investments. Referencing the issuer’s payout policy anchors the expectation to an established framework rather than market comparisons or unsupported assurances.
Dividend sustainability in a research report is an evidence-based claim, so it should be grounded in cash flow and policy. Cash flow measures (often free cash flow after capital expenditures) directly address whether the company can fund dividends while meeting operating, reinvestment, and balance-sheet priorities. Pairing that analysis with the issuer’s stated dividend/payout policy (and any constraints such as leverage targets or cyclicality) explains not just capacity, but intent and likely behavior across conditions. Metrics like dividend yield or GAAP earnings payout can be useful context, but they are weaker primary support because they may not reflect cash availability or management’s capital allocation framework. The best dividend outlook ties expected dividends to cash flow coverage and to policy-based decision-making.
Topic: Research Reports
A research analyst is scheduled for a live TV interview to discuss ABC Corp. Your firm is currently soliciting ABC for an investment banking mandate, and the analyst is still drafting a research update that has not received supervisory approval or the analyst’s certification. The producer asks the analyst to “tell viewers ABC will reach $60 by year-end” and to make it a “can’t-miss call.”
What is the single best compliant action for the analyst to take during the interview?
Best answer: A
Explanation: Using qualified, non-promissory language avoids an implied guarantee and keeps statements within compliant research communications.
Public statements by research analysts must avoid promissory or “can’t miss” language that implies certainty about future performance. The best approach is to frame any outlook as an opinion using conditional language and to avoid guaranteeing a price target or return. This reduces the risk of misleading investors and supports research independence controls in public appearances.
In public appearances, an analyst should not present a future price level or performance outcome as certain (for example, “will hit $60,” “can’t miss,” or “guaranteed”). Even if the analyst has a price target in mind, targets and projections are opinions and can be wrong; presenting them as promises can be misleading.
A compliant practice is to:
The key takeaway is to remove the guarantee and certainty from the message rather than trying to “disclaimer away” promissory language.
Topic: Research Reports
Which statement is most accurate regarding a research report’s conclusions versus the evidence and assumptions presented in the report?
Best answer: A
Explanation: A report’s rating/price target must be supportable by the stated evidence and any key assumptions must be clearly disclosed and tied to the conclusion.
Research conclusions (such as a rating or price target) should be consistent with the evidence and assumptions disclosed in the report. When a conclusion depends on a key assumption, that assumption should be stated clearly and the report should explain how it supports the conclusion. This helps prevent misleading research that cannot be reconciled with its own analysis.
A core quality-control expectation in research report preparation is internal consistency: the conclusion must be supportable by the disclosed analysis, evidence, and assumptions. If an analyst’s investment conclusion relies on a key driver (for example, an aggressive growth rate, margin expansion, a higher terminal multiple, or a specific catalyst), that driver should be disclosed and connected to the stated rating/price target so a reader can understand and evaluate the logic.
If the conclusion differs from what a “base case” or presented evidence would otherwise suggest, the analyst should not simply assert judgment; the report should explain the assumptions or reasoning that reconcile the conclusion with the analysis. The takeaway is that readers should be able to trace the conclusion back to disclosed support within the report itself.
Topic: Research Dissemination
A research analyst’s report on ABC Co. is approved by Research Supervision and stored in the firm’s research system with the required disclosures (analyst certification and firm conflicts). The next morning, the firm’s public website posts a PDF for ABC Co., but the posted file is an earlier draft that omits the disclosure page and differs slightly in the recommendation language.
Which is the primary compliance risk/red flag?
Best answer: C
Explanation: Publicly posting a version that differs from the approved report and omits required disclosures creates a misleading, noncompliant research communication.
Public website postings of research must match the approved version and include required disclosures. Uploading an earlier draft that omits disclosures and changes recommendation wording creates a noncompliant, potentially misleading research communication. The key red flag is the breakdown in dissemination controls over the posted content.
The core control for website dissemination is that what the public sees must be the same, supervisor-approved research report and must carry all required disclosures (for example, certifications and material conflicts). Posting a different file (an earlier draft) introduces two problems at once: the website content is not the approved communication, and the omission of the disclosure page means readers do not receive required conflict and certification information. This is a primary red flag because it directly affects the integrity of the research message and the completeness of required disclosures, and it indicates a failure of controls over who can post, what can be posted, and version management/audit trail. Other concerns like selective disclosure, trading ahead, or rumors are not the central issue on these facts.
Key takeaway: website research must be an exact, disclosure-complete match to the approved version before it is made public.
Topic: Research Dissemination
A research analyst is preparing an initiation report on ABC Corp. Before submitting the report for supervisory review and Regulation AC certification, the analyst wants to call ABC’s investor relations contact to confirm a newly announced change in segment reporting. During scheduling, the issuer asks the analyst to “tell us your rating and price target so we can make sure it’s fair before you publish.”
What is the analyst’s best next step?
Best answer: A
Explanation: Issuer contact may be used for business updates and fact-checking, but the analyst must not coordinate or disclose the planned rating or price target and should maintain an audit trail.
Analysts may speak with issuer management to obtain factual business updates and to clarify publicly available information while preparing research. They must not share, negotiate, or “pre-clear” a rating, recommendation, or price target with the issuer. The interaction should be appropriately documented consistent with firm procedures.
The key compliance distinction is between permissible fact-finding and impermissible coordination of research conclusions. Before publication, an analyst can contact issuer management (often through investor relations) to confirm factual items, clarify disclosures, or obtain business updates that help ensure the report is accurate. However, the analyst must not disclose or negotiate the planned rating, recommendation, or price target (or otherwise allow the issuer to influence those conclusions).
A sound next step in the workflow is to proceed with a narrowly scoped factual call, keep conclusions internal, and create an audit trail (e.g., notes of questions asked and answers received) for supervisory oversight. This addresses accuracy without compromising research independence or creating the appearance of issuer influence. The closest trap is sharing a draft or conclusions with the issuer, which can look like coordination of the rating/target.
Topic: Research Dissemination
An analyst’s morning “flash note” on ABC has already received required supervisory approval. The analyst wants to include a single line: “Price target is $54; upside of approximately X% from the current price.” ABC last traded at $42.
Firm policy: research may be distributed only through firm-controlled, archived channels (firm email distribution system or recorded firm lines). Personal text/IM and external posting platforms are not captured by the firm’s retention system.
Which dissemination choice and upside figure is most appropriate? (Round to the nearest whole percent.)
Best answer: D
Explanation: \((54-42)/42\approx 28.6\%\) rounds to 29%, and firm email is an approved, retained research channel.
The upside from $42 to a $54 target is \((54-42)/42\approx 28.6\%\), which rounds to 29%. Dissemination must use a firm-controlled, archived channel so the communication is supervised and retained, making distribution through the firm’s email system appropriate.
This scenario tests two high-level dissemination risks: (1) making an accurate performance-related statement and (2) using a channel the firm can supervise and retain.
Upside should be calculated off the current price:
Even when the content has been approved, distributing research through personal text/IM or external platforms creates recordkeeping and supervision gaps because those channels are not captured by the firm’s retention system. Using the firm’s archived research email distribution system satisfies the channel-control requirement while delivering the correctly calculated upside figure.
Topic: Research Dissemination
A member firm archives the body of outgoing analyst emails, but its system does not capture or retain (1) attached files that exceed 10MB and (2) the content of third‑party webpages reached through hyperlinks.
An analyst emails 200 retail clients: “Updated research report and new price target—click here,” and includes a hyperlink to a PDF hosted on an external file‑sharing site (no attachment). Six months later, during a regulatory exam, the firm is asked to produce the research report that was distributed via that email but cannot retrieve the linked PDF or evidence of supervisory review of what clients received.
What is the most likely outcome for the firm?
Best answer: C
Explanation: If the firm cannot retain and supervise the report content delivered via a hyperlink, it faces books-and-records and supervisory control deficiencies.
A hyperlink can deliver substantive research content, and that content must be subject to the firm’s supervision and retention controls. Because the firm cannot produce what was actually distributed (the linked PDF) or evidence of review, the failure is most likely viewed as a supervision and recordkeeping deficiency. This creates regulatory exposure and typically requires remediation of the controls.
Firms must have controls to supervise and retain business-related electronic communications, including the actual content being communicated to clients. When an email contains a hyperlink that delivers substantive material (such as a research report PDF), the firm’s obligations are not satisfied by archiving only the email body if the linked content itself is not captured, retained, and available for retrieval.
In this scenario, the firm cannot:
That combination most directly creates books-and-records and supervisory control weaknesses, which are common exam findings and can lead to required remediation and potential disciplinary action.
Topic: Research Dissemination
Which statement is most accurate regarding a research analyst communicating with the press or other media about a company the analyst covers?
Best answer: A
Explanation: Media communications are treated like public appearances and must not conflict with the firm’s most recent published research absent an updated publication.
Communications with reporters are generally handled as public appearances and must follow firm controls. The analyst should not make statements that are inconsistent with the firm’s current published research view unless the firm first updates its research (so the market gets the change through the proper research channel).
The key consideration in dealing with the press/media is that an analyst’s comments can move the market and must not undermine the integrity of published research. Firms typically treat press interviews and similar media interactions as “public appearances,” meaning they are subject to supervisory policies and recordkeeping expectations.
A core control is consistency: the analyst should not provide a different rating, price target, or materially different view than the firm’s most recently published research. If the analyst’s view has changed, the appropriate approach is to update and publish the research (with required disclosures) rather than “preview” the change to a reporter. This helps prevent misleading or selective messaging and supports a clear audit trail of the firm’s official research position.
Topic: Research Reports
A research analyst has written a report that will upgrade ABC Corp from Hold to Buy and raise the price target. The analyst plans to publish before the market opens tomorrow.
Firm research policy (excerpt):
Which approach best aligns with these timing-related controls for a rating change?
Best answer: B
Explanation: It coordinates an embargoed, supervised, non-selective release and limits issuer review to factual verification without disclosing the rating change.
For a rating change, the firm should control timing through supervisory approval, an embargo, and coordinated release designed to avoid selective dissemination. Any issuer involvement must be limited to factual verification and must exclude the rating/price target. The upgrade should be made broadly available at the same time across intended channels.
Timing controls around rating changes are meant to preserve research independence and ensure fair, balanced distribution. Before an upgrade is released, the report should receive documented supervisory approval and be held under an embargo until a defined release time. Dissemination should be coordinated so intended recipients and firm-controlled platforms receive the information at the same time, reducing the risk of selective disclosure or trading on advance knowledge.
If the issuer is involved at all, that interaction should be narrowly limited to factual verification (for example, business description or segment data) and must not include the rating, price target, or recommendation language. Draft handling and embargo access should be restricted to those who need to know, with heightened trading controls during the embargo period.
Any approach that gives early access to a subset of clients, the issuer, sales, or trading undermines non-selective release and increases conflict and misuse risks.
Topic: Research Reports
Exhibit: Research report disclosure block (excerpt)
Based on the exhibit and baseline Series 87 knowledge, which statement best describes what this certification is intended to attest to and when it is required?
Best answer: C
Explanation: Reg AC certifications are the analyst’s attestation that the views are their own and compensation is not tied to specific recommendations, and they are required in research reports and public appearances.
Regulation AC is designed to reinforce research analyst independence by requiring the analyst to certify that the expressed views are the analyst’s own and that compensation is not tied to specific recommendations or views. This certification must accompany covered research reports and also applies to research analysts’ public appearances.
The exhibit is a standard Regulation AC analyst certification: it is the analyst’s personal attestation that (1) the views in the research are the analyst’s honest opinions and (2) the analyst’s compensation is not directly or indirectly linked to the specific recommendations or views. Regulation AC is an analyst certification requirement, not a firm “approval” statement, and it is used to support the integrity and independence of research communications. At a high level, the certification is required in research reports and in connection with research analysts’ public appearances, consistent with the goal of ensuring audiences understand the analyst is speaking independently rather than being paid to deliver a particular recommendation.
Topic: Research Reports
A broker-dealer’s research supervision team runs a quarterly test in which it selects a sample of published research reports and traces each one back to the approval workflow (required principal sign-off, analyst certification, timestamps, and retained records) to confirm approvals occurred before dissemination and exceptions are escalated.
Which supervisory control feature is being described?
Best answer: D
Explanation: It is a recurring sample-based review designed to confirm the approval workflow operates as intended before reports are distributed.
The described procedure is a periodic, retrospective test of whether the firm’s research approval controls are working as designed. By sampling issued reports and reconciling them to approvals, certifications, timestamps, and escalation evidence, supervision validates that required steps occurred before dissemination and that the process is functioning effectively.
Periodic supervisory testing is a control used to validate—after the fact and on a recurring basis—that the research approval process is operating as designed. Rather than editing a report before release, the tester selects a sample of already-disseminated reports and “traces” each report to the firm’s required workflow evidence (e.g., principal approval, analyst certification, timestamps showing approval preceded distribution, and record retention). Any breaks in the control (missing sign-off, late approval, missing records) are documented and escalated so the process can be corrected. The key distinction is that the activity is a periodic control test of the approval system, not a content/disclosure check, an information-barrier surveillance program, or a trading restriction program.
Topic: Research Reports
A research analyst is finalizing a published research report that includes a one-page “5-Year Performance Highlights” chart. The chart plots “Adjusted EPS,” “Adjusted EBITDA,” and “Free Cash Flow” for each year, but the chart does not label these measures as non-GAAP and contains no footnote pointing readers to a GAAP reconciliation elsewhere in the report.
Which is the primary compliance risk/red flag in this draft report section?
Best answer: D
Explanation: Charts that present non-GAAP performance metrics should clearly identify them as non-GAAP and direct readers to the GAAP reconciliation.
The chart presents non-GAAP performance measures but does not clearly label them as non-GAAP or point readers to where GAAP reconciliations can be found. That creates a risk the presentation is misleading because readers cannot readily understand how the measures differ from GAAP results. The fix is clear labeling and an explicit reconciliation reference (or inclusion) tied to the chart.
A key red flag in research report charts is presenting non-GAAP performance metrics (for example, “Adjusted” results, EBITDA, or free cash flow) without making it obvious they are non-GAAP and without guiding the reader to the related GAAP reconciliation. When non-GAAP measures appear in a chart, the report should clearly identify them as non-GAAP and include, or at least clearly reference, where the reconciliation to the most comparable GAAP measure is located (with equal or greater prominence to prevent a misleading impression). The issue here is the chart’s standalone presentation: a reader could treat the metrics like GAAP and never find the reconciliation.
Key takeaway: the primary risk is misleading disclosure due to incomplete non-GAAP labeling and reconciliation references, not dissemination or trading conduct.
Topic: Research Dissemination
When responding to a customer request for an archived research report, which action best ensures the customer receives the proper version?
Best answer: A
Explanation: Archived-report requests should be fulfilled using the final distributed version, not a recreated or updated document.
Archived research must be produced in the same form it was actually distributed so the customer receives what was published at that time. Using the final, approved version preserves version control, required disclosures, and the report’s “as disseminated” content. Substituting later updates or drafts creates an inaccurate record of what was issued.
For archived research, the control objective is version integrity: the firm should be able to retrieve and deliver the exact research report that was approved and disseminated to clients at the time it was issued. That means providing the final “as disseminated” version (including the original publication date/time, rating/price target at that time, and the disclosures that accompanied that version). Providing a later update, rebuilding a report using current templates/disclosures, or sending drafts undermines the audit trail and can mislead the customer about what the firm actually published. The key is to treat archived research as a record that must be produced in its original, distributed form.
Topic: Research Reports
An analyst is finalizing a client-facing research report that cites a non-GAAP metric (Adjusted EBITDA). Two draft disclosure treatments are proposed:
Which version is most consistent with high-level Regulation G concepts for presenting non-GAAP measures?
Best answer: D
Explanation: It gives GAAP equal prominence and provides a reconciliation and context for the non-GAAP measure.
When a research report presents a non-GAAP measure, Regulation G-style concepts expect the non-GAAP figure to be clearly labeled, not misleading, and accompanied by the most comparable GAAP measure with at least equal prominence. A quantitative reconciliation to the GAAP measure is also expected. Version 2 meets these presentation and reconciliation expectations.
High-level Regulation G concepts focus on preventing non-GAAP measures from being presented in a misleading way. In a client-facing research report, if an analyst uses a non-GAAP metric (such as Adjusted EBITDA), the communication should (1) present the most directly comparable GAAP measure and avoid giving the non-GAAP metric greater prominence, and (2) include a quantitative reconciliation from the GAAP measure to the non-GAAP measure. A brief explanation of why management/analyst uses the adjustment can help context, but it does not substitute for reconciliation or proper prominence.
Version 2 follows these concepts by keeping GAAP results prominent and supplying a reconciliation that lets the reader see exactly how the non-GAAP number was derived. The key takeaway is that labeling alone is not enough—prominence and reconciliation are central.
Topic: Research Reports
A research analyst is preparing a company research report and is drafting the “Industry Overview” section. The current draft is mostly recent stock performance and a few quotes from the issuer’s CEO, and it does not explain how the sector is organized or what factors drive revenues and margins across the group. The analyst intends to submit the full draft for the required pre-publication supervisory review and then complete the analyst certification.
What is the best next step in the correct sequence?
Best answer: C
Explanation: The industry overview should be completed with high-level sector structure and key drivers (and supporting evidence) before supervisory review and any certification or distribution steps.
Before the draft goes into the firm’s pre-publication review workflow, the industry overview should be brought to an acceptable research standard. That means explaining the sector’s structure (how the industry is segmented and where the issuer fits) and the key drivers that typically move performance across the group, with an evidence-based, documentable foundation.
An industry overview in a research report is expected to be a high-level, objective framing of the sector, not a recap of one stock’s trading or management soundbites. In the scenario, the draft is missing two core elements: sector structure (e.g., segments, value chain, customer/end-market mix, competitive landscape) and key drivers (e.g., demand drivers, pricing/cycle dynamics, regulation, input costs, capacity, technology shifts).
As a workflow matter, required report components should be complete and supported by documented sources in the analyst’s workpapers before the report is submitted for supervisory review, and certainly before any certification or dissemination steps. Issuer “approval” and circulating drafts to sales are not appropriate substitutes for completing the research content to firm standards. The key takeaway is to fix the industry overview first, then proceed through review and certification.
Topic: Research Reports
A research analyst drafts a research report on Delta Systems, Inc. The company’s latest 10‑K shows three reportable segments: Software Subscriptions (62% of revenue), Professional Services (23%), and Hardware (15%).
In the “Company Overview,” the analyst describes Delta as “primarily a hardware manufacturer” and states that subscriptions are “an early-stage offering (<10% of revenue).” The report is approved for publication through a workflow that did not include a check of segment revenue mix against the 10‑K, and it is disseminated to clients.
What is the most likely outcome of this control failure?
Best answer: A
Explanation: Misstating the issuer’s business model and segment revenue drivers is a material factual error that can make the research report misleading and requires prompt correction and escalation.
A company overview in a research report must accurately describe the issuer’s business model, segments, and key revenue drivers when presented as fact. Here, the overview contradicts the issuer’s disclosed segment mix and mischaracterizes the primary revenue source. That type of factual misstatement can make the report materially misleading, requiring prompt correction and supervisory escalation.
Company overviews are not purely narrative; they often contain factual statements about how the issuer operates and what drives revenue. When a research report presents segment mix and business model descriptions that contradict the issuer’s public filings (for example, reversing the primary segment from subscriptions to hardware), the report can be viewed as materially misleading.
In practice, a firm should respond by:
A disclaimer cannot “cure” a specific factual error, and delaying correction can increase client harm and regulatory risk.
Topic: Research Reports
A research analyst is preparing to publish the document shown below.
Exhibit: Report header (excerpt)
ABC Corp (ABC) | Research Report
Report type: Initiating Coverage
Rating: Outperform (NEW)
12-month Price Target: $42 (NEW)
This report represents our first published research on ABC.
Which interpretation is best supported by the exhibit and typical research-report objectives?
Best answer: A
Explanation: The exhibit states “Initiating Coverage” and shows new initial rating and price target, which are typical initiation objectives.
The exhibit explicitly labels the report as “Initiating Coverage” and states it is the firm’s first published research on the issuer. Initiations typically introduce the company, present a full baseline investment thesis, and set an initial rating and price target (both shown as new in the header).
An initiation of coverage is the first time the firm publishes research on a company (or re-initiates after a lapse) and is designed to establish a baseline view for clients. It typically includes a more complete foundational discussion (company overview, key drivers/risks, and the analyst’s core thesis) along with an initial recommendation/rating and an initial price target.
An update note, by contrast, assumes prior coverage exists and generally focuses on incremental new information (e.g., earnings, guidance changes, events) and how that affects the existing thesis, rating, or price target.
Here, the header explicitly says “Initiating Coverage,” shows “NEW” rating and price target, and states it is the first published research—consistent with an initiation rather than an update.
Topic: Research Dissemination
A broker-dealer is about to disseminate a time-sensitive research update to 200 institutional clients and wants to reduce the risk that recipients will forward or repost the content externally. Compliance is comparing two distribution controls:
Which choice best matches the stronger confidentiality control for reducing unauthorized forwarding or redistribution?
Best answer: D
Explanation: Credentialed access and individualized watermarking deter and help trace redistribution, unlike a mere email legend.
The strongest confidentiality control is the one that limits access to authorized recipients and deters/identifies unauthorized redistribution. A secure portal with individual credentials restricts who can retrieve the report, and client-specific watermarking increases accountability if it is forwarded or reposted. A confidentiality legend alone does not prevent forwarding.
To reduce unauthorized forwarding or redistribution of research, firms typically use access controls and traceability controls—not just notices. A secure portal with individual client credentials can restrict retrieval to authorized users (and can support monitoring/audit trails), while client-specific watermarking discourages sharing and helps identify the source if the material is redistributed. In contrast, emailing a PDF attachment broadly relies largely on recipient behavior; a “do not redistribute” legend may set expectations but does not materially prevent forwarding or posting. The key differentiator is whether the control technically limits access and adds accountability, rather than merely stating a restriction.
Topic: Research Reports
A research analyst’s firm has never published research on Horizon BioTech. The analyst emails a 2-page “Company Update” to the sales force and a handful of top clients the morning after a publicly webcast earnings call. The email assigns a Buy rating and a $42 price target and states, “Formal initiation report to follow next month.” The note does not include the firm’s rating definitions/distribution or other standard initiation-style disclosures, and it has not yet gone through the firm’s new-coverage approval workflow.
Which is the primary compliance red flag in this scenario?
Best answer: C
Explanation: Because this is the firm’s first published view, it should be treated as an initiation and routed with the required initiation workflow and disclosures.
This is effectively an initiation of coverage because the firm has not previously covered the issuer and the communication introduces a rating and price target. Labeling it as an “update” creates a risk that required initiation processes (supervisory review/new-coverage approval) and baseline disclosures typically expected with an initiation will be skipped. The key red flag is misleading classification that undermines research controls.
An initiation of coverage is the firm’s first research view on an issuer and typically establishes the rating/price target, the investment thesis, and baseline context and disclosures, and it is generally subject to a formal new-coverage approval and documentation trail before dissemination. An update note is a follow-up communication on an already-covered issuer, usually tied to a discrete development (earnings, news, model change) and is not a substitute for initiating coverage.
Here, the firm has never published on Horizon BioTech, yet the analyst is distributing a rating and price target while explicitly deferring the “formal initiation.” That is a classic red flag: treating an initiation as an update can sidestep required supervisory controls and result in missing or incomplete disclosures and an inconsistent record of coverage.
Topic: Research Dissemination
A research analyst at a broker-dealer is drafting a report on ABC Corp. Before publication, the analyst schedules a call with ABC’s CFO to confirm factual points from the draft (e.g., unit volumes, timing of a facility opening, and details of a recently announced refinancing). The firm’s policy permits issuer management to review research only to identify factual errors, and prohibits discussion of ratings or price targets.
Which approach best aligns with durable research standards for communicating with issuer management while preserving research independence?
Best answer: D
Explanation: Management review should be limited to factual verification with an audit trail, and the analyst must not coordinate rating/target decisions with the issuer.
Issuer management may be contacted to confirm facts and clarify publicly available or already-announced information, but that interaction must be tightly limited and documented. Allowing review only of factual sections, keeping an audit trail of changes, and avoiding any discussion of ratings or price targets preserves analyst independence and helps ensure communications remain fair and balanced.
A core research standard is maintaining independence from issuer influence while still allowing analysts to improve accuracy. Contact with issuer management is generally appropriate when it is used to verify facts, clarify business updates, or correct non-substantive errors based on information that is already public or otherwise appropriate to share. To protect independence, firms typically limit what can be shared (often excluding conclusions such as ratings and price targets), require the analyst to control the final content, and expect documentation of what was provided, what feedback was received, and what changes were made.
The best practice under the stated firm policy is to confine issuer involvement to factual verification, keep a clear record of changes, and avoid any coordination or “testing” of the rating/target with management.
Topic: Research Reports
A research report includes a 12-month performance chart comparing ABC to the S&P 500. Over the last 12 months, ABC moved from $40 to $46 (assume no dividends), and the S&P 500 returned 10% over the same period.
Which statement is most accurate for the report’s performance discussion?
Best answer: B
Explanation: Absolute return is \((46-40)/40=15\%\), and relative return vs the S&P 500 is \(15\%-10\%=5\%\) points.
Absolute return is the security’s own return over the period, computed from beginning and ending values (and dividends, if any). Relative return is the comparison to a benchmark over the same window, typically expressed in percentage points. Here, ABC returned 15% and beat the S&P 500’s 10% by 5 percentage points.
In a research report’s performance/chart discussion, use the correct context:
With no dividends, ABC’s absolute return is \((46-40)/40=15\%\). The S&P 500’s benchmark return is 10% for the same 12-month window, so ABC’s relative return is \(15\%-10\%=5\%\) (five percentage points). A common mistake is using the ending price as the denominator or expressing relative performance as a ratio (e.g., 15% divided by 10%).
Topic: Research Reports
A research analyst is drafting the “Investment Thesis” section of a research report on XYZ. Two versions are proposed:
Which draft is most appropriate to include as written, given the need to distinguish facts from opinions and state the basis for forward-looking conclusions?
Best answer: B
Explanation: It clearly labels forecasts as opinion, uses qualifiers, and states the basis and “as of” timing for the conclusion.
Forward-looking projections and price targets are opinions, not facts, and should be presented with clear qualifiers (for example, “in our view,” “could,” “expect”) and with the basis for the conclusion. Draft 2 does this by identifying it as the analyst’s view, using conditional language, and stating the information relied upon and the as-of date.
In research reports, factual statements should be framed as verifiable facts (and sourced as needed), while forecasts, estimates, and price targets are inherently opinions about the future. To avoid presenting opinion as fact, an analyst should (1) use clear opinion qualifiers and non-promissory language, and (2) describe the basis for the conclusion (such as public company guidance, published data, or documented channel checks) and the “as of” date for that information. Draft 2 appropriately treats the revenue impact and price target as opinion by using “in our view” and “could,” and it ties the conclusion to identified inputs and timing. Draft 1 is problematic because it uses definitive language (“will”) that can imply certainty for forward-looking outcomes without stating a basis.
Topic: Research Reports
A member firm’s written supervisory procedures require pre-publication supervisory review of equity research reports for required disclosures and conflicts. The firm’s designated research supervisor is out on leave, and an analyst wants to publish a report update today.
Which statement about supervision of this research report is INCORRECT?
Best answer: B
Explanation: Investment banking personnel should not serve as the approving supervisor for research because it undermines required separation and supervisory controls over research independence.
Research reports are subject to supervisory controls, including pre-publication review under the firm’s written procedures to help ensure required disclosures, conflicts, and independence standards are met. Those supervisory responsibilities must be performed by appropriately designated research supervision, not by investment banking personnel. Records of review and the distributed report should be maintained.
At a high level, firms must supervise the preparation and distribution of research through written supervisory procedures, including assigning appropriately qualified research supervision to perform pre-publication review. That review is designed to catch missing disclosures, unmanaged conflicts, and other compliance issues, and the firm should maintain an audit trail showing what was approved and what was distributed. Because research must be insulated from investment banking influence, supervision/approval of research cannot be delegated to investment banking personnel as a substitute for research supervision; doing so compromises the firm’s controls intended to support research independence.
Key takeaway: research supervision must be independent from investment banking, even when staffing is tight.
Topic: Research Reports
A research analyst wants to post on a personal X (Twitter) account: “Initiating ABC: Buy, PT $42. Expect margin expansion.” The post would go to the general public and includes the firm’s rating and price target.
Firm policy excerpt: “Any external electronic communication relating to the firm’s business (including social media) must be sent only through firm-approved, archived channels and is subject to supervisory review. Research ratings/price targets may not be publicly disseminated without research supervision approval.”
Which approach best aligns with these standards?
Best answer: B
Explanation: Because the post is business-related research content, it must be supervised and retained using approved, archived systems.
A social media post that communicates a firm research rating and price target is a business communication that must follow the firm’s supervision and recordkeeping controls. Using only firm-approved, archived channels creates the required audit trail. Obtaining supervisory approval before posting also helps ensure the communication is fair, balanced, and appropriately disclosed.
The core issue is whether the analyst’s social media activity is a business-related research communication. Here, the content includes a rating and price target tied to the firm’s research, and it is distributed to the public, so it is subject to the firm’s supervisory procedures and recordkeeping requirements for external communications.
Applying the firm’s stated standards:
The key takeaway is that once an analyst uses social media to communicate firm research views, it must be treated like other external research communications for supervision and retention.
Topic: Research Reports
A broker-dealer’s written supervisory procedures state that research analyst compensation must not be based on specific investment banking transactions and must be approved by a compensation committee with Compliance oversight.
Due to a control failure, an equity research analyst who covers XYZ is told (in writing) that their year-end bonus will be increased based on the firm’s investment banking revenue from XYZ’s recently completed follow-on offering. The analyst then publishes a research report on XYZ with a Buy rating and price target, but the report does not disclose this compensation arrangement.
If this is identified in a regulatory exam, what is the most likely outcome?
Best answer: B
Explanation: Tying analyst pay to a specific banking deal undermines independence and, if undisclosed, can make the report materially misleading and lead to enforcement and remediation.
Linking an analyst’s compensation to revenue from a specific investment banking transaction creates a significant conflict that undermines research independence. If the arrangement is not properly controlled and disclosed, the firm is exposed to regulatory findings for inadequate supervision and potentially misleading research communications. The expected consequence is remediation of the compensation process and corrective action around disclosures and controls.
Compensation restrictions exist to protect research objectivity by preventing analysts from being rewarded (or threatened) based on outcomes of specific investment banking transactions. When a firm’s controls fail and an analyst’s pay is explicitly tied to a particular deal for a covered issuer, it raises a serious independence concern and a conflict that regulators expect firms to prevent through supervision, governance, and compliance oversight.
In this scenario, the consequences are most likely to include:
The key takeaway is that “good analysis” does not cure an independence/control failure created by deal-tied compensation.
Topic: Research Reports
A research analyst is preparing to resend coverage on ABC Corp to clients after making updates. The firm’s research system shows the following entry:
Research Report Workflow Log (ABC)
Report ID: R-2026-0145
Version: 1.1
Status: Approved for External Distribution
Supersedes: Version 1.0 (Published Jan 6, 2026)
Change summary: Rating Hold -> Buy; Price target $25 -> $30
Approver (supervisory analyst): M. Smith
Approved timestamp: Feb 12, 2026 09:18 ET
Which interpretation is best supported by the exhibit and sound version-control practice for research reports?
Best answer: C
Explanation: The log identifies Version 1.1 as approved, documents what changed, and shows it supersedes Version 1.0, supporting controlled distribution and change tracking.
The exhibit shows an updated report version that is explicitly approved for external distribution, identifies the approver and timestamp, and states it supersedes the prior published version. It also records a change summary, which supports maintaining an audit trail across iterative updates. Together, these are core elements of version control and change tracking for research reports.
Strong version control for research reports means the firm can demonstrate (1) which specific version is the current externally approved document, and (2) what changed and who approved the change. In the exhibit, Version 1.1 is labeled “Approved for External Distribution,” includes the supervisory approver and timestamp, and states it “Supersedes” Version 1.0. The change summary documents the substantive edits (rating and price target), which supports an auditable change history.
A sound workflow is to disseminate only the currently approved version while retaining prior versions and approval/change records so the firm can evidence what was sent, when, and under what approvals.
Topic: Research Dissemination
A research analyst is scheduled to disseminate a research report on ABC at 9:00 a.m. ET to all clients via the firm’s email platform and website.
Exhibit: IM snippet (8:20 a.m. ET)
Trader: Can you tell me if you’re upgrading/downgrading ABC and your new price target?
Trader: I want to position our prop book before the 9:00 a.m. blast. I’ll keep it between us.
Which response best addresses trading-ahead concerns in this situation?
Best answer: A
Explanation: Sharing the change pre-release with a trader could facilitate trading ahead of the research dissemination.
The IM request is to obtain market-moving research conclusions before the report is broadly distributed, specifically so the desk can trade first. That is a classic trading-ahead/tipping risk. The appropriate control is to withhold the rating/price target discussion until the research is disseminated in the firm’s normal, broad manner.
Trading-ahead concepts apply when someone seeks to trade (or enable others to trade) based on material research conclusions before those conclusions are broadly disseminated. Here, the trader explicitly wants to position the firm’s prop book before the 9:00 a.m. release, so providing the rating change or price target early would be tipping and could facilitate trading ahead of the report.
To manage this risk, a research analyst should:
A promise not to trade, limiting details, or calling it “internal” does not remove the conflict or trading-ahead concern.
Topic: Research Reports
A research analyst is preparing an initiation report on a subscription-based consumer services company. The report is still in draft form and has not yet been submitted for the firm’s pre-publication supervisory review, conflict check, or Regulation AC certification.
Draft excerpt (business model section): “The company grows by adding subscribers and benefits from scale. We expect improving profitability as the customer base expands.”
To align the report with evidence-based writing standards before entering the approval workflow, what is the best next step?
Best answer: A
Explanation: Before submitting for review, the analyst should turn the generic narrative into a sourced business model analysis with key inputs/outputs and unit economics (e.g., CAC, churn, ARPU/LTV).
Before a report enters pre-publication review and certification, its core sections should be complete and supported. A business model analysis should identify the company’s key inputs and outputs and, where relevant, unit economics (such as CAC, churn, ARPU, and LTV) with clear sourcing or workpaper support. This makes the report reviewable and defensible and reduces the risk of unsupported claims being disseminated.
The core concept is evidence-based business model analysis: the report should explain how the company makes money by linking key inputs to outputs, and it should quantify unit economics when they drive the thesis. Here, the excerpt is generic and does not identify measurable drivers (what drives revenue, what drives costs, and what a “unit” is), so it is not ready to enter the firm’s pre-publication workflow.
A strong next step is to update the section with sourced, decision-useful metrics, for example:
Only after the content is complete should the draft move through supervisory review, conflict checks/disclosures, and Reg AC certification before any dissemination.
Topic: Research Reports
A research analyst has a draft report on XYZ with a current market price of $40 and a model-supported 12-month price target of $47. An investment banking managing director emails: “We’re pitching XYZ for a follow-on offering and need the report to show at least 25% upside. Please adjust the target accordingly before it goes out.”
Firm policy permits banking to review draft research only to identify factual errors about banking transaction details and to verify required conflict disclosures; it prohibits banking input on ratings, price targets, or valuation assumptions.
Which analyst response is permitted under research independence controls?
Best answer: C
Explanation: Banking may fact-check deal/disclosure items, but requesting a target change (to $50 for 25% upside) is prohibited influence and must be rejected and escalated.
A 25% upside from a $40 stock implies a $50 target, showing the banker is attempting to influence the investment conclusion. Research independence controls prohibit banking from shaping ratings, targets, or valuation inputs. The analyst should refuse the request, escalate it, and limit any banking review to factual transaction details and required disclosures only.
The core issue is distinguishing permitted coordination (factual verification and disclosure checks) from prohibited influence (attempts to change the analyst’s conclusions). Here, the banker’s request is explicitly tied to making the report more supportive of a follow-on pitch by increasing the apparent upside.
The arithmetic makes that intent clear:
\[ \begin{aligned} \text{Target for 25\% upside} &= 40 \times 1.25 \\ &= 50 \end{aligned} \]Because banking input on the price target is prohibited, the analyst should decline the requested change, escalate the communication to research supervision/compliance, and (if the firm allows) restrict any banking review to factual deal-description items and required conflict disclosures—without discussing or editing ratings/targets/valuation assumptions.
Topic: Research Reports
A research analyst’s firm has not previously published research on Horizon Bio (HZB). The analyst has completed due diligence and is preparing the first report to introduce HZB to clients, including an initial rating and price target.
Current price: $40.00 Proposed 12-month price target: $52.00
Which choice correctly identifies the report type and the expected upside to the price target to include in the summary?
Best answer: A
Explanation: A first-time report is an initiation of coverage, and upside is \((52-40)/40=30\%\).
Because the firm has not previously covered HZB, the correct report type is an initiation of coverage, whose typical objective is to introduce the company and present an initial investment thesis, rating, and price target. The expected upside is calculated from the current price to the target: \((\$52-\$40)/\$40=30\%\).
An initiation of coverage is the first research report a firm publishes on an issuer; its objective is to introduce the company to clients and lay out the initial investment thesis, key risks, valuation framework, and the initial rating and price target. An update note is used after coverage already exists and typically focuses on changes since the prior report (e.g., earnings results, revised estimates, rating/target changes).
To express upside/downside to a price target, use the current price as the denominator:
Using the target price as the denominator or reporting only the dollar difference does not produce the standard upside percentage disclosure.
Topic: Research Reports
A broker-dealer’s policy states: issuers are placed on the restricted list when the firm is participating in an investment banking transaction for the issuer; while restricted, the firm may not publish new research or solicit transactions in the issuer’s securities.
The investment banking department notifies Compliance that the firm has been retained as a co-manager for an upcoming follow-on offering for ABCD. Due to an internal processing error, ABCD is not added to the restricted list. The next morning, the research analyst publishes an upgrade note on ABCD to clients through the firm’s normal research distribution system.
What is the most likely outcome once the control failure is discovered?
Best answer: D
Explanation: A missed restricted-list placement typically triggers immediate stop/recall controls and an internal review to mitigate and assess regulatory exposure.
A restricted list is used to prevent publication and solicitation when the firm has certain conflicts (such as active investment banking participation). Because the issuer should have been restricted, discovering the failure typically results in stopping further dissemination and escalating for compliance review of what was sent and any related activity.
Restricted lists and watch lists are supervisory tools to manage trading and communications risk. A restricted list generally imposes the strongest controls (for example, no new research publication and limits on solicitation) when the firm’s activities create heightened conflict or MNPI risk, such as participating in an investment banking transaction.
Here, the firm’s own policy required ABCD to be restricted once the underwriting role began. Publishing an upgrade note despite that required restriction is a control failure affecting communications, so the practical consequence is to immediately stop further dissemination (and potentially retract) and escalate for review of related communications and activity to assess remediation and regulatory exposure. A watch list would not be sufficient if the policy calls for restriction.
Topic: Research Reports
A research analyst is drafting a client-facing piece on ABC Corp after its quarterly earnings release. The firm already has an active rating and price target on ABC, and the analyst’s goal is to briefly summarize what changed in the quarter and update the price target based on new guidance, without reintroducing the full investment thesis.
Which research report type best matches this objective?
Best answer: C
Explanation: An update note is used to communicate new, incremental developments on a currently covered company.
Because the firm already covers the issuer, the appropriate product is an update note focused on incremental information (earnings and guidance) and any changes to rating/price target. An initiation of coverage is typically used when coverage begins and the analyst is establishing the thesis, valuation framework, and baseline assumptions.
The key distinction is whether the firm is starting coverage or maintaining existing coverage. An initiation of coverage report is generally the first comprehensive publication on an issuer and is designed to establish the analyst’s investment thesis, valuation approach, key risks, and baseline expectations, along with the initial rating and price target.
An update note is used when coverage already exists and the objective is to communicate what is new (for example, earnings results, guidance, a material event) and the specific implications for the existing thesis—often including any changes to estimates, rating, or price target—without recreating the full “start-to-finish” initiation package. The scenario describes incremental, event-driven updates on an already covered issuer.
Topic: Research Dissemination
A broker-dealer’s marketing team drafts a one-page PDF titled “XYZ Corp: Strong Buy — $45 Price Target,” using a few sentences copied from an analyst’s published report. The firm is currently pitching XYZ for an investment banking mandate, and the PDF will be emailed by sales to clients and posted in a “Trade Ideas” section of the firm’s public website.
Which approach best aligns with durable standards for clearly distinguishing research from marketing materials?
Best answer: A
Explanation: Clear “not research” labeling with transparent conflicts and access to the underlying report best distinguishes marketing from research while keeping the communication fair and balanced.
To distinguish marketing from research, the communication should be clearly labeled as marketing (not a research report) and should not imply independent research authorship. Because it repackages research content and is used while the firm is pursuing investment banking business, it should include prominent conflicts/disclosures and point recipients to the full published research report for basis, context, and required disclosures.
The core standard is to avoid confusing recipients about what is independent research versus sales/marketing. When a marketing piece repackages research content (ratings, price targets, excerpts), it should be labeled in a way that plainly signals it is marketing/sales material and not a research report, and it should be fair and balanced. It also must be transparent about material conflicts relevant to the communication—here, the firm’s investment banking pitch—so recipients can evaluate the message appropriately.
A sound approach typically includes:
Adding reviewer language, changing the audience, or removing a few data points does not, by itself, prevent the piece from being misleading about its nature or conflicts.
Topic: Research Reports
An equity research analyst is finalizing a written research report with a rating and price target that will be emailed to clients and posted to the firm’s website tomorrow morning. The draft contains this certification: “I, Alex Rivera, certify that this report reflects my views.” Compliance notes that the firm must include a Regulation AC certification in the report before it can be disseminated.
Which update is the single best compliant action to satisfy Regulation AC certification requirements for this report?
Best answer: B
Explanation: Regulation AC requires the analyst to certify both the independence of the views and that compensation is not tied to specific recommendations/views.
A Regulation AC certification in a research report must cover two core points: the report’s views accurately reflect the analyst’s personal views, and the analyst’s compensation is not directly or indirectly tied to the specific recommendations or views expressed. Updating the certification to include both elements (before dissemination) best satisfies the requirement in the scenario.
Regulation AC focuses on analyst attestation of independence and compensation linkage in connection with published research. For a written research report, the certification should explicitly state that (1) the views expressed accurately reflect the analyst’s personal views about the subject issuer or securities, and (2) no part of the analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in the report. Other statements (for example, about data sources, reasonable basis, or general conflict disclosure) may be required under other research rules and firm policies, but they do not substitute for the required Regulation AC certification elements. The key control is to ensure this certification language is included before the report is disseminated.
Topic: Research Reports
Which statement is most accurate regarding issuer review of a draft research report?
Best answer: C
Explanation: Issuer feedback may be used to correct facts, but not to shape opinions, ratings, or price targets.
Firms may allow an issuer to review a draft solely to identify factual errors. Controls should prevent the issuer from influencing the analyst’s views, recommendation/rating, or price target and should limit what is shared to factual content.
Allowing issuer review can be consistent with research independence when it is narrowly used for fact-checking. The key is to separate correcting objective factual information (for example, business descriptions, historical facts, or factual statements about products) from influencing subjective judgments (for example, outlook, investment thesis, rating, or price target). Good practice is to provide only the portions necessary for verifying facts, exclude conclusions and recommendations, and ensure the analyst (and required supervisory process) retains full control over opinions. If issuer feedback goes beyond factual corrections or attempts to pressure the analyst’s views, it should not be adopted as an “issuer-approved” opinion and should be escalated per firm policy.
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