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[PASSED] Independent investment research protocol

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Simone Republic
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[PASSED] Independent investment research protocol

Postby Simone Republic » Mon Oct 10, 2022 5:20 am

Submitted.

Simple background to this resolution

A quick explainer of what this resolution does (as it's admittedly a very technical topic although it concerns one of the few areas of securities law that is implemented globally - a bit of background to those who don't work in finance:
1. Investment banks publish what is called "investment research", which recommends that investors buy or sell stocks (or other financial instruments). (This is what you hear on news channels saying that "XYZ Bank recommends a BUY on a stock!" These are called "ratings".

All of these are written by investment analysts employed by investment banks and distributed globally. Investors anywhere in the world can receive ratings on US stocks, for example. There are also other ratings on bonds, funds and other financial instruments, or the direction of markets in general.

2. There are rules to ensure that the investment analysts are separated in their work from other departments in the same bank.

This was a direct result of the Enron scandal in 2000, when several banks vying for business with Enron were accused of pressuring their analysts to put "Buy" ratings on Enron stock, even as Enron was teetering towards collapse.

3. As a result, reforms were put in place to safeguard the independence of analysts, so that banks cannot pressure their analysts to put a favorable view on a stock to try to win business.

Indirectly, this proposal protects investors (from small to large investors) from getting biased or misleading opinions on stocks and other investments.

It also has a technical requirement applicable when analysts behave like journalists and write widely distributed that the standard of proof for libel is legally tightened, to make it harder for rich companies to sue to silence analysts.

Globally, the rest of the world adopted the principles called "IOSCO Statement of Principles for Addressing Sell Side Securities Analyst Conflicts of Interest", published by the International Organization of Securities Commissions, which is the global coordinator for securities regulators. This resolution basically imports the principles from the IOSCO Statement into the World Assembly (although the text is conceptually closer to Sarbanes-Oxley). It is a global issue as investment research is largely distributed globally.

Technical background to this resolution

This is a fairly technical proposal and assumes some background knowledge in governance requirements in independence in investment research.

Clause 1 is based off the Global Analyst Research Settlements in 2003 and it is also very roughly based on Title V of the Sarbanes-Oxley Act). It is significantly less stringent than the EU rules known as MIFID.

Globally it is a derivative of the IOSCO Statement of of Principles for Addressing Sell Side Securities Analyst Conflicts of Interest from the International Organization of Securities Commissions, although the US rules came earlier (largely due to the Enron and Worldcom scandals).

https://www.iosco.org/library/pubdocs/p ... OPD150.pdf

Clause 2 is based on the imposition of the US Supreme Court New York Times Co. v Sullivan standard on published opinions in research and basically requires an extremely high standard of proof for issuers from suing analysts for a negative opinion. (For those familiar with the topic, this is broadly similar to preventing SLAPP suits, but this time against analysts, not journalists).

Clause 1(c)(i) and Clause 2(c) together restrict short-sellers from being sued on the grounds that their analysis is taking the same direction as their proprietary position although they can still be sued on the grounds of actual malice. Clause 1(c)(ii) covers research published by nominated brokers in the UK and other jurisdictions that permit some form of indirectly paid research.

Why is this an international issue

I strongly consider this an international issue given that most investors (effectively, anyone with a retirement savings (or 401(k), occupational pension, superannuation) have some exposure to international bonds, equities, derivatives etc indirectly through their savings schemes and therefore benefit from global regulations on investment research, which significantly influences decisions made by investment managers on their behalf.

This issue is globally regulated in real life through MIFID II (for any institution doing business in the EU) and Global Analyst Research Settlements (and Series 16) for anyone doing business in the US. Indirectly it is globally recommended practice from the International Organization of Securities Commissions.

For our non-capitalist role regions

IC: I also consider this issue to be worthy of commendation to our democratic socialist/communist colleagues in WA since this imposes an additional burden of honesty on the part of investment banks, and that even if your WA member state is socialist, you may still have investments in other capitalist states and this will still indirectly protect you from investment banks playing games with ratings.

Category: Free Trade/Mild.

The World Assembly,

Acknowledges previous resolutions to protect the interest of investors (GAR#474);

Recognizing the reliance of investors on investment research written by analysts for decisions on financial instruments, especially on securities from jurisdictions outside of their own state or nation;

Noting that the views of analysts are not always favorable to particular stakeholders;

Anxious to protect the opinions of analysts for their independence, both from undue intervention by their employers and from frivolous or strategic litigation by other stakeholders;

Hereby defines:

"Analysts" as regulated and qualified financial analysts employed by a research department of an institution;

"Financial instruments" to include all securities, currencies, futures, options and all their respective derivatives traded in any WA member state;

"Institution" to mean a financial institution regulated by at least one member state;

"Investment research" as any written opinions and reports on financial instruments published by analysts under their own name on behalf of an institution in a member state and distributed to investors.

Hereby requires that:

  1. Institutions must:

    1. Impose information barriers, controlled by qualified staff, between their research department and any other department(s) that may have a material actual or potential conflict of interest with their research unit;
    2. Prohibit linking the compensation of analysts to the performance of any specific banking activities conducted by that institution;
    3. Prohibit any threats, or perceived threats, by another department of the institution against the analyst(s) or their research department(s) (or their respective compensation) over the contents of any investment research;
    4. Prohibit clearance or approval of investment research by persons employed by the institution who are not directly responsible for the research department, other than legal or compliance staff;
    5. Purchase adequate directors' and officers' liability insurance from a reputable insurer against any litigation directed at the institution, their research department(s) or their analysts.
  2. A published "investment research" report must disclose, in a very clear and legible font:

    1. Any material potential or actual conflicts as specified in clause (1)(a);
    2. Historical ratings and historical performance data pertinent to each of the said analysts who authored this report;
    3. If an entity that is the subject of the investment research has been provided with a copy the report prior to publication;
    4. Specifically disclose on the front page if (i) the investment research is published to support a client or proprietary position taken by that institution and/or (ii) is sponsored by any organization(s) with a material interest in the instruments covered;
    5. Any position(s) in any of the financial instruments mentioned in a report held by the analyst(s) who authored the report;
    6. Any other disclosures required by the competent authority of a member state with jurisdiction on the said report.
  3. In any litigation pending before any member state involving any published investment research:

    1. A petitioner against an analyst, a research unit, or the institution itself must prove beyond reasonable doubt of actual malice in any analysis and opinions published therein;
    2. The burden of proof is on the petitioner(s) in demonstrating actual malice and/or a reckless disregard for unambiguous factual statements published therein;
    3. The direction of any proprietary or client positions taken by any institution may not be admitted as evidence in any such litigation.
  4. A competent authority of a member state with jurisdiction is responsible for the implementation and interpretation of Clauses 1 and 2, and for any penalties that may be imposed.



Previous draft.

Draft 2.

Added Clause 3 to allow smaller states to seek expertise from "other member states" if they desire. This prevents cases in real life where very small countries' regulatory authorities are overwhelmed by complex issues due to a lack of expertise. (Some Caribbean countries do this for example).

I changed the title slightly to avoid using a preposition in the title, because resolutions use Title Case on all words which annoys me a bit. I also removed the reference to #401 as I am considering a repeal of that as well.

Draft 1.

The World Assembly,

Acknowledges previous resolutions to protect the interest of investors (GAR#474);

Recognizing the reliance of sophisticated investors on investment research written by analysts for decisions on financial instruments, especially on securities from jurisdictions outside of their own state or nation;

Noting that the views of analysts are not always favorable to particular stakeholders;

Anxious to protect the opinions of analysts for their independence, both from undue intervention by their employers and from frivolous or strategic litigation by other stakeholders;

Hereby defines:

"Analysts" as regulated and qualified financial analysts employed by a research department of an institution;

"Financial instruments" to include all securities, currencies, futures, options and all their respective derivatives traded in any WA member state;

"Institution" to mean a financial institution regulated by at least one member state;

"Investment research" as any written opinions and reports on financial instruments published by analysts under their own name on behalf of an institution in a member state and distributed to sophisticated investors only.

Hereby requires that:

  1. Institutions must:

    1. Impose information barriers, controlled by qualified staff, between their research unit and any other unit(s) that may have a material actual or potential conflict of interest with their research unit;
    2. Disclose periodically in an electronically accessible form and without charge, updated information on (i) any such material potential or actual conflicts, and (ii) ratings and historical performance data pertinent to each of the said analysts;
    3. Disclose specifically on the front page in a clear and legible font if any investment research is (i) published to support a client or proprietary position taken by that institution and/or (ii) is sponsored by any organization(s) with a material interest in the instruments covered;
    4. Prohibit linking the compensation of analysts to the performance of any specific banking activities conducted by that institution;
    5. Purchase adequate directors' and officers' liability insurance against any litigation directed at the institution, their research unit(s) or their analysts.
  2. In any litigation pending before any member state involving any published investment research:

    1. A litigant against an analyst, a research unit, or the institution itself must prove beyond reasonable doubt of actual malice in any analysis and opinions published therein;
    2. The burden of proof is on the petitioner(s) in demonstrating actual malice and/or a reckless disregard for unambiguous factual statements published therein;
    3. The direction of any proprietary or client positions taken by any institution may not be admitted as evidence in any such litigation.
  3. A competent authority of a member state is responsible for the implementation of Clause 1. However, it may at its discretion seek technical expertise from other member states if the member state desires such assistance.
Last edited by Goobergunchia on Tue Nov 29, 2022 10:50 am, edited 60 times in total.
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Postby Tinhampton » Mon Oct 10, 2022 6:51 am

The phrase "WA state" only appears in your definitions and defining it - instead of just replace your three other references to WA states with references to "World Assembly member states" - offers no immediate benefit.

"directors and officers liability insurance" in Article 1e should contain two apostrophes after the relevant S-es.

Support in principle, with that said.
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Postby Simone Republic » Mon Oct 10, 2022 7:25 am

Tinhampton wrote:The phrase "WA state" only appears in your definitions and defining it - instead of just replace your three other references to WA states with references to "World Assembly member states" - offers no immediate benefit.

"directors and officers liability insurance" in Article 1e should contain two apostrophes after the relevant S-es.

Support in principle, with that said.


Typos fixed.
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Postby Heavens Reach » Mon Oct 10, 2022 7:50 am

Support in principle. Two notes:

Regarding clause 1, subclause b: in most fields of research, revealing your analysis before formal publication opens you up to being beaten to the punch by competitors, which, in a career where "publish or die" is the mantra, is a potential threat to not only one's work, but one's livelihood. We don't know if investment research is special in that publication does not operate like this, as it does in most research fields, so feel free to correct us if this is irrelevant here. Also, we think you meant "potentially or actually" rather than "potential or actual"

Regarding clause 2, subclause a: while we don't actually mind that you've decided to increase the burden of proof here, we just wanted to point out that civil cases are generally decided on a preponderance of evidence not beyond a reasonable doubt. The former is less stringent than the latter.
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Postby Simone Republic » Mon Oct 10, 2022 8:04 am

Heavens Reach wrote:Support in principle. Two notes:

Regarding clause 1, subclause b: in most fields of research, revealing your analysis before formal publication opens you up to being beaten to the punch by competitors, which, in a career where "publish or die" is the mantra, is a potential threat to not only one's work, but one's livelihood. We don't know if investment research is special in that publication does not operate like this, as it does in most research fields, so feel free to correct us if this is irrelevant here. Also, we think you meant "potentially or actually" rather than "potential or actual"

Regarding clause 2, subclause a: while we don't actually mind that you've decided to increase the burden of proof here, we just wanted to point out that civil cases are generally decided on a preponderance of evidence not beyond a reasonable doubt. The former is less stringent than the latter.


Clause(1)(b) actually refers to a separate matter - investment bank research usually contain several pages of disclaimers, disclosures, and other matters pertinent to a particular piece research (sometimes known as "back matter"), such as disclosures of the fact that the publishing investment bank may have an investment banking relationship with one of the companies covered. In the US, share price charts are required to be shown to show clearly whether the analyst's recommendations are correct or not in recent years. In some jursidictions, additional disclosures are required for example if analysts have a personal position in the shares covered by their research. I've re-worded it slightly.

Clause 2 - the very high burden of proof is extremely deliberate and brings it up to the standard of US libel laws against politicians (hence my reference to NYT v Sullivan). It basically prevents cases (a number of jurisdictions are very prone to this) where analysts putting out "Sell" recommendations are frequently sued for spreading false information or libel just to silence them.
Last edited by Simone Republic on Mon Oct 10, 2022 6:16 pm, edited 6 times in total.
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Postby Heavens Reach » Mon Oct 10, 2022 8:18 am

Simone Republic wrote:
Heavens Reach wrote:Support in principle. Two notes:

Regarding clause 1, subclause b: in most fields of research, revealing your analysis before formal publication opens you up to being beaten to the punch by competitors, which, in a career where "publish or die" is the mantra, is a potential threat to not only one's work, but one's livelihood. We don't know if investment research is special in that publication does not operate like this, as it does in most research fields, so feel free to correct us if this is irrelevant here. Also, we think you meant "potentially or actually" rather than "potential or actual"

Regarding clause 2, subclause a: while we don't actually mind that you've decided to increase the burden of proof here, we just wanted to point out that civil cases are generally decided on a preponderance of evidence not beyond a reasonable doubt. The former is less stringent than the latter.


Clause(1)(b) actually refers to a separate matter - investment bank research usually contain several pages of disclaimers, disclosures, and other matters pertinent to a particular piece research (sometimes known as "back matter"), such as disclosures of the fact that the publishing investment bank may have an investment banking relationship with one of the companies covered. In the US, share price charts are required to be shown to show clearly whether the analyst's recommendations are correct or not in recent years. In some jursidictions, additional disclosures are required for example if an analyst has a personal position in the shares covered by her research. I've re-worded it slightly.

Clause 2 - the very high burden of proof is extremely deliberate and brings it up to the standard of US libel laws against politicians (hence my reference to NYT v Sullivan). It basically prevents cases (a number of jurisdictions are very prone to this) where analysts putting out "Sell" recommendations are frequently sued for spreading false information or libel just to silence them.


Good enough for us. Support.

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Postby Simone Republic » Thu Oct 13, 2022 7:37 pm

Heavens Reach wrote:
Simone Republic wrote:
Clause(1)(b) actually refers to a separate matter - investment bank research usually contain several pages of disclaimers, disclosures, and other matters pertinent to a particular piece research (sometimes known as "back matter"), such as disclosures of the fact that the publishing investment bank may have an investment banking relationship with one of the companies covered. In the US, share price charts are required to be shown to show clearly whether the analyst's recommendations are correct or not in recent years. In some jursidictions, additional disclosures are required for example if an analyst has a personal position in the shares covered by her research. I've re-worded it slightly.

Clause 2 - the very high burden of proof is extremely deliberate and brings it up to the standard of US libel laws against politicians (hence my reference to NYT v Sullivan). It basically prevents cases (a number of jurisdictions are very prone to this) where analysts putting out "Sell" recommendations are frequently sued for spreading false information or libel just to silence them.


Good enough for us. Support.


I have restructured Clause 1(b) into a new Clause 2 to spell out exactly the disclosure requirements, which are roughly drawn from Sarbanes-Oxley Act Title V and make it clear what are the exact requirements.
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Postby Magecastle Embassy Building A5 » Thu Oct 13, 2022 7:39 pm

"Section 2 has an empty list item I presume is a scrivener's error. However, on a first glance I fail to see any other issues with this draft."

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Postby Simone Republic » Thu Oct 13, 2022 7:40 pm

Magecastle Embassy Building A5 wrote:"Section 2 has an empty list item I presume is a scrivener's error. However, on a first glance I fail to see any other issues with this draft."

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I've fixed that. For character count reasons I removed certain minor additional disclosure requirements that are required in Sarbanes-Oxley or the EU regulations.
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Postby Simone Republic » Sun Oct 16, 2022 9:57 am

Humpty bumpty.
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Postby Excidium Planetis » Sun Oct 16, 2022 12:51 pm

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Postby Fachumonn » Sun Oct 16, 2022 1:43 pm

I would like to question your decision to put this on the last call based on just a little feedback and a little support. Seems awfully like rushing to me. Let people get around to this and give you the proper feedback that this proposal needs.
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Postby Magecastle Embassy Building A5 » Sun Oct 16, 2022 2:57 pm

Fachumonn wrote:I would like to question your decision to put this on the last call based on just a little feedback and a little support. Seems awfully like rushing to me. Let people get around to this and give you the proper feedback that this proposal needs.

Ooc: Concurred -- <a week seems too fast.
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Postby Simone Republic » Sun Oct 16, 2022 4:49 pm

Magecastle Embassy Building A5 wrote:
Fachumonn wrote:I would like to question your decision to put this on the last call based on just a little feedback and a little support. Seems awfully like rushing to me. Let people get around to this and give you the proper feedback that this proposal needs.

Ooc: Concurred -- <a week seems too fast.


Fachumonn wrote:I would like to question your decision to put this on the last call based on just a little feedback and a little support. Seems awfully like rushing to me. Let people get around to this and give you the proper feedback that this proposal needs.



Sure, will give it another couple of weeks.
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Postby Simone Republic » Sun Oct 16, 2022 5:49 pm

Excidium Planetis wrote:"Opposed." Adelia Meritt announces. "Not an international issue."


It is an international issue in real life, if by stealth - EU rules (MIFID II) and US rules (GARS) are applied globally as a result of the economics of the global distribution of investment research and the fact that almost all major investment banks have global operations.
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Postby Heavens Reach » Sun Oct 16, 2022 5:57 pm

Simone Republic wrote:
Excidium Planetis wrote:"Opposed." Adelia Meritt announces. "Not an international issue."


It is an international issue in real life, if by stealth - EU rules (MIFID II) and US rules (GARS) are applied globally as a result of the economics of the global distribution of investment research and the fact that almost all major investment banks have global operations.


We find this to be a substantive, principled, argument

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Postby Excidium Planetis » Sun Oct 16, 2022 10:21 pm

Simone Republic wrote:
Excidium Planetis wrote:"Opposed." Adelia Meritt announces. "Not an international issue."


It is an international issue in real life, if by stealth - EU rules (MIFID II) and US rules (GARS) are applied globally as a result of the economics of the global distribution of investment research and the fact that almost all major investment banks have global operations.

OOC:
If it is the case that national rules (such as those imposed by the US) can be applied globally, I don't see why individual member nations or international economic organizations cannot introduce such measures without the help of the WA. Presumably these measures are beneficial to all nations, and if not, why should the WA implement them then? And if they are beneficial, then why would they not already be in use?
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Postby Simone Republic » Mon Oct 17, 2022 2:09 am

Excidium Planetis wrote:
Simone Republic wrote:
It is an international issue in real life, if by stealth - EU rules (MIFID II) and US rules (GARS) are applied globally as a result of the economics of the global distribution of investment research and the fact that almost all major investment banks have global operations.

OOC:
If it is the case that national rules (such as those imposed by the US) can be applied globally, I don't see why individual member nations or international economic organizations cannot introduce such measures without the help of the WA. Presumably these measures are beneficial to all nations, and if not, why should the WA implement them then? And if they are beneficial, then why would they not already be in use?


Globally it is also implemented via the IOSCO Statement of Principles for Addressing Sell Side Securities Analyst Conflicts of Interest from the International Organization of Securities Commissions.

https://www.iosco.org/library/pubdocs/p ... OPD150.pdf

I wrote the resolution off the American rule (GARS and Sarbox) rather than the IOSCO one because the US rules came first (largely as a result of Enron and Worldcom) and is closer to how most jurisdictions implemented it.

I do believe the rules benefit all nations. It just so happens that in real life, outside of the US and the EU, there are only about 20-odd cities with active analyst communities, as stock exchanges tend to congregate.
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Postby Simone Republic » Sun Oct 23, 2022 7:42 am

Humpty Bumpty. If no further comments will submit by end of October.
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Postby Simone Republic » Fri Oct 28, 2022 8:00 pm

Bump bump bump bump bump....
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Simone Republic
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Posts: 1957
Founded: Jul 09, 2019
Inoffensive Centrist Democracy

Postby Simone Republic » Wed Nov 02, 2022 5:46 am

Last call. I feel now is a good time to change the subject of debate from music art, wars etc to something completely different.
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Potted Plants United
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Posts: 1282
Founded: Jan 14, 2013
Democratic Socialists

Postby Potted Plants United » Thu Nov 03, 2022 6:50 pm

OOC: I suspect much if the reason you lack feedback is that the topic is something that requires people to read up on RL laws (and possibly court cases and whatnot) to understand what is even being discussed, and many (myself included) don't know enough to care enough to do that. That's not your problem or your proposal's problem.

But any chance you could give the gist of it as if you were explaining it to your elderly grandmother? Because I think my understanding of it is around that level... :p
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Simone Republic
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Posts: 1957
Founded: Jul 09, 2019
Inoffensive Centrist Democracy

Postby Simone Republic » Mon Nov 21, 2022 7:19 pm

Potted Plants United wrote:OOC: I suspect much if the reason you lack feedback is that the topic is something that requires people to read up on RL laws (and possibly court cases and whatnot) to understand what is even being discussed, and many (myself included) don't know enough to care enough to do that. That's not your problem or your proposal's problem.

But any chance you could give the gist of it as if you were explaining it to your elderly grandmother? Because I think my understanding of it is around that level... :p


OK. Let me try this:


1. Investment banks publish what is called "investment research", which recommends that investors buy or sell stocks (or other financial instruments). (This is what you hear on news channels saying that "XYZ Bank recommends a BUY on a stock!" These are called "ratings".

All of these are written by investment analysts employed by investment banks and distributed globally. Investors anywhere in the world can receive ratings on US stocks, for example. There are also other ratings on bonds, funds and other financial instruments, or the direction of markets in general.

2. There are rules to ensure that the investment analysts are separated in their work from other departments in the same bank.

This was a direct result of the Enron scandal in 2000, when several banks vying for business with Enron were accused of pressuring their analysts to put "Buy" ratings on Enron stock, even as Enron was teetering towards collapse.

3. As a result, reforms were put in place to safeguard the independence of analysts, so that banks cannot pressure their analysts to put a favorable view on a stock to try to win business.

Indirectly, this proposal protects investors (from small to large investors) from getting biased or misleading opinions on stocks and other investments.

It also has a technical requirement applicable when analysts behave like journalists and write widely distributed that the standard of proof for libel is legally tightened, to make it harder for rich companies to sue to silence analysts.

Globally, the rest of the world adopted the principles called "IOSCO Statement of Principles for Addressing Sell Side Securities Analyst Conflicts of Interest", published by the International Organization of Securities Commissions, which is the global coordinator for securities regulators. This resolution basically imports the principles from the IOSCO Statement into the World Assembly (although the text is conceptually closer to Sarbanes-Oxley). It is a global issue as investment research is largely distributed globally.
Last edited by Simone Republic on Tue Nov 22, 2022 8:22 am, edited 1 time in total.
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Magecastle Embassy Building A5
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Posts: 509
Founded: Jul 03, 2022
Corporate Police State

Postby Magecastle Embassy Building A5 » Thu Nov 24, 2022 10:10 pm

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Youtube Inc
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Posts: 34
Founded: Mar 01, 2019
Inoffensive Centrist Democracy

Postby Youtube Inc » Fri Nov 25, 2022 1:15 am

Question, what are "unambiguous factual statements" from 3b?

do we have an existing definition? what is unambiguous? is common law unambiguous?
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