Often, the firm's shares, and in certain cases, the analyst's shares, are subject to a lock-up period after the issuer's initial public offering. After the lock-up period expires, the firm can sell the stock. Shares of the company rise in value and the brokerage firm reaps a huge profit by selling its shares into an inflated market. Legalities aside, this practice does not reflect well on brokerage firms. Analyst Compensation Compensation schemes within brokerage firms also present conflicts when they further align the interests of analysts with the revenues of the brokerage firm.
Some firms tie analyst compensation and bonuses to investment banking division revenues overall.
Other firms tie analyst compensation to the amount of business done by the firm with a particular issuer, giving the analyst an incentive in seeing the company continue its investment banking relationship with the brokerage firm. And in some cases, analysts receive discounted, pre-IPO shares in a company they cover. The conflict involving individual analysts owning shares, including pre-IPO shares, in the companies they follow is one that is easily curable by disclosure. While many firms prohibit analysts from owning stock in companies they cover, in an effort to protect them from conflicts of interest, it seems to be becoming more common for firms to allow analysts to own pre-IPO stakes. Recent examples indicate that when analysts and firms disclose their ownership positions in the security being recommended, the disclosure language is just boilerplate, stating only that the firm and the analyst may have a position in the security being recommended.