Your Rights and Responsibilities as a Raymond James Client

Equity Research Reports

Raymond James devotes considerable resources to providing quality research and publishes reports on more than 600 companies in a variety of industries. Our analysts are often recognized for stock-picking performance, both individually and as a group. In fact, the team’s stockpicking recommendations have regularly finished first for five-year performance in an annual survey conducted by Zacks Investment Research, consistently outperforming the market as well as the stock selections of competing firms.

Because research must be supported by revenue producing activities, potential conflicts of interest exist. More specifically, research is typically paid for by commissions generated through institutional and retail sales and trading, as well as by investment banking activities, including stock underwriting. Since managements may not respond well to negative conclusions about their companies’ stock or, in the case of large institutional holders, about recommendations vis-à-vis the stocks that they own, it is possible that those constituencies might attempt to influence analysts’ opinions. Raymond James’ policy is to require analyst objectivity and to support analysts’ conclusions, even if contrary to the interests of our investment banking activities. It should be noted that while all parties may be well-intentioned, these assessments are somewhat subjective and differences of opinion are quite normal.

The following is Raymond James’ position on the independence and integrity of our research and our policies to manage potential conflicts of interest.

Research is conducted in a manner consistent with the firm’s business principles and investor objectives. The firm encourages thorough and insightful assessments of industries, companies, and the outlook for individual securities and the general market. Raymond James prizes analyst independence, objectivity, thorough analysis and integrity. Management believes that value-added analysis and independent judgment are critical elements in the quest for superior investment performance. Raymond James equity analysts strive to anticipate both positive and negative information and to respond accordingly with timely changes in ratings, earnings estimates and price targets. Our primary goal is to contribute to the success of our investing clients by providing opinions and information based on the analysis of available facts.

A variety of factors go into the research process including an assessment of industry dynamics, interviews of company executives, analysis of the competition, and information as available from the suppliers, distributors, major customers and other independent sources. Analysts are encouraged to develop opinions that may differ from those of the management of companies that they are evaluating. Valuation methodologies, investment risks and conclusions are discussed in all basic company research reports.

Expected returns are utilized in our ratings analysis, but these expectations are not a guarantee of the success of the investments and are the analysts’ own opinions based upon the analyst’s assessment of the company’s prospects and his or her “guess” about market direction. This analysis is summarized in a rating for stocks in our coverage universe as follows:

• Strong Buy – The stock is expected to appreciate and produce a total return of at least 15% and outperform the S&P 500² during the next six months. For higher yielding and more conservative equities, such as real estate investment trusts and certain master limited partnerships, a total return of at least 15% is expected to be realized over the next 12 months.
• Outperform – The stock is expected to appreciate and outperform the S&P 500 over the next 12 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, an Outperform rating is used where we are comfortable with the relative safety of the dividend and expect a total return modestly exceeding the dividend yield over the next 12 months.
• Market Perform – The stock is expected to perform generally in line with the S&P 500 over the next 12 months and is potentially a source of funds for more highly rated securities.
• Underperform – The stock is expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold.

Obviously, stocks that we consider most attractive for purchase are rated Strong Buy. Our Focus List includes the Equity Research Department’s favorite Strong Buy-rated securities. While past performance does not guarantee future results, the firm’s Focus List has performed better than the Strong Buy-rated securities over time, as would be expected. Generally we believe that only stocks in the first two categories – Strong Buy and Outperform – should be purchased or retained, as the goal of research is to outperform the market. Market Perform-rated securities are not expected to do that and, depending upon other considerations such as taxes and portfolio diversification, can be viewed as either holds or sources of funds. These decisions are typically client- or portfolio-specific and we recommend that clients seek the advice of their financial advisor.

Since our research is limited to a small universe of public companies, which are often small- or mid-cap, we supplement it with research provided by select other firms, which focuses on larger public companies. We do not independently verify their information.

Raymond James financial advisors are not required to conform to the firm’s opinions. Financial advisors, who are more familiar with an individual client’s needs, objectives and tolerance for risk, are better able to assess whether a stock is suitable for that client and/or may have a different opinion of the investment merits of the security, as may other research sources. For example, the direction of rating changes – upward or downward – is often considered as critical as the rating itself, since good or bad news often comes in doses over a period of time. It is also possible that a stock may “bottom out” before the company’s fundamentals have improved and the stock may represent a good value even though the analyst has not yet upgraded the stock. Nonetheless, additional care should be employed when purchasing stocks other than recommendations rated Strong Buy.

In addition to rating stocks relative to the market and industry group, we also provide ratings that should be used to help determine investor suitability³:

• Total Return (TR): Lower risk equities possessing dividend yields above that of the S&P 500 and greater stability of principal.
• Growth (G): Low to average risk equities with sound financials, more consistent earnings growth, possibly a small dividend, and the potential for long-term price appreciation.
• Aggressive Growth (AG): Medium or higher risk equities of companies in fast growing and competitive industries, with less predictable earnings and acceptable, but possibly more leveraged balance sheets.
• High Risk (HR): Companies with less predictable earnings (or losses), rapidly changing market dynamics, financial and competitive issues, higher price volatility (beta), and risk of principal.
• Venture Risk (VR): Companies with a short or unprofitable operating history, limited or less predictable revenues, very high risk associated with success, and a substantial risk of principal.

While our analysts’ track records are good, they are far from perfect. Analysts are not able to independently check and verify all facts and, to a large degree, must rely on information provided in public financial disclosure and by company officials. Regulatory actions designed to assure equal disclosure to public investors may even have impeded the timely flow of information to analysts. Overly optimistic or fraudulent management can mislead analysts and financial advisors. However, our analysts attempt to develop other industry information sources from trade groups, government agencies and competitors, as well as suppliers and customers of the subject company. In periods of poor general market performance, it is difficult for individual securities not to be affected. All the other factors included in the “Understanding Investment Risk” section may also cause our ideas not to perform as expected. Thus, our recommendations represent our analysts’ best judgments given available facts and public information, not guarantees of investment performance. Some of our ideas will lose money, although historically, our average long-term performance has been very good.

Raymond James and Associates’ policies and procedures are reasonably designed to ensure compliance with regulatory rules applicable to equity research.

Research management is committed to providing an environment that encourages thorough and independent securities analysis unaffected by inappropriate influences upon stock ratings, earnings estimates and price targets. Our operating principles are designed to minimize or eliminate the potential for conflicts of interest. Sources of conflict may be internal in nature, stemming from the fact that we may be an investment banker to a covered company, or external in nature, such as potential pressure from covered company executives or institutional owners. Research is organized and policies are in place to manage potential conflicts. For example, if a report is to be reviewed by a company for factual accuracy prior to publication, the investment rating and thesis are removed to ensure analyst independence and confidentiality with respect to the intended rating.

Equity analysts’ compensation is based on a salary and bonus system. Many factors enter into the bonus determination, including the analyst’s success in effectively rating stocks versus an industry index. Other factors considered include: overall productivity, support effectiveness to our financial advisors and traders, institutional research votes and business generated in covered stocks. In all cases, this assistance must comply with all Securities and Exchange Commission, NYSE and FINRA regulations and, most important, place investor interests above all else.

Research does not and has never reported to the Investment Banking Department at Raymond James. Moreover, Investment Banking has no direct or indirect approval of the ratings, earnings estimates and/or price targets of companies covered, whether the subject company is an investment banking client or not. Although an analyst may occasionally be brought “over the wall” to work with an investment banker on a transaction, it is clearly understood by all parties that the independence of the analyst and the interest of the investing client is the first priority of the analyst. In fact, the analyst’s opinion is solicited in the due diligence process to determine if our firm should assist a potential corporate client.

Analysts and other research employees are required to put client interests ahead of personal investments. Moreover, personal interests must be fully disclosed and consistent with investment recommendations. Analysts and their research associates are not permitted to purchase equity-related securities in companies that they cover. They are permitted to sell existing equity positions in covered companies no sooner than five days after the rating has been reduced to Underperform.

Analysts and research associates’ ownership of stocks that they cover is disclosed in all equity research reports discussing those securities. Additionally, relevant private investments or business interests cannot conflict with company analysis and must be disclosed in related company reports. Finally, analysts cannot cover securities of companies in which they or members of their household or immediate family are officers, directors or advisory board members.

Raymond James’ clients have the right to expect the firm’s analysts to provide advice reflective of their objective conclusions after diligent analysis. That research must be intended to generate results consistent with the clients’ best interests, though some of those recommendations will inevitably prove unprofitable. However, when investing in individual stocks, it is the client’s responsibility to read the research in order to make better-informed investment decisions.

² The S&P 500 is an unmanaged index of 500 widely held stocks that are generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index and index performance does not include transaction costs or other fees, which will affect actual investment performance.

³ Suitability ratings are not assigned to stocks rated Underperform.

The information in this section also appears in the brochure entitled: “Your rights and responsibilities as a Raymond James client.”