SEC chairman says Wall Street too bullish on stocks
By Michael Connor
BOCA RATON, Fla., April 13 (Reuters) - America's chief
stock-market regulator on Tuesday said Wall Street analysts
were issuing far too many bullish stock reports.
U.S. Securities and Exchange Commission chairman Arthur
Levitt, saying he was issuing "an early warning signal," said
such rosy stock analyses -- in an age of finance-industry
mergers -- appear to be shaped by the lucrative ties analysts'
firms have with the corporations they follow.
Levitt, in comments to a trade group here, put analysts,
the financial conglomerates that employ them and the corporate
clients which expect glowing reports on their stocks on notice
that he would be taking up such potential conflicts of interest
with the industry organizations that oversee Wall Street.
Levitt, a Wall Street veteran who has headed the SEC for
six years, said he now had no specific governmental proposals
to cure the potential conflicts of interests between analysts
and the individual and institutional investors who have lifted
U.S. equities values to lofty heights never before seen.
"We all know this industry is filled with possible
conflicts of interest," Levitt said at a meeting in Boca Raton,
Florida, of the Securities Industry Association. "I am going to
discuss this with the various self-regulating agencies. This is
kind of an early warning signal."
Levitt said a study had shown that equity analysts -- a
frequent source of expert commentary in television, newspaper
and news agency coverage of business -- had shown that sell
recommendations accounted for just 1.4 percent of all analysts
recommendations, while buys added up to 68 percent.
"Certainly, the growth in the market has something to do
with this lopsidedness," Levitt said. "But I can't help but
wonder what else is driving the number of buys to exceed sells
by eight to one, when in the early 1980s that ratio was roughly
one to one.
"Part of the explanation could be what more and more
studies are showing: a direct correlation between the content
of an analyst's recommendation and the amount of business his
firm does with the issuer."
Global finance has undergone a wave of mergers through the
1990s, creating giants with different divisions soliciting
corporations for mergers and acquisitions business as well as
loans and other finance functions even as their equity analysts
track and report on the same companies as potential investments
for other clients and the media.
"Today, analysts are under increased pressures to look for
and attract business and to help the firm keep the business it
has," Levitt said, adding that analysts are frequently expected
to help corporate executives to promote sales of securities.
"And very often, the trading desk and investment bankers
help determine (analysts') compensation," Levitt said.
Levitt, who praised Wall Street for dropping some dubious
sales practices by brokers, said he had no intention of
instructing investment firms on how to compensate analysts,
brokers and other staff but underscored the potential for abuse
was great and that individual investors were largely ignorant
about the possible conflicts of interest among analysts.
"I worry that investors are being influenced too much by
analysts whose evaluations read like they graduated from the
Lake Wobegon School of Securities Analysis -- that's the one
that boasts that all securities are above average," Levitt
said.
"I wonder how many investors realize that the firm that is
paying an analyst to talk about a particular company is the
same firm that was paid to handle the issuance of that
company's stock. And I wonder how many investors realize the
professional and financial pressure many analysts face to
dispense recommendations that are more in a company's interest
rather than the public's interest."
Levitt's agency has recently cracked down on U.S.
corporations for manipulating earnings reports, promoted the
independence of directors for U.S. mutual funds and is seeking
to ban political contributions by bond firms seeking government
business.
((-- Michael Connor, miami.newsroom@reuters.com,
305-374-5013))
REUTERS
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