Get rid of all analysts...........JP Morgan reins in analysts
THE independence of JP Morgan’s stock market research is being questioned after analysts at the US investment bank were instructed to seek approval from corporate clients before publishing recommendations on those stocks.
In a memorandum circulated to JP Morgan analysts last week, Peter Houghton, head of equity research, said he must personally sign off all changes in stock recommendations. In addition, the memo further sets out rules, described as “mandatory”, requiring analysts to seek out comments from both the companies concerned and the relevant investment banker at JP Morgan, prior to publishing the research.
Mr Houghton then says: “If the company requests changes to the research note, the analyst has a responsibility to incorporate the changes requested or communicate clearly why the changes cannot be made.”
In a further effort to ensure nothing slips through the net without being reviewed by the corporate financiers, JP Morgan requires prior to release of the research note, “the client banker” e-mails his approval to the publishing department.
The attempt by JP Morgan to discipline its analysts will ring alarm bells among fund managers and investors. Concern is mounting over the integrity of research published by large investment banks where the main driver of business is not selling shares to investors but fees for advice on mergers and takeovers. “This is slavish subservience of analysts to bankers,” an analyst at a rival firm said.
In his report to The Treasury, Paul Myners criticised the relationship between brokers and fund managers and suggested fund managers should develop their own in-house research teams.
Mike Crawshaw, co-head of research at Schroder Salomon Smith Barney, confirmed that it was not unusual to let corporate clients see research before it was released but there he drew the line. “There are pressures from corporate relationships but putting the onus on the analyst to justify himself, that is definitely wrong.”
In the final paragraph of the memo, Mr Houghton states that independence and integrity is vital to the firm. “The procedures outlined above do not represent an approval process but a communication process,” he says.
Terry Smith, head of research at Collins Stewart, said the constraints on analysts at large firms were increasing. “It is a bit like a judicial system where the accused decides the outcome.”
Mr Smith fought a legal battle with his former employer, the investment bank UBS, over the publication of a book about dubious accounting practices which mentioned UBS clients. Yesterday he pointed to the recent flotation of Orange where analysts were barred from briefings unless they agreed to have research vetted by the company.
The urgent language of the memo and its tone suggest that the firm is seeking to rein in its research team at a time when investment banking revenues are drying up. Mr Houghton acknowledges the difficulties of a bear market in his memo, thus: “Downgrade notes obviously attract more attention than upgrade notes and we need to reflect this in our procedures.”
One analyst at another firm said: “How are we supposed to earn a living? There is no corporate business this year.” |
