self regulation and analysts ...
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Analysts don't always do as they say
SEC unveils preliminary findings of research inquiry
By Matt Andrejczak, CBS.MarketWatch.com
Last Update: 2:24 PM ET July 31, 2001
WASHINGTON (CBS.MW) -- The Securities and Exchange Commission has turned up isolated cases where analysts profited by trading against their recommendations, the agency disclosed Tuesday.
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At a congressional hearing probing the practices of Wall Street analysts, acting SEC chief Laura Unger testified that three analysts at undisclosed investment banks executed trades for their personal accounts contrary to recommendations made in research reports they authored -- scoring profits between $100,000 to $3.5 million.
In one case, the analyst shorted the stock while maintaining a "buy" rating on the company, Unger said.
The SEC revealed preliminary findings based on on-site examinations at nine investment banks that have underwritten a significant number of initial public offerings in the Internet and technology-related sector.
In its report, the SEC also found that many Wall Street investment banks pay analysts largely on the profits generated from the institutions' investment banking unit.
Moreover, analysts sometimes tip off their firms' investment bankers prior to changing a rating on a particular stock, according to the SEC.
And disclosure in analysts' reports of whether their firms have investment banking relationship with the company covered is typically limited, the SEC said.
Still, Unger said the SEC is "optimistic that appropriate amendments to self-regulatory organization rules, coupled with vigilant enforcement of these rules, will improve disclosure of conflicts of interest by firms and their analysts."
The SEC's findings were part of the second in a series of congressional hearings focused on whether stock research is compromised so brokerage firms can gain lucrative investing banking relationships.
Ever since lawmakers pledged to restore investor confidence in Wall Street at the initial hearing in mid-June, a handful of investment firms have responded in what some call a knee-jerk reaction to improve their public perception at a time of bearish action in the stock market.
In the wake of last year's market tumble, many investors were peeved to find out that in less than 2 percent of their recommendations did analysts advise clients to "sell."
Recently, CS First Boston, Merrill Lynch, and Edward Jones unveiled plans to bar their analysts from owning stocks in the companies they cover, while Prudential Securities enacted similar -- but not as far-reaching -- measures for their senior analysts.
They are requiring analysts to divulge equity positions worth at least $10,000 in the companies they cover. Similar changes could be ahead for other big-name investment banks.
On a similar note, the National Association of Securities Dealers -- the nation's largest securities industry self-regulatory organization -- is considering whether analysts should reveal financial stakes in recommended stocks as well as any compensation received for investment banking services tied to the companies they tout.
Long road ahead
At this point, lawmakers have not determined whether they should take a legislative approach to correcting Wall Street's research shortcomings. Many would like the industry to clean up its practices through self-regulation.
But if Congress really aims to fix conflicts of interest on Wall Street, it faces a daunting task. It would require nothing less than lawmakers turning the structure of the brokerage industry on its head, according to the Precursor Group.
The Washington, D.C.-based independent research broker-dealer said Monday the entire brokerage system is skewed to putting Corporate America's interests ahead of the average investor because of bread-and-butter investment banking relationships, direct ownership of a company's stock through proprietary trading and money management duties.
According to a Precursor Group survey, 95 percent of the 82 investment firms ranked by in the Wall Street Journal's annual stock pickers feature are plagued by these conflicts of interests, deeper than analysts owning stocks in the companies they cover.
"The current system isn't going to produce objective research," said Scott Cleland, founder and chief executive of the Precursor Group, who testified at the first hearing on analyst practices.
Chuck Hill, director of research at Thomson Financial/First Call, scheduled to testify at Tuesday's hearing, agreed that Congress has its work cut out.
"The bigger problem remains that analysts are still being compensated by what they do for the investment banking side," Hill said in an interview with CBS.MarketWatch.com. "Until they do something about it, I'm not sure we'll make a whole lot of progress." Watch Interview.
But Hill also cautioned the public shouldn't paint all analysts with the same brush.
Matt Andrejczak is a reporter for CBS.MarketWatch.com. |
