Analyst rules head for SEC adoption,hit by critics
By Kevin Drawbaugh
WASHINGTON, May 6 (Reuters) - New rules for stock analysts, under fire for touting shares they didn't really believe in, look headed for adoption by U.S. regulators this week despite criticism that the changes don't go far enough.
ADVERTISEMENT
The Securities and Exchange Commission is set to vote on Wednesday on the measures, proposed by the nation's largest stock exchanges and by Republicans in Congress and which are meant to make analysts more independent and their research more honest.
Amid a broad crisis of market confidence triggered by the Dec. 2 bankruptcy of former energy trading giant Enron Corp. (Other OTC:ENRNQ.PK - news), controversy has grown over the role of stock analysts who work for the world's top investment banks.
The reforms were drawn up by the New York Stock Exchange and the National Association of Securities Dealers, which oversees the Nasdaq, after congressional hearings led by Louisiana Republican Rep. Richard Baker.
By setting new limits on analyst behavior and forcing more disclosure, the proposals "go quite far in changing much of the identified conflicts that have concerned people," Baker said.
But others see the measures as inadequate on their own.
"I think this is a start, but I just don't see these regulations as being final," said Joseph Borg, president of the North American Securities Administrators Association, representing the 50 state-level securities market cops.
"This proposal might pass muster at the SEC as a sign of progress, but it is far from enough to assure the investor community," said investor activist Nell Minow, editor of The Corporate Library.
Experienced Wall Streeters have long winked at the dual roles of sell-side analysts. They are portrayed as objective market researchers. But they also serve the marketing and investment banking interests of their powerful employers.
The conflicts they confront were tolerated until America, coming to grips with a new culture of popular capitalism, in early 2000 entered its first major bear market since stock ownership exploded among the middle classes in the 1990s.
New York State Attorney General Eliot Spitzer last month starkly exposed the problem, stunning investors and lawmakers. In an investigation he led, Merrill Lynch (NYSE:MER - news) analysts were shown to have privately disparaged as "junk" shares in Internet firms that they had publicly recommended as good investments.
ANALYST CONTROVERSY FAR FROM OVER
Merrill CEO David Komansky apologized days later, but the affair is far from over. Spitzer has threatened Merrill with formal charges. He has subpoenaed other banks, as well.
The U.S. Justice Department has launched its own probe and the SEC is cooperating on an inquiry with fast-moving state law enforcement officials and stock exchange regulators.
Borg was among state, SEC and exchange officials meeting at Spitzer's office last Thursday to discuss probe coordination. "More recommendations may come out as this investigation proceeds," said Borg, Alabama Securities Commission director.
In congressional hearings, the notion has been discussed of divorcing equity analysis entirely from investment banking, but less radical surgery has been viewed as more pragmatic.
As outlined in a March NASD draft, the rules coming before the SEC would, among other things:
--Restrict analysts from dealing in initial public offering shares in sectors they cover, except in diversified funds;
--Restrict, but not ban, collaboration on research reports between analysts and investment banking employees;
--Limit to certain parts any pre-publication review of analysts' research reports by the companies written about;
--Ban pay for analysts based on specific deals, as well as ban offering favorable research for banking business;
--Ban reports 40 days after the IPO of a company handled by an analyst's banks; 10 days for a secondary offering, but not if the report concerns "a significant news event."
--Require more disclosure of analysts' pay and personal holdings, the bank's holdings and its client relationships;
--Require banks to clearly explain their stock rating systems and disclose historic data about ratings assigned.
The New York Stock Exchange's proposal differs in language, but is largely similar in concept to the NASD's. Investment banking powerhouse Goldman Sachs (NYSE:GS - news) has complained to the SEC that the new rules would be costly and time-consuming, as have other banks and the Securities Industry Association. |
