Is this just some tough talk for the sake of avoiding blame later? Or is it for real?
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SEC: Analysts too bullish
Markets regulator Arthur Levitt eyes conflicts of interest on Wall Street
April 13, 1999: 1:35 p.m. ET
SEC eyes NYSE brokers - April 5, 1999
SEC offers new fund rules - March 22, 1999
Securities and Exchange Commission
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BOCA RATON, Fla. (Reuters) - America's chief stock-market regulator on Tuesday said Wall Street analysts are 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 that expect glowing stock reports on notice that he would take 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 has 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 heights never before seen.
"We all know this industry is filled with possible conflicts of interest," Levitt said at a Securities Industry Association meeting in Boca Raton, Fla. "I am going to discuss this with the various self-regulating agencies. This is kind of an early warning signal."
In bed with public companies
Levitt said a study had shown that "sell" recommendations from equity analysts -- a frequent source of expert commentary in television, newspaper and news agency coverage of business -- 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 promote sales of securities.
"And very often, the trading desk and investment bankers help determine (analysts') compensation," Levitt said.
A mission in the public interest
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 is great and that individual investors are 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.
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