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Tuesday June 12, 4:31 pm Eastern Time
Wall St analysts face new guidelines
(UPDATE: Adds investor, analyst comments, details)
By Brian Kelleher
NEW YORK, June 12 (Reuters) - A Wall Street trade group on Tuesday announced a prohibition on linking analyst pay to lucrative investment banking deals in an attempt to deflect criticism that securities research is biased.
The prohibition was among 13 guidelines issued by the Securities Industry Association. They were approved by chief executives of the 14 biggest U.S. investment banks and compiled by the heads of equity research of the companies, which included Morgan Stanley (NYSE:MWD - news), Goldman Sachs Group Inc. (NYSE:GS - news) and Merrill Lynch & Co. Inc. (NYSE:MER - news)
Announcement of the guidelines precede congressional hearings scheduled for Thursday on the question of analyst independence. But SIA executives said their committee had been working on the matter since April and aren't trying to head off any potential government regulation.
``We're acknowledging there have been perceptions of problems,'' said Marc Lackritz, president of the SIA and a scheduled witness at the hearings. ``If there's perceptions, we do have problems.''
Analysts at securities companies are supposed to make objective investment recommendations on companies that often also use their firm for investment banking work. Regulators worry that possible conflicts of interest have led to biased research, as the barrier between analysts and investment may have eroded.
POLITICIANS, INVESTORS AND EVEN AN ANALYST UNCONVINCED
But politicians, investors and even an analyst had their doubts the guidelines will ease the conflict concerns.
``I am still very concerned that these recommendations do not go far enough to protect investors from the serious problems they face when relying on the recommendations of analysts who have apparent and direct conflicts of interest relating to their investment advice,'' Rep. John LaFalce, a New York Democrat, said in a statement.
One portfolio manager said ``sell'' recommendations will still be a rare breed on Wall Street.
``Many analysts won't ever come out with outright sells because they don't want management to be mad at them,'' said Graham Tanaka, president of Tanaka Capital Management, a money management firm that has about $200 million in assets under management.
Even one analyst had his doubts.
``I am skeptical that (some investment banks) can self-police to maintain analyst independence,'' said David Trone, an analyst at Prudential Securities. Prudential, which agreed to the guidelines, has cut most of its investment banking staff to focus on providing research for its brokerage clients.
MOST FIRMS SAY BUSINESS AS USUAL FOR THEIR ANALYSTS
The U.S. or North American heads of research for the firms worked through about 10 drafts in a month before the guidelines were finalized, said Frank Fernandez, SIA's chief economist.
``Virtually all'' of the companies were not in compliance with at least one guideline, which varied from one to another, Fernandez said.
But spokespeople reached for contact at the firms, including Salomon Smith Barney, Lehman Bros. Inc. (NYSE:LEH - news) and Deutsche Banc Alex. Brown, all said their research departments were already up to snuff. Credit Suisse First Boston acknowledged it was not in full compliance.
``We have adopted (the guidelines) and are bringing our policies into full compliance with them,'' a spokeswoman for the firm said.
One highlight of the guidelines is that research departments should not report to investment banking units, a relationship that could undermine analyst independence.
CSFB changed its practices so its technology analysts will only report to Al Jackson, its global head of equity research. Previously, the group reported to star tech banker Frank Quattrone as well as Jackson.
The guidelines are recommendations, SIA executives noted at a press briefing. They will not be enforced, as the SIA is not a self-regulatory body, but an industry trade group.
``The marketplace is an unforgiving enforcer,'' Lackritz said. That means if companies are releasing bad research, investors won't look to them for advice and will pull their business.
ANALYST PAY PACKAGES MAY BE LIGHTER
One possible consequence of the new guidelines would be lower analyst pay packages. The 14 companies agreed they will not link analyst compensation to specific investment banking deals such as initial public offerings.
Instead, analysts will be paid in part based on how their investment recommendations fare. In today's environment, that might not bode well for many analysts -- even as stock prices continue to fall, less than 2 percent of analyst recommendations are ``sells,'' according to Thomson Financial/First Call.
Another key guideline is analysts cannot trade against their recommendations, or sell a stock they rate as a ``buy.''
And while analysts can give companies a heads-up the evening before they issue new research report, they are prohibited from submitting recommendation changes to either the companies or investment bankers.
One guideline could result in some boring TV -- when commenting on companies, analysts will have to say if they or anyone in their family are shareholders.
Bear Stearns Cos. Inc. (NYSE:BSC - news), CIBC World Markets, Credit Suisse First Boston, J.P. Morgan Securities (NYSE:JPM - news), Robertson Stephens, Salomon Smith Barney, Thomas Weisel Partners and UBS Warburg rounded out the 14 firms agreeing to the guidelines.
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