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A lobbying group seeks to negate the perception that some analysts favor businesses whose stocks they or their companies own.
©New York Times
© St. Petersburg Times, published June 13, 2001
Moving to counter the growing belief among investors that Wall Street research is biased, obfuscating or downright untrustworthy, the nation's largest securities firms Tuesday announced guidelines to shore up the ethical and professional standards for their securities analysts and other employees.
After six months of sometimes fractious negotiations, research directors at 14 Wall Street firms produced a set of best practices for the industry covering such broad areas as analysts' compensation, personal ownership of stocks by analysts and the objectivity of the reports themselves.
"The concerns have been that research recommendations are biased, analyst conflicts undisclosed, their language confusing and their compensation skewed to investment banking," said Marc Lackritz, president of the Securities Industry Association, which announced the rules. "These best practices call for clear disclosure and will preserve the independence and objective judgment of Wall Street research."
The mission statement is simple enough: "The integrity of research should be fostered and respected throughout a securities firm." But in an indication of how far the standards have fallen in recent years, Lackritz said each firm that helped write the guidelines had to agree to change at least one practice to comply.
Robert Olstein, manager of the Olstein Financial Alert Fund and a critic of Wall Street research, called the guidelines "a step in the right direction," though they did not go far enough. "It's about time they stated that analysts' first obligation is to the investor and not to the firm or their own personal accounts," he said.
Laura Unger, the interim head of the Securities and Exchange Commission, said in a statement Tuesday that the new guidelines "provide a foundation for enhancing investor confidence in analyst research reports."
The participating firms included Goldman Sachs, Merrill Lynch, Morgan Stanley, Robertson Stephens, UBS Warburg and Salomon Smith Barney.
The guidelines were issued two days before Lackritz is expected to testify on analysts' conflicts in congressional hearings, sponsored by Rep. Richard Baker, R-La.
Baker, chairman of the House Financial Services subcommittee on capital markets, has questioned whether analysts "cheerlead" for companies whose stocks they or their companies own. "My concern is for the growing number of small, individual, retail investors outside Wall Street and across the country who take this stock advice to mean what it says and to say what it means," Baker said recently.
Until the late 1990s, stock analysts operated in relative obscurity, putting out research on companies or industries they followed. But in the mania for technology stocks that took hold in late 1998, the cheery reports from analysts increasingly helped to lure lucrative investment banking deals to their firms, bolstering researchers' pay significantly. In addition, the researchers' pronouncements, often amplified in TV appearances, drove stocks to unheard-of levels and made the analysts popular with individual investors.
But as most of the highflying stocks crashed to earth last year, many analysts continued to recommend the stocks. And as investors toted up their losses, they began to wonder why they had not been warned of these companies' teetering finances or dwindling prospects before disaster struck. At one point during the slide, when the Nasdaq Composite Index was down 60 percent, less than 1 percent of analysts' recommendations were to sell. In committing to change the way research is conducted on Wall Street, the large brokerage firms appear to be conceding that public trust in Wall Street was in danger of being irreparably damaged by conflicts of interest that had become all too common.
According to the guidelines, no research employee should report to a member of a firm's investment banking department.
Also, the group's new "best practices" guidelines require analysts to clearly disclose their holdings in companies they cover and prohibit them from trading against their own recommendations.
- Information from the Associated Press was used in this report.