June 12, 2001 12:00 PM PDT
SIA sets best practices ahead of hearings
The guidelines from the industry group representing investment banks, broker-dealers and mutual fund companies come ahead of congressional hearings on Thursday. The New York state attorney general also announced that he's investigating the situation.
On Thursday, the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises will hold hearings focusing on "across-the-board grade inflation," according to a spokesman for U.S. Rep. Richard H. Baker, R-La., chairman of the subcommittee.
The hearing will also cover potential conflicts of interest between ostensibly objective research analysts and the underwriting divisions of the investment banks that employ them.
SIA President Marc Lackritz did not go so far as to say that the best practices are an attempt to head off congressional interference, but he did say a heavy hand would be unwarranted.
"We're looking forward to the hearings. I'm going to testify, and I'm looking forward to getting a chance to discuss this," he said. "We don't think legislation is necessary or appropriate, nor do we think additional regulation is necessary or appropriate. "
The best practices were agreed to by 14 major investment banking firms, which represent 95 percent of all underwriting on Wall Street. SIA officials said smaller and independent brokerages are considering the proposals, adding that they "expect this to be industrywide best practices."
The new proposals include:
Research departments should not be part of investment banking or other business units that could compromise their independence
Analysts should be encouraged to indicate what their recommendations mean, that is, detailing the difference between terms such as "accumulate" and "market perform." They should be encouraged to use the "full ratings spectrum," which includes the "sell" rating, rarely used on Wall Street. The guidelines also call for "plain English disclosure," according to SIA Chairman Mark Sutton.
Analysts should not trade against their recommendations, and should disclose their holdings.
An analyst's pay should not be tied to banking transactions, sales and trading revenues or asset-management fees.
"We are pleased with the SIA best practices. We have adopted them and are bringing our policies into full compliance with them," said Jeanmarie McFadden, spokeswoman for Credit Suisse First Boston. "We believe it will help maintain the high level of integrity and independence in research that our clients demand."
SIA officials said during a press conference that many of these practices are already covered by existing regulations. But the new guidelines "build on these requirements and in some cases take them further," Lackritz said.
No enforcement power
SIA officials acknowledged that the guidelines have no enforcement power of their own. The industry group does plan to monitor enforcement on a continuing basis, they said.
"How will we know whether the firms are complying? The best measure is really going to be the marketplace," Sutton said.
Some of the firms signing off on the guidelines are already in compliance, but some will need to change their policies, officials said. The agency would not say which firms need to make alterations.
However, Merrill Lynch, for one, said in a statement that it would "enhance" its disclosure notices "to more prominently display the firm's business relationships and to include analysts' holdings."
And at least one brokerage firm, which asked not to be identified, will change its reporting structure to comply with the new guidelines.
The controversy surrounding these issues has gotten more intense as the booming tech market has collapsed.
The brokerage firms have come under fire for overhyping the stocks they cover, and have been accused of, for instance, pushing up a stock that the parent company has underwritten.
Despite the steep decline in tech stocks and the Nasdaq, fewer than 2 percent of stocks tracked by First Call have the equivalent of a "sell" rating.
Lackritz said the analyst community follows an extremely small number of securities--only about 2,400 of the 14,500 securities listed on exchanges--"so you already have a bias, a selection bias. Analysts tend to cover stocks they will like or which tend to have (positive ratings)."
The hope is that today's pronouncement will help stave off any bad feelings between Main Street and Wall Street.
"At the end of the day there's a lot of misinformation about the way the world works between investment banking and analysts," said Bill Ahearn, spokesman for Lehman Brothers. "Even though we don't have a big retail business, we thought we should add our names to the list and be part of the proposal."