SEC Rubber Stamps Analyst Research Rules

May 8, 2002 ( - New rules that prohibit Wall Street investment firms from tying their analysts' pay to related investment banking business won the stamp of approval from the Securities and Exchange Commission (SEC).

The rules, developed by the New York Stock Exchange and the brokers’ group that operates the Nasdaq Stock Market, are designed to curb conflicts of interest among financial analysts – one of many spinoff issues gaining fresh momentum following Enron’s collapse.

However, according to an Associated Press news report, consumer groups and lawmakers have blasted the new regulations as not being strict enough to deal with the possibility that an analyst could praise a stock to help his firm win investment banking business. The SEC recently opened an investigation into that issue at major Wall Street brokerages, the AP said.

SEC: “That is Fraud”

If an analyst knowingly makes a false recommendation on a stock, “that is fraud, pure and simple” and it will be prosecuted, Annette Nazareth, director of the SEC’s market regulation division, said at an open meeting before the vote by the three SEC commissioners, according to the AP.

SEC Chairman Harvey Pitt said at Wednesday’s meeting that the new rules, proposed by, “will go a long way toward addressing concerns that Congress and others have raised.”

“Our efforts are not concluded,” he promised.

For about a year, New York state’s attorney general has been investigating conflicts and possible fraud by analysts at big brokerage houses, including Merrill Lynch & Co.

In the case of Enron, ten of 15 analysts who followed the company still rated it as a “buy” or “strong buy” as late as November 8, two weeks after the SEC announced it had opened an inquiry into the energy-trading giant. Enron slid into the biggest bankruptcy in US history on December 2.

Rules to Be Examined

The SEC will take another look at the rules a year from now. Some go into effect immediately while others get phased in during the remainder of the year.

The rules include:

  • firms are barred from tying their analysts’ compensation to related investment-banking business. If an analyst’s compensation is based on his or her firm’s general revenues from investment banking, that must be disclosed in stock research reports,
  • analysts must clearly disclose, in research reports and television and radio interviews, if they own shares in companies they are recommending,
  • analysts are prohibited from offering or threatening to withhold a favorable research rating or specific price target for a stock to lure investment-banking business from companies,
  • research analysts cannot be supervised by the investment banking department of a firm and employees in the investment banking area are prohibited from discussing research reports with analysts before they are issued, and
  • analysts and members of their households are barred from investing in a company’s stock before it is first sold to the public if the company is in a business sector covered by the analyst.