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Disclosure rules proposed
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July 3, 2001: 8:47 a.m. ET
NASD floats rules to reveal analysts' interest in recommended companies
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NEW YORK (CNNfn) - The National Association of Securities Dealers' board of governors has proposed rules requiring analysts to make much more detailed disclosures about their own or their firms' interests in stocks on which they are commenting.
The rules would require the disclosure be made when an analyst or other member of a security firm makes a recommendation during a television interview or other public appearance.
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 ANALYST DISCLOSURE RULES
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The National Association of Securities Dealers board of governors has proposed rules that require disclosurers by any of the group's members when they are commenting on companies with which they they have any of the following financial relationships:
The member has a financial interest in the company
Any discretionary account he or she manages has a financial interest in the company
The member's firm owns more than 5 percent of the company's outstanding shares
The member has received compensation from the company for investment banking services.
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The rules follow congressional hearings last month on the issue of analyst objectivity and conflicts of interests. The group as a whole received criticism about recommendations that stayed high while many stocks declined in value during the last year and a half.
Critics say that recommendations too often are tailored to helping the analyst's firm attract a company's lucrative investment banking business rather than accurately guiding the individual investor. They point out that very few analysts ever changed their recommendation on stocks to "sell" even while share prices declined.
The proposed rules would apply to members of the NASD, the group best known for running the NASDAQ market. The rules will be open for comment until Aug. 15, and would require the approval of the Securities and Exchange Commission before implementation.
"An analyst's report can have great impact on the buying and selling decisions of investors in a particular security, so investors must be made aware if potential conflicts exist," NASD CEO Robert R. Glauber said. "Investors need to be able to determine if they think an analyst may have a conflict of interest influencing a recommendation. Indeed, anyone who acts as an 'analyst' should fully disclose conflicts of interest."
The rules would require disclosure when the NASD member principally responsible for a recommendation has an interest in the stock on which he or she is commenting, or when any discretionary account he or she manages has a financial interest in the recommended security.
They also would require disclosure when the member's firm owns more than 5 percent of the shares outstanding of the company's stock, or when the member is compensated by the company being commented on for providing investment banking services.
The NASD proposal comes just days after the SEC issued an "investor alert," urging investors to explore the various relationships among the analyst, the company whose stock is being analyzed, and the analyst's investment banking and brokerage firm before deciding to buy a stock.
Earlier this month, the Securities Industry Association, a Wall Street trade group, announced 13 new, voluntary guidelines, approved by the chief executives of the 14 biggest U.S. investment banks. They also were compiled by the heads of equity research of the companies.
U.S. Rep. Richard Baker, chairman of the powerful U.S. House Financial Services subcommittee on securities markets, announced the creation of an outside panel of regulators and academics to examine recent industry proposals, and his spokesman Michael DiResto called Monday's proposal by NASD a "positive development."
DiResto added that Baker invited Acting SEC Chairman Laura Unger to testify at a hearing tentatively scheduled for early August on how the financial media can help disclose potential conflicts and examine if the investment banking side puts pressure or places certain burdens on analysts. Unger has not responded to the invitation, DiResto said. 
From staff and wire reports
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NASD Regulation
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