Wall St. faces tough rules
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February 7, 2002: 4:02 p.m. ET
Investors may benefit from analysts' disclosure, if NASD gets its way.
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NEW YORK (CNN/Money) - Seeking to restore the credibility of Wall Street research, the National Association of Securities Dealers wants analysts to disclose their many apparent conflicts of interest with the investment banks that employ them.
The NASD released proposals Thursday amid growing investors distrust toward an analyst community that has remained mostly bullish even as the bear market worsens.
Subject to approval by the Securities and Exchange Commission, the NASD proposal would force analysts to disclose their firm's lucrative banking relationship with the companies they cover. And no analysts' pay should be tied to banking fees.
"An analyst may not receive a bonus that is based on the analyst's contributions to a specific investment banking deal," the recommendations say.
The Securities Industry Association, which speaks for Wall Street, agreed with the intent of the proposals, but called them burdensome. It vowed to "address these very troubling provisions," when the SEC publishes them for public comment.
"The proposal will impose technical regulatory requirements at significant costs that may impair the ability of firms and their analysts to provide timely, relevant investment recommendations," Marc E. Lackritz, president of the SIA, said in a statement.
If an analyst's firm underwrote an initial public offering, they can issue no reports on the newly public company for 40 days, the NASD proposal states. And analysts must say if they own share of companies they cover. Further, they cannot sell securities that they have recommended, nor buy those they publicly dislike.
"No analyst or household member may make trades contrary to the analyst's most current recommendations," the NASD proposal said.
The report comes as another industry, accounting, deals with its own crisis of confidence. In the wake of Enron's collapse, many of the big firms have vowed to separate their accounting arms from their lucrative consulting services.
But Wall Street has not been blamed for being wrong about its stock calls the way Andersen, Enron's accountant, has been tainted by that company's collapse.
The NASD rules also aim to put analysts' bullishness in perspective, saying "a firm must disclose in research reports the percentage of all securities that the firm recommends an investor 'buy,' 'hold,' or 'sell,'" NASD wrote.
Only 2 percent of all recommendations on Wall Street are "sells," according to analyst tracking firm Thomson Financial/First Call
Prudential Financial is among the few institutions issuing multiple bearish calls, including one to "sell" Kmart shares weeks before the retailer went bankruptcy. Prudential has no investment bank.
The rules come amid growing investor frustration with losing money by listening to Wall Street. Last year, eight lawsuits against Morgan Stanley Dean Witter & Co. star Internet analyst Mary Meeker were dismissed by a federal judge, who said they were riddled with flaws.
But Merrill Lynch last year settled a $400,000 suit against Internet analyst Henry Blodget, who like his colleagues recommended stock that lost investors millions.
The NASD recommends that a firm must include in research reports a price chart that maps the price of a stock over time and indicates points at which an analyst assigned or changed a rating or price target.
Before the SEC acts on any of the rules, the public will have a period to comment.
"Obviously, more disclosure is better than less," said Chuck Kadlec, chief investment strategist at J&W Seligman.
But not everyone on Wall Street may agree.
"We support the intent but we may have some problems with the details," said Dan Michaelis, spokesman for the Securities Association. ![graphic](/images/bug.gif)
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