Brokerages Support Conflict Disclosure
Merrill Lynch & Co., Goldman Sachs Group and other major brokerages have endorsed a regulatory plan to require stock analysts to disclose potential conflicts of interest, while arguing that analysts shouldn’t be forced to give details during TV appearances.
The endorsement came in a letter from the Securities Industry Assn., a trade group that represents 700 brokerages and that previously had urged a delay in any new rule-making on analysts’ potential conflicts.
In outlining its new position, the SIA gave qualified support to proposals put forth in July by the National Assn. of Securities Dealers’ regulatory arm.
The SIA’s letter said analysts in TV appearances should make a general disclosure if they own stock in a company under discussion or if their firms do investment banking for these companies. However, any requirement that analysts make detailed disclosures would be “unworkable,” said the letter dated Wednesday.
Congress and the Securities and Exchange Commission have pushed for changes in brokerage practices, arguing that some analysts in recent years may have made unreasonably optimistic forecasts to advance their own financial interests.
Many analysts own stock in companies they cover and are paid on the basis of their firms’ underwriting profits, a recent SEC study found.
The NASD proposal would require disclosure of potential conflicts whenever analysts make a recommendation in writing, on TV or during a public appearance. The NASD is reviewing comments on the proposal and will decide what to recommend to the SEC for final approval.
The SIA’s latest letter expressed support for the thrust of the NASD plan, while listing some reservations. “We agree that potential conflicts of interest exist and that enhanced disclosure of them might strengthen public confidence in the securities industry,” the SIA said.
But the SIA’s letter suggested limits to the disclosure rules, such as when analysts appear on TV.
“Analysts often have no way of knowing in advance what securities might be brought into the conversation, and it would be unrealistic to expect an analyst to know in advance every security in which his or her firm or its affiliates has a disclosable interest,” the SIA said.
The group also said a firm shouldn’t have to disclose confidential investment-banking work that it is doing for companies under review by its analysts.
Disclosure of a firm’s work on a hostile corporate takeover, for example, could produce information that would violate federal inside-trading rules, SIA said.
“These are reasonable positions that make good sense,” Georgetown University finance professor James Angel said.
An investor advocate, Barbara Roper of the Consumer Federation of America, said the SIA “seems to be making a genuine effort to come up with workable disclosure rules.”
In June, the SIA issued a list of “best practices” for the securities industry to follow on potential analyst conflicts of interest. But of the 14 major firms that worked on the SIA list, 13 said they already met the standards. That caused some critics to complain the industry wasn’t interested in true reform.
