SIA to Unveil Analysts’ Code of Conduct

The Securities Industry Assn. today is expected to release a code of conduct for stock research that will urge Wall Street brokerages to limit ties between analysts and their investment banking businesses, said people familiar with the matter.

The association, the main trade group for the brokerage industry, will call for barring analysts from receiving direct compensation from stock issues, mergers or other business they help generate, and from reporting to the investment banking arms of their firms, the people said.

The group also will recommend analysts use the full spectrum of ratings from “strong buy” to “sell,” the people said. Today, 98% of stock ratings range from “strong buy” to “hold,” according to Bloomberg News data.

The SIA is releasing guidelines two days before U.S. congressional hearings into potential conflicts of interest between brokerages’ research arms and their investment banking arms.

Wall Street has long been accused of using research to support investment banking--for example, writing favorable reports, or at least reports that aren’t negative, about companies that the brokerages are pursuing for fee-generating investment banking business.

Brokerages have consistently denied that their research is compromised by their investment banking goals.

But the federal government’s ongoing probe into alleged manipulation of initial public stock offerings during the tech stock boom of 1999 and early 2000 has resurrected the topic of analyst objectivity.

Brokerages “are upset that the credibility of their analysts has been reduced to such a level,” said Roy Smith, an investment banking professor at New York University who ran Goldman Sachs Group’s equity department in the 1980s. “This is an effort to contain the brush fire.”

Most securities firms say they already abide by the “best practices” policy to be released today. It was drafted during the last three months by the heads of research at more than 10 investment banks, sources said.

On Thursday, Rep. Richard Baker (R-La.) will hold hearings on analysts’ conflicts of interests. “The lines have become blurred between analysis and merchandising” on Wall Street, Baker said.

Although Baker and fellow Republicans favor an industry solution, Rep. Edward Markey (D-Mass.) advocates establishing a Securities and Exchange Commission rule that would require greater disclosure of brokerage relationships with companies they follow on the research side.

Particularly irking to many investors is that Wall Street analysts have long appeared fearful to advise selling a stock.

For example, shares of Amazon.com have fallen 70% in the last 12 months. Yet few analysts advised investors to bail out of the stock on the way down.

Currently, the only brokerages that have sell recommendations on the stock are Prudential Securities, Sanford C. Bernstein & Co. and Thomas Weisel Partners. Neither Prudential nor Bernstein does investment banking of any kind.