Lawmakers Probe Analyst Conduct


Voluntary guidelines newly proposed by the securities industry don't go far enough to protect investors from conflicts of interest that can taint brokerages' stock recommendations, lawmakers said Thursday.

Unless the industry puts teeth into the rules, the federal government might step in with regulations or legislation, Rep. Michael G. Oxley (R-Ohio), chairman of the House Financial Services Committee, which oversees the brokerage industry, said at a hearing Thursday of the panel's subcommittee on capital markets.

"If the Chinese wall is in need of repair, wallpaper will not suffice," Oxley said, referring to the barrier that traditionally has separated brokerages' stock research departments from their investment banking departments.

Under pressure to help the investment banking side land lucrative stock underwriting deals, analysts either pull their punches or become outright cheerleaders for stocks of dubious value, critics say.

The biggest excesses came during the boom in Internet and telecommunications stocks in the late 1990s and early last year, when analyst "buy" recommendations outnumbered "sells" by more than 50 to 1, critics say.

The collapse of that tech stock bubble and the loss of hundreds of billions of dollars of investor wealth have produced a powerful backlash of criticism in the media and on Capitol Hill, as well as several investigations by law enforcement authorities.

The Securities Industry Assn., representing 14 of Wall Street's largest brokerages, responded this week with a list of "best practices" meant to secure the independence of stock analysts.

Among other things, the guidelines suggest that analysts not report to the investment banking department or have their pay linked to investment banking deals; that they disclose any personal or family ownership of stocks they cover; and that any personal stock transactions be consistent with their public recommendations--for example, not selling shares they have rated a "buy."

The topic was hot enough that a crowd of more than 100 reporters and spectators jammed the hearing room. Dozens more crowded into an overflow room to listen to the proceedings via an audio hookup.

Thursday's was the first of a planned series of hearings by the subcommittee, chaired by Rep. Richard H. Baker (R-La.). Baker said he would circulate the SIA guidelines to regulators, academics and industry officials, soliciting their suggestions for improving them.

Like Oxley, Baker said he would prefer to address the problems without legislation.

Baker also took a shot at the financial media, saying that it is "irresponsible of the press to quote irresponsible analysts, then put them on the cover of magazines and make them into rock stars."

Defending the industry, SIA President Marc E. Lackritz, one of eight witnesses, said that where securities analysts are concerned, there is a big difference between making a wrong projection and being influenced by their firm's other business.

"To be wrong in projecting the performance of a company or a security is very different from failing to try their hardest to serve the interests of investors," Lackritz said.

He also noted that federal securities laws, stock exchange rules and the codes of ethics of professional organizations already address many of the issues being spotlighted by the critics.

Gregg Hymowitz of EnTrust Capital Inc., an investment advisory firm, said that the preponderance of "buy" recommendations failed to explain the Internet stock mania because "old-economy" stocks such as railroads and food companies "would have gone to the moon" too if buy recommendations alone drove stocks.

Financial journalist James Glassman, author of "Dow 36,000," told lawmakers that the lack of sell recommendations was not indicative of a scandal.

"Smart investors buy stocks, and they keep them. They don't sell," Glassman said. "If I could change anything that analysts do, it would be to encourage them to tell us the best stocks to own unchangingly for the next five to 10 years, not the next five to 10 weeks."


Times wire services were used in compiling this report.

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