SEC Requires Analysts to Certify Research
The Securities and Exchange Commission voted 4 to 0 Thursday to require Wall Street stock and bond analysts to vouch that the views expressed in their research reports are genuinely their own.
Regulation Analyst Certification, or Reg AC, forces analysts to certify that opinions in the reports accurately reflect their personal views. The certification must be prominently included in reports.
“Simply put, we want analysts to say what they mean and mean what they say and to sign their name to that,” SEC Commissioner Cynthia Glassman said at a public hearing.
Analysts also must certify that they received no payment for specific research opinions. If they could not certify that, they would have to say who paid for the research and how much, as well as to state that such compensation could influence their opinions.
Reg AC was proposed more than six months ago by the SEC, which since then has agreed to a massive settlement with major brokerages over allegedly misleading stock research during the bull market boom years.
Investigations of former superstar analysts, such as Henry Blodget at Merrill Lynch & Co. Inc. and Jack Grubman at Citigroup’s Salomon Smith Barney unit, led the brokerages to agree in December to pay $1.4 billion to settle federal and state probes without admitting or denying guilt.
Investigators have alleged that some analysts privately disparaged stocks even as they publicly hyped them to help their brokerages win and keep lucrative investment banking business from corporate clients.
As the bull market ended and share prices plunged, analysts also came under increasing criticism for having rarely issued “sell” recommendations on stocks they cover.
Critics said analysts too often were maintaining bullish recommendations on stocks for the general public while privately telling institutional investors to avoid particular issues.
That has become somewhat less of an issue over the last year: A regular tally of 24,000 analyst recommendations by data firm Thomson First Call in Boston shows that 9.8% of recommendations now are “sells,” up from just 2.6% on April 1.
The percentage of recommendations that are “buys” now is 47.7%, down from 62.5% on April 1. The percentage of “hold” recommendations is 42.5%, up from 34.9%.
Some brokerages, including Salomon Smith Barney, already include analyst certification statements in their research reports. Salomon, Merrill, Credit Suisse First Boston and other firms mostly supported the SEC rule.
But Goldman Sachs Group Inc. questioned the fairness of holding stock analysts personally responsible for their recommendations because supervisors can make changes to stock commentaries.
In a Sept. 23 comment letter, Goldman Sachs general counsel John W. Curtis urged the SEC to change the rule to make analysts certify their work “subject to supervision policies of the broker or dealer applicable to all research published by it.”
The SEC adopted the final rule without that proposed change.
The SEC’s analyst certification rule mirrors similar requirements that the agency has imposed on senior corporate executives and mutual fund officers, in line with mandates in last year’s federal Sarbanes-Oxley corporate governance law.
Some lawyers said Reg AC added little to existing securities fraud law, which already covers misleading or false research.
“I’m not sure what it adds to the mix. But if it makes some people more comfortable, fine,” said Saul Cohen, a partner at law firm Proskauer Rose in New York.
SEC Commissioner Harvey Goldschmid said Reg AC, while helpful, would provide “a patch of only marginal value.... It’s not a seal of approval. It’s not an indicator of quality” of research.
The SEC should move toward comprehensive national regulation of analysts, he said.
“Efforts to improve sell-side research do not end here,” said SEC Commissioner Roel Campos, who voted for Reg AC along with Goldschmid, Glassman and departing SEC Chairman Harvey Pitt. Commissioner Paul Atkins did not attend the hearing.
Pitt has continued to work pending Senate confirmation of the White House’s nomination of former New York Stock Exchange Chairman William Donaldson as his successor.
The SEC’s rule on analysts also requires them to file quarterly reports with their firms certifying the accuracy of their comments about stocks on television, in interviews and during other public appearances.
Nancy Grunberg, a former SEC enforcement lawyer, said the regulation might help build private fraud cases against analysts. A large number of such cases is expected despite the federal and state settlement with brokerages.
“From an enforcement side, it gives you a clear statement, an easier hook to go after an analyst,” said Grunberg, now a partner at law firm Venable in Washington.
