February 26, 2002

SEC Commissioners
Washington, DC

Dear Commissioners,

As a security analyst and Chartered Financial Analyst (CFA) with more than 20-years in both the investment management business, and the Wall Street brokerage house business, I have passionate views about the current debate on Wall Street analyst accountability, and I believe a simple solution. (Skip Ahead if you're short on time).

Most certainly, the reason for a reluctance to issue sell ratings by Wall Street is due to the enormous potential revenue streams from investment banking activities. Any view to the contrary is simply misinformed. How do I know this? I was one of them for 10 years.

A simple test to illustrate this is to simply compare the buy/sell ratios of analysts at brokerage firms to those at money management firms. At brokerage firms the biggest revenue opportunity comes from investment banking, which has little to do with stock performance, while at money management firms the biggest revenue opportunity comes from additional assets under management, which has everything to do with stock performance. It turns out that buy side analyst compensation is tied to performance, which is what their constituents expect, while sell-side analyst compensation is tied to banking, which is not what their constituents expect.

The biggest cause for confusion and anger among investors who listen to sell-side analysts is that investors rely on the belief that these analysts are unbiased. If investors more clearly understood that these sell-side "analysts" are not unbiased, but are primarily smart marketers for their firms investment banking business, much of the outrage would dissipate.

HERE'S MY SIMPLE SOLUTION IDEA >>>>>>>>>>>>>>>>>>>

Much like the FTC doesn't allow the phrase "Juice" on partial-juice products because of the potential for misperception by consumers, the SEC should disallow the phrase "analyst" on those brokerage house workers whose primary paycheck comes from investment banking, because of the clear misperception by consumers. If we require firms to call these workers "Equity Marketers" or "Equity Information Officers" or a proper title more in the nature of their true function, the potential for consumer misperception is greatly reduced. Do not overlook the Orwellian nature of calling what is truly the Investment Banking Marketing Department by the name Research Department to create an aura of impartial science. It's really nothing of the kind.

In my opinion, there will be nothing that can be done to change the compensation pattern at brokerage firms. Research departments do not collect revenue from any clients. All monies that fund research departments come from investment banking, trading, or brokerage. There is very little money in trading, and many firms lose money in it. In brokerage, the revenue is taken primarily by the brokers ("financial advisors - more Orwell), who are quite reluctant to fund research. Most brokers say they don't use research and don't want to pay for it. That leaves investment banking as the primary revenue source for research.

Changing this structure would be impossible. While some firms could create bonus pools from banking deals, and fund analysts pay out of that, breaking ties to any specific deals, it would always be clear which "analysts" helped bring in which deals, and what fees were generated. If compensation is not commensurate with these realities at existing places of employment, they would simply be used to fund recruiting efforts, and still end up in paychecks as signing bonuses.

And there is nothing wrong with marketers earning commissions. Certainly salesmen in other fields are paid on commission and can earn significant compensation doing so. But in those cases, no customer is misinformed. Salesmen don't masquerade as impartial scientists in the aerospace business, or in the automobile business.

Please consider discussing this proposal with your colleagues. I have wrestled with this issue for years as I tried to impartially analyze stocks, but was "guided" toward client biases. I am now plying my analyst trade at an investment management firm, where the goal of my analysis and the goal of my firm are the same, and both are fully understood by the client. Increasingly, so-called "analysts" at brokerage firms are giving the profession a bad name simply because they are misnamed.