SEC Launches Inquiry into Research Analyst Conflicts


Washington, D.C., April 25, 2002 -- Securities and Exchange Commission Chairman Harvey L. Pitt announced today that the SEC has commenced a formal inquiry into market practices concerning research analysts and the potential conflicts that can arise from the relationship between research and investment banking. The inquiry will be conducted jointly with the New York Stock Exchange, the National Association of Securities Dealers, New York Attorney General Eliot Spitzer, the North American Securities Administrators Association and the states. The inquiry will help determine the necessity of additional rulemaking and whether any laws have been violated.

"This is the next step-and a critical one-in the Commission's year-long review of analyst practices," said Chairman Pitt. The Commission's active review of analyst practices was undertaken in conjunction with the legislative oversight of the House Financial Services Committee. "The recent disclosures that resulted from the investigation by the New York State Attorney General, as well as the practices uncovered by the staff of the SEC, the NYSE and NASD, reinforced the Commission's conclusion that further inquiry is warranted," Pitt said.

"We look forward to working with the self-regulatory organizations and the states to ensure that the letter and spirit of both state and federal laws are followed," Pitt added. "We will work closely with all of our counterparts while we enforce the national regulations and standards that have made the U.S. securities markets the strongest in the world. We will give investors confidence that the same securities rules and protections apply no matter where they live or do business."

For its part, the North American Securities Administrators Association, on behalf of the states, has formed a multi-state task force that will be part of the SEC inquiry to focus on analyst research issues and possible securities law violations by Wall Street firms.

In a related action, Pitt announced that the Commission will consider analyst rules proposed by the NYSE and NASD at an open meeting scheduled for May 8. The rules, intended to address the conflicts that can arise when research analysts recommend securities in public communications, were proposed in February after an extensive joint effort by the two major self-regulatory organizations in consultation with the Commission and the House Financial Services Committee. The period for comment on the rules ended April 18, and the Commission received more than 45 comment letters.

"The NASD and NYSE have put forward a thoughtful and progressive framework for protecting investors and the integrity of our securities markets," Pitt said. "We will carefully consider the comments we have received for ideas that could strengthen and streamline the rules, and we will be open to considering additional rules after the completion of the joint inquiry we announced today."

Over the last year, the Commission has been reviewing analyst practices and working closely with the NASD and NYSE and in their efforts to strengthen the ethical standards and rules for analysts. Last summer, Commission staff conducted on-site examinations of full-service broker-dealers that focused on analysts' financial interests in the companies they cover, analyst reporting structures and compensation arrangements. Last July, Commission staff issued an "investor alert" highlighting the numerous biases that may affect analyst recommendations.

In addition, the Commission has worked closely with members of Congress on their concerns about the objectivity and independence of research analysis, specifically participating in hearings last summer before the House Financial Services Committee and its Subcommittee on Capital Markets, led by full Committee Chair Michael Oxley and the Subcommittee's Chair Richard Baker.

On Feb. 7, the proposed NYSE and NASD rules were announced with bipartisan support from members of the House Financial Services Committee.

Significant elements of the rules proposed by the NYSE and NASD include the following:

  • Structural reforms to increase analysts' independence, such as a prohibition on investment banking departments supervising analysts or approving research reports;
  • A prohibition on tying analyst compensation to specific investment banking transactions;
  • A prohibition on offering favorable research to induce firm business;
  • Increased disclosures of conflicts of interest in research reports and public appearances, such as business relationships with or ownership interests in the subject company;
  • Disclosure in research reports of data concerning a firm's ratings, such as the percentage of ratings issued in each of the "buy," "hold," and "sell" categories, and a price chart comparing the rated security's closing prices and the firm's rating or price target over time; and
  • Restrictions on personal trading by analysts in securities of companies followed by the analyst.

Last modified: 4/25/2002