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Brokerages Struggle With Analyst Rules

Wall Street: Regulators want more disclosure, but compliance can be problematic.


Brokerages are struggling to comply with new disclosure rules adopted in the wake of recent scandals involving securities analysts, and some firms are going far beyond the rules to protect themselves from charges of misconduct.

The new regulations require that all Wall Street analysts appearing on television and radio or at public forums detail, during the appearance, any financial interest they or their firm may have in the stocks they recommend. That would include whether their firm has an investment banking relationship with a recommended company.

Taking the idea a step further, some brokerages are pressuring their analysts to make the same disclosures to newspaper and magazine reporters, although the rules don't require that.

At least one firm, Chicago-based William Blair & Co., plans to require reporters to sign forms promising that they will disclose potential conflicts of interest in their stories before they can interview a Blair analyst who is making a specific stock recommendation.

"We live in a society where there is a lot of suspicion about what businesspeople are saying," said Art Simon, general counsel for Blair, which has 26 stock analysts. "We're not trying to hide anything here, and we want the public to know it. We're a conservative firm."

Brokerage analysts have faced heavy attack during the last year for their aggressive stock touting during the late-1990s bull market. Critics say analysts face inherent conflicts of interest when their firm is seeking to provide lucrative investment banking services to companies the analysts are supposed to be rating objectively.

In April, New York Atty. Gen. Eliot Spitzer alleged that Merrill Lynch & Co.'s Internet stock analysts had touted publicly shares they had slammed privately as "junk." Spitzer said the analysts had skewed their recommendations solely to help Merrill's investment bankers win business and thus had duped public investors.

Merrill subsequently paid $100 million to settle the charges, and agreed to restructure its research operations and disclosure policies, though the firm didn't admit guilt.

The new industrywide rules, drafted by the National Assn. of Securities Dealers and the New York Stock Exchange and approved by the Securities and Exchange Commission, are aimed at limiting how and when analysts issue opinions on stocks, and require brokerages and their analysts to publicly disclose more about their links to the firms they recommend or pan. The rules took effect July 9.

But the rules regarding analysts' conduct with the media cover only appearances in electronic media, because it would be difficult to enforce the requirements in print media, an NASD spokesman said. An analyst might voluntarily disclose certain conflicts to a print reporter, but if the reporter chose to leave out those details the NASD has no authority to levy punishments on the press.

Regulators can't punish electronic media, either, but the rules are clear regarding enforcement for electronic media that might edit out conflict-of-interest disclosures made during an interview. The NASD "expects that an analyst will decline subsequent appearances, absent assurances that the disclosures will not be edited out," according to an NASD background release on the rules.

Also, brokerages are expected to keep records and tapes of all appearances by their analysts.

Some brokerages say they are considering broadening the scope of the rules to include print media.

"We are encouraging our analysts to make those disclosures in print interviews," said Susan McCabe, spokeswoman for Merrill Lynch. But unlike William Blair, Merrill has no plans to require reporters to sign forms guaranteeing certain disclosures, McCabe said.

At Blair, the forms that a print reporter would be asked to sign are still being developed, officials said. The firm has yet to test the plan because it hasn't faced a situation in which an analyst was being interviewed about a specific stock recommendation (as opposed, say, to being asked generically about an industry), officials said.

Many experts say First Amendment issues make it unlikely that print media would allow reporters to sign any document guaranteeing certain commentary in a story.

"We know it's cumbersome for print reporters," said Blair's Simon. "But we're all operating on sketchy facts with these new rules. We're scrambling to figure out how to best put them in place."

At New York-based investment firm Keefe Bruyette & Woods, known for its research on bank stocks, analysts and lawyers also are struggling with how best to comply with the new rules. They have discussed whether to ban analysts from talking to the press altogether.

"People are just so scared," said Mitchell Kleinman, Keefe's general counsel. "That's why they're saying, 'We're just going to hit this thing with an elephant gun.' "

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