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Analyst Hearings
By Bruce Mushial
This past week the U.S. Congress convened hearings
to look into Wall Street analyst ratings and their relationship
to other departments within their companies. What has been
the issue that created the need for hearings and what has
been the outcome? Legislators have had many concerns.
Analysts seem to only recommend buying stocks but rarely issue
a clear "sell" recommendation. Also there is a concern
that some analysts' reports are tainted by the brokerage firm's
desire to develop lucrative investment banking relationships
with the companies the analysts are reviewing. Companies wanting
to go public often chose their lead underwriters as those
that are most favorable to companies in their industry. Thus
positive ratings from a firm's analysts can translate into
a large amount of investment banking income for the firm and
a large bonus for the analysts who helped make it possible.
The chain of command at some brokerage firms has the research
department under the direct supervision of the firm's investment
banking executives, which hardly paints a picture of unbiased,
independent research by analysts. A study showed that
firms that underwrite a stock issue 50 percent more "buy"
recommendations on the stock as firms that didn't take part
in the underwriting, and in the two years following an IPO
those stocks recommended performed 50 percent worse than those
given a "buy" rating at other firms. A couple
of days prior to the hearings the Securities Industry Association
came out with a list of voluntary guidelines for industry
analysts, but these came under fire of the legislators. Representative
Kanjorski of Pennsylvania called them, "nice, a little
late, but without any enforcement mechanism." Arthur
Levitt, former SEC chairman called the new guidelines "vague
and fuzzy." Many of the witnesses testifying were
from the large Wall Street brokerage firms, but some of the
individuals testifying before the hearings were from independent
research firms, similar to the Stock Traders Press, that strive
to present unbiased research and don't have investment banking
relationships with the firms they recommend. The outcome
of the hearings will evolve over time but the first changes
are already beginning to take place. Merrill Lynch has
announced they would be revising their current system of rating
they issue on companies. The current 5-tiered system will
become a 4-tiered system that is believed to make their recommendations
clearer and easier to follow. The current system employs the
ratings "buy," "accumulate," "neutral,"
"reduce" and "sell." The new ratings system
will use the terms, "strong buy," "buy,"
"neutral," and "reduce/sell." Hopefully
the final result of the hearings will be voluntary guidelines
for analysts that elevate their role as an independent provider
of research to the public without any hint of any conflict
of interests.
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