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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.