- The Washington Times - Friday, February 7, 2003

Stock analysts will have to certify their reports and public comments reflect true personal views and that they weren’t paid by the companies they assessed, under a new rule adopted by federal regulators yesterday.
The Securities and Exchange Commission voted to approve the rule, which it proposed last year in response to the collapses of Enron and other big companies whose stock analysts had publicly promoted despite harboring doubts about the companies’ finances.
Wall Street analysts have been sharply criticized by regulators and lawmakers for touting stocks of companies for whom their firms do lucrative investment-banking business. Several prominent analysts, especially in the high-tech area, are under investigation for possible violations of federal law.
The new SEC rule has been criticized by small-investor advocates and some lawmakers as not going far enough.
And some SEC commissioners said the agency needs to take more aggressive action to curb analysts’ conflicts of interest, going beyond a recent $1.4 billion settlement agreement by all the big Wall Street investment firms that resulted from an investigation led by New York Attorney General Eliot Spitzer.
The SEC, as a federal agency, should “impose a permanent solution to the issue of analysts’ conflicts,” Commissioner Roel Campos said at yesterday’s public meeting.
President Bush’s nominee to become the new SEC chairman, investment banker William H. Donaldson, addressed the issue at his Senate confirmation hearing on Wednesday. He expressed only qualified approval of Mr. Spitzer’s action against the Wall Street firms, saying it was “constructive up to a point” as a supplement to SEC efforts but that state law enforcement officials should take care not to intrude on the SEC’s turf.
Financial analysts can reach millions of households on television and in their research reports, and their advice is closely heeded by investors. Yet critics say they have sometimes compromised their credibility by holding significant positions in stocks they recommend.
“Simply put, we want analysts to say what they mean and mean what they say,” said Commissioner Cynthia Glassman before the vote.
Mr. Spitzer last spring released documents and e-mail messages showing that Merrill Lynch analysts privately used profanities to describe some stocks and the words “disaster” and “dog” for others while publicly recommending that investors buy the companies’ shares.
In the case of Enron, 10 of 15 analysts who followed the company still rated it as a “buy” or “strong buy” as late as Nov. 8, 2001, two weeks after the SEC announced it had opened an inquiry into the energy-trading company. On Dec. 2, Enron tumbled into what was then the biggest corporate bankruptcy in U.S. history.
Even before the Enron disaster, critics of analysts’ conduct said investor confidence was eroded by analysts who issued rosy stock recommendations as the market plummeted in 2000. At one point during the slide, when the Nasdaq Composite Index was down 60 percent, fewer than 1 percent of analysts recommended selling stocks.

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