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The Honolulu Advertiser
Posted on: Thursday, May 9, 2002

SEC approves rules for financial analysts

 •  Averting conficts of interest

By Marcy Gordon
Associated Press

WASHINGTON — That analyst on television praising some stock to the heights is going to have to let you know if he has a financial interest in the company.

Seeking to restore investor confidence shaken by Enron's collapse, federal regulators approved rules yesterday requiring analysts to clearly disclose, in research reports and TV and radio interviews, their interest in companies whose stock they recommend.

Financial analysts can reach millions of households on television, and their advice was heeded by investors during the bull market of the 1990s. Yet, critics say, they have compromised their power by holding significant positions in companies while they recommend those stocks.

The rules, designed to curb conflicts of interest among analysts, also prohibit securities firms from tying their analysts' compensation to some investment-banking business the firms do for companies.

Proposed by Wall Street's self-policing bodies and approved by the Securities and Exchange Commission, the rules have been criticized by consumer advocates and some lawmakers as not going far enough.

The SEC action came a few days after the agency opened an investigation into whether analysts at big Wall Street brokerages rated certain stocks highly so that their firms could obtain lucrative investment-banking business. That business includes arranging and financing companies' first sales of stock to the public.

Several prominent analysts recommended high-tech stocks while their firms financed the companies' initial public offerings.

If an analyst knowingly makes a false recommendation on a stock, "that is fraud, pure and simple" and it will be prosecuted, Annette Nazareth, director of the SEC's market regulation division, said at an open meeting before the vote by the three SEC commissioners.

For about a year, New York state's attorney general, Eliot Spitzer, separately has investigated alleged conflicts and possible fraud by analysts at big brokerage houses, including Merrill Lynch & Co.

Spitzer released documents and e-mails showing that Merrill analysts privately used profanities to describe some stocks and the words "disaster" and "dog" for others while publicly recommending that investors buy those shares.

"In light of the recent revelations, it's clear that the rules they (the SEC) came out with today don't go far enough," said Juanita Scarlett, a spokeswoman for Spitzer.