WASHINGTON - The interim head of the Securities and Exchange Commission criticized investment banks before a House panel Tuesday for permitting potential conflicts of interest that raise doubts about the objectivity of Wall Street analysts.
Acting SEC Chairman Laura S. Unger testified that an agency study, which included examinations of nine broker-dealers with significant investment banking operations, had identified several practices of concern.
These practices included the holdings of significant interests by analysts in the companies they cover, compensation structures that create incentives for analysts to issue overly enthusiastic reports, and poor enforcement of the industry's self-imposed rules.
"There is a mood of skepticism about analysts' stock recommendations," Ms. Unger said. "This skepticism is due, in large part, to a blurring of the lines between research and investment banking."
The hearing was the second in a series called by Rep. Richard H. Baker, the Louisiana Republican who chairs the House Financial Services capital markets subcommittee. In an opening statement he reiterated his hope that the industry will correct the real and perceived conflicts of interest on its own.
However, he warned, "I am not turning my back on a legislative remedy should we fail to reach our goals."
Others members of the House panel also said they were not willing to rule out a legislative solution.
Rep. John J. LaFalce of New York, the Financial Services Committee's top Democrat, warned that any industry initiatives that simply disclose potential conflicts would be insufficient.
"Conflicts of interest undermine the objectivity of the analysts and the efficacy of the work that they do," he said. "Like any profession that requires trust by the public, conflicts needs to be minimized or eliminated, not simply disclosed."
"I urge the regulators to act quickly to eliminate these conflicts, because if the regulators do not, the Congress must."
In her testimony, Ms. Unger said that the SEC's study of analyst practices is ongoing, but she presented some preliminary results:
- In 308 of 317 initial public offerings examined, the firm that underwrote the security also provided research coverage.
- Sixteen of 57 analysts reviewed had invested in a company they later covered before it was taken public by the analyst's own firm. All 16 initiated research coverage with a "buy" recommendation, and three made personal trades that went against their own recommendations.
- The majority of the investment banking firms reviewed could not accurately identify the investments their employees, including analysts, had made in companies they took public.
- In cases where a company or analyst owned stock in a firm but was prohibited from selling it during the "lock-up" period following an IPO, more than 25% issued a "buy" rating within a week of the lock-up period's expiration.
