May 9, 2002 By Marcy Gordon Ap Business Writer 3 min read

WASHINGTON (AP) – The Securities and Exchange Commission on Wednesday approved new rules proposed by Wall Street’s self-policing bodies to curb conflicts of interest among financial analysts and restore investors’ confidence in the wake of Enron’s collapse. The rules, which prohibit firms from tying their analysts’ compensation to related investment-banking business and make other changes, have been criticized by consumer advocates and some lawmakers as not going far enough.

They come as the SEC has opened an investigation into whether analysts at major brokerages rated certain stocks highly just so their firms could obtain lucrative investment-banking business.

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.

Nazareth said the new rules for analysts were needed urgently because “strengthening investor trust and confidence is critical to our markets.”

For about a year, New York state’s attorney general has been investigating alleged conflicts and possible fraud by analysts at big brokerage houses, including Merrill Lynch & Co. SEC Chairman Harvey Pitt said at Wednesday’s meeting that the new rules, proposed by the New York Stock Exchange and the brokers’ group that operates the Nasdaq Stock Market, “will go a long way toward addressing concerns that Congress and others have raised.”

“Our efforts are not concluded,” he promised.

The SEC will review the rules within a year to see how well they’re working. Some of them will take effect immediately while others will be phased in during the next six months. They include:

n Firms are barred from tying their analysts’ compensation to related investment-banking business.

If an analyst’s compensation is based on his or her firm’s general revenues from investment banking, that must be disclosed in stock research reports.

n Analysts must clearly disclose, in research reports and television and radio interviews, if they own shares in companies they are recommending.

n Analysts are prohibited from offering or threatening to withhold a favorable research rating or specific price target for a stock to lure investment-banking business from companies.

n Research analysts cannot be supervised by the investment banking department of a firm and employees in the investment banking area are prohibited from discussing research reports with analysts before they are issued.

n Analysts and members of their households are barred from investing in a company’s stock before it is first sold to the public if the company is in a business sector covered by the analyst.

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