MARKET COMMENT
Analysts To Do It Behind The Wall

By David Kuo (TMFDragon)
June 14, 2001

Carburton Street, London -- The Securities Industries Association (SIA) in America yesterday endorsed a compilation of key recommendations for analysts that has been also been endorsed by 14 of the world's largest underwriting firms. The SIA boasts a membership of some 700 firms that include investment banks, broker-dealers and mutual fund companies.

The "best practices" list includes the following:

• Research departments should not report to investment banking or any other business units that might compromise their independence.
• Analysts should be encouraged to indicate both when a stock should be bought and when it should be sold, and management should support the use of the full rating spectrum.
• Analysts should not trade against their recommendations and should disclose their holdings in companies they cover.
• Analysts' pay should not be directly linked to investment banking transactions, sales, and trading revenues or asset management fees.

In essence, analysts are to be encouraged to perform their duties behind a "Chinese wall", independent of other interests in the same firm that could otherwise cloud their judgement. As investors, we have always been suspicious of analysts' recommendations, and the existing potential for conflicts of interest is not healthy for the industry as a whole.

Many of us will remember the mid-nineties when buy recommendations were attached to just about every tin pot dot com and technology company that came to market. We ask ourselves, today, how some of these apparently intelligent individuals could get it so very wrong. In most cases, the answer can be found in the conflict of interest between the analysts and the companies that they worked for. It is difficult for an analyst to remain impartial if he knows that his own bank is about to raise additional finance for the company through additional share offerings.

Today's move is long overdue and should help allay some of the concerns of smaller investors who have treated the industry with suspicion. But whether the analysts do it behind, in front or even on top of the Chinese wall, nothing can beat doing your own research.