The relationship between research and investment banking at Wall Street firms is “fraught with ethical conflicts,” but those conflicts can be managed to build credibility and analyst integrity, Thomas Bowman, the president and CEO of the Association for Investment Management and Research, told the U.S. Congress today.

Bowman also testified that Wall Street firms should adopt new rating systems for securities. These systems should be “concise, clear and easily understood by the average investor,” he said, and “should include a risk measure and a time horizon to provide investors better information to judge the suitability of the investment to their own unique circumstances and constraints.”

To manage ethical conflicts effectively, Bowman said, Wall Street firms must:

  • foster a corporate culture that protects analysts from undue pressure to be positive from the companies they follow;
  • have reporting structures that prevent investment banking departments from approving, modifying, or rejecting analysts’ reports or recommendations;
  • have clear policies for analysts’ personal investments and trading to ensure there is no front-running of clients’ trades, nor trades against recommendations;
  • not link analyst compensation directly to the success of investment-banking activities; and disclose conflicts in reports and media appearances that are prominent, specific, and “plain English,” not marginal and “boilerplate.”
      As examples of the information that analysts should disclose, Bowman cited personal investments compensation to their firm from the subject company, and material gifts received from the subject company.

      Commenting on reports that too many Wall Street analysts had been bullish on Enron stock for too long, Bowman said in lengthier, written testimony he submitted to the panel that he was “not here to defend those Wall Street firms and their analysts who condone or accept an environment replete with conflicts of interest that inhibit, or worse prevent, research objectivity.”

      “Wall Street analysts (are) sometimes pressured to be positive,” he told the panel. These pressures, he said, arise from both internal forces – the conflicts with investment banking – and external ones – such as the pressures from the companies the analysts follow. “These forces create an environment … that undermines the ethical principles upon which AIMR and the CFA program are based. We condemn all who foster or sustain it.”

      Bowman said that Enron’s management “played the most egregious games with financial reporting rules and misled even the most sophisticated investors.” But, he continued, “We are convinced that most companies play such games to a greater or lesser degree.”