By James Langton

(March 21 – 11:00 ET) – If you ever held out any hope that brokerage firm research is independent and not beholden to the investment banking business — forget it.

According to a story in today’s Times (of London), a memo was circulated to J.P. Morgan analysts last week by Peter Houghton, the firm’s head of equity research. The memo reportedly states that Houghton must personally sign off all changes in stock recommendations, and that analysts must seek out comments from both the companies concerned and the relevant investment banker at J.P. Morgan, prior to publishing the research.

The memo reportedly says, “If the company requests changes to the research note, the analyst has a responsibility to incorporate the changes requested or communicate clearly why the changes cannot be made.” It also notes that the investment banker that covers the relevant company must email their approval to the publishing department before research can be released.

The independence and integrity of equity research from big brokerage houses with investment banking clients has always been questioned. The assumption has been that analysts write research to please investment banking clients, not trading clients, either institutional or retail. Most institutional clients employ their own analysts to avoid this issue, but for retail clients there can be little else to rely on other than brokerage research.

The damning J.P. Morgan memo attempts to salvage the firm’s independence, noting, “The procedures outlined above do not represent an approval process but a communication process”.

The Canadian securities industry is anticipating the imminent release of a report addressing the issue of analyst independence. It is hoped that the report will provide some guidelines for sell side firms to preserve the integrity of their analysts.