“Regulators finally will attempt to stamp out a firestorm of controversy over conflicts embedded in Wall Street’s influential research departments,” writes Micheal Schroeder in today’s Wall Street Journal.

“Thursday, House Financial Services Committee members and chiefs from the Securities and Exchange Commission and National Association of Securities Dealers are expected to unveil significant proposals for new analyst disclosure and stock-ownership requirements.”

“The proposals would require Wall Street research analysts to explain their stock-rating systems and limit stock ownership in companies they recommend. The proposals also would require analysts to prominently disclose their firms’ investment-banking relationship in research reports. To update existing rules, regulators also are seeking to impose strict new standards for separating securities firms’ investment-banking arms from research departments and assigning management responsibility to police the new requirements.”

“The move follows months of criticism of Wall Street analysts for failing to call the technology-stock crash and Enron debacle, among other things. At issue are conflicts between analysts and investment bankers — who long have known that negative research will hurt their chances of winning lucrative corporate-finance work. Many prominent research analysts remained wildly optimistic on stocks, particularly tech shares, long after those stocks crashed, as investors were saddled with large losses.”

“The lack of Wall Street research independence has drawn unprecedented attention for the past year. Analysts became the focus of possible regulation from federal officials and lawmakers. Last summer, Congress held hearings on conflicts of interest, and threatened legislation if firms didn’t do a better job of self-policing. The SEC also launched an examination of conflicts in the summer.”

“The SEC has been working with the NASD, the self-regulatory agency that oversees brokers, and the New York Stock Exchange, to help craft the rules. The NASD board recently approved the proposed rules, and the NYSE board is expected to consider the rules in a meeting Thursday. If they are approved as expected, the rule proposals will be submitted to the SEC for public comment. The rules, which likely will undergo some modification by the SEC, could go into effect within a few months.”

“Spokesmen for the SEC, NASD and NYSE declined to comment.”