(April 20 – 13:05 ET) – Acting chairwoman of the SEC, Laura Unger is warning Wall Street firms to end conflicts of interest among equity analysts.

Unger made the remarks in a speech to the Ray Garrett Jr. Corporate and Securities Law Institute at the Northwestern University School of Law. Investors are becoming skeptical of the objectivity of analysts’ recommendations, said Unger,and rightly so, according to recent research that found 99.1% of brokerage-house analysts’ recommendations were “strong buy,” “buy” or “hold” recommendations.

“So just as investors are taking a second look at their portfolios as a result of our changed market conditions, it may also be the perfect time for analysts and the brokerage firms they work for to take a hard look at whether conflicting duties to investment banking and other clients stand in the way of truly independent analysis,” said Unger.

Unger voted against the controversial regulation promoting fair disclosure, last year. “I took issue with the solution, not the problem. Although Regulation FD reaches far, it does not really address many of the inherent conflicts that analysts, particularly sell-side analysts who work for investment banking firms, face in performing their job. I worry that as investors seek an explanation about why so many stock market experts could have been so wrong about so many companies, they will conclude that analyst conflicts of interests are a big part of the answer.”

The industry, she says, needs to get serious about eliminating some of those conflicts. “To reinvigorate public confidence, the brokerage industry needs to start thinking about resolving some of the more blatant conflicts facing this part of the industry.”

Among the most pernicious conflicts she highlighted were: analysts working in service of investment banking, brokers involved in venture investing and analysts are used to boost stocks, analyst compensation, and owning shares in covered companies.

Unger suggests disclosure as the best remedy. “Brokerage firms profess to rely on “Chinese walls” to minimize conflicts between their research, trading and underwriting departments and to prevent insider trading, but these procedures may well need to either be upgraded or enforced more effectively. To comply with the “spirit” of the “Chinese walls,” firms may need to rethink both their disclosure practices and their compensation structures to ensure that they aren’t undermining the necessary separation between research and underwriting.”
-IE Staff