“Stock analysts and the companies they cover have proposed a new code of conduct governing the sometimes-thorny, tit-for-tat relationship between them,” writes Ann Davis in today’s Wall Street Journal.

“And in a new twist, trade organizations for the two groups that hammered out the agreement felt compelled to address another ballooning trend: companies paying analysts at small firms to cover their stock.”

“The release Thursday of a first-ever set of ‘best practices’ guidelines is a joint effort between the Association for Investment Management and Research, the leading trade organization for stock research analysts and investment managers, and the National Investor Relations Institute, a group of corporate financial representatives. After hashing out ways to improve the integrity of stock research in a series of meetings that began in July, the groups laid out nonbinding rules of engagement that they will ‘strongly’ encourage companies and Wall Street firms to adopt.”

“The AIMR is seeking comment on the guidelines through May 31 before issuing a final version.”

“The guidelines cover many issues not specifically addressed in last year’s $1.4 billion regulatory settlement that the 10 largest Wall Street firms struck over allegedly biased stock research. That pact focused on improper pressure that investment bankers put on their firms’ analysts to tailor research to win business. The new guidelines address the underlying pressure that sometimes comes from the companies being covered, including the practice of denying analysts access to information when they hold bearish views on the company.”

“The Securities and Exchange Commission has been conducting a review of its own, with other regulators’ assistance, into how some companies improperly pressure analysts to issue positive reports and at times retaliate against those who don’t toe the line. Given that continuing inquiry, the AIMR and the NIRI asked regulators from the New York Stock Exchange, the SEC and National Association of Securities Dealers to participate in their task-force meetings as observers.”

“Jonathan Boersma, vice president of professional standards at the AIMR, says the potential for companies to retaliate against analysts has grown since last year’s settlement because many analysts are less bullish these days. ‘As sell recommendations have gone up, there are probably more companies unhappy with the research.’ “

“But, he adds, far from looking only at wrongdoing by companies, the task force also examined, at the request of the investor-relations association, ways that analysts may exert undue pressure on companies. In this category: analysts pressuring companies for nonpublic information by implying they might release more-negative views if they don’t receive the information. Although the guidelines aren’t enforceable, ‘we’d love for corporations and analysts to adopt as much of this as possible,’ Mr. Boersma says.”

“The newest wrinkle addressed in the report is the trend of so-called issuer-paid research, in which companies that have lost coverage by the big Wall Street firms pay analysts to report on them. The use of such research has greatly accelerated since last year’s big regulatory pact, Mr. Boersma says. That is because the settlement’s restrictions, along with declining revenue at Wall Street firms, has led big research departments to slice their coverage lists by nearly 20%.”

“Louis Thompson, chief executive of the investor-relations association, says the group has seen a noticeable rise in former Wall Street analysts being compensated to cover companies. ‘From an investor standpoint, they’re very vulnerable to people who call themselves investor-relations people but are really stock promoters,’ he says.”

“The best-practices guidelines note that such arrangements can mislead investors ‘into believing that issuer-funded research appears to be from an independent source when, in reality, it is solicited and paid for by the subject-company.’ Rather than recommending a ban on such arrangements, the organizations say such research may be important to companies that can’t get attention from a Wall Street firm. The guidelines say analysts must disclose who is paying them and the nature of their relationship to the company, as well as their ownership of any company stock. In addition, companies must pay an analyst for his report before it is published, so the analysts’ pay isn’t dependent on what he writes.”