“Federal regulators are looking into whether Wall Street firms are cheating bond investors with research that is either skewed or leaked ahead of time to the firms’ own traders,” writes Aaron Lucchetti in today’s Wall Street Journal.

“The scrutiny comes as the bond industry has begun taking steps itself to address potential conflicts of interest. Some Wall Street firms are physically separating their bond analysts from their bond traders, and the Bond Market Association, a trade group, is about to make final a new set of guidelines aimed at preventing conflicts.”

“Officials from the Securities and Exchange Commission informed the bond trade group during a meeting in February that the SEC had started reviewing potential conflicts of interest between bond-research analysts and Wall Street brokers and traders, people at the meeting said. The SEC’s review isn’t now focused on particular companies or alleged conflicts but could be at some point, people familiar with the matter said.”

“SEC officials also are evaluating whether federal rules are needed for bond research, but none are expected before the bond group’s nonbinding guidelines are made final in May.”

“The new focus on bond research follows an earlier regulatory crackdown on stock-research conflicts. State and federal investigators discovered multiple instances of analysts urging the public to buy stocks in companies they privately disparaged as their investment-banking co-workers solicited lucrative business from those same companies. Ten big Wall Street firms agreed last April to settle conflict allegations by paying a total of $1.4 billion and by making their stock-research departments independent from their investment-banking businesses. The firms neither admitted nor denied wrongdoing.”

“Until now, potential conflicts involving bond research have been largely ignored, even though the issues are similar. Among them: whether bond traders or bankers get advance peeks at research before it is published, giving them a chance to trade ahead of the public or clients who paid for the reports; and whether bankers or traders have influence over what analysts say in their research reports.”