The Association of Investment Management and Research (AIMR) is calling for a new uniform reporting system that will help analysts focus more attention on risk assessments and less on buy/sell ratings.

Misdirected Criticism

Analysts have been criticized in recent months for perceived conflicts of interest and for failing to predict the demise of dot-com and telecommunications companies. But many feel the criticism is misdirected for reasons cited in AIMR's response to rules proposed by the Securities & Exchange Commission(SEC), New York Stock Exchange (NYSE) and National Association of Securities Dealers (NASD). Key reasons:

• The pressures on research analysts to be biased are not all internal to their employers. Pressures also come from companies that may retaliate against analysts they view as negative or uncooperative.
• Simple "buy," "hold" or "sell" ratings are insufficient for making investment decisions. Yet that is often all that is communicated to the general public, with the result that the ratings overshadow the research.

Suggestions

To address these problems, AIMR makes a number of suggestions including the following:

1. Analysts should develop rating systems with three elements: a recommendation, a risk characteristic and an associated time horizon. This will help average investors better guage the suitability of the investment for their own circumstances and constraints.

2. If research analysts give media interviews and make other public appearances, their employers should be required to provide the relevant research reports to those audiences for free or a nominal fee. This way investors will also see the full research, not just the rating.

3. Research analysts and their employers should be required to issue a final report when they discontinue coverage of a company and explain their reasons for discontinuing. This will address the temptation to quietly discontinue coverage, rather than issue a "sell" rating on a company.

AIMR is a 57,000-member organization of financial analysts, portfolio managers, investment advisors and other investment professionals in 112 countries. It was founded in 1990 from the merger of the Financial Analysts Federation (FAF) and the Institute of Chartered Financial Analysts (ICFA), the organization that originated the Chartered Financial Analyst (CFA) designation.

-Rosemary Schlank