SEC Gives Analysts Some Space - On Its Web Site

Recognizing the increasingly important role they play in today's capital markets, the Securities and Exchange Commission (SEC) has now established a separate section on its Web site to provide investor guidance and Commission information about securities analysts.

Analysts are arguably the newest players in the "blame game." Mike Rake, international chairman of KPMG, recently told the Financial Times, he believes accountants should accept only about 20% of the responsibility for the crisis of confidence in global capital markets. ("We aren't bloodhounds says KPMG chairman," July 12, 2002.) It's not clear what percentage of the blame belongs to the analysts, but it has become evident in recent years that investors increasingly look to analysts to make sense of financial reports.

The analysts' reports and recommendations are often more visible and understandable to investors than the accounting information buried in annual reports, prospectuses and proxy statements filed with the SEC. But they are not without risks. To help investors evaluate the risks, the SEC's new Web site section includes an investor alert on "Analyzing Analyst Recommendations" and various SEC speeches and documents about analysts, as well as links to a document from the National Association of Securities Dealers (NASD) on "Understanding Securities Analyst Recommendations" and analyst rules recently passed by the NASD and New York Stock Exchange.

Approved by the SEC in May 2002, the new analyst rules cover issues that can arise when research analysts recommend securities in public communications. For example, SEC explains, conflicts of interest can arise when analysts work for firms that have investment banking relationships with the issuers of the recommended securities, or when the analyst or firm owns securities of the recommended issuer.

The SEC's alert explains the new rules and tells investors how to uncover conflicts. Among other things, information from the corporate filings maintained in SEC's EDGAR system can be used to identify underwriters, research ownership interests, and unlock the mystery of "lock-ups," periods of time that generally last for 180 days after an offering's registration statement becomes effective. Research reports issued just before a lock-up period expires are sometimes known as "booster shot" reports, making them less credible than reports issued at other times.

-Rosemary Schlank


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