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OVERVIEW OF NEW SRO ANALYST CONFLICTS OF INTEREST RULES
Overview
On May 10, 2002 the Securities and Exchange Commission issued an order approving significant amendments to NASD Rule 2711 of the National Association of Securities Dealers, Inc. and Rule 472 of the New York Stock Exchange. These amendments are intended to deal head-on with the current high level of public concern about buy-side equity securities' conflicts of interest, and the impact that those conflicts may have on recommendations and price targets contained in analysts' research reports.
Approval of the NASD and NYSE rule amendments marks a culminating moment in a public debate over analyst objectivity that goes back many years, but that became particularly vociferous following the sharp decline in technology stocks in late 2000 and early 2001. Critics pointed to many instances where broker-dealer analysts maintained buy ratings, and/or optimistic price targets, on many high-tech companies even as their stock prices plummeted, and charged that these analysts' views were tainted by pressures from their firms' investment banking departments, which either had investment banking ties with, or sought business from these companies. This criticism resulted in a series of Congressional hearings beginning in the spring of 2001. In addition, SIA adopted a set of best practices intended to strengthen investor confidence in the integrity of analyst recommendations. However, since these were voluntary standards adopted by a trade association, they lacked a clear enforcement mechanism. The SRO amendments, which incorporate many elements of the Best Practices as well as many provisions that go farther, provide that mechanism.
To view summary of SRO Rules click here.
