New Standards Would Seek Reform on Several Fronts

Here are some of the key ideas the Assn. for Investment Management and Research has proposed to improve the objectivity of analysts’ stock research:

* Brokerages should establish “three-dimensional” stock rating systems that incorporate measures of risk and a time horizon to help investors assess the suitability of a security for their own circumstances, rather than rely on simple “buy,” “sell” or “hold” ratings.

* When discontinuing coverage of a stock, a brokerage should issue a “final” research report and recommendation, explaining the reasons for dropping the issue. Many brokerages have preferred to quietly end coverage of stocks to avoid offending the issuing companies.

* Brokerages should prohibit research analysts from participating in marketing activities, including “road shows,” for corporate clients that are issuing new shares.

* Analysts who give media interviews or make other public appearances discussing their stock recommendations should make the full research reports available to the public at a reasonable price.

* Corporations should refrain from making accusations against research analysts in the media. Some companies have publicly criticized analysts when the firms haven’t liked an analyst’s rating of the company.

* Fund managers and other “buy side” investment professionals should be prohibited from threatening to reduce their companies’ trading business with a brokerage in an effort to secure a more favorable rating on a security they hold.

* News media should establish formal policies for disclosing conflicts of interest, or potential conflicts, when interviewing analysts or portfolio managers.

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Josh Friedman