Wall Street's bid for credibility

Maybe - probably - the quality of Wall Street's stock-market research has improved in recent months.

That doesn't mean analysts are any better at picking stocks that will ensure individual investors a flush retirement. But most analysts are likely freer now to call their stock picks as they actually see them.

"The analysts themselves are acutely aware of the potential bias in their reports that result from conflicts of interest," says Rebecca McEnally, a vice president of the Association of Investment Management and Research (AIMR), a group of 50,000 analysts. "It is quite likely their reports are far more reliable than they have been in the past."

Undoubtedly many individual investors have become skeptics, if not cynics, over the true value of stock research.

They see stocks in their investment portfolios, perhaps touted by an analyst as the cat's meow a couple of years ago, now badly beaten down by the bear market. They read accounts of the falsely optimistic "buy" recommendations of analysts at major financial firms aimed at stirring up investment-banking business - even if that business is won at the expense of individuals buying the hyped stock.

Analysts at such major firms as Merrill Lynch and Citigroup have traditionally won fat bonuses if buy recommendations steered lucrative new business to these Wall Street giants.

They will likely be more cautious in the wake of a controversial, punishing, possible settlement of complaints about misleading practices.

That settlement - still being negotiated by a coalition of the New York state attorney general, other regulators, and the Securities and Exchange Commission (SEC) - plus liability from civil litigation, reportedly add up to $2 billion. If agreed on, Wall Street faces fines by regulators and a bill to finance $1 billion of independent research for small investors for five years.

The resignation of SEC Chairman Harvey Pitt last Tuesday will "absolutely not" impede those talks, says a spokeswoman.

Another reform push comes from an SEC proposal that analysts be required to certify that their research reports reflect true views of the stocks they cover, much as top corporate executives were told to swear that their financial filings were on the up-and-up.

"What is now under discussion will directly benefit and is designed to benefit individual investors," says William Freund, a securities industry expert at Pace University in New York. "Institutional investors [mutual funds, pension funds, etc.] can look after themselves."

Despite the intense regulatory scrutiny, analysts still tend to be overly optimistic. A study by Weiss Ratings Inc. in Palm Beach Gardens, Fla., looked at the stock recommendations of 62 brokerage firms covering 19 companies filing for bankruptcy between May 1 and Aug. 31. Nine were getting "buy" or "hold" ratings on the day of their bankruptcy filing. Another nine received a mix of positive and negative ratings.

"We are not to the point of getting purely objective research out of Wall Street," says David Lackey, president of Weiss.

Most analysts would welcome a boost in their independence. An AIMR task force issued a draft "Research Objectivity Standards" setting ethical standards last July. Comments on that proposal are now being evaluated by the AIMR.

Embarrassed by the revelations, Wall Street firms have made some voluntary changes. Firms are spelling out the meaning of "buy," "hold," or "sell." Sell recommendations, once a rarity, have multiplied.

At least in theory, the so-called "Chinese Wall" between analysts and the investment-banking arm of major Wall Street firms has been strengthened. For instance, Citigroup recently announced its stock brokering and research units, with 12,500 brokers being separated from its investment-banking business into a new division.

The research scandals have brought more business to independent stock-research firms.

Value Line, for example, has enjoyed a rise in subscriptions to its market letter, despite the bear market, says Jean Buttner, Value Line's president. She notes that her firm's analysts have stringent rules to assure unbiased reports. They can't, for instance, buy stocks of companies they research.

Last July, a group of independent research firms launched Investorside Research Association "to build investor trust." It has 14 member firms that promise to do research for investors alone, without conflicting interests that may bedevil as much as 95 percent of research.

One goal is "to show regulators and investors we have a market-based solution in place already," says John Eade, president of Argus Research and vice-chairman of the association. His and other independent firms might get extra business in a Wall Street settlement.

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