A new report from the U.S. Government Accountability Office finds that regulators could be doing more to address equity analysts’ conflicts of interest.
The GAO report follows up on regulatory settlements that were reached back in in 2003 and 2004 between the U.S. Securities and Exchange Commission, self-regulatory organizations, and 12 broker-dealers to address conflicts of interest between the firms’ research and investment banking personnel. As part of the settlements, the firms had to undertake reforms designed to sever links between research and investment banking, and the SROs adopted rules to address analyst conflicts. The GAO was mandated to study these issues once again as part of the Dodd-Frank reforms.
It found that both the original settlement and other regulatory actions have helped to address conflicts faced by equity analysts, and that they have led to improvements in analysts’ recommendations. Also, independent monitors have found that the 12 firms were generally complying with the terms of the settlement. Additionally, broker-dealers, institutional investors, and others told the GAO that the regulatory actions have helped insulate equity research from investment banking influence.
“Although SEC and [Financial Industry Regulatory Authority] have been taking regulatory action to further address conflicts faced by research analysts, additional action is warranted,” it concludes.
It notes that FINRA has been working to finalize a rule proposal designed to broaden the obligations of firms to identify and manage equity analyst conflicts, and better balance the goals of helping ensure objective and reliable research with minimizing regulatory costs and burdens. It’s also working on a rule proposal that would address conflicts faced by debt research analysts. The GAO says that FINRA plans to package its two rule proposals together and submit them to SEC in the first half of 2012.
But it notes that the SEC and FINRA have not proposed codifying the settlement’s other terms, which means that the 12 firms that participated in the original settlement are subject to more stringent requirements than the rest of the industry. “By not formally assessing whether codifying any of the settlement’s remaining terms provides an effective way of furthering investor protection, [the] SEC may be missing an opportunity to provide the same level of protection for all investors,” it says.
As a result, the GAO report recommends that the SEC formally assess whether any of the global settlement’s remaining terms should be codified. “To help ensure that investors consistently are protected from potential conflicts of interest between research analysts and investment bankers employed by the same broker-dealers, the chairman of SEC should direct the appropriate divisions or offices to formally assess and document in a recommendation whether any of the global settlement’s remaining terms should be codified,” it says.