In a game of political catch-up, securities regulators over the past year have opened 50 cases into research analysts and their potential conflicts of interest with the companies they cover.
A letter from
Securities and Exchange Commission
Chairman Harvey Pitt, in response to questions from Rep. Edward Markey (D., Mass.), reveals that the SEC's Division of Enforcement has initiated 10 conflict-of-interest inquiries in the last 12 months. According to the letter, five of the inquiries resulted in formal orders of investigation. The others are being pursued without formal orders.
Neither the analysts nor their firms were identified. Pitt's letter also states that the National Association of Securities Dealers has taken three formal actions concerning analysts in the last 12 months. In addition, the NASD has initiated 20 nonpublic probes into conflicts of interest on Wall Street. The
New York Stock Exchange
has opened 17 inquiries in the last year.
According to Pitt's letter, in the last 15 years the SEC has granted formal orders of investigation in connection with 21 cases that raised possible conflicts of interest by research analysts.
The apparent increase in the rate of conflict-of-interest probes comes at a time when some of the biggest research and investment banking companies in the world are having their methods questioned by investors, clients and government officials.
In April, Eliot Spitzer, the New York state attorney general, said he had evidence that analysts at
( MER) were privately disparaging stocks they were publicly encouraging investors to buy. The reason, Spitzer argued, was that the research analysts were part of a concerted effort to drum up investment banking business for the firm.
The Spitzer probe led to heightened scrutiny of research and banking firms, and Merrill recently agreed to pay $100 million to New York and other states to settle the matter. In addition, Merrill adopted new internal rules that the company said will ensure investment bankers and analysts operate independently.
Other firms, including
Credit Suisse First Boston
Salomon Smith Barney
, have followed suit and vowed to prevent conflicts from arising in the future.
Earlier this month, the SEC unanimously approved new rules aimed at curtailing the conflicts of interest between securities firms' research departments and investment banking divisions. The SEC asked that the NASD and the NYSE, both of which proposed the rule changes in February, come back in a year with a progress report on how the new regulations are working and any recommended changes.