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The National Association of Securities Dealers is asking its members to comment on a proposed rule that would require research analysts and brokerages to disclose potential conflicts of interest in the stocks they cover. The comment period ends Aug. 15. Under the proposed rule, in both written reports and public appearances stock analysts and other brokerage representatives would be required to disclose whether they individually have a stake in the company. Currently, NASD rules require that reports disclose if an officer or partner of the bank owns options or warrants of the companies discussed. The rule will also require disclosure if the bank or brokerage issuing a report owns 5 percent or more of the company’s stock, but the NASD is looking for guidance on whether that percentage is appropriate. It also wants comments on whether it should impose a rule for banks to disclose the nature of their investment banking relationships. Rules currently require a footnote to disclose whether the bank was a manager or co-manager for any public offering for the company within the past five years. “When an individual speaks authoritatively in recommending a security, it is essential that the listening audience fully understand the stake that person, or their employer, has in that security,” said Mary Schapiro, president of NASD Regulation, in a statement. NASD Regulation is the regulatory arm of the NASD. This follows recent actions by the Securities Industry Association, the Securities and Exchange Commission, the U.S. House of Representatives and the New York attorney general’s office. The “Best Practices for Research” endorsed by the SIA and 14 major investment banks last month was widely regarded as a weak attempt by the industry to appease concerns. At a congressional hearing on the subject last month, a bipartisan group of representatives voiced concerns over the conflicts of interest and the general lack of understanding on the part of the investing public. They agreed the Best Practices wouldn’t cut it, but legislation should be avoided if possible. Last week, the SEC issued an alert telling investors not to rely on analyst recommendations when making investment decisions. Research reports issued by most investment banks are already cluttered with disclosures in fine print, which are difficult to read and understand. Although this proposal would only add to the verbiage, the NASD has added a requirement that the disclosures be printed in font the same size as words in the reports. Although the media has escaped much of the criticism in this controversy so far, this proposal could change that. Rep. Richard Baker, R-La., chairman of the House Subcommittee on Capital Markets, brought the issue to the table at the hearing he presided over last month. “It is irresponsible reporting to quote unquestioningly irresponsible analysts and place them on magazine covers and turn them into rock stars,” he said in his opening statement. During the height of the market, research analysts became regular talking heads on the numerous financial cable channels and the relationships with the analysts’ employers were rarely mentioned. Similarly, financial publications infrequently mention potential conflicts of interest when quoting analysts. If passed, this amendment would require disclosure of conflicts of interest in media reports in print, television and radio programs. The NASD is also requesting comments as to the feasibility of such public disclosures given the time and space requirements. Related Articles from The Industry Standard: Official: Don’t Blame IT for California’s Power Problems Taiwan Touts New Tech Virtues 3 Big Vendors Force Vacation Copyright � 2001 The Industry Standard

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