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The Securities and Exchange Commission’s “to do” list got a little longer on Tuesday. At a hearing on Wall Street analysts before the House subcommittee on financial services — the second such Congressional inquiry this year — acting SEC Chairwoman Laura Unger said that supposedly independent research analysts at nine top Wall Street firms consult with investment bankers on possible deals, including mergers and acquisitions and IPOs. Seven firms admitted that research analysts’ bonuses are tied to banking, and some even let their investment bankers participate in research analysts’ compensation reviews, according to Unger. Unger’s testimony, drawn from the often-startling results of the agency’s review of research practices on Wall Street technology underwriters, underscores broader criticism of the financial community. Just last week, Merrill Lynch settled with an individual investor who said he lost money after following the advice of top-ranked analyst Henry Blodget. Unger’s testimony suggested a broad range of questionable practices on Wall Street. Many analysts purchased pre-IPO stock of the companies they would later cover, at levels far below those at which shares were offered to the public. In every case, the analyst initiated coverage with a “buy” recommendation. Three of those analysts subsequently sold their own holdings while continuing to recommend the companies publicly, and in one of those cases the analyst netted $3.5 million in profits. Only one firm was able to accurately provide a list of its analysts’ private equity investments and ownership of stocks they covered. Six firms admitted that analysts sometimes give their firms’ bankers and brokers advance notice of rating changes. While Rep. Richard Baker, R-La., who chairs the committee, and his committee members were thankful for Unger’s testimony, they clearly were not satisfied with her agency’s role in preventing these things from happening in the first place. While much of the responsibility for this oversight falls to the self-regulatory organizations (SROs) — including the National Association of Securities Dealers and the New York Stock Exchange — it is the SEC’s responsibility to make sure the SROs are doing their jobs in monitoring the industry. The committee expressed concern that only one firm was able to disclose details behind analyst ownership and suggested that it was worried the agency wasn’t doing its job. “It seems to me there is a great deal of noncompliance with no consequences,” said Baker, the Louisiana Republican who referred to the regulations around such practices as “a pretty book sitting on the shelf that nobody ever reads.” Another representative was disturbed by the fact that these questionable transactions took place in 1999 and 2000 and that no regulatory body discovered them until now. Unger, who has run the agency since Arthur Levitt left in February, indicated that the SEC is exploring the possibility that federal securities laws were violated in some of the cases, and if so, it will act accordingly. She stressed that the SEC’s responsibility lies in ensuring adequate disclosure on the part of the investment banks and in educating the investing public. Unger did say the agency will step up its efforts of overseeing the SROs in enforcing regulations against the investment banking industry. No members of the NASD or the NYSE have testified on the subject. Similarly, no current member of a Wall Street investment bank has appeared before the committee. Tuesday’s hearing included testimony from one former Wall Street research analyst and several members of the financial press. Every witness agreed that conflicts of interest among Wall Street research analysts are pervasive. Baker reiterated his remarks at the first such hearing that he would like to avoid legislating the industry on this issue but that he will resort to it if the industry can’t straighten itself out. The committee will continue this dialogue with members of the securities industry and will develop recommendations for it to consider by autumn. Related Articles from The Industry Standard: Lucent Expects to Raise $1 Billion in Stock Offer Motorola Says It’s Sorry Online Brokerages Do Some of Their Own Buying Copyright � 2001 The Industry Standard

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