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SEC Rules To Target Analysts, Official Says

Sep 10, 2002 | The Washington Post

The Securities and Exchange Commission, facing pressure to try to bolster shaken investor trust, is likely to adopt comprehensive rules to curb conflicts of interest between stock analysts and investment bankers, according to SEC Commissioner Harvey J. Goldschmid.

By adopting such rules, the SEC would impose uniform standards that would apply to the financial industry nationwide. The rules are expected to be tougher than regulations adopted in May by the industry's two self-regulatory groups, the New York Stock Exchange and the National Association of Securities Dealers, according to agency sources.

And in the current climate of investor mistrust, the standards would probably have to be at least as strict as rules that Merrill Lynch & Co. agreed to follow in May under a settlement with New York state's attorney general, Eliot Spitzer, said sources.

The likelihood that the SEC, the nation's top market regulator, would craft strong new rules was suggested last week by Goldschmid, who in a speech to corporate directors said, "The SEC should impose comprehensive rules that set uniform, rigorous, national standards in the analyst area."

Goldschmid, a new commissioner, said during the speech that SEC Chairman Harvey L. Pitt agreed with him and that the two would urge the other three commissioners to act.

Neither Pitt nor Goldschmid would comment yesterday on the speech, which was first reported in the Wall Street Journal. Members of Congress and consumer and investor groups have accused Pitt of acting too slowly on the analyst conflict issue. Wall Street executives have criticized him for allowing a state official like Spitzer to take the lead in imposing new standards, because it could lead to a patchwork of state-by-state rules for the industry.

Sources at the SEC said the perceived need for the SEC to act underscores the shortcomings of the industry's self-regulatory process under the NYSE and the NASD. Rules proposed directly by the SEC -- rather than by the NYSE and NASD and then approved by the SEC are less likely to be overridden by state rules or agreements, SEC sources said.

In addition, consumer groups and some people within the SEC say the NYSE and NASD have failed to protect individual investors because those self-regulatory groups are overly influenced by their members, which are Wall Street firms.

The analyst rules could be crafted within a year, Goldschmid said. They would be based on results of an on-going SEC investigation into potential analyst conflicts of interest that might result in misleading stock recommendations, SEC sources said.

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