A question of independence

Analyst independence is a major concern in the US with class actions pending after links emerged between the broking and investment banking arms of some major Wall Street firms in the wake of the dotcom collapse. Howard Davies, FSA chairman, says that while he cannot point to specific instances of “bias and corrupted advice” in the UK, evidence does exist of a positive trend in recommendations which market performance does not warrant. Worse, analysts’ recommendations on companies for which their firms act as corporate brokers tend to be “systematically more positive than the average,” the rate of ‘buy’ recommendations for these companies is 80%, nearly twice the proportion when no sponsor relationship exists. The FSA’s discussion paper, “Investment research conflicts and other issues” examines the options it may pursue in the light of these findings.They include: no change if it concludes that the market is already acting to correct some of the distortions; review visits through which it could learn and disseminate best practice in preserving analyst integrity; improved investor awareness and understanding; enhanced disclosure, perhaps with explanations of analyst ratings and percentage breakdowns of buy/hold/sell recommendations; and constraints on the structure and operational organisation of firms, although probably not the extreme remedy under which an issuer would not be permitted to retain a sponsor if analysts elsewhere in the sponsor’s group published research on the company; such a moratorium would probably not be “workable” say the discussion paper’s authors. They go on to note that the Listing Rules allow for advice and analysis by employees in the same group and that “provided that there is an adequate segregation of roles, the independence of the sponsor will not usually be compromised.” The closing date for comments is 30 October 2002 .