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Should analysts own stocks they cover?

Wall Street research analysts increasingly are accused of ditching their objectivity to please underwriting clients. But another, even more basic potential conflict , their own holdings in the companies they cover , has gone largely unnoticed.

Wall Street research analysts increasingly are accused of ditching their objectivity to please underwriting clients. But another, even more basic potential conflict , their own holdings in the companies they cover , has gone largely unnoticed.

By Justin Schack
April 2001
Institutional Investor Magazine

Wall Street research analysts increasingly are accused of ditching their objectivity to please underwriting clients. But another, even more basic potential conflict , their own holdings in the companies they cover , has gone largely unnoticed.

On June 26, 2000, research analyst Paul Johnson of Robertson Stephens initiated coverage of ONI Systems Corp., the San Jose, California, maker of optical networking equipment that had gone public one month earlier. Because Robertson Stephens co-managed the IPO, Johnson had to withhold written comments during much of that month , or risk running afoul of federal "quiet period" regulations. But when the time came, Johnson christened the stock with a resounding buy rating, citing strong projected revenue growth and a wealth of untapped demand for ONI's products.

Careful readers might have noticed, buried in the fine print at the end of Johnson's report, a disclaimer stating that "Robertson Stephens . . . and/or its employees may have an interest in the securities of the issue(s) described." What the legal boilerplate didn,t reveal was the fact and the extent of Johnson,s personal interest.

As it turns out, at the time he initiated coverage, Johnson owned approximately 100,000 shares of ONI, then worth some $10 million. Johnson picked up the stake for $150,000 in two venture capital financing rounds, according to ONI's prospectus for its IPO. He says he made the investment at the behest of "some pals" inside the company.

Wall Street research analysts spent the 1990s growing rich and famous on the public's obsession with an ever-rising stock market. These quirky and once low-profile number-crunchers became media darlings and sometimes earned millions in compensation. Their comments on stocks , almost always positive , often sent share prices soaring.

But much of what analysts said and wrote , particularly about technology and Internet companies , in 1998, 1999 and 2000 turns out to have been fundamentally, even absurdly, wrong. Now comes the backlash. Furious investors are looking for someone to blame for their losses, and financial analysts are running for cover, vilified as investment bankers were during the takeover mania of the 1980s. "Shoot all the analysts," the Financial Times editorialized last month, neatly summing up the feelings of money managers and individuals scorched by a more than 60 percent free fall in the tech-heavy Nasdaq composite index in the past year, and by the hefty declines in other indexes that occurred even as the Street held on to its buy ratings.

How could such a vast array of the best and brightest seemingly have blown it so badly? Was it stupidity? Cupidity? Some combination of the two? Certainly money managers have long griped that analysts are overwhelmed by conflicts of interest, forced to spend too much time drumming up corporate finance business and pressured to write favorably about their firms, investment banking clients. This magazine's own surveys reveal that investors, growing disenchanted with the research they receive, think the quality has deteriorated in recent years (Institutional Investor, October 2000).

But largely overlooked in all of the complaints has been perhaps the most fundamental conflict of interest of all for Wall Street analysts , owning the stocks of companies they cover.

Is there anything wrong with that? It's not illegal; nor, by Wall Street's standards, is it unethical. In fact, it's a common industry practice. Most firms not only permit analysts to own stock in companies they cover, some encourage the practice. To be sure, firms place a host of restrictions on analysts, trading both within and outside their sectors, in an attempt to minimize conflicts of interest (see chart, page 63). But in the end, for the most part, analysts like Johnson aren,t prohibited from buying the stock of, say, ONI and then writing about it.

Okay, so it's a time-honored practice, but is it really a good idea? Bear markets make skeptics of investors, who start looking for scapegoats and remedies. Research analysts, widely seen as touting their picks not long ago, make handy , and highly visible , targets. Is it fair in the wake of the market debacle to wonder whether share ownership influenced analysts when they made stock recommendations during the market boom of the late 1990s? Did it make any analysts complacent about prospects as the air began to escape from the bubble? Did ownership lead some to pump up that bubble with hot air in the first place? What role did analysts, investments in their own sectors play in the technology and Internet market mania?

"Owning the stock is a reason to color your recommendations , to support your investment," asserts John Coffee, a securities law professor at Columbia University. "Human nature is such that people are not unaware of the influence their own recommendations have on their personal net worth."

This is not simply an academic debate. The Securities and Exchange Commission is taking an interest in analysts, shareholdings. Examiners from the agency have, for several months, been collecting information from Wall Street firms about whether they have allowed analysts to buy pre-IPO stakes in the stocks they cover, according to people with knowledge of the inquiry. The examiners also want to know whether analysts receive direct payments for bringing in investment banking assignments. The probe is still in its early stages, so predicting the outcome is difficult. As is its practice, the SEC declines to confirm or deny the existence of an investigation.

Congress, too, is concerned about the conflicts of interest Wall Street analysts face. Representative Richard Baker, a veteran Louisiana Republican and chairman of the House subcommittee on capital markets, likely will hold hearings , possibly by late spring. The purpose of the hearings is to establish whether certain conflicts, including investment banking relationships and analysts, personal stockholdings, ought to be more prominently and specifically disclosed to investors.

"I,m concerned about analysts, manipulating the markets for their own gain," says Baker.

To address questions about stock ownership, we decided to take a look at how widespread the practice is. Right away we ran into a problem: Very few firms require specific, public disclosure of such personal investment positions. Nearly all investment banks and brokerages employ the kind of cover-all-bases disclaimers that Robertson Stephens used in Johnson,s report on ONI Systems. We found just three firms that disclose whether an analyst writing a report about a company owns stock in that company: WR Hambrecht & Co., Deutsche Banc Alex. Brown and J.P. Morgan. "We think that our institutional client base, as well as our retail base, should know that," says David Manlowe, director of Americas research at Deutsche Banc Alex. Brown.

But even these three don,t reveal how much stock an analyst owns. Without such voluntary disclosure, investors have no way of knowing whether "strong buy" may also mean "I,m long."

Despite the lack of specific disclosure, an examination of certain SEC documents did turn up instances of several analysts who obtained shares of companies in their coverage groups, typically through pre-IPO financings. Before a holder of such "restricted" shares can sell them through a broker, he must file with the SEC a document known as Form 144, which registers the shares for sale to the public. Institutional Investor, with the help of financial data vendor Thomson Financial/First Call, searched these voluminous filings and found several cases where analysts profited handsomely from the sale of restricted shares of companies they had touted earlier.

The trouble is that these examples , more on them later , may represent only the tip of the iceberg. Because of the lack of specific disclosure, determining how many other analysts bought, but have not yet sold, such pre-IPO stakes is virtually impossible. Moreover, analysts regularly buy and sell shares of already-public companies they follow.

So what? Proponents say that by owning shares in the sectors they cover, analysts are putting "their money where their mouth is," that firm compliance policies prevent conflicts of interest and that an individual analyst is just one of the many market participants who determine share prices. Moreover, they note, owning such shares allows analysts to diversify their holdings (many are heavily invested in their own firms, stock). And why should they be prohibited from buying what they know best; why limit them to investing in areas they don,t know nearly as well?

Johnson, who in 1998 was a runner-up in the data networking sector in II's All-America Research Team, sees no conflict in having bought pre-IPO shares in ONI. "It didn,t affect my opinion on the stock at all. It was just the perception of a conflict," he says. "My opinion only goes so far in influencing people anyway. If my views aren,t reinforced by the facts as they unfold, investors will realize that. At the end of the day, my credibility is determined by whether I,m right or wrong, not by whether I own the stock or not."

Well, maybe. As Johnson himself notes, there is a perception of a conflict, and that perception goes beyond the individual analyst , and his financial well-being , to the reputations of firms and of Wall Street itself. It's hard for some investors to see how analysts can purport to give objective advice about companies whose stock they own. Firms ought to have a vested interest in distinguishing their research from their marketing materials.

The idea of backing up one's picks with one,s dollars is all very well. But the theory breaks down once it comes time, inevitably, to sell , or to put out a sell recommendation, say skeptics. Certainly during the past year plenty of analysts have clung to favorable ratings even as the stocks they recommended tanked.

"There's a very clear potential for conflicts here," says Kenneth Bertsch, director of corporate governance at TIAA-CREF, a giant pension and mutual fund group. "I think it removes some of the credibility of the individuals who are doing it. There's definitely a different ethic on the sell side than there used to be, which is unfortunate."

Not all conflicts are equal. Pre-IPO investments raise especially touchy questions. Getting into a hot concept ahead of clients inevitably smacks of favoritism. Moreover, many of the tech and Internet companies that went public in the past few years had very small floats, traded with more volatility and were much more susceptible to influence by analysts, comments.

"With all of the IPOs we have seen over the past few years, the prospect for a small number of people to make a quick buck was huge," says Deborah Kuenstner, chief investment officer for large-cap value stocks at Putnam Investments. "Especially if you got in before the IPO, sitting on a big position while you recommend the stock is just the wrong thing to do. It just doesn,t pass the sniff test."

Ideally, say such skeptics, financial analysts should be above suspicion. At the very least, their potential conflicts of interest should be disclosed to those they advise. Investors can then decide whether such holdings present conflicts. They may well conclude, as some Wall Street firms have, that personal ownership stakes reinforce analysts, recommendations by putting their money where their mouths are. But learning of the stakes after the fact is likely to make some investors cry foul.

BACK IN THE MID-1990s LIOR BREGMAN HAD A hunch. Just as Silicon Valley had become a hub of technology riches, so too could Tel Aviv. So Bregman, then a telecommunications analyst at Oppenheimer & Co. in New York, invested $25,000 to buy 10,000 shares of a little-known Israeli company called Orckit Communications. Orckit was an early provider of digital subscriber line systems to telephone companies. Bregman's backing helped his firm win a co-manager role for Orckit's October 1996 IPO on the Nasdaq. Soon after the IPO Steven Levy, the analyst who had begun covering Orckit for the firm, by that time known as CIBC Oppenheimer, left for Lehman Brothers. Bregman was asked to take over the coverage and did, recommending that investors buy Orckit's shares. (Two Oppenheimer research officials did not return calls requesting comment on the assignment decision.)

About one year later, immediately following the expiration of a lockup period during which the sale of the restricted stock was forbidden, Bregman cashed out to the tune of $170,000. "The first opportunity I had, I sold it," says Bregman, who left the research department last year for a job with CIBC's alternative investments division, leaving coverage of his stocks to another analyst.

Why didn,t he just ask for a colleague to cover Orckit to begin with? "There was nobody else at the firm to pick it up," Bregman says. "It's a sensitive issue. Some people believe it's a good idea to back up your recommendations by owning the stock, and other people think it's a bad practice. It may look bad when you push a stock that you already own. But this was a special case. I inherited the coverage. You should go and look at situations where analysts recommend stocks and then go and buy them in the public market. It happens all the time. There are far sexier stories than mine on Wall Street."

Perhaps. Consider Shaun Andrikopoulos, who bought 15,000 shares of Internet Capital Group, the now-troubled e-commerce incubator, in a private financing several months before the company's August 4, 1999, IPO. Andrikopoulos at the time was covering Internet companies for Bankers Trust Alex. Brown, which was acquired by Deutsche Bank that summer. "I asked [ICG] if I could invest and they let me," he says of his stock purchase.

The newly merged Deutsche Banc Alex. Brown went on to help underwrite the ICG public offering. Andrikopoulos initiated coverage on August 30 with a buy rating (the shares were then trading at about 45, nearly quadruple the offering price of $12, making the analyst's stake worth some $675,000). When Andrikopoulos left Deutsche Banc Alex. Brown in February 2000, ICG was trading at more than 100 (and his shares were worth more than $1.5 million). He filed to sell his shares in November, well after a one-year lockup period had expired. By then the stock was well into a protracted decline, but Andrikopoulos still managed to gross $300,000 from the sale.

Andrikopoulos denies any conflict of interest with investors. "My job was really to get the company public and to make sure that my investors made money in the aftermarket," he says. "Good analysts realize that their clients are not the companies. They,re the investors who buy the stock based on your recommendation. If you think about it, a one-year time horizon, especially in the market that existed two years ago, is a long time horizon. I was fully aware of the one-year lockup, so I didn,t worry about the position. It could have gone up to 300 or it could have gone down to zero."

Andrikopoulos also says that while he was at Deutsche Banc Alex. Brown and its predecessor firms, he bought shares in the open market of two other companies he covered: Lycos, acquired three years ago; and Gemstar,TV Guide International, acquired five years ago. He still owns the stocks.

Ex,analyst Keith Benjamin, who left Robertson Stephens in October 1999 for venture capital firm Highland Capital Partners, filed in January 2000 to sell 3,333 shares of StarMedia Network, a Spanish-language Internet portal that Robertson Stephens helped bring public. In October 1998, as the company was preparing for its offering, Benjamin was quoted in a StarMedia press release, touting the company's potential. He also appeared at an Internet symposium in San Francisco that StarMedia co-sponsored before the IPO. On June 21, 1999, shortly after the offering, he initiated coverage with a buy rating. His sale of restricted shares last year yielded $127,487. Benjamin did not respond to repeated requests for comment, and II was unable to determine how he acquired the shares, or at what price.

The stakes held by Johnson, Bregman, Andrikopoulos and Benjamin came to light because they filed to sell restricted shares and because II searched the filings and identified them as analysts. How many other analysts own restricted shares but haven,t sold, or own shares purchased on the open market, is not known. Disclosure practices, as well as the policies governing analysts, investments, vary from firm to firm. But there are some rules in common: Analysts should not execute a transaction that runs counter to their recommendation, they shouldn,t front-run their clients on trades, and typically, they must first obtain clearance from their department heads or compliance chiefs.

Most firms mandate a minimum holding period for any investment an analyst makes within his sector. Generally, the older, bigger firms have had more stringent policies, while boutique investment banks that have specialized in IPOs of concept companies tended to be less strict. But the lines are blurring. "At J.P. Morgan, you weren,t allowed to own anything in your space," says Tim Savageaux, an optical networking analyst at WR Hambrecht who worked for J.P. Morgan Securities in the early 1990s. About five years ago, however, J.P. Morgan began allowing analysts to own stocks they cover. At WR Hambrecht, Savageaux owns shares of six of the 14 companies he covers, including Advanced Fibre Communications, Next Level Communications and Sonus Networks.

Analysts often participate in private equity funds that their firms sponsor and that allow employees to invest with the firm to increase their income. In many cases, analysts are allocated greater portions of the funds, shares (or cash equivalents) in companies for which they helped land private investments or subsequent IPOs. Boutique investment banks pioneered such arrangements, but some of their larger rivals are adopting the technique. Because analysts do not control such shares as they would direct investments, the situation poses less of a conflict at first. But once the shares are distributed, the analyst faces the same potential conflict of interest he would have if he had invested directly in the company.

Says Kevin McCaffrey, head of U.S. research at Salomon Smith Barney: "The question is, Once the company goes public and the investment gets marked up, does the analyst really like the company, or is the analyst just looking for an exit like the rest of the initial investors? If the analyst is going to cover it, I think there has to be very open dissemination of the potential conflict."

Says another research director: "At some firms it,s an everyday thing. It's how they compensate their people. I,ve had analysts come in for interviews and say, ,My salary and bonus last year was $750,000. But I made another $500,000 on privates., They practically laugh in my face when I tell them that we don,t do that here."

In September 2000, as word of Paul Johnson,s lucrative stake in ONI Systems spread, Robertson Stephens decreed that all analysts who had made pre-IPO investments in companies they later wound up covering had to put their stakes into blind trusts , which Johnson did. There had been discussions previously about instituting such a policy, but Johnson,s situation accelerated its implementation.

"This issue has come up more over the past couple of years because there has been more private investment activity by everybody," says Johnson. "We were already doing something about it. Did my situation cause us to change the policy right away? Absolutely. But it didn,t change our intentions fundamentally. We would have gone that way anyway."

Sometimes an analyst strays unknowingly into a potential conflict. Take Eric Upin, who tracks the business-to-business e-commerce sector for Robertson Stephens. On October 18, 2000, Upin filed to sell 1,639 shares of Saba Software, an education software company his firm helped take public last April and on which he initiated coverage with a buy on May 9. Upin's filing came one day before Robertson reiterated its buy rating on Saba. The analyst upholding that rating, however, was Cynthia Hatstadt, not Upin.

Upin, who made a $40,000 profit on his $5,000 investment in Saba, says he received the shares in a distribution from a venture capital fund, which at the time was controlled by Robertson Stephens but has since been spun off. He worked on Saba's IPO, but he thought at the time that Hatstadt would be covering the stock once it went public. Then, he says, he was told that he would be the lead analyst, while the firm sorted out its coverage assignments in the rapidly changing software sector. "We did a compliance review," recalls Upin, "And it was determined that it was such a small investment, such a small percentage of my investable assets, that it wouldn,t engender a massive conflict. Compliance was fine with it."

By October Hatstadt had taken over as lead analyst, and Upin sold the shares. "The day after I got the distribution," he says, "I sold the shares, so it wouldn,t be an issue. I didn,t know when the distribution would come. We made the transition to Cyndi over the summer." He adds: "My investment in Saba was $5,000. There are analysts, including analysts at our firm, who have millions of dollars of investments. For some Americans $5,000 is a ton of money, and I understand that, but for me, it wasn,t something that would alter my approach."

Should analysts avoid such potential conflicts by never owning stocks they cover? "Potentially, it is a conflict," says Salomon's McCaffrey. "At least on our part, we,ve eliminated it, because the restrictions are so great that it disincentivizes analysts from investing in their own names. Analysts have enough riding on the success of their stocks that it's just not worth putting their reputations at risk. It's not even in the top 20 of our concerns."

"Generally, we,ve always had a more restrictive policy," says Lehman Brothers, global research head Joseph Amato. "When the market was really hot, a lot of the analysts were clamoring for less-restrictive rules. They wanted to short stocks. They wanted shorter holding periods. We did an analysis of our policy and we found that, in the range of firms we compete with, we were among the strictest; and we decided to keep it that way. I don,t want guys worried about trading their own accounts when they should be worried about doing their jobs."

Although some Wall Streeters, like McCaffrey, concede the potential for a conflict of interest, most sell-side professionals don,t see these practices as problematic. Some argue that staking a modest amount of their own savings on their best ideas more closely aligns their interests with those of their clients.

"I like seeing stock ownership in the industries and particularly the names that the analyst recommends," says the research head at a major firm. "If you,re going to recommend it for your clients, then why on earth don,t you own it yourself?" That same executive adds, however: "Our compliance guys would freak out if they heard me saying that publicly. They,d rather that analysts not own anything in their universe. We,ve got to battle them all the time on that."

"This is not something evil," says Lehman's Amato. "Analysts want to invest in stuff they,re fairly familiar with. A lot of times they want to diversify because they are heavily exposed to their own firm,s stock. So if a guy really likes GE, what's wrong with his owning it? As long as you have the safeguards in place and are careful about the potential conflicts and disclosure, it's not an issue." Then again, Lehman,s disclosure is boilerplate, not specific.

WR Hambrecht is the rare firm that discloses when analysts maintain positions in the stocks they track. The information is contained in the fine print of the individual analysts, reports, which are available for free on the Web, although the disclosures do not say how much stock any analyst owns.

Do those positions compromise their objectivity? "I don,t think it's necessarily a conflict per se, but there are definitely times and there are definitely situations where it could influence an analyst,s viewpoint," says WR Hambrecht research head Peter Rogers. The firm believes that its specific disclosure policy goes a long way toward deflecting any conflicts, he adds. "It's no more of a bias than recommending the stock of an investment banking client. At the end of the day, it really depends on how each situation is implemented. Let me put it this way: I,ve been a director of research for three years and I,ve never had a situation where this became an issue."

But critics argue that even with restrictions, the potential for conflicts exists. Take the "put your money where your mouth is" argument, for instance. An analyst who invested $100,000 in a stock and saw the stake appreciate to $500,000 during the technology boom , or even higher in the case of pre-IPO investments , might be less likely to change his opinion if that company's prospects dim or the market starts to turn against it than an analyst with no financial stake.

And even a small investment can be significant to an analyst , especially a recent MBA who has not yet made a name for himself on the Street, is up to his eyeballs in business school debt and finds himself among the hordes hired in recent years to cover tech stocks. Even for an analyst making $1 million a year or more, the kinds of profits that could be made during the market mania , in the hundreds of thousands of dollars , amount to a significant percentage of annual income.

Consider the hottest IPOs, where small investments became million-dollar fortunes , for a while. Many of these stocks had tiny public floats , between 4 million and 10 million shares, compared with hundreds of millions for more-established companies. Coverage of such companies is often limited to the handful of firms that participated in the IPOs. Consequently, analysts covering these stocks can have a far more dramatic effect on the shares, prices than they would if they were following, say, Ford Motor Co. or General Electric Co., which are tracked by scores of analysts and have far more shares in circulation.

"I never bought in my sector, because I didn,t think I could ever handle the conflict," says William Burnham, who covered Internet stocks for Credit Suisse First Boston before becoming a general partner at Softbank Capital Partners in September 1999. "Analysts make a good living to begin with. Especially if you have a large position, it has to affect your judgment. I never wanted to risk my reputation. But other analysts would argue, sometimes very persuasively, that I was a wimp. You know, ,How can your clients trust you, because you,re not putting your money where your mouth is?,"

THE SEC AND CONGRESS MAY SOON weigh in on whether these practices should be fixed. Some critics, of course, already have made up their minds. "I personally don,t like it," says Putnam's Kuenstner. "But nothing,s going to be done about it until the sell side sees that it's good for their business to act in a more upright and ethical way."

There are a number of remedies , varying in strictness , to address the potential conflicts of interest that analysts face. Analysts could be prohibited from owning any of the stocks they cover. A less severe step might be to prohibit researchers from investing in companies in their coverage areas before an IPO. Alternatively, analysts could be permitted to own stocks in their areas, but be required to disclose potential conflicts more specifically and prominently.

But full disclosure poses its own problems. If an analyst recommends ten stocks but owns only seven of them himself, the reaction from the companies and investors when disclosure is made is likely to be heated. Nonownership in that context would speak almost as loudly as a sell recommendation.

In some ways, this may be a bull market issue that is put to rest by the bear market now prevailing. Analysts have in recent months finally thrown in the towel on scores of companies they once recommended despite unjustifiable valuations and murky prospects. This tech bubble, however, is just the latest in a long line throughout history: biotechnology, personal computers, conglomerates, railroads, tulip bulbs. It will not be the last.

How different is an analyst's owning pre-IPO stock from insider trading, before it was made illegal many years ago? Back then, the connected benefited from inside information. During the tech mania, they arguably benefited from inside pricing. Though imperfect, specific and prominent disclosure should be required, at the very least, to let investors decide whether there is a conflict of interest, say some observers. "We need more disclosure and transparency when an analyst has a financial stake in a particular stock," says Representative Baker, who is considering legislation to do just that.

The role of Wall Street research already is changing, largely because of how it is paid for. Modern sell-side research grew out of the need to better serve money managers who provided brokerages with lucrative trading commissions. Over the past 25 years, those commissions have withered to almost zero. Technology continues to commoditize the trade execution business and will only shrink margins further. Research departments will grow even more dependent upon investment banking fees to pay the lavish salaries commanded by top analysts. Claims of objectivity will become even more suspect.

As sophisticated money managers realize they are no longer the highest-priority clients of investment banks, they are seeking independent sources of investment advice. Some look increasingly to in-house research staffs. "Our approach to the market generally has been that sell-side analysts are serving so many masters besides us that we increasingly need to rely on our own research," says Kuenstner. "I worked on the sell side for a long time, and I think the quality of the research we do at Putnam is a lot better than the research we did 12 years ago at Merrill."

The Association for Investment Management and Research, a professional organization for buy-side and sell-side analysts, has formed a task force to develop research objectivity standards. It will draft a position paper on how analysts should manage their relationships with their employers, investors and the companies they follow. "It's important to develop some standards, some best practices for analysts to follow, especially in disclosing all the conflicts that may exist both for them personally and for their firms," says Patricia Walters, head of professional standards at the organization. "I,m getting to the point where I need two pairs of glasses to read [the boilerplate disclosures]. We think we need to go beyond that, and hopefully, when we put out our standards, there will be some market pressure on companies to follow them. The problem for us is that our members are individual people, and the disclosure is done by the companies they work for." The task force, led by retired Merrill Lynch Asset Management chairman Arthur Zeikel, expects to issue its recommendations next month.

What better way to defuse investor anger and repair a tarnished reputation than through greater transparency? If analysts see no potential for conflict of interest in owning the stocks they cover, their reputations can only benefit from specific disclosure of the extent of their stockholdings. If they feel such disclosure is an invasion of privacy, they have the options of mutual funds or blind trusts.

Even Paul Johnson, who became something of a poster child for the issue when his $10 million ONI Systems stake was revealed last fall, says that better disclosure is needed. "Should it be more explicitly stated? Probably yes, as a matter of general rule. It should be very clear if an analyst owns or doesn,t own."

That kind of sunshine certainly would have helped investors , both the sophisticated institutions that are already skeptical of analysts, objectivity and the ordinary Joes saving for their retirements , better ascertain exactly what was backing up all those "strong buy" ratings during the bubble days.

Firm
May analysts purchase stocks they cover?
Do any restrictions apply?
Are pre-IPO investments allowed?
How are positions disclosed?

Credit Suisse First Boston
Yes
Transactions must be preapproved by research and compliance officials. Minimum six-month holding period (30 days for stocks outside sector). Trading must be consistent with company ratings. Shorting permitted

only if stock rated sell
Yes, with preapproval of research and compliance officials
General disclaimer that firm and its employees may own the stock

Deutsche Banc Alex. Brown
Yes
Transactions must be preapproved by research director and compliance officer. No trading within two days of ratings or estimates changes. No trading between close of company's fiscal quarter and earnings announcement. No trading for two days after company makes SEC filing. Six-month holding period (30 days outside sector). No shorting
Yes, with preapproval of research director and compliance officer
Reports specifically name analyst and state that he owns the stock

Goldman, Sachs & Co.
Yes
Approval of research management required. Minimum 30-day holding period. May only buy stocks on recommended list or those rated trading buy. May not sell unless stock downgraded to below trading buy. No trading within 24 hours of commenting on company. Shorting allowed (positions must be held for 30 days)
Yes, on a case-by-case basis. Investments in firm-sponsored funds typically distributed in cash. Share distributions subject to the restrictions at left
General disclaimer

Lehman Brothers
Yes
Research management must preapprove transactions. Sixty-day minimum holding period (14 days outside sector). No trades not consistent with recommendations. No shorting
Yes, with preapproval of research management
General disclaimer

Merrill Lynch & Co.
Yes
All transactions must be preapproved by compliance. No trading within 24 hours of issuing comments on a company. No sales without negative rating on stock. No shorting
Yes, but must be preapproved by compliance department
General disclaimer with case-by-case exceptions

J.P. Morgan
Yes
All trades must be approved in advance by research director and compliance officer. May not sell unless stock is rated market perform or underperform. May not sell until 24 hours after downgrade to these ratings. Minimum 30-day holding period. No shorting
Yes, as part of employee private equity fund or as co-investments, with approval from research director and compliance officer. May not sell for six months after IPO
Reports specifically name analyst and state that he owns the stock

Robertson Stephens
No
Not applicable
Yes, with preapproval of research and compliance directors. IPO shares must be sold or put in a blind trust before analyst

initiates coverage*
General disclaimer

Salomon Smith Barney
Yes
Minimum six-month holding period (30 days for investments outside sector). May only buy if stock rated neutral or higher. May only sell if rated underperform or lower. No shorting
No
General disclaimer



Sources: The firms

*New policy, September 2000