Investment Banking: More Bricks in the Wall

Regulators are introducing new rules to ensure the objectivity of stock analysts, but what's good for investors could be bad for CFOs.

The rules say that analysts must make these disclosures in public appearances (such as on television) as well. They also require them to put a chart in each research report showing the subject company’s stock price and the rating assigned to the company over the same time period, as well as a chart showing what percentage of the firm’s covered companies fall into each of the firm’s rating categories.

The SEC’s Regulation Analyst Certification, proposed in July, would require analysts to certify that the opinions in their research reports are their personal opinions. Analysts would further be obliged to certify whether or not their compensation is tied to the specific recommendations or views expressed in the research report. That’s not to imply that analysts could no longer be paid for covering companies or writing reports, adds the SEC. (The text of the proposed regulation is available at the SEC Web site.)

Seemingly more onerous are the NASD’s rules governing communications between analysts and investment bankers. The rules prohibit bankers from reviewing or approving a research report prior to publication, except to verify factual accuracy. Any written or oral communication between bankers and analysts regarding a research report must be made through a legal or compliance officer. Any draft reports that are shared must omit the research summary, rating, or price target. Analysts may not be compensated based on specific investment banking deals. Nor may they offer a company favorable research or ratings, or threaten to change research or ratings, as a consideration of inducement for business or compensation.

This last provision would affect not just analysts but some companies, too. No longer would CFOs be able to convince an analyst to adjust ratings based on the amount of investment-banking business their companies do with the analyst’s firm. Although just 9 percent of survey respondents admit to pressuring analysts in this way in the past five years, 71 percent of those who have say they plan to do so again in the next 12 months.

“If you asked 100 CFOs, they would say they liked the idea of being able to buy or influence coverage,” says Lavallee of Revolution Partners. “It was a nice arrow to have in their quiver. These rules make it a lot harder for them to pick up coverage.”

Losing Perks

But corporate finance executives will find the rules governing analyst involvement in IPOs the most disturbing. As an NASD spokesperson acknowledges, there is an expectation of an investment bank’s analyst involvement and coverage during the IPO process. And indeed, the CFO survey reveals that more than 23 percent of respondents expect a firm’s analyst to recommend the company’s stock in exchange for underwriting business. But the NASD’s rules bar a lead or co-managing underwriter from publishing a research report on a public company for 40 days following an IPO, or 10 days following a secondary offering (compared with the previous rules blocking reports for 25 days after an IPO). Such reports have long been one of the valuable perks that CFOs of newly public companies received when they selected an underwriter.


Your email address will not be published. Required fields are marked *