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SEC Warns on Recommendations SEC Warns Investors to Exercise Care With Analysts' Recommendations By MARCY GORDON AP Business Writer

WASHINGTON (AP) -- The Securities and Exchange Commission is warning investors to take the stock recommendations of financial analysts with a grain of salt, amid growing criticism that some analysts aren't independent enough from the companies they tout.

Investors also should consult other sources of information, such as company financial reports filed with the SEC and independent news reports, rather than relying solely on analysts' advice, the SEC said in an ``investor alert'' issued Thursday.

In addition, the SEC said, investors should find out whether an analyst or his or her brokerage firm has a financial interest in a company, creating a potential conflict of interest by allowing the firm to profit from the analyst's recommendations. Some analysts work for firms that do investment work for, or own stock in, the companies they cover, while some analysts own the stock themselves.

The investor alert explains potential analyst conflicts in detail as well as who financial analysts are and the different types of companies and institutions they work for.

In a telephone interview, acting SEC chairwoman Laura Unger said she was hopeful the securities industry will eliminate conflicts of interest. In the meantime, she said, the SEC wants to ensure that investors ``are aware of the practices that have called analyst credibility into question.''

Unger said she had asked SEC examiners to inspect several brokerage firms to see how their practices may be contributing to biased stock advice from analysts.

``We're working towards a solution of the problem,'' she said.

Analysts have been under fire in recent weeks from regulators and lawmakers. Critics say they have shaken public confidence by making rosy stock recommendations as the market plummeted last year. At one point during the slide, when the Nasdaq composite index was down 60 percent, less than 1 percent of analysts' recommendations were to sell.

Unger prodded Wall Street in a speech in April to begin resolving what she said were analysts' conflicts of interests. The New York state attorney general's office is conducting an inquiry into whether analysts are providing unbiased stock tips, with investment strategists and analysts being interviewed about what goes on behind the scenes -- especially how recommendations are formed.

And Rep. Richard Baker, R-La., chairman of the House Financial Services subcommittee on capital markets, held a hearing two weeks ago to examine whether analysts have become cheerleaders for companies the analysts' investment firms own stock in or do business for, giving investors biased advice.

Baker called the SEC alert ``an unprecedented and invaluable guide for every investor.''

Jim Spellman, a spokesman for the Securities Industry Association, said, ``We all share the same goal -- to educate investors -- and this is the SEC's effort to do that.''

The SIA, Wall Street's biggest trade group, unveiled new voluntary guidelines for analysts earlier this month. They require analysts to clearly disclose their holdings in companies they cover and prohibit them from trading against their own recommendations. Analysts should not have their pay directly linked to the investment banking transactions handled by their firms for companies they cover, the guidelines say.

Baker plans more hearings, as lawmakers delve into the roles played by investment bankers who work with analysts, companies that may pressure analysts for favorable recommendations of their stock, big investors such as mutual funds and pension funds, and financial journalists who pump up analysts' reputations.

On Wednesday, Baker and Rep. Paul Kanjorski of Pennsylvania, the subcommittee's senior Democrat, announced they were creating a group of experts -- including Unger and New York Stock Exchange Chairman Richard Grasso -- to review the new Wall Street guidelines.


On the Net:

The investor alert is available on the SEC's Web site at

-- CAKidd (, June 29, 2001

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