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 To: AIMR Public Comment on proposed issues concerninganalyst independenceFrom: Edward Werner, CFADate: 24.08.01
Dear Sirs,Please find below my comments concerning the proposed paper on analystindependence.I have followed with great interest the public debate on all the issues surrounding thedisappointment with the perceived lack of analyst independence. As usual in suchsituations the analysts are being singled out as scapegoats by the popular press. Itfurther appears that Washington wants to get into the act with politicians looking forsome sort of legislative solution to the problem, which is a scary thought indeed.While on the one side it is a very human first reaction to sit back in a feeling of "Schadenfreude" and enjoy the difficulties which the large sell-side brokerage housesare going through now, this would be short-sighted and selfish. I must say that this isa real opportunity for AIMR to shine, as the standards of practice which all CFAcandidates are required to read and follow provide ample solutions to today’sproblems. The trouble is that great sums of money are at stake, which can result inenormous pressure to bend rules, and smear lines.The statement "Given the symbiotic relationship between research and investmentbanking" is a red flag for me. Why does this symbiosis exist? I feel that it may benecessary to disallow any future cooperation between analysts and Investmentbankers. When I write, analyst I mean those analysts, which are thought to be on theother side of the "Chinese Wall" from the bankers. This is not to say that there is noroom for a promoting banker to spread the good word about a company, but it must bemade clear that this is not an analyst, but a banker. Further the quality of thepresentation by this banker is something like an infomercial as opposed to objectivereporting. This addresses the crux of the issue and the source of the disappointmenttoday. The investing public today feels itself betrayed by analysts who they took forobjective. Rightly or wrongly these investors are realizing in certain instances thereports they trusted were in fact designed to drum up buyers for the benefit of thecorporate sellers. It is a fact that the corporate sellers (Investment Banking clients)pay much more than the brokerage clients.
 
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 I think the paper points out adequately that good companies may not be the best of investments, which is not a reflection in any way on the company. Integrity inbrokerage reports is definitely missing as seen by the lack of sell recommendations.This has long been known by institutional investors, who are perhaps moreexperienced or seasoned. Institutional investors further have certain tools available tothem such as the ANR function on the Bloomberg, allowing them to see what "all" thebrokers think of a particular company. Most retail investment clients do not haveaccess to such tools. I think that at least on this point the market will regulate itself.As the information, such as that found on the ANR function from Bloomberg, beginsto make it’s way down into the market, investors will punish those brokers perceivedas serving Investment Banking clients over all others. This trust once lost will bedifficult to regain.I disagree with the idea that a buy-side manager can somehow "out" an analyst ashaving a negative opinion about a company. If we are really at the point where suchis possible then the idea of a Chinese wall is finished. Analysts should mean whatthey say and say what they mean. Why should an analyst care if a buy-side portfoliomanager is going to report them to the company? What could possibly happen?Either the buy side manager will be ignored, or listened to. If the company does listenperhaps they will adopt the suggestions of the analyst, and become more efficient.Doesn’t the analyst stand behind his work anyway? This is assuming that the analystwas giving his or her best to identify a good investment, but if they were serving theinvestment-banking department there may be a problem. Being an analyst is not easy,and requires strength and conviction. Weak individuals need not apply.The paper could do a better job of pointing out that the management of the sell-sidebrokerage firms is probably remiss in their duties to help maintain the objectivity of the analysts. All of the major firms probably have the necessary guidelines on thebooks to ensure that objectivity is maintained, but they have not enforced things asthey should. While the analysts must be responsible for their actions, many of themare young, perhaps inexperienced, and they are being offered large sums of money. Itis obvious where this situation can lead if it is not managed according to a spirit of integrity and service to the client.As far as the media is concerned, let’s focus attention where it belongs, and that iswhere the fiduciary responsibility lies i.e. with the banks, brokerage houses, andmanagers. The press should be left to itself. Mind control is no way to help things,and anyway there will always be a certain percentage of fools in the market at anytime. There is nothing that can be done for these investors, and despite the perfectadvisory service they will insist on destroying themselves.
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