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Mechanism Is In Place To Resolve Analyst-Company Disputes
By Samuel B. Jones, Jr.
 Investment News
10 October 2005Retaliation against securities analysts continues to plague the working relationship betweensenior management of publicly traded companies and Wall Street sell-side analysts who coverthe stocks.Such continuing behavior requires ample disclosure in the media, because the majority of investors and shareholders are largely unaware of such reprehensible conduct.As long as there are companies that think they can selectively deny access to analysts who areheld in disfavor - by preventing them, for example, from asking legitimate questions duringconference calls or by cutting them off entirely from access - the mere threat of a possible cutoff creates a poisonous atmosphere.
Dilemma for analysts
 The result is that many analysts feel they need to curry favor with senior management bymaintaining no-worse-than-neutral ratings to ensure access to key executives. Analystssupposedly are duty bound to exercise diligence, independence and objectivity while researchingcompanies and issuing recommendations and ratings.How ironic it is that financial market integrity still is being compromised years after themeltdowns of Houston-based Enron Corp. and Clinton, Miss.-based WorldCom Inc., when sell-side analysts were vilified for issuing too many positive, and rarely any negative, ratings - evenas stocks fell.Eradicating retaliation and permitting analysts fair access won't alone guarantee more balanced"buy," "hold" and "sell" ratings, but it would almost assuredly restore an environment that ismore conducive to providing a smooth flow of more meaningful information to investors.
What can be done about it?
In order to defuse any threat of regulatory action, leading practitioners in the industry and theinvestment community need to mobilize their forces, come together and forge some mutuallyagreeable best practices - or risk watching the regulators seize the initiative.Enter CFA Institute and National Investor Relations Institute. Our two organizations - the first
 
 
representing about 78,000 investment professionals worldwide and the latter 4,400 investorrelations professionals in the United States - already had successfully collaborated on a variety of issues bearing on analyst and investor relations dealings.Our deliberations culminated in the publication of the "Best Practice Guidelines GoverningAnalyst/Corporate Issuer Relations" in December 2004. (Company executives take note - theSecurities and Exchange Commission, NASD of Washington, the Nasdaq Stock Market Inc. of New York and the New York Stock Exchange all sent observers to participate in our task forcemeetings throughout.)There are five guidelines dealing with the following core issues:• Information flow between analysts and corporate issuers.• Analysts' conduct in preparing and publishing research reports and making investmentrecommendations.• Corporate issuers' conduct in providing analysts with access to senior management.• Review of analyst reports by corporate issuers.• Research that is solicited, paid or sponsored by the issuer (so-called issuer-paid research).Rest assured that it wasn't a one-way conversation. We examined behaviors, includingretaliation, that investment professionals wanted to see changed.But we also looked at market manipulation and threats of using banking or other relationships toextract favors that companys' management wanted to see corrected.Indeed, analysts aren't pure, either. Our top priorities - avoiding retaliation against analysts andmanipulation - were low-hanging fruit, because the Charlottesville, Va.-based CFA Institute(formerly known as the Association for Investment Management and Research) and Vienna, Va.-based NIRI already prohibit such behavior in their respective standards-of-practice handbooks.At the very least, our recommended steps for dispute resolution should prove useful to corporateexecutives: Initially, try to reach agreement with the analyst on the facts.If the problem can't be resolved with the analyst, the issuer should discuss any disagreement orerror with the analyst firm's research director.If the issue still is unresolved, the issuer should discuss the disagreement with the complianceofficer at the analyst's firm when either the research director doesn't offer assistance or when theresearch report's recommendation and the analyst's oral communication with clients aren't thesame.
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