Analysts’ Rosy Reports Draw SEC Chief’s Fire

Would you buy a “buy” recommendation from these people?

America’s chief stock market regulator said Tuesday that Wall Street analysts are issuing far too many bullish stock reports, a trend intensifying the long-standing debate over the objectivity of analysts.

Securities and Exchange Commission Chairman Arthur Levitt, sending up what he called an “early warning signal,” said such rosy stock analyses appear to be shaped by the lucrative investment banking ties that analysts’ firms have with the companies they’re supposed to watch with a critical eye.

Levitt, in comments to the main securities industry trade group meeting in Boca Raton, Fla., put analysts, the brokerages that employ them and any corporate clients that expect glowing reports on their stocks on notice that he will be taking up such potential conflicts of interest with industry organizations.

“We all know this industry is filled with possible conflicts of interest,” Levitt said at the meeting of the Securities Industry Assn. “I am going to discuss this with the various self-regulating agencies.”

Levitt said a study of reports from analysts--a frequent source of expert commentary in television, newspaper and news agency coverage of business--showed that stock “sell” recommendations now are dwarfed by “buy” recommendations.

“Certainly, the growth in the market has something to do with this lopsidedness,” Levitt said. “But I can’t help but wonder what else is driving the number of buys to exceed sells by 8 to 1 when, in the early 1980s, that ratio was roughly 1 to 1.”

Critics of Wall Street have argued that it has become much tougher for analysts to be objective about the prospects for companies and their stocks as competition among brokerages for investment banking fees--such as for merger deal advice--has intensified.

Levitt said he would ask the New York Stock Exchange and the National Assn. of Securities Dealers for advice on what regulatory steps, if any, should be taken.

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The Hard Sell

Tuesday was a typical day on Wall Street: Of 134 new or revised stock ratings issued by analysts, only two were “sells,” while 102 were “buys.” The “buy” category includes such ratings as “market outperform,” “outperform significantly” and “top pick”; the “neutral” category includes such ratings as “hold,” “market perform” and “perform in line”; and the “sell” category includes a “below average” rating.

Buy: 102

Neutral: 30

Sell: 2

Sources: Times research, Bloomberg News