Analysts will soon make pledges on results

8220;The SEC is trying to react to the issues that have been raised by Spitzer and others concerning the influence of investment banking operations on analyst recommendations,8221; said Richard Phillips, a partner with law firm Kirkpatrick 038; Lockhart in San Francisco.

While the national scandal over fraudulent accounting at top US firms surfaced with the implosion of Enron last fall, controversy over research has been on a somewhat longer simmer.

Concern that overly bullish stock picks had helped inflate the telecom/tech bubble resulted in Congressional hearings more than a year ago. Critics charged that analysts had wanted to land deals, not provide objective investment advice. Then, this spring, New York Attorney General Eliot Spitzer unveiled numerous instances in which Merrill Lynch 038; Co internet analysts privately trashed stocks to which they had given top ratings.

Spitzer, bolstered by a multi-state coalition of securities regulators, has expanded his probe to other top Wall Street firms. He also reached a 100 million settlement with Merrill that included restrictions on its research division.

Spitzer8217;s success emboldened8212;some say embarrassed8212;other regulators and prosecutors to take a closer look at what has been an open secret: Wall Street analysts may tailor their opinions to please management and earn million-dollar bonuses.

The proposed SEC rule8212;Regulation AC, for analyst certification8212;would require analysts to certify that the views expressed in a research report accurately reflect their personal views. The certification would be included in each report, and be clear and prominent.

Analysts would certify that no part of their pay related to the recommendations or views expressed in the report8212;unless they disclose the source and amount of such pay.

Analysts also would be required to make certifications and disclosures on a quarterly basis for public appearances such as radio or television interviews when they opine on a security. 8220;The rule is an effort by the SEC to reassure the marketplace that you can indeed rely on an opinion of the analyst, that this is her good faith belief,8221; said Ron Berenstain, a partner with Perkins Coie in Seattle.

8220;If it later turns out that he told the guy in the cubbyhole next to him, 8216;I8217;m putting this out, but it8217;s really not my opinion8217;8212;not his good faith belief8212;then there8217;s liability,8221; he said. Regulation AC adds to new rules including disclosure requirements governing analyst research that the SEC approved in May.

Those rules prohibit tying analyst pay to specific transactions or offering favourable research to induce firm business. Analysts were also required to attach a stock chart showing when they recommended a stock and how it performed.

A year ago, Wall Street firms were hopeful of staving off new restrictions by agreeing to voluntary 8216;best practices8217; strictures to which they said they already adhered. Since then, the political climate has changed with the Enron and WorldCom scandals, in which analysts were cheerleaders for management, and the grinding bear market.

Wall Street leaders have become resigned to the inevitability of increased regulation. Reuters