Market analysts’ opinions of Apple stock are almost always guaranteed to provoke heated reaction from Macintosh users and enthusiasts. Those same folks may take some interest in a hearing taking place today in the US House of Representatives entitled Analyzing the Analysts: Are Investors Getting Unbiased Research from Wall Street?
The House Subcommittee on Capital Markets is chairing the hearing; the subcommittee is part of the House Committee on Financial Services. Led by Subcommittee Chairman Richard H. Baker, the hearing will focus on what Baker calls the “relative degree of erosion” between analysts and banking interests.
Baker expressed concern that investors — particularly individual retail investors — may not be receiving fair and ethical treatment at the hands of market analysts. Some of the issues at hand were outlined recently by Baker’s Subcommittee.
“Financial analysts make recommendations to investors while their employing companies are vying for lucrative underwriting business. When taking companies public, the firms which underwrite the securities offering generally make a 7 percent commission. Also, financial analysts often have personal holdings in stocks they analyze and recommend to investors. Too many firms have vague, boilerplate disclosure rules about ownership by the individual analyst and the firm,” said the Subcommittee.
Some assert that these conditions cause some analysts to issue buy recommendations in order to boost the value of the shares they’re selling. Offering bullish analysis of a company’s stock can help preserve an analyst’s access to market info from the target companies, as well. But painting an overly optimistic (or pessimistic) view of a company’s performance based on the analysts’ own self-interest can present a serious conflict of interest when that same information is being used by individual investors to make decisions about their portfolios.
The House Committee on Financial Services Chairman, Michael G. Oxley of Ohio, said recently that he was distressed that despite the market troubles of last year, less than two percent of analyst recommendations were to sell stock.
“Investors have lost a great deal of money and value from their portfolios recently. So in this atmosphere, analysts must bear some responsibility to maintain their independence from the marketing side of their employing firms,” said Oxley. “Analysts are so important to the marketplace the last thing we need is the perception that they’re nothing more than hucksters.”
Witnesses scheduled to present testimony at the hearing include Thomas A. Bowman, president and CEO of the Association of Investment Management and Research; Scott C. Cleland, CEO of Precursor Group; financial journalist Benjamin Mark Cole; James Glassman, host of www.TechCentralStation.com; Gregg S. Hymowitz of EnTrust Capital; and others.
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