SEC Looking Into Retaliation Against Analysts

The Securities and Exchange Commission is looking into the practice of companies retaliating against research analysts who provide negative reports.

“The Commission staff has been reviewing this matter and is currently considering several possible solutions for recommendation,” Chairman Christopher Cox wrote in a Sept. 1 letter to U.S. Sen. Ron Wyden (D-Ore.). Wyden had written to Cox expressing concern over published reports that programmable chip maker Altera had given the cold shoulder to an analyst who covers the semiconductor industry after the analyst gave the company a negative “sell” rating.

The SEC’s San Francisco office is conducting an informal inquiry into the Altera allegations. The company acknowledged on Sept. 22 that it had received a request from the Commission to turn over information relating to Altera’s communications with equity analysts and its firms. Altera “is cooperating fully in this matter,” the company said in a prepared statement. “[Our] policy is to grant access to all analysts who cover the company.”

Frumento

Aegis Frumento, a partner with Duane Morris in New York, tells Compliance Week that the Commission’s attention to the issue has created a buzz, particularly because Cox’s mention of “potential solutions” could theoretically include new rules or guidance. “Many people are interested in it only because the SEC is interested in it,” he notes.

But Frumento, who chairs the law firm’s Brokers & Dealers Group, says he’s not convinced that this will be a fruitful grounds for regulation. “Issuers don’t have to talk to everybody,” he says, “and I would think they would have the right to avoid, criticize and even sue an analyst who does a hatchet job or lies about a company.”

Dumas

Others agree with Frumento, with some noting that they aren't even sure why the SEC has launched an inquiry at Altera in the first place. “The SEC may find it offensive if someone was excluded [by Altera]," says Dennis Dumas, a former SEC enforcement division staffer who is now a partner with Chadbourne & Parke, "but I don’t know if it’s a real violation.”

“I don’t know of any rule that requires you to talk to an analyst in particular,” asserted another attorney.

As a result, says Frumento, any Commission rule or guidance on the topic may be more theoretical than real, and perhaps even misdirected. “I don’t have a problem with the SEC studying it to understand the dynamics between companies and analysts, but any regulation here is likely to be clumsy and heavy-handed,” he says. “The relationship between analyst and company should be a little adversarial, just like the relationship between a journalist and the protagonist of a story is.” Frumento would prefer a resolution created by market dynamics. “An analyst’s remedy against intimidation is more rigorous and factual reporting and analysis, and that ultimately serves investors better than rules and regulations.”

The SEC declined through a spokesman to comment on the issue.

‘Informal’ SEC Survey

Wyden

In his Aug. 4 letter to the SEC, Sen. Wyden said that “the public will lose confidence in the accuracy of research and information on the stock market” if companies are allowed to retaliate against analysts who express unfavorable opinions. Wyden urged the Commission “to enact regulations to prevent companies from taking actions that would punish analysts who give them a negative rating.”

In his reply, Cox noted that SEC staff “has engaged in extensive discussions with the industry and self-regulatory organization staff.”

Cox attached to his letter a three-page memo on the subject from Robert Colby, the deputy director of the Division of Market Regulation. In the memo to Cox, Colby said that SEC staff had taken an “informal survey” of several “multi-service broker-dealers to gauge the extent to which retaliation continues to be a problem for firms.”

That informal survey, Colby said, “indicated that retaliation against analysts and their firms by issuers and affiliated parties (e.g., venture capitalists), as well as large investors, continues to be a problem.”

Colby said retaliation by issuers takes several forms:

Limiting participation in company-organized conference calls and events;

Denying access to senior management;

Limiting or eliminating participation in “non-deal road shows” with company management;

Threatening to withdraw business from other areas of the analyst’s firm;

Criticizing an analyst’s work product on conference calls and in the media; and

Threatening legal action for defamation.

Colby noted that many of the firms that the SEC spoke with “suggested that the exercise of formal regulatory action was probably not a practical solution,” but said the staff would nevertheless “continue to examine whether Commission or SRO [self-regulatory organization] rulemaking would provide necessary or appropriate responses to retaliation against analysts by issuers.”

More Heat From The SEC

A joint task force of the CFA Centre for Market Integrity and the National Investor Relations Institute addressed the relationship between companies and market analysts and came up with a set of “best practice guidelines” that were issued in December 2004.

Under those guidelines, which were cited in Colby’s memo to Chairman Cox, issuers can’t:

Discriminate among recipients of information based on the analyst’s prior research, opinions, recommendations, earnings estimates or conclusions;

Restrict, deny or threaten to deny information or access to company representatives in an attempt to influence the research, recommendations or actions of analysts; or

Attempt to influence the research, recommendations or actions of analysts by exerting pressure through other business relationships.

Samuel B. Jones Jr. of Trillium Investment Management in Boston, who co-chaired the CFI/NIRI task force, says the Altera situation shows that “we still have work to do” in getting companies to abide by the guidelines.

Jones said that voluntary compliance with the CFA/NIRI guidelines is preferable to having the SEC “come in and force the issue.”

Jones

“The main message here is not that NIRI and the CFA institute are trying to play ‘holier than thou’ and that we’re taking a naïve approach,” says Jones. “What we’re trying to tell everybody is, ‘Look: You’ve got a choice. Take a look at our best practices. … If you don’t embrace the best practices and go along the path of trying to rail against the analysts, all you’re going to do is bring in more heat from the SEC.’”

According to Jones, the CFA and NIRI are still in “fairly steady conversation” with the SEC’s Division of Market Regulation and the Division of Corporation Finance. “Both are monitoring what goes on,” he says. “We need to try to keep the momentum going in promoting these best practice guidelines—if the corporate community doesn’t embrace these things and use them and continues to retaliate against [analysts], they’ll get what they deserve.”

The joint CFA/NIRI guidelines are available from the box above, right, as are related resources and coverage.