In addition to conflicts of interest in the accounting industry, critics during the early 2000s became concerned about conflicts that occurred with respect to stock analysts in securities firms. These concerns arose because analysts made recommendations regarding the potential value of securities in public communications. A conflict could occur in several situations, such as where a stock analyst firm had a financial relationship with a company that issued securities.
In 2002, the U.S. Securities and Exchange Commission approved rule changes that addressed conflicts of interest that may arise with respect to stock analysts. These rules include provisions relating to the following:
- Analysts are prohibited from offering or threatening to withhold a favorable rating or price target with respect to stock in order to induce companies to employ the analyst for investment banking purposes.
- Research analysts may not be supervised by a company’s investment banking department. Rules also restrict communications between investment banking personnel and research analysts.
- Securities firms may not tie in an analyst’s compensation with a specific investment banking transaction.
- A securities firm must disclose in a research report that it received compensation for investment banking services from a company that is the subject of the report.
- A stock analyst may not personally invest in a company’s securities prior to the company’s initial public offering if the company is in the same business sector that the analyst covers.
- Stock analysts are required to disclose whether they own shares in companies that they recommend.