AIMR President Tells U.S. Senate: Wall Street Firms Should Pay Analysts Based On Performance of Recommended Stocks, Not Investment Banking Results.

Business Editors/Government Writers

WASHINGTON--(BUSINESS WIRE)--March 20, 2002

New Rating System With Risk and Time Qualifiers Also Recommended

In his Senate testimony today, the president of the Association for Investment Management and Research(R) will call on Wall Street firms to address conflict of interest problems by compensating their research analysts based explicitly on the performance of their stock recommendations and the accuracy of their earnings forecasts.

"We strongly believe that firms can and must reward analysts first and foremost for the quality of their analysis and on explicit quantitative measures of the success of their recommendations," said Thomas A. Bowman, CFA, AIMR's president and CEO.

Bowman is scheduled to speak today at a U.S. Senate Banking, Housing and Urban Affairs Committee hearing on accounting and investor protection issues raised by Enron and other public companies. The hearing is chaired by Sen. Paul Sarbanes, D-Md.

Bowman said he will also call for an overhaul of the securities rating systems that Wall Street firms now use. These systems, which are different from firm to firm, include a wide range of terms, from "strong buy," "intermediate term attractive" and "long-term accumulate" to "hold," (usually interpreted as a euphemism for "sell"), "neutral" and "reduce."

"Although firms may believe their proprietary rating systems are a competitive advantage, the market is better served when ratings are concise, clear and easily understood by the average investor and provide reasonable comparability across firms," Bowman said.

He will recommend that all ratings not only have a bottom-line, "buy-hold-sell" recommendation, but also two other factors: a risk element that would measure expected price volatility or other risks and a time horizon that would give, for instance, an estimated length of time before the stock price would reach its price target.

"Too many individual investors have made investment decisions based on 30-second sound-bites," Bowman said. "They see an analyst on TV or read on the Internet that an analyst has rated a stock a `buy,' and they make an investment decision on the spot, without reading or oftentimes even being able to get the research report - and without considering the suitability of the investment to their own risk tolerance, time horizon and investment goals.

"We believe that adding a risk measure and time horizon to the rating, and always communicating these three elements, will provide investors who do not read or have access to the full research report with better information by which to judge the suitability of the investment to their own unique circumstances and constraints," Bowman said.

Bowman also will tell the Senate committee that Wall Street analysts and their firms should be required to update or reconfirm their recommendations on a timely and regular basis, and more frequently in periods of high market volatility. They should be required to issue a "final" report when coverage is being discontinued and provide a reason for discontinuance.

"A `closet' sell rating does not serve investors' interests," Bowman said, referring to the practice of an analyst quietly discontinuing coverage to avoid issuing a "sell" recommendation.

AIMR is a 55,000-member, non-profit organization of financial analysts, portfolio managers, investment advisors and other investment professionals in 108 countries. It sponsors the Chartered Financial Analyst(R) (CFA)(R) designation, a rigorous, fast-growing designation that reflects the investment industry's most rigorous professional and ethical standards. AIMR has offices in Charlottesville, Va., Hong Kong and London.