Conflicts of Interest Among Brokerage-Firm Analysts Must be Better Managed, Investment-Association Leaders Say.

Business Editors

LOS ANGELES--(BUSINESS WIRE)--May 21, 2001

AIMR Task Force On Analyst Independence At Work

On New ``Research Objectivity Standards''

Long-standing conflicts of interest among brokerage-firm analysts have been aggravated by the technology-market "bubble" and a heavy investor emphasis on initial public offerings, the head of an industry task force on analyst independence said today. While some conflicts may be unavoidable, they need to be better managed, he said.

"The vast majority of the investment-professional community is not subject to the conflicts of interest on which so much attention has been focused," said Arthur Zeikel, retired chairman of Merrill Lynch Asset Management and a member of the Board of Governors of the Association for Investment Management and Research - a global professional association of 50,000 financial analysts, investment managers and advisors.

"The conflicts really have to do with a finite number of brokerage firms that offer a full range of investment services, from retail advisory and brokerage to research to investment banking and corporate finance," he said. "Yet concerns over their objectivity are casting a shadow over the entire profession."

Chairman of the AIMR Task Force on Selective Disclosure and Analyst Independence, Zeikel made these remarks at AIMR's annual "State of the Investment Industry" press briefing at the association's annual meeting in Los Angeles.

"Investing has become a national pastime," Zeikel said, "and many investors who are new to the market are relying on news programs and the Internet for much of their investment information. Too many act on a 'buy' recommendation without even reading the analyst's full research report, which contains a wealth of information about the company's risks and prospects before arriving at a bottom-line recommendation."

Because conflicts of interest have always existed for brokerage-firm analysts and are in many ways unavoidable, Zeikel said, the question is not whether there are pressures on analysts to be unduly bullish, but how analysts and their employers can manage those conflicts to minimize the pressure, maintain their objectivity and independence, and then make adequate disclosure to investors.

The task force does not consider an inter-relationship a firm's analysts and investment bankers to be inherently inappropriate, he noted, as long as analysts are not coerced or enticed into issuing research that does not reflect their true opinions, and as long as conflicts of interest are disclosed to investors.

For instance, brokerage-firm analysts help screen potential clients for the firm, or participate in "road shows" to explain the company financials and competitive market of a particular security to potential investors, Zeikel explained. "After all, they have a more in-depth understanding of the company than the investment banker does," he said.

To help foster a more objective research environment with more explicit disclosure, Zeikel said the AIMR task force he chairs is moving forward on three initiatives:

-- It is developing a position paper on preserving research integrity, which
will describe sources of potential influence on analysts, including investment
bankers, the firm's institutional clients (fund managers) and the public
companies themselves. Zeikel said the paper "hopefully will serve as a
'best practices' guideline of appropriate behavior of all
concerned." The paper is scheduled for release for public comment in June.


-- The task force is developing new "AIMR Research Objectivity
Standards" to provide specific and measurable "best practices"
that a firm should follow to protect the independence and objectivity of its
analysts. Firms that comply with these standards will be encouraged to
publicize their compliance, thus creating a competitive edge by offering
investors greater assurance concerning their analysts' objectivity. Over
time, this should help fuel market demand for research that is identifiably
objective.

AIMR's highly successful Performance Presentation Standards (AIMR-PPS(TM)) and Global Investment Performance Standards (GIPS(TM)), now used in 25 countries as common methodologies based on ethical principles for calculating and reporting investment results, are the models for creation of the new AIMR Research Objectivity Standards. Similarly, AIMR's Soft Dollar Standards have been broadly adopted as the ethical guidelines for acceptable use of "soft dollars" for investment firms acquiring research products and services from directed brokerage.

The Research Objectivity Standards are planned for release for public comment later this year.

-- AIMR will also publish an in-depth "topical study" addendum to

the AIMR "Standards of Practice Handbook" providing guidance

through specific scenarios addressing what AIMR's 50,000

members and 86,000 Chartered Financial Analyst(TM) (CFA(R))

candidates must do to ensure that their research reports are

adequate and investment recommendations have a reasonable

basis ensuring the independence and objectivity in their work

product.

Analyst Get Less Information Since Reg FD, Survey Says

Turning their attention to another major concern of the investment profession, AIMR leaders said that initial evaluations by analysts of the impact of Regulation Fair Disclosure (FD), which the Securities and Exchange Commission implemented last October, have been mixed. Regulation FD requires public companies to release "material" information such as earnings warnings simultaneously to all market participants, including individual investors.

AIMR Senior Vice President Patricia D. Walters, CFA, said that, in a survey that AIMR conducted in February, 57 percent of analysts and portfolio managers said the volume of substantive information released by public companies they research has declined since Regulation FD went into effect. Only 14 percent said the volume of substantive information has increased. Moreover, she said, 81 percent of analysts agreed that, since Regulation FD, companies that want to minimize communication with investors can do so more effectively.

"On the plus side," Walters said, "the survey also showed that analysts are doing more fundamental analysis than before - including more review of public documents and filings, more competitive evaluation, and more discussions with customers and competitors."

Walters said the results show a need for a better definition of what constitutes materiality, and for companies and investors alike to have a clearer understanding of how to operate in the new environment to ensure a continued flow of information to the markets, she said.

Rational Caution vs. Irrational Exuberance

As for market performance in the past year, AIMR President and CEO Thomas A. Bowman, CFA, commented, "It's tempting to look at the numbers and conclude that we have taken a step backward. I prefer to look globally - both literally and figuratively - at the health of markets overall, and I can't help but conclude that markets today are healthier in many ways than a year ago."

"Rational caution has replaced irrational exuberance, and markets perform much more efficiently over the long term when investors go back to fundamentals and make well-founded investment decisions," Bowman said.

Investors and investment professionals alike have been reminded that investing is a long-term strategy requiring careful evaluation of objectives, resources, risk tolerance and time horizon.

Investment Professionals Worldwide Learn from Gurus

About 1,000 investment professionals from around the world are attending the AIMR meeting here at the the Century Plaza Hotel, viewing exhibits and attending educational workshops and panel discussions. Topics under discussion include technology stock valuation, Regulation FD, looking beneath the surface of financial statements, managing online information, valuation of media and entertainment stocks, issues in fixed-income investing, and many others. Among the more prominent speakers at the meeting are:

-- Peter Drucker, the world-renowned management consultant, who

is speaking on the new challenges facing executives, such as

changing demographics and the failure of Information

Technology to give executives the information they really

need;

-- William F. Sharpe, the co-winner of the 1990 Nobel Prize in

economics, who is speaking about techniques for helping

individuals make good investment decisions;

-- Jeremy J. Siegel, Professor of Finance, University of

Pennsylvania, Wharton School of Business, co-author of the

acclaimed "Stocks for the Long Run," addressing what the

market's turmoil may signal for the future;

-- Ben Stein, author and game-show host, discussing investment

ethics; and

-- Donald H. Straszheim, president of the Milken Institute,

addressing the question of whether we are in a "new" economy,

and the outlook for Japan and Europe

A Web cast of AIMR's state-of-the-industry press briefing will be available for free public viewing at www.aimr.org next week. Highlights of selected conference sessions will also be available online.

Headquartered in Charlottesville, Va., with a regional office in Hong Kong and an office about to be opened in London, the Association for Investment Management and Research includes 101 member societies and chapters in 27 countries. More than 86,000 CFA candidates from 143 nations are preparing now to take the organization's CFA exam in the June 2001. Along with the CFA program, AIMR is globally renowned for its stringent professional conduct standards and for its industry-leading advocacy and standard-setting work encouraging full and fair disclosure of financial information for investors and analysts. More information is available at www.aimr.org or 804/951-5499.

SOURCE: AIMR