WASHINGTON - The association that represents securities analysts wants to serve as a forum to resolve disputes between analysts and public companies, taking the Securities and Exchange Commission out of the equation.
The CFA Institute in Charlottesville, Va., wants to discuss that possibility with the National Investor Relations Institute, said Jeffrey J. Diermeier, the former's president and chief executive. NIRI, based in Vienna, Va., represents investor relations officials at public companies.
The CFA Institute hopes to engage other financial services associations in a discussion of the idea, Mr. Diermeier said.
"We're all in agreement that we don't think that SEC regulation is the best way to go," he said. "It would be better if we as an industry were to come up with a way to address this issue."
Mr. Diermeier is pushing the idea of creating the dispute forum for analysts and securities-issuing companies as the SEC is looking to issue rules aimed at preventing companies from retaliating against analysts who put out reports and recommendations that are not to the companies' liking.
On Sept. 1, SEC Chairman Christopher Cox sent a letter to Sen. Ron Wyden, D-Ore., saying that the issue "is indeed a concern, and we will tackle it."
The letter was attached to a report from Robert Colby, deputy director of the SEC's division of market regulation, finding 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."
The SEC is investigating Altera Corp. of San Jose, Calif., for possibly retaliating against Wall Street analysts who issued negative recommendations about the company's stock.
The CFA Institute and NIRI last year issued best-practices guidelines governing analyst and corporate-issuer relations, stipulating that corporate issuers should not discriminate among recipients of the information they release.
In addition, a 2003 settlement between 10 major Wall Street securities firms, and federal and state securities regulators, attempted to eradicate conflicts of interest between the firms and the recommendations issued by their analysts. This followed a major investigation by New York Attorney General Eliot L. Spitzer
However, Mr. Diermeier said, "we still need to figure out how to deal with dispute resolution from the standpoint of the analysts themselves - whether we should try to create some kind of ombudsman."
Organizations that have a stake in the issue are greeting his idea with interest. Talks have been taking place between the CFA Institute, NIRI, the SEC and the Securities Industry Association of New York and Washington on having a round-table discussion of the issue of corporate retaliation against analysts, and what can be done about it.
But there are questions about how such a dispute system would work and whether companies would use it. "The problem we have as organizations is that we don't have enforcement powers," said Louis Thompson, president and CEO of NIRI.
Further, he noted, it is difficult for the SEC or any organization to try to regulate to whom company officials talk, because of the conflict with free-speech rights.
"The bottom line in our guidelines is, everybody should be able to talk to the investor relations person," Mr. Thompson said. "But beyond that, the company can establish its own internal criteria as to who talks to the CFO or the CEO. That can vary a great deal."
Further, he added, "the real problem is, retaliation is done in more subtle ways: An analyst didn't get a chance to ask questions in conference calls or they may not get invited to some company events."
While Mr. Thompson agrees "that the regulatory route is not the way to go," he questions how the approach suggested by Mr. Diermeier would work. "This has some pretty broad implications. It gets into the arbitration area, which has some legal ramifications," Mr. Thompson said. "An ombudsman ought to be somebody who's not representing either side,"
SEC member Annette Nazareth, formerly the director of the division of market regulation, has asked NASD in Washington and the New York Stock Exchange Inc. to look into issuing, for companies listed on their exchanges, regulations preventing discrimination against analysts. So far, neither organization has come out with anything.
"It makes a lot of sense to try and resolve things in a non-litigious way," commented Scott Cleland, CEO of the Precursor Group Inc., an independent-research firm in Washington.
"It can be very effective in dealing with more routine and lesser offenses," said Mr. Cleland, who also is co-founder and a director of the Washington-based Investorside Research Association, which represents independent-research firms. "But serious bullying warrants government enforcement."
Proof is hard
No matter which organizations try to tackle the issue, dealing with it will not be easy. "Retaliation is terribly difficult to prove," said John Kallop, chief financial officer and chief administrative officer of The National Research Exchange Inc. in New York.
The organization, which went public in May, is aiming to sell independent research on small companies that do not have analyst coverage. In addition, it has set up an alternative dispute resolution process through the American Arbitration Association in New York to resolve problems between analysts and issuer companies.
The company is set up as a membership organization, and all members - there are none yet - must agree to abide by its rules, which include reporting all grievances, whether or not a party chooses to go through the dispute resolution process.
The CFA Institute and NIRI "have no regulatory authority," Mr. Kallop said. "They can ask people to abide by the rules. Their members can either do so or not. Our members are bound to agree[ing] to the code of conduct and reporting agreement."