The Securities Analyst as Agent: Rethinking the Regulation of Analysts

65 Pages·2015·9.66 MB·English

UUnniivveerrssiittyy ooff PPeennnnssyyllvvaanniiaa CCaarreeyy LLaaww SScchhooooll
PPeennnn LLaaww:: LLeeggaall SScchhoollaarrsshhiipp RReeppoossiittoorryy
Faculty Scholarship at Penn Law
2003
TThhee SSeeccuurriittiieess AAnnaallyysstt aass AAggeenntt:: RReetthhiinnkkiinngg tthhee RReegguullaattiioonn ooff
AAnnaallyyssttss
Jill E. Fisch
University of Pennsylvania Carey Law School
Hillary A. Sale
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RReeppoossiittoorryy CCiittaattiioonn
Fisch, Jill E. and Sale, Hillary A., "The Securities Analyst as Agent: Rethinking the Regulation of Analysts"
(2003). Faculty Scholarship at Penn Law. 1038.
https://scholarship.law.upenn.edu/faculty_scholarship/1038
This Article is brought to you for free and open access by Penn Law: Legal Scholarship Repository. It has been
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TheS ecuritAineasl yasstA gent:
RethinkitnhgeR egulatioofAn n alysts
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ABSTRACRTe:c epnrte hsassh ighhltiesgdh ocke.iwunngp sl oefb iasse,ll
dealianngdi, n accuimnCt )hb'ee havoifto hrse cue ritieasn alyC;rti.t ics
havaet tritbhuebt uebdeba lnds ubseqcureanistnht hteech nology secttoo r
analhy)s•tap ned j Jostihtaeutdn duaen alyosptti mciosnmt- ritbou ted
scandalass E nsruocnAh.f tnewrn ye aryso fm inimalr egulatomvy ersight,
a·naysltasr en owth es ujbecto fex tenves riegulamty reforjnmo posa/s,
includmianngd aaint t eh Sea rbane.Asct-o Of2x 00l2ere yq urinigt hatth e
Securaintdi} e.s'x chaCnogmem issaidoonpa t v arioeftr ye striocnt ions
anaZb'Veshla vior.
Desptiet hem ediatat rmtithoerne, h avbee efne awl lemtfoc Jolnsa ptualize
careftuhlme(z ya (')rs•o slTteh .iA sr liocflfese urcsha na nal_)'Fsiirsst.tl ,u:
Articchlaenl gleetsh ter aditcoinocepntiaonl o ft haena lysta si ndependnlt
gateheTehpAeer rt.id crlaweus poenmp ircail, legala,nd a necdeovtiadle nce
toe valucraitticael yl theex istbienhga voifso erc uriatnieasZ vasntdts h e
extetnow th icthhe iarc tiviitinecsr e'aa1sr/eetklc .fficiAesntc h)Ae'r .t icle
dem.onstutaltews,l yasrtseus l �jteoac t v arioefcto nyjl ictso fi ntertehsatt
consttrhaeibienhr av ior.T her esulctoisinttgsn pobs)Ihe' ed s coenjZ ictws- e
clsasica genc_)' costs.
AccorditnhAgelr yt,id celvee lao 'pJsuc: wo ncejJtuaolfti zhaet isoenc urities
analyts as quasi-ageAnltth.o ugh analyshtasv neo tt raditiob1wle(ve n
treaatsea dg enutnsd esrtm ulaargde nCl)a'w p riJnlcifjj�iSma,n b roader
ecrmmjnJiecr speacntiav(yesa,t rjse J mjuJndenrsiolody t oa cti n aang eiU)!
capacAin(ya.l_) 'osctotsn b ehlafof m ultinwprlhe!'Lj HirticijHlnls, including
their enzijsJsluoeyanc.nr isdn,v e stors.T heisnet earreiesn tte snsi on." 'lgenc)'
pricinpesli llumibnraetaeh dotwhnaesn ailyns rtosml uelj Jrovide guidance
ini dentifyaijJ/JrnogjJ risaotleu tIinojJ narsitc.ul m � wea rguet hat nform
effosrhtosuj l(dJ counst e h minimizatoifor ntg encCo)s'tt sh,r outghhe
apjJlicatioonfa q uasi-agaefJjmJryao chi 11cludirnjg' na:l idaubt)'il itv.
--·----- ---------------------------------
ProfessoofrL: m·,F ordhamU nie\r·siStcvh ooolC L m·T.h is, \nic'k. ·:p��t'l'r lima·liltv tcn
\l·hPirloef esFsisochr �tlswoa ss erivng �ISS lo�uV1i sitiPnrgo fessGoero.r getowUnn iw·rsLitt111·
Center.
:;:P:r:o:f es�oLra wof aF.n .d- -\n1old Oaun1 C:oSrcphnorlaaLrr·e.n iL,�·nevr sil:· nf lo\\-:l
Collgee of LaFwo.t rhe ri comment�sm ehle lpfusulg gc:-:tiontsh,e� utt!ltohrsa nkJeAnrnliefn,t :r
Stn·Cch u1Vil,. iGtuub tiP,e telrl uang, DunLatlncgln (.>oPr�tu,t i !\Ld,l\<c>lnP�crlyil,tl clh ��t�rcnlc,l
RoberSti tJ.:.oT!hf ea uthorts kllRolbke rtG adrke�,· [ichR;�uts·slc Jiel.t llli'e;�·r;ksc r. Doug
Pondearn.d B riaVna nderP olf or.rh eriers ea�rtscshi srance.
1035
J036 [2003]
TheA 1tidfc ocuosn etsh es jJeccxiwjni/ofcJ sleele cdtiisvdeo stuor c
failtuo! -ceo nceptualisztea otfut sh e
demonstrate !hot !he thqeu asi-agen(�\'
anal_ystm'!s ,, laend i ntao pprotpolreiraanoftc seec lrcdtiisvcel osure.
Insteatdh,eA rticle offera snew efficiejnucys tijfiocart hteai doopnt ioofn
Regulat}iDon b aseodn a gmc)p'r incipTlheesA .r tictlhee dni scustshees
impliratoifao gnesn ctyh emf)o'rr ecepnmpto saltso a ddreostsh er tcyfp es
anal_covnjsltcits . TheA rticcloen ciudeosffer ib_vn gs omes uggestifoonrs
furthdeer bote.
I:\TRODUCTI..O.·."'· ·J·· ····.·.·.·.·. ...............................·.·.·.·..·.·.·.· ·.·.·.·. .................1.0. 37
I.T HER OLEOF T HES ECURITIAE:-JSA LYS.T.. ..........................................1.0. 40
II.A :"\.\CLOY:SF\TL! CfSO Fh TEREST.. ...................................................1...0 "13
A. On:\D!SH1I:J\'I Di..E...\..J..S.. ................................................!.0. .4...3.. .
B. BUS!;IN\T1E:P.J':;..·<..:n,..: ..r:,... ............................................................ .l0 45
C. ACC.l1:\:'Sn-RSJ ·ST..\. ...................................................................1..0.. . .54
IIIR.E CLL-\TlOOF:\ THSEE CURJTAIl\'E,\�L;Y .S.T... ...............................[.0. .5..6.
.L Fi:DLFR.F�(·;\UJLn,Ao .v-n·.rC 1ou rns.. ...........................................l 0 .56
B. FiDUi\!.". f.\ R_u'f!;OX!- THFSE C AXn PJ·C\U!'! 0\�FD\ .\.\rJJi C.... lOfil
l.R egulatFiDo. ..n.. .................................................................l..0 61
a. Bacg;hmun..t.../....... .........................................................1..0. 61
!J. Reg·Llla..t..i..o....J...z......]...�...]....).. .....................................l. {)62
t. TliIem pacotf ReguFDl a...t..i...o....n...... ...........................1. 065
�-RegulatAiCo ..n... ...............................................................1..0. ()8
iJJ}_:!.()\/ -',\Ll'.S\'TSi": U1'.\ j'fRJ(}J\; .[....L....\.. ..................................1.0. 69
l. NASD/i"<'YSERegu..l..a..t..i....o....n....s... ........................l ..0..6..9
2. The MerLrmiclhlS ettlem..e..m..... .....................................l 071
3. The IomfpR aeCgLu iation on th.e.. ...C...o.....n..fl....i..c..10 t7s4
D. T!-11S�\'! .W.L\"l:SA-.0XcrOL FH2 00.2.. ............................................. 1076
IV.S LI\liO\F· DLEF\IRCYI ENCIINEE SX ISTING REGt..7..L...\...T...!...O..N.... .1.0 78
\. .:'\BETTER SCH.LTIQOL>\JS-lTH-EA I'vClEo:'m:\L.. C...Y..... ................l.0 80
A. DJTFUJP�\OIFJ :n-11-.sQ rU \S!AcM:onLJv....c.'f...Y .. ........................ .l Oi::lO
(2C.\SJ-Ac;F.\n
B. T!!!: fi,JOULJ. rl-nr'R_Fo U(l;:DI 'II'i.!.U.,.\. .1FD.0 .8.6. ......
•I.L·s.r..C.:....\. .........................................................................................l.0. 97
THE SECURITIEASN ALYSTA SA GENT 1037
i'vla y2 000-Fe2b0n0W11,) ' i\�-1S1JA.Q by
"From _ whilteh e indedxe clinedov er
one-thainradl,: vst's['s.e ll]' 1ecomhmeelnsddt awtdia_ovt.n . s. 0 %" 1
lNTRODLJCT!ON
8,2 002,
On April New YorkA ttorn ey GeneraEll ioStp itzeanrn ounced
shockign findinfgrso m an invesgtaition of seucriitesa nalysatts !\ Ierlrli
�
Lynch.Inp apers filewdi tht hec ourtS,p itzreerve alde thati \'rIiellr Lynch
analysts ocnsistetnyl skewed their research reportsa nd stock
recommendatoinsi na ne ffort tog eneratinev estmentb anking businefsosr
'l
thef irmA.ccordintgoS pitzer,s enioorff icilasw ere aware tthhera ets earch
reports were tainted mainsdl eaodfityneengt ,c o ntniued toa ssurpeu blic
1
investotrhsa t tihnef ormatiwoans i ndependent, o�jetcive, and unbiztsec\."
Courtp apersd etairle peateedx amples inw hichM errilLly nchp ubilclv
recommendesdt ocktso inevstosr whiled isparagitnhgo sesa me stockisn
internea-mla ilass "clogso,r" 'j unk,"o r warnintgh at thec ompanvw as
� t in
"fallnig apart.I"ndeeda,s them arketf orI nternsett ockpslu mmeed
2000,
thospe apers retvheaal\lt' lermraii!nlt ainae rda ting of" accrunualte"
ora boveo n allt hec ompaniietcs o Yerecnle,v ero ncea dvisiinmgc stros ro
u ';
sella ss tocpkr ciesp lnged, sometime·s' atlhlew ayt o zero."
recent
Spitezr's investigaiotn ism erelyo ne examplei n a serioefs
n
developme tsh ighlighttihnegp robelmaticr oleo ft hes ecuirties ;malv:st.
Botht hem ediaa nd the SecuritainedsE �changCeo mmissio(nth e ··sEC")
addition,
havew arnedo f analvsbti ass,e lf-dealainndg o,t hera busesI.n
analytss haveb eenc riticifzoerdr hefiari ltou rsepo tp roblem<sl lt: nro11.
Finalyl, planitiff' slawyercso minuet o pursuen ovelli abiltiyt heoriie1s1
litigataigoainn st analyAsmtisd. a lolf thicso ntroversy, theS EC adoptde
Regluaiton FD i'2n0 00t o pro�libiti ssuerfsr om selectiYdeilsvc losing
corporaitnef ormatitoo na nalvs't Bse.latecthlehS ,E C alsoa nnounced<ll l
l. B<trba'.clro :<eRsI,' SI'Atnlirilih\ '>IS Cl:l\llf.tl'-i.B·-\rlBu·Ak" eiDrl ee,a leRre guL!riCo:r"ru rse
ufStudUya n.1 0-ll.� 110:!).
�- S1'Ptr esRse lt::Orfstf·i.co fe' \t:11·..- \tYto"rnktG ee\t·r erE:lrilo t Spi\tkzrerri.ll l.1 ·nrlr
Stuck RatiSnvsgt cnFto unBdia .-b;1e·cl l. 'rtcli,C;:colnofsleicoclfb I nteres(t.s- \p0r.i l :!l.l il:!)
'.Lrr.
ouoilor/1! hJt!t,p/,/: 11\\'IUJ:Jg'..s/lupltr>ct'··.,�t;its.:l/l/!l:ltp/:r1pr08b._h(t)l2l(llL r1;;irs itul 2,-,_
Jm,·<r
�OO(coltn)i lwier ht he:· LrwR e�·iew).
;>,_S til't !.
-L .')wid.
.-\llicl:rl·it Cerrt·Lrl
:1. Petitioner\ in Srrpp<">fr. ·\rp plicrtfioor<n l lOlr derP ursrL't't' lt
BusincssLS1e1c1rioYnl -;fr,It U -1'\S.p itz1e.r\ krrill.l1nrS.h.: C o, '\oU.: '--IOl(:'\'.>\:..'S:u!p . . Ct
. -\pt\r., 20m0•a2i)i.oa fJ//he t tp/: 11\1·l.·'l.tog:.r,i;et.;ll/li.mtchsru/rpsres/s:!()/:0r2p/r\knilll.pc!f
(onf i 1k1rI· tit heICJ 11L·la\ Rlc 1i e11·!.
15.S eitd a.t �-10 .
Feel. 7lti-Cil
7. SclectDiins:cl osamen di rbicTlrc:rt cli6n:g-.J Reg,.-,] (.\g.u'2 -L:.' lll)l ()t(o be
codifiaet1d 7 C .F.JlRl:2.s- .l �f1:1l..: ut2d- ll(Jo)tn i l1e1 ·irrhlelt u ''L'1a1 1R nin1). STF.ilCtk ·t s
In lhL·
nuLli <JII:·tednu·ptr:c.rd m c· lirnc·cgtu l�11ii"tnl'l ;1,tJ;het'h s:rr 1ilo:<rc.t. SEC's i.>durt' '"
!akaen \�·l ctiiun1n h c din-:�c,trio n! ·cg·;uuita;ttil,1�-,:1·tg��p t ;st lo'fl, ,·\Lu pr1\ :ntnoprt!tl·td' '.
1308 88 [2003]
IOn0'L1A W REVIEW
K 2002,
inquiyr intoa nalyscto nlficotfsi nterestI.ns pring theN ewY orkS tcok
Exchange h(et" i\TYSE") andt heN atoinalA ssocioanto ifS ecu rtii eDse alers
(hte" NASD"),a ss e-lrfegulya toorrganizatio(ntsh "e SROs")a,l saod opetd
new stadnardsf ora nalysdti socslurea nd trandig activiwthyi,c hw ere
�
subseqeunltya pprovebdy t heS EC.Thel atedsetve lpomenti sa mandate
undert hen ewS arbane-OsxleAyc tt hat tShEeC ort he SROsp romulagte
0
rulse toa ddresasn alyscto nflicotfsi ntrees1tT.he goalo ft hesvea roius
measurewsas t oi mplementa moret horougrhe uglatorreyg mie toa lelviate
thec onfloifcit nt eresptr olbemst hahta vep lgaueda nalyrsetoc mmendatinos
inr ecenyte ar\sV.he ther thesset epwsi lslu cceed,h oweverr,em ainusn clear,
inp artb,e causoef thec ontineud ambiguiyt int hec onceipotn of the
analysrto'els. T o seew hy,c ondseirb owa nalysatrse t ratdiinoalltyr eatbevd
courtsc,om menattorasn,d r egluato.r s
Hisotricla,yla nalyshtasv eb eenr eltvaielfyre ef rom regluatoin.l ncleecl,
ins omer espectasn,a lyshtasv ee i"Uoyperdee frresdat tusu ndert he feedral
secruitileasw. sC ourtcsa revdo uta na nalysetxc eptitoont hep rohibiitono n
the useno nop fu bliicno frmaotini ns eucrtiietsr andigj,u tsifyitnhsgi p oilcy
by a twoflodc laimF.i rscto,u rtas ndc ommenattorasrg uedt haste ieicvte
dislcosurteos ecureisat inalyssi tsb enecfiiatlo t hes ecutriiemsa rketsb ecause
iti nrceasetsh ed isseminatioann di ncorporatni oofi nofrmatioinnt os tock
pric.e Secon,d some commenattorasr gued tahnaalty suts e oifns die
informatidoone sn otp oser iskasn aolgoust ot hsoep resetnedb yt rdaitinoal
insiedrt rdaingB.o thj utsificiaotnrse lyi,np arto,n thet heoryt haatn alssyt
fm�ctionas unbiasemda rket gatkeeepersT.h is" gatkeeepign" rhe10y is
premisedo n thea ssuprtnoin thaatn alsytsac ta sc onduiotfsi nofrmation
from compantyo s harheoldearn df rom shraehlodert oc ompanyB.e casueo f
thei nformiaotnf lowp rovidebdy a nalystisno,fr maotin idsis seminated to
them arketa,n d them arket becomes more efficein.t Based on the
conclusitohna atn asltyasc tuallpyer formt higsa etkeepifnugn ctiocno,u rts
and regautiors havel etf analystlsag relyu nregultaeds o as to avoid
interrupttihnegf lowo fi nofrmaitonE.v eni nl ighotft hea nalypsrto belms
oultind eabovteh,e saerg umentasr es itluls ed dteoef nda priilvegerdo lfeo r
securtiiesan alyss,t inclundgi thec lami thatR egualtino FD IS both
unneecssya rand undeisrbaleA.lt huoght hiasr gumenth as reecntlbye en
CenerE;l1il"S pti tzrnn Lttmchhi so wn investigaitniototn h ea reaS.e Ceh arleGsa ps;tri\nVaol.l
Streleita1 s11 (1 'uliklC"ofjyr Xn uSW .j-J\SiLTL.L. .n.J, , -\ pr.2 ::!\00 :2a.t C 'l.
0. SClk'trek :C,; "L,par&i nSuc oJt..P altro.w,%' C. JoIi'nosrOl j!,m Ilnsq uiry into .'luu!ysts.
\\.\"Ll.J S.\r pr:21 i:2.0 0:2a,r. -\I.
�!. 'S<n.·\; StDi :le'-\i YRSuEl emakiEnxgc,ha ngAect Relea�sue.3 4-4:)9(0i\tlLt vI U.:2 00�).
m•nilubhltptc:/ o\1t\ ".1,;\el.clgo/lrulehst/m (las1ti sii\thcrd. '2'2:10.0 (3u)l1 i1i1 e1i tthh e)(>\L\t"l;\\
Rel·ic11·).
IIJ )1S';1� rh:ltles,\--ctCuh lln2 D0'2l.' uLb. N1o.0 7-2� :l1H0.1J .() S lt :t7·tL./" liJ.(l 2 002)
(tHjltiSrHi:n 1g1 i1honien lt.·ro: tard opt rule·s· rt•;N>nr;itcbsh,i gI·<>n: etdd clr(l;·msash slj
Ct>llfluif'cit.slT tlL.l")Sl. ..
THE SECURT11E) ANALYST SAA G.tiVT 1309
muteds omewhati nt hew akeo fr evleaitonsl iek thosaet M erirllL yncht,h e
acturaoll pel yaedb ys ecutriieasn alstyrse mainosp ent od ebate.
ThisA rticlceh alleesnt ghet raditivoineawol f a nalssyt asi ndepednent
gatekeepeWres .q uestiwohne thergi,v ent heijro bsa se mplyoeesi,t i s
reasnoablteo a ssmue analssyt area ctaull"yni dependentT.o" e xplaiwnh y
secruitiaensa lysatrsen ot" nidependent,t"h eA rticle drawesm puiproinc, a l
legaaln,d a necdotaelvd iencet oe valuattheee xisntgib ehavioofrs ecutriies
anaslytas ndt hee xetntt ow hich theiarc titviieisnc reasmea rkeetf ficiency.
Baseodn thiesxa minaiotnt,h eA rticdleem ontsrtaest haatn alyssa tren ot the
independeinnfotr matiogna theretrhsec ourtasn do thearc ademihcasv e
purportetdh emt ob e buta rei,ns teads,ub jectto a varieotfyc onflicotfs
inetrestth acto mpromisteh eiirn depeenndce.
One possibrlesep ones tot hicso nfliocfit n terepsrotb lemi ss impltyo
improved isclosoufrt eh esceo nflicatnsd taoc knowledgteh at lasynsta are
esseantlilsyal espeo,p sleeinV'gi thei netrestosf theifri rsm'i nvetsment
banikngc lientTsh.is repsonsei su nsaitsafctorIys.s ueirnsv,e tsorsa,n dt he
markettsh emseelsav reh eavidleyp endnetu pont hea bitlyoi ft hea nalystto
functioansa ni nofrmatiointn ermediaIrnya .d ditiotnh,ee xitsnigr egluaotry
treaetmnto fa naylsthsa s beenp rernsiedo n protecntgi thifsu nciton, an
11
objetcivet hatp erssist in theS arbasn-eOxleAyc t. Nonethleess,t he
subasnttiarlo let haat nalyss ptlya withr espectto i nofrmatiofnl o\a\n'd
secutriiepsr iicngi ss ingiifcalnytu nderminebdy c onflicotfsi nteretshta t
creatae v ariye tofi ncetnivefso ra nalyss ttod itsotr thei nofrmationt hey
presnet.
Ther euslitngc osttsh atth esceo nflicitmsp oes ont hem arkeatre clsasic
l"-'
agenccyo s.t sAnalsysth aven ott radointailbleye nt reataesda gentsa,t l east
for anyoneo thert hant heire mpolyer,a nd theer are sigfniicnat
impedimenttos classif)t'hinegma sa gents unders atndadr agency law.
Nonetheeslsb,e causteh ieri nctnnediaitone fefctvielrye uslst int heira cting
on behaloffi ssuer,si nvestoarnsdt, h em arketfsr,o ma broadeerc onomic
perspectainvael,yt ssa re properluynd erosotd to acti na na genccya pacity.
To capteu rthsi conecptaulizatiwohni led istingunigs ahnialstysf rom
traditiaogneanlt tsh,i Asr tcilede scriabenasl ysatss" quasi-atgse".n vVed o not
arguef or thea pplicatoifo snt anrdda agenclya wp rinciplehsu,t w e do
proposteh aatn alyrsetgu lationb e viewefdr oma n agenpceyr spectiB\y· e.
utilziintgh sia gencayp porachi,ti sp ossbilet oi llumniatber eakdwonsi nt he
anal'yssr tolaen dto providgeu idaceni ni deniftYniga ppropriate soluntsi.o
Inl gihto ft hiasn alys1ivsea, rg uet hta reforemf fortssh oulfdoc uso n the
minimiziatono fa genccyo stTso.w ardt haetn d,w e argtuhaet a nasltysow e
l!. Stti d.( clirt:cttilnng� StEoC: a dopt ruldeess igne·d· tporo tect the uhj�elclrlic,l· it,·
illclepellodefo;l elcCuCr itainesa lysts"").
1'2. S!'ivtl ichzC.w l. fen&s \\e"nil liH�.l, l\lilc ckliFnlgu,' oIJf!I li\t' Fi•n\nl:r lll/l)l,_!·!/,u"nl•"i!u'ri,o !
Agnu:y CosUtis io>nldSl tomrslhuirJjc .J F?>lE C\:O.'-! .: >0;:{)O,S ( (1c9:/,lplbi)n innagw r�etn cl
l\peusfa gency costs).
1400 88 [2003]
TUWA LAW RE\/IV.E.'
dutietsot h e market-dutitehsaw te t erm' 'reliadbiultiitey s"t-hanathctol s e
ll
dutiessh oulbde e nforce:cl.
To proYidae frameworfko ra nalyzintgh esed utiest,h e Article
conceptualtihzees se curiatnya lysrto'lsea n do utlinae qsu asi-agemnocdye l
for undseatrndinga ndr eguliangt anasltyb ehavoir baseodn that
conceptualizaTthiiosmn o.d els ervetsh reei mportanptu rposeFsi.r sitt,
clarifhioewsc onflictdiuntgi eisn hereinntt hea nalysrto'lsce a usaen alysttos
faila s gatekeepse.r Second,t he model provideas more coherent
explanatifoonrR egulatiFoDn t hant hatp rovidebdy t heS EC'sf ocus on
fairnesFsi.n altlhye,m odelp roviddeisr ectifoonrf urthreerg ulation.
The Articplreo ceedisn t hef ollowimnagn ner.P artI formalizes the
identitv raonldeo ft he securitiesP aann IaIli vdsetn.t iftiheesc onfliocft s
' I
interetshta ts ecuritaineasl ysftasc ed,e tailienmgp iriclailt eratounr teh eir
jobsa ndr oleasn,d e xplaihnso wt hesceo nfliccrtesa tien centifvoersa nalysts
to use insidien formatiionn w avst hata re inconsistweintth m arket
)
efficienPcayn. Illb riefrleyv iewtsh eh istoroyf anaylstr egulatiaonn d
describesk ey componentosfr ecenptr oposaflosrr egulatroerfyo rmP.a rIVt
expasn dotnhe d eficienicinre esf orpmr oposablysd emonstrathinogwt he
proposaflasit lo c onceptualtihzeae n alysrto'lspe r operlPya.n V exetndst his
analvssito develoap q uasi-agemnocdye lo ft hea nalysTth.e P aratp plitehse
modelt oc reataen a nalydstut yo fr eliabialnidtyt oo ffearn efficiency-based
justificufioorRn e gulatiFoDn.T he Articcloen cludwesit hs omer eflections
on ther oloef t heS ECi nr egulatsiencgu ritaineasl ysts.
I. THER OLEO FT HES ECURITIAENSA LYST
Securitaineasl ysptesr forrme searacnhd a nalysoins c ompanieisno rder
toe Yaluasteec uritanine se stimatthee i\r' alausei nvestmenItnst .h eortyh,e y
sen·aes informaticoonn duitosr,i ntermediarbieetsw,e etnh ec ompanies
11
theyi n\·estaindga actteu aolrp otentiianlv estionr s thocsoem paniesT.heir
worki m·olvceosl lectianngd processiinngf ormatiforno ma varietoyf
''
sourcebso,t hi nsidaen d outsidoef thec ompany'.A s a resulotf their
researcahn.; clvsttYsp icalplryo ducet wo productsa: · 'porreta"n d a
··recomrnen(LHioInn.t "h er epona,n alysotfsf efra catnsd o pinionasb outt he
subjeccto mpam anclit ss ecurit1'i;eT sh.e recommendatiownh, ich is
1:>. Rt.d\;rcn· rC·C.L t:r\kg.; !Cn'slll\scy' ns usF ir/wir/n))u"l iit·nPs R.I \TII.Y'\.D\ L:.\SC f\:TTIS!:F
SneL1l1 R FO FB t.�I\:FS(]�< J:i-m1P:\r-a\l1S."l : R. i char)d.Z cckkut:e<lekr.1 �1:(-\d:e1s)cr igb tihne
rule1 1l!i dttcdiudtni ei1s1n ··cluc:itngge JcloCs\t s)f.< Jarn :tgurmctltth at: tn:th·tsitc>l'u cian
J.�·pd
responsibil·i'lhiotu>blsde l ill\ittoic mc·!e stosrese,P er.erH uaInIg.. lmj;/imloifoCnusi lrl1 11rl
f'ridtofiil.'il"ruri\l:'iinlcl)·!I .t' g\!u.. l.o lRir(r-Ymf .o nhco2m00i3n)g.
1-LT F.n Tt\.\LT_)\t\X\\i\lL:l·\ S.\ I�>.:I I.1T\OF\l.>R \1C<.J\RLP OR.\DTiLs ci.OSUL:-.;.nRmr
FtlH\IIZ:i U .Rl l!tL SL \\I I" W(C-l : C:'2HU OU).
l:i. S1·\t\ \1i.t_ ..\\.s·Is\ .T \ . C :0\11'.T\O: \EYFF ICXlTI"\lEl )SLTO <i-JRIUU ..-\! T.IIOl\F'2:Rc. \S.
RF.1S�.1 �1;'o.'2.1 ( I CJ:-;'\).
lti.. J:t\l.i'>c<i>l:iwll \\lh:anl:h�i.'ll lil tt:'r nJii/1.1-!\/11i:r1\!o llll"l:i lrlf{l {hlt.i•\l il'lill lnlnirlli f"·,
F.111i1w. �r l."u\lf li!,n·:giu!slDs1.t11 ol-+Dli Lflu' n. 1\.il ) ·sl.L JI. i '(I'2.J1 {. )11 . I'2 :'>
'THES ECUFU T!ESA N/iLYSTASA GEiV T 1041
genearllay e slectionf rom a seireosf r atnigc ategoraice·hsi,s tehse i nYensgt i
publci tob uy,s ell,o rc ontintuoeh oldt hes ecuiirtse inq uesiton\.V hen
analystasc t" indeenpdelnyta nd o�jecitveliy,vn estso rgam frmo the
1'
publicatoifto hne iirnsg ihst."
Analsyts conductth eirers aerchf or varoiust ypeosf i nvesotrsT.h is
Articlleie,k m ostr ecnetc onrgesosniala ndm ediaatt entifooncu,s eosn s e­ll
sidaen aslty1s�'. Sells-ied analyss,wt hoc ompriaspep roxmiately3 0%o ft he
1'�
analytsi nclutsry,areg enearlyl emplyoedb yb roekragefr imsa ndp roudce
researfcorh b rokaegrefi rmc ustomse arndo theirnv estoMrasn.y of these
brokaegref irmsa lshoa vea ni nvetsmentb anking divoisni.I na ccllititoo n
donigr esearfcorh c usotmerr epotrsa,n aslstyw how ork for thosef rimsa lso
may perofrm researfcohr the undewrrtinig of an isuser'sse cruities,
parctpiiaet int hero ads hmv (acutallyt ralveintgo p icths ecurit,o ireh se)lp
clintchhe u ndewrrtiindge alT.h ei nofrmatiporno ducbeyds e-lisldea nalysts
isw idey ldisseminatiend tfinhaen cailm arktesI.nd ividrueaclo mmendaitons
are annonuced to the marketplaacned, "evr1ces liek Thomson
Financli/aFisrtC alplu bslhir egular reprotsp olling analysts apnrde diction
recommendatioAnssa . r Tuslcth,a negsi na nlaysrte commendatiotnpysi cay ll
triggseurb asnttiparli cmeo vemetns.
Analysgtse nearlltye ntdo concetnrtaeo n a patriculiandru stlJ}n.
theory,t hesye arcfho �r!l ladn a·hzceor poratienf ormatoin.A nalysrtes aadn d
diegstc ompanrye ptosr� melo thesre cnodayr soucress,p eawki tcho mp<m;'
offices arnde mploeyes;n,:c !w,h eer approprivaitisetc, o mpansyi tIeOs h elp
themfo rm an idneepndenimtp erssioonf t heb usienssA.n alvsrtse view
companyd ocmuenst fliedw itthh eS EC ando therr egautlorsa s wt:lals
materisaeln ctlir ectlv tos hareholdesr.T hisi nofrmatiiosan \ a·ibl!afreo mt he
compainse,t heS EC, ��:n;cdeo cPla:lo:;)u'cr esl iek Stadnard& Po(·)\t] hat
compiles,um m<u- i�zz,. m_el repubilhs i.L Analysatlss moa y l'iCe�,\·, tarde
�11
publiicoantis,n clc'.ui1i1,�dn u:,it-;,p·e-icccmi afgaznie5.
17. �fR.L-T\\\i�..�-8...I:L; \\fTl<)L :\S,:t /1J\Uf_(()!:-'l ,-+: l1oi ::s .
1�.' hTes cc)(ndL u-.:_;cf; -r)ot<;.xp��J ·tL yd:.;istb us\s· -idci .tn::t[l)tv\t·s-idtses �.u1 ;·.1L ..:h.s.\ \·o!r"ko r
instittiunniatl\ 'le�rr...on :,1S\tco nnnonlny HlUlt(lr und��r;eh.i rre porr:st !'1Co1 tf ur :hei n:n·a:ig1 1
ptibl. biucrt)( rL tllilrtn' pl'oLiT..T 'heilr' ll·leprplstm trchs:cetuser' iCSto itrth ie·r< II'I. .'l')lC \I.m:ts ltdl l
thosoef t hecilicrJ H'·�. p-\por..::.1 d J�rt·�·l�L·! }! Jo<ft hea naslly:-i;l lc <itloyS''tsC l·li·itsii t:l1t.cr-�!:;�\ie· br t·i­�
si(alne; dy.s.\h r J):.(I"'F·! FE'·iY: . hnni:..\.· �� )!_�'CR!lA.T\YL: Y:iS\S 0 \: \,\\1'.S.1T-.I\ Y,F\- TC:t) \(lIF.'\:RSEII\T
(:"IlJ.JTFO TUD.)\\ Y'..�.\\TLlOL'�<\ lTL�iUD>�1� '}(. \\L.EiYl �ql).S -.\s ;n�pdrl>{ porlt"iolof . v>'-'Cuirt:iSt
anlays�tr1se: ;cod-l-cidnl :c·p..c.:1:_'..�Jl;Ht n��.·dt�:\"d,H ,p ru.,·:ni d:'fsrec�h1\ i\i·l;o;uirnl ll..� �lrT.di, Liulr :g
nth:crre lati�ohnitpo t::-h-"l i;·tL1liint �L:- .·C\o\··-:.-·r. i'L.t.ni-�nedpen'dlt�lnllay. l..;tsp l·o,·tihdce-! i··rpl osn
t�r
on sau b.•r;icptiono t�·hrft. ·.·�] ).,.;,T_;n."-\!t.:i :u d·cpcn·dJtrlets earccahn b et ·�:p-cn.\-i\·n,, J�_n.ht l
Zi·t!sikniR.t tn.;t;:·tktt sh· t' SECR nmtcit:·DJi>.bcuises iuonl Fti n:1ncli)ail, do: -;;run.;dt"<.\ tdir"r
(),·.;eirgr:l 1( .\ :p1·-.� .� )�( ).\.� ti'<ri t! r-'/' 1tol/ l1 !1p :_//: \\'\\\.·(g.)·s/\�e p�c( 1rlt 1/·(i; gL 11:l 1.C. �lt1lt·J�l/
:teneu n rronud04H{-O.�h:!11 ( on! )_\�l\ t:·lidlH :L >·\�\l-i:.�l \R\c.,· 'i·\'t)·.
88 [2003]
1042 IOWA LAv VRE VIEW
Traditliloyan,na laystr esearaclhs o hiacnsl udehda dns-no
�'
ivnetsitgoian.Anasltymsa yh olpde sronamle etsiw nigtmhe mbesr otfh e
comapny'msa naegmenttae m.T hossea mmea nagermsay atetnda nalysts'
conefrencteobs u lidr elaitosnhiapnsd s hraei fnormaitonI.n tchouer soef
dissciuosnasnl,ay satcsq rueii nofrmiaottnh atth euys et om aket heir
their
earinngse stimaTtheyes s.h arteh osees timwaitthec so mpaonfyif cliswa ho
commeonnt arnesdp ondt hetmoA. n alymsaytt she nr enfiet hees taitmeisn
repsonest oc omapnyr eaicotn<-)s<) .-
Thea nalygsetn aetrehsio srh erre commendatiforomnt hien ofrmatoin
coelcletd.T hea nalyassetss stehes i ssru'vesau leb aseodnt haitfn ormation
thies user's withiisnti dnusrtyT.h usp,ro csesnigt hie nofrmation
and place
on a parctuilcaorm apnya lsroeq ueisra nalysttops ro cessi fnormatioonn
otehrc ompanwiitehsi n itdnhuets rya,n di ti sc ommonf or analysttos
specailizea speciifinucdst royr s ectToyrpi.ac llyt,he anlayst waillls o
in
emplyo his fnianclsi kaitlolc ser aet andr evifisnaen civaaulla tion
orh er
mode.l s
The endre sulotf t his reissaer aerpcothrh tai tsd i sitbreudtb otohra lyl
and inw rtitefnor m.T hesree protnso to nldye srcibteh ec omapnya nd
lcoaet thei ndstul)b'u,t a lsporo vdiep rediinocst. Tmhoset
itw it1lin
impotrant predictiisot nhe sa nalsyte'ssmt aiteo f tchoem apny's
of these
securimtarikeses ht avbee comhegi hyl sentsiivteo
future1 menicgsT.h e
resv11o;n o�f <n1aylste smtaiteasn dto disecparnciebse wteen analyst
prediocntsi isesrua nnonucemnest ofa cutalo perinagtr eslsut,o tfne
and
responditon egi thweitrhs ubsttiaapnlr icfleu cutaitonTsh.e r epotra lso
reocmmendatiboans eodnt haen alty'spsroj ections
conatina sb ottolmie-n
fort he sth,ao nrd sometthei lomneg,s t rem.T hee xatcte rmuss efdor het
recommendativoanrsayc roasnasl ysbtust, tchaeetg orainesd
botto-miine
pupr;,s-e--tsrlaauttihnrege seairnoct hoa n e-woarsds semse,nl tkieb uys,e ll,
-
or hni-di--se: ;nstical·l)t hsea m.e
repond epesn d parotn t hee xtent
Th::' d<ue( )tfh e inl agre tow hich
anasliyaser idnependTehneti .dn ependeonfc e
thea nd,yst\re esarcahn d
icnerasilnyg bectoheme ex ceptriatohnet rh an
aUJl)'":<ntL tJvshiass, h oweve1·,
Tht·o<r·cl:i>;·il lnufnnccClo ntenAtna slisy 4 (Oct2.1 1(0u0pn)ub ilsehd lltln<sucrpito.n f ile,, r·lii
2i .. \; •·:.c c<HH "lrltS tdJ Y.oJurna:1lir ctlfoer.c c-.: alllkp, clcscrithhcdea pproacohf o ne
r:•·islt<l!d''l'l c as it.:11iuding ditgielset oifoc no mpanrre posn andc ompanfy oo.d JDdT.
Opch :..ff ".!iijf.·>.r·!·rS: to.sl tS!·tlncrA / 1:/f ny.C,tf•B.fa\ c tk oll osiinrWo sk ,•o f.a 'iuliWn.y\.1,!S T... .J.S c pL
:.·'.2, '1)!.;t) ,! l\.Th ·:: tnd:vsrte gluralcv atisn t her e.sw:rr:J!sHhS ec overSsh.e r Jft,t·i·isns t :;-reanl
JrH,ic;::.:i·s:;," chaitno c elrcrimnc whcliwrt hen> sr.auarnti s 1bstyw,h ethmeern uc hanegs::t t'r
pop!::hl!rll!." ·!luhcLri 1slt'fai fsp le:JSl:a Innclk nuwlelcgcahl[efs .h feni ds a llJs<yt sl<f.l< �Id in\·
Ltci·:i,!:- [:!·!·l \�\,l·i �t-ilnign� e.t : t1 pn�\o·ui�loy Yersrnibbsreeccr�allltl rnt:',h ec o1nbei:t�nh: tt
iin>:J.T:'t:>i!•·<:!.\1i :t hlei nadn nc>pi":r!:Sm dJ TCCJaH cquitosinisi mn hcrr esecahr.! d.
•Jl) '<Dt;c·:':l; lCi.d .. i:;- �'u:('to>n:t.r.h n,.srl·'mir.·\luln_y lstosn tdh l' tf�lJfnli i.sdl·tlor Trr .!!,l·7i·()u ..\V .L .
�E_.:\_'IU .� .>·1 i! J'2(! �)t1 9)0.
THES ECPUJ71EASN ALYSTA SA GENT 1403
�\
the rule:.Many aynsatlhsa vec omet or eloyn companyi nsidrest os hrae
informatioanb outt hec ompanyw iht them,c reatinag symbiotiacn d
21
conflcitr-idderne liaotnsh'iRpa.tehrt han poerrmfinignd ependeannatl yss,i
analyshtasv e incerasniglys evreda sc ondusi ftor management ctoon evy
informtaoint ot he securimtairkeest sM.o revoer,a sd eatilde inP arItI b elow,
analysatrse s ujbectt oa varieyt ofo thecro nfcltist hact ompormisteh eir
independenAsc e.a resul,t thet rdaiitonla hands-fo fapproactho a nalyst
regluaitonw,h icwha sp remisoend the theoy rthaatn alysftuns ctoineda s
�'
independegnattk eeeperiss, lnoo negra ppropri'ate.
II.fu'- !ALYCSOTN LFICTOSFI NTEREST
�6
Contrartyo t het rdaitionjaudl iicavli ew,secuireist aalnysctusrr etnly
facea variye tofc onlfisc otfi nteresTth.e sec onlfisc ctanb ed ivideidn ot
thregee nearlc atergioesF.is rt,a nalystasn d theri firms may have an
ownershiipn tereisnta company tihsat th es ujbect tohfea nalys'tr seport.
Seconda,n alstymsa yb es ujbectto p ressurbee acuseo ft he firsm'b usniess
inetrestsi;nv esmtentb anknig relaotnishsi pbewteenb roekragef rimsa nd
issuesr haveb eenp arctuillayrp roblematTihci.dr ,a nalystrsep'o trsm ay be
afefcetd by effortst o mnataiins upenoarc cestso c orproatei nofrmatino,
typicaflrolmy companyo fficails.
A. OIVNERSHI P Nl77:"liES T'i
The firstg roup of conlfisc atrisoesu to f thei nvestemnst madeb y
anaslsty andt heierm ployres. aAlsnyst consisttleiyn nvest inc otmhpea nsi e
theyco vre.T heiorw n se-lerfgulaotry organizaitonr ulerse qiure dissuecr lo
and motonriingo f suchi nvesmtenst, but disocslure requriemenst
trdaiitonallhya ve beenm inimaaln,d m onitorinhga sb eenv irtually
nonxeisteTnhte..t 'NES requiersd iscsluoroe fa lflni ancipaolst iionhse lbdy
a firma ndi tasn lay::;itnts h es etnrtiieosfa recommeneddi ssubeurtp, e rmsi t
�'
thed iscloes utrboe coniditonla.Conseuqenltyt, heNY SE requiermenst
couldbe saitsifedb yi ncluditnhge b oirlpelatset aetment," thef irmo r
employeesm ay own secuirtieosfa recommended Jsusel-,m an analvts
23. SwO pdvskjuen,nn ot t:'2 1.
2}:. SeeG retchen1-[: orngsocn,St i'\lE''vu i lS,p ml1':/ ol �vFiOlR,B DEeSc,l.S ,1 997a,c1 '26,1fi -,1
m•nilulai!l1 e99 7W L I)1I 778"i()(q 1 1i0n 1g ;tn wney m;u11;ger; 1ss;1y ing that·[ ·< d�y]:lh;al'r.;'sC
becormeep oerrst t<thxe cotn:p11y"1"; md that·[ ·in]nfna gemtllsta ysc Ycrytihng"s
Ce\rhvitg"nosb /)[ hereniatfei\r[ orgeno:-;n,S t;\'o· e; ·,�i,f].
:2S. Sf'ftgy... ,i t(i.e xplarhiantrhi e:n·nig sa ·c'onsapcaiynr 1oVn\'gaS ltlr eeatn a}l':nioLtSt u
nocte·it· hastt opcrki: usa rc abl(ltlolf all)A.s earlya s 19:13,t heA meric1�l.!a1n gacmcnt
Assoncoiin;c xhocnclllltag!clror ;sc tid·;\tLtanca ylsts":I its i mportanttu Clt\li·lathtigcsro upf,u r
isr rcposn oyno urc nrnp<lU\r·e,c o:nmenidng the ptt:er' cohr.-;a lea of: :tolSLru" crirint-nsy,h ave
\·cry broadc icruLniu1:1t n�lid1i nlp(Jretfeafcntt0 1t1h er nakreta cti·o. \n-.\1..i�f\ C\iATss.' .;·<.-; ntj JJl
note1 CSt,�L -:).
'17.\ 1\SER ul·�e7� .