SEC May Let Industry Set Analyst Disclosure Rules

The Securities and Exchange Commission plans to let brokerage industry rule-makers prepare standards requiring stock analysts to disclose holdings in stocks they recommend, instead of stepping in itself.

“These are ethical issues, not legal issues, so it makes it appropriate for the self-regulators to do something,” SEC Chairman Harvey Pitt said Monday.

Pitt said he is deferring to the National Assn. of Securities Dealers, a broker self-policing group that soon will announce whether it plans to set conflict-of-interest rules for analysts at brokerages such as Merrill Lynch & Co. and Goldman Sachs Group. Letting broker groups regulate conflict-of-interest disclosures is the approach likeliest to draw broad support, a legal expert said.

“Pitt’s is a Republican approach but also one that’s reasonable and moderate,” Georgetown University law professor Donald Langevoort said. “Any measure that goes beyond the NASD’s proposal lacks consensus and might do more harm than good.”

SEC officials said in July that they were considering federal rules to force analysts to disclose potential conflicts if the industry failed to adequately regulate itself. Some members of Congress said legislation might be needed.

Pitt, a Republican who became the top U.S. securities regulator last month, also said he doesn’t think Congress should pass legislation on analyst conflicts.

“Industry self-regulation may not be enough to guard against the problems caused by analysts’ conflicts of interest,” Rep. John J. LaFalce (D-N.Y.) said Tuesday. “If the regulators do not act, Congress must.”

The NASD proposal would need SEC approval. The potential conflicts include analysts’ personal ownership of stocks they recommend and their firms’ investment-banking ties to companies covered by the analysts.

Analysts came under fire after they consistently made rosy forecasts for technology and Internet stocks, even after those shares plunged.

The SEC, by abstaining from rule-making, will deny investors an opportunity to file class-action fraud complaints against analysts in court, Harvard Law School professor John Coffee said.

“Plaintiffs’ lawyers prefer having SEC rules, but class-action suits against analysts haven’t been very successful lately,” Coffee said.