The Securities and Exchange Commission is warning investors not to rely solely on analysts when they go searching for stock.
An "investor alert" issued by the SEC on Thursday cautions of possible conflicts of interest between analysts and the companies they cover.
"Investors should not rely solely on an analyst's recommendation when deciding whether to buy, hold or sell a stock," the alert said. "Instead, they should also do their own research--such as reading the prospectus for new companies or for public companies, the quarterly and annual reports filed with the SEC--to confirm whether a particular investment is appropriate for them in light of their individual financial circumstances."
The report points to conflicts of interest that can arise when an analyst's firm is competing to get underwriting or banking business from the covered company. Analysts also face conflicts because they may own stock in the companies they write about or because their compensation is tied to the amount of money the bank brings in through deals with the covered companies.
These issues have been under a considerable degree of scrutiny in recent months. Congress has held hearings on the matter and just this week set up a "review board" to examine recent industry association proposals about the standards and practices of research analysts.
The House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises will hold further hearings on the issue in August, Rep. Richard Baker, R-La., said this week. Baker, who chairs that panel, said the committee is seeking written comment on the issue from "all interested parties." He has also asked for written responses from the selected review board members.
The board includes acting SEC Chairwoman Laura Unger; Jonathan Cohen, managing partner at JHC Capital Management and a former Merrill Lynch analyst; NYSE Chief Executive Dick Grasso; and NASD Regulation president Mary L. Schapiro.
Unger said in a news release that she is "hopeful the industry will eliminate the conflicts of interest that threaten the fairness and objectivity of analyst recommendations."
"As far as consulting more than one source for investing advice, we've consistently sent the same message in our (reports)," said Margaret Draper, a spokeswoman for the Securities Industry Association. "And we would emphasize that the industry has addressed these issues through a series of best practices which have been endorsed by the top firms."
A copy of the report is available here, or by calling 1-800-732-0330.