Regulators zero in on TV stock-touting conflicts

Investors got an earful as usual last Friday when Prudential Securities Inc. market analyst Ash Rajan appeared on the CNNfn show “Ahead of the Curve.”

When asked to pick some hot stocks, Mr. Rajan reeled off American Express Co., Charles Schwab Corp., American International Group Inc. and Home Depot Inc., among others.

What the program host never asked about — and Mr. Rajan failed to mention — was the fact that Pru has positions in all four through its mutual funds.

That’s a problem that regulators want fixed.

Members of the Securities and Exchange Commission staff met Wednesday with the National Association of Securities Dealers and the New York Stock Exchange to discuss new curbs on investment pros.

But in this case an often-untouchable powerhouse — the media — may be both a culprit in the problem and a roadblock to a solution.

“You can control disclosures on written [analyst] research very well, but who regulates the media in this situation?” asks Jessica Mann, a vice president with the Association for Investment Management and Research. The Charlottesville, Va., association is a trade group for analysts.

“There’s a certain responsibility for analysts to disclose, but also for the media to assure analysts that they’ll be given enough visibility for those disclosures,” Ms. Mann says.

If a rule were adopted, the NASD and New York Stock Exchange, both self-regulatory organizations, would require analysts to come clean on the stocks they or their firms own when they tout them, typically on financial news cable networks such as CNBC or CNNfn.

“Financial talk shows are riddled with analysts who give [stock] recommendations,” he explains.

“It’s far less frequent that you see such things in print or on radio.”

But Chris Ullman, an SEC spokesman, warns against discounting rules affecting how disclosures are made in other media.

“They’ll probably take into consideration how to deal with disclosure in [print, radio and on the Internet] too,” Mr. Ullman says without providing further details.

He says federal regulators have yet to decide how they will handle the requirement for registered investment advisers, who are covered by the SEC.

Mr. Rajan, for his part, says he fully supports better disclosure if there is an investment banking relationship.

The stocks he named, he says, are core holdings for many large-cap stock funds, and he’s not even sure which Pru funds hold them.

“The risk is when you’re recommending a very small, unknown boutique type of stock and there’s a banking relationship or a large position in the stock,” he says. “That’s when there’s potential for conflict.”

Publish or perish?

The issue stirred last summer when the SEC began asking financial networks for their views on how potential analyst conflicts should be disclosed. The SEC, NASD and Big Board announced last month that they would update disclosure rules.

And therein lies the problem: Rulemakers can require analysts to make disclosures to a reporter, but no guarantee exists that the information will be published.

The media are protected by First Amendment guarantees, which restricts the government’s ability to mandate certain coverage.

Although regulators say the onus would rest with the financial professionals – not the media – to make the disclosures, it would still require the media’s cooperation.

The proposal has generated some heat from television, which, like all media, resists intervention — from government or industry.

CNBC executives defend the network’s shows and its policies.

“We already have standing guidelines saying that [analysts] will disclose any current or recent investment banking relationships,” says Bruno Cohen, CNBC’s senior vice president for business news.

“The problem has been one of establishing a regular practice of doing it so it doesn’t become an intrusive part of the interview,” he says.

Jonathan Krim, executive editor at financial news website TheStreet .com, which prides itself on its own stringent conflict-of-interest policies, says: “It’s going to be difficult if not impossible –and unwise — to require the media to implement disclosure rules.”

“But on the other end of it, I tend to favor some kind of requirement that analysts and the firms they work for have to do more to make disclosures,” he says.