New SEC broker rules fail to resolve conflicts, company says

Newly proposed rules governing broker stock ratings and research fail to adequately resolve many of the conflicts of interest that have plagued investors, according to a statement submitted in March to the Securities & Exchange Commission by Weiss Ratings Inc., an independent provider of ratings and analyses of financial services companies, mutual funds and stocks.

"The rules proposed by the New York Stock Exchange and the NASD, while a step in the right direction, leave several significant loopholes that could undermine the Wall Street reform effort," said Martin D. Weiss, PhD, chairman of Weiss Ratings Inc.

Weiss recommends the following measures to strengthen the proposed rules:

Create a comprehensive stock ratings database and make it widely available to the public, enabling investors to compare the ratings and historical track records of research analysts and their firms.

Require firms to update their stock ratings on a regular basis and following any event that could materially impact a rated company.

Require firms to base analysts' incentive compensation exclusively on the accuracy of their research and ratings, eliminating all direct and indirect contributions from investment banking revenues.

Require firms to write all research reports in plain English, including specific disclosures regarding the nature of any remaining conflicts, explicitly pointing out how such conflicts could bias the research.

Require firms and their brokers to provide similar disclosures to investors when recommendations are communicated orally and to inform customers when ratings change or coverage is dropped.

"Without these added measures, we believe investment banking will continue to influence most research, bias will remain the cornerstone of the industry, and investors will often be kept in the dark regarding critical ratings changes," Weiss said.