The GRAS is Half Full


New York – Morgan Stanley was fined $800,000 by FINRA for inadequately disclosing conflicts of interest in research reports and analyst appearances.  The settlement covered improper disclosures dating back to 2006. It’s déjà vu all over again for Morgan Stanley which had to settle similar charges in 2005.

Of course the genesis of the rules is from the Global Research Analyst Settlement (GRAS) sought by Elliot Spitzer in 2003.  In turn, self-regulatory bodies NYSE and NASD, the SEC and Congress developed rules around research disclosures and conflicts of interest including: NYSE rule 472, NASD 2711, Reg AC and the Sarbanes-Oxley Act, respectively. The following three paragraphs are from the “Introduction and Summary of Regulation Analyst Certification” (full report).

“During 1999, the Commission and Congress began to closely examine research analysts’ conflicts of interest. We were particularly concerned that many investors who rely on analysts’ recommendations may not know, among other things, that favorable research coverage could be used to market the investment banking services provided by an analyst’s firm, and that an analyst’s compensation may be based significantly on generating investment banking business. Moreover, news reports stated that some analysts had issued reports that did not reflect their true beliefs and communicated to institutional investors views that differed materially from those expressed in their research reports. Regulation AC, together with other efforts, is intended to address these issues.

On May 10, 2002, we approved rule changes filed by the NYSE and NASD governing analyst conflicts of interest. On December 31, 2002, we noticed for comment a second set of proposed rules filed by the NYSE and NASD to further address research analyst conflicts of interest. These self-regulatory organization rules are part of an ongoing process on our part and that of the NYSE and NASD to address conflicts of interest affecting the integrity and objectivity of research by securities firms. Regulation AC is intended to complement other rules governing conflicts of interest disclosure by research analysts, including NYSE Rule 472, NASD Rule 2711, and the anti-fraud provisions of the federal securities law.

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (“SOA”). Section 501 of the SOA requires that rules governing analyst conflicts be adopted within a year of enactment, including rules: limiting the supervision and compensatory evaluation of securities analysts; defining periods in which brokers or dealers engaged in a public offering of a security as underwriter or dealer may not publish research on such security; and requiring securities analysts and brokers or dealers to disclose specified conflicts of interest. The Commission voted to propose Regulation AC on July 24, 2002, before the passage of the SOA. 7 In the Proposing Release, the Commission noted that it would abide by the directives of the SOA as it continues to address analyst conflicts of interest issues, including with respect to the possible adoption of Regulation AC.”

The violations indicate that there are still serious problems with the sell-side analyst research model as far as living within the rules of Reg AC. Additionally, the fact that Morgan Stanley brought the violations to the attention of the SEC, indicates that the SEC continues to have difficulty imposing the rules on its books. And finally, the fact that there were 6,836 deficient disclosures means one breach of Reg AC only costs about $117. Economically, it seems to be a lot cheaper to pay the fine than to fix the problem.


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