Corporate Governance

Paper Summary:

The paper explains how analysts, particularly sell-side analysts, work in an environment with many inherent conflicts of interest that put pressure on their objectivity. The paper then outlines the key provisions of the new National Association Of Securities Dealers (NASD) and New York Stock Exchange (NYSE) rules as well as the Sarbanes-Oxley Act. Additionally, the paper relates that investment firms have faced significant penalties for their roles in defrauding the public. The paper contends, however, that too much burden is on the individual investor to discover conflicts of interest. The paper believes that conflict of interest rules need to stop unethical conduct instead of just requiring public admission.

From the Paper:

"After the stock market collapsed in 2002, more than seven trillion dollars vanished from the U.S. stock market and from the brokerage accounts and retirement funds of ninety million Americans, a vanishing act helped along by greed and corporate fraud ("60 Minutes - The Sheriff of Wall Street"). The public, whose money was being used, whose interests the financial institutions were committed to serve, and who should have benefited from the financial proceeds of the stock market advances were systematically lied to and defrauded. In one instance a securities research analyst told an institutional investor in an email, "well, ratings and price targets are fairly meaningless anyway . . . but, yes, the 'little guy' who isn't smart about the nuances may get misled, such is the nature of my business" (Securities and Exchange Commission Litigation Release No. 18116)."

Sample of Sources Used:

• "60 Minutes - The Sheriff of Wall Street." 6 Oct. 2002. Retrieved from James Hoyer Web site: http://www.jameshoyer.com/news_cbs_merrill_lynch.html
• Boni, Leslie. and Womack, Kent L. "Wall Street Research: Will New Rules Change its Usefulness?" Financial Analysts Journal May/Jun 2003. Retrieved from CFA Institute Web site: http://www.cfapubs.org/doi/abs/10.2469/faj.v59.n3.2528
• Fleischman, D. "Outline of New Research Analyst Conflicts of Interest Rules." Securities Industry Association. 6 Mar. 2003.
• Rayburn, K. "Insecure Securities." Impact. Winter 2004. Retrieved from University of Louisville Web site: http://php.louisville.edu/advancement/pub/impact/winter2004/insecure.php
• "Report on Analyst Conflicts of Interest ." Sept. 2003. Retrieved from International Organization of Securities Commissions Web site: http://www.iosco.org/library/pubdocs/pdf/IOSCOPD152.pdf

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• Analytical Essay # 114818 : "Corporate Governance Principles of McDonald's"

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