The Securities and Exchange Commission

[thepennyking]

The CFA Institute's joint efforts with the National Investor Relations Institute to forge new guidelines for the interaction of analysts and corporate issuers, and for the first time, guidelines for the growing practice of issuer-paid research, is a "commendable process," according to executives and practitioners at Investrend Research, the world's largest and oldest standards-based and fee-based independent research provider, but "needs substantial work before the investing public can be comfortable that inherent conflicts have been eliminated."

The effort by CFAI (formerly the Association for Investment Management and Research) and NIRI comes in the wake of the global research settlement involving ten investment banks, including Citigroup (NYSE: C) and Merrill Lynch & Co. (NYSE: MER), and a spate of lawsuits and threats, mostly in France, by firms such as Sodexho Alliance SA (NYSE: SDX), and LVMH Moet Hennessy Louis Vuitton against Morgan Stanley (NYSE: MWD), designed to squelch professional criticism.

Investrend Research, with some 70 analysts, and the Investrend Research Syndicate, which distributes independent research for ten standards-based research providers, is a division of Investrend Communications, Inc., whose Investrend Information division publishes FinancialWire.

In comments provided to CFAI and NIRI at those organizations’ invitation at http://www.aimr.org/standards/pdf/aimrniricommentfinal.pdf , Investrend CEO Gayle Essary suggested the organizations’ could enhance the proposed guidelines with the adoption of tenets of the “Standards for Independent Research Providers” at http://www.firstresearchconsortium.com .

The full comments are at http://www.investrendinformation.com .

First and foremost, said Essary, there is no discernable benefit to the public for analysts or their firms to own or trade stock in companies they cover. Essary called on the CFAI-NIRI task force to follow the lead of the standards-based independent research providers in eliminating what he termed an “inherent fatal conflict.” He noted that on the one hand the task force suggests it is a conflict for analysts to receive stock as a fee for coverage while at the same time “inexplicably” suggesting it is not a conflict for the same analysts to own such stock.

The two organizations propose that coverage must be paid for in cash, and “only in a manner that does not influence or seek to influence the content and conclusions of the research, not attempt explicitly or implicitly to influence the research, recommendations, or behavior of analysts or otherwise pressure analysts to produce research or recommendations favorable to the corporate issue, and ensure that the disclosures required of the analyst … are included in the research report, that are published or distributed, in whole or in part, by the corporate issuer.”

The document states that payment in “stock warrants or other equity instruments that could increase in value based on positive coverage in the report” means “analysts would have incentive to avoid negative information or conclusions that would diminish their compensation.”

“As research providers, we find no hardship in adhering to a higher standard,” said Essary, “so we urge the task force to reconcile the disparity in its proposed Guidelines by banning stock ownership altogether.”

Essary pointed out that stock ownership is at the root of many problems, noting that in January, a judge allowed a class action lawsuit against analysts at Robertson Stephens, formerly a Bank of America (NYSE: BAC) unit, over their opinions regarding Corvis Corporation (NASDAQ: CORV), over allegations that Robertson Stephens analysts recommended Corvis shares to inflate its price and then sold their own shares in the company.

Essary said that to adopt the tougher standard, because it would conflict with current CFAI practices, the six CFAI members on the task force may have to “recuse” themselves.

Several weeks ago, Essary told Nightly Business News that most of the organizations’ proposals “mirror” those originally established by Investrend Research (http://www.investrendresearch.com) some eight years ago, and more recently propogated as the “Standards for Independent Research Providers.”

The ten fee-based independent research providers that have subscribed to the “Standards” that now mirror those proposed by NIRI and CFAI are EquityNet Research, Los Angeles; eResearch, Toronto; Fundamental Research Corp., West Vancouver; Howlett Research Corp., Sechelt, British Columbia, Canada; Investrend Research, Forest Hills, NY; MarketPerform.com, White Plains, NY; SISM Research & Investment Services, Zurich; Sophia Orange Investment Advisors, LLC, Ladera Ranch, CA; ValueNotes, Pune, India; and VEReports, Miami.

Second, he said, the proposals “dance around” the idea that researchers “might” provide investor relations or other promotional services, and indicate that is “okay” if the activity is “disclosed.” Essary said it is “not okay, and NIRI’s own guidance at http://www.investrend.com/Admin/Topics/Articles/Resources/490_1073335258.doc specifically warned against such practices. We will urge CFAI and NIRI to adopt the NIRI position on this before the guidelines are finally promulgated.”

Third, the independent research provider takes issue with the practice of releasing ratings and targets without providing public access to the full research report, which its comments said could be described by some as “institutionalized pump and dump,” whereby a second class of investors receive truncated, often subsequently-released information “after the first class of investors have had an opportunity to position themselves to sell into the second wave of trading volume.”

Finally, noting that it is public corporate issuers or their investor relations practitioners who pressure analysts for “promotional” coverage, Essary said that independent research providers must be empowered to inform the public of circumstances that might result in impaired coverage. He said that because surveys show that three out of every four investors are “most influenced” by an analyst report, and that nearly nine out of ten believe that “legitimate fee-based research is objective and useful,” it is important for the two organizations, after final promulgation, to “undertake a pro-active campaign to educate investors that there is no longer any obstacle to credible, independent research on companies in which they are in invested.”

Essary said CFAI and NIRI should inform investors if companies do not have coverage it is a legitimate question for investors to ask, “Why not?”

FinancialWire, in an ongoing series, has identified a number of corporate issuers whose coverage announcements or whose provider announcements have failed to meet the proposed standards, and more often than not the Securities and Exchange Commission Regulation 17(b), including Horizon Medical (AMEX: HMP), Nymox (NASDAQ: NYMX), Genesis Technology Group (OTCBB: GTEC), Martek Biosciences (NASDAQ: MATK), Ecolab (NYSE: ECL), Clorox (NYSE: CLX), Dial Corp. (NYSE: DL), AdZone (OTCBB: ADZR), American Water Star (OTCBB: AMWS), Markland Technologies (OTCBB: MRKL), Transnational Financial Network (AMEX: TFN) and International Barrier Technology (OTCBB: IBTGF; TSX Venture: IBH), Telkonet (OTCBB: TLKO), Cytomedix (OTCBB: CYME), LocatePlus (OTCBB: LPLHA), Rockport Healthcare (OTCBB: RPHL), Universal Express Co. (OTCBB: USXP), Lifestream Technologies (OTCBB: LFTC), CareDecision Corp. (OTCBB: CDED), Life Energy and Technology Holdings, Inc. (OTCBB: LETH), and Flight Safety (OTCBB: FSFY);

Also, Playtex Products (NYSE: PYX), Ericware Technologies (OTC: ECWR), NuTech Digital, Inc. (OTCBB: NTDL), Terra Nostra Technology Ltd. (OTCBB: TNRL), and NanoSignal Corp. (OTCBB: NNOS)., DNAPrintGenomics (OTCBB: DNAP), Syndication Net.com (OTCBB: SYCI), Quintek Technologies (OTCBB: QTEK), GeneLink (OTCBB: GLNK), Quality of Life Health Corp. (OTC: QLHC), Environmental Remediation Holding Corp. (OTCBB: ERHC), Cornerstone Entertainment (OTC: CNRH), Medifast, Inc. (AMEX: MED), Workstream, Inc. (NASDAQ: WSTM), SIGA Technologies (NASDAQ: SIGA), Sub Surface Waste Management of Delaware (OTCBB: SSWM), Xfone, Inc. (OTCBB: XFNE), Offshore Systems International (OTCBB: OFSYF; TSX Venture: OSI), American Ammunition, Inc. (OTCBB: AAMI), Destiny Mediat Technologies (OTCBB: DSNY), Isonics Corp. (NASDAQ: ISON), a21, Inc. (OTCBB: ATWO); and

Also, OrderPro Logistics (OTCBB: OPLO), Military Resale Group, Inc. (OTCBB: MYRG), Timber Resources International, Inc. (OTC: TMBN), OptimumCare Corporation (OTCBB: OPMC), Command Security (OTCBB: CMMD), Molecular Imaging Corporation (OTCBB: MLRI), TechnoConcepts Inc. (OTCBB: TCPT), Sequiam Corporation (OTCBB: SQUM), Provectus Pharmaceuticals, Inc. (OTCBB: PVCT), eFoodSafety.com (OTCBB: EFSF), Intelligent Business Systems Group International, Inc (OTCBB: IGII), Chilmark Entertainment (OTC: CMKK), Tech Laboratories, Inc. (OTCBB: TCHL), BodyScan Corp. (OTC: BDYS), Wireless Frontier Internet, Inc. (OTCBB: WFRI), Ableauctions.com, Inc. (AMEX: AAC), UFP Technologies (NASDAQ: UFPT), Systems Evolution Inc. (OTCBB: SEVI), Touchstone Applied Sciences (OTCBB: TASA), JMAR Technologies (NASDAQ: JMAR), TravelZoo (NASDAQ: TZOO) Axonyx Inc. (NASDAQ: AXYX), and Epixtar Corp. (OTCBB: EPXR).

CFAI and NIRI developed the best-practice guidelines through a Joint Task Force on Corporate Issuer and Analyst Relations, with participants from Europe, Canada and the United States, that began work in June 2003. Task force members include analysts and investor relations professionals, with people from standard-setting and regulatory organizations sitting in as observers.

Samuel Jones, CFA, who served as co-chair of the AIMR-NIRI Joint Task Force, said, "Our guiding principles for developing these standards were based on the view of both AIMR and NIRI that information is the lifeblood of efficient, effective and fair capital markets. Investors need transparent information that is fairly and consistently disclosed if they are to make good investment decisions and allocate their capital appropriately."

Thomas A. Bowman, CFA, president and CEO of CFAI, commented, "Investors' interests must be front and center in all matters guiding the relationship between public company executives and research analysts. Both exist to serve the best interest of investors, although in different roles and from different perspectives. So it is important that corporate issuers respect an analyst's duty to ask hard questions, point out potential risks to investors, and make fair, unbiased assessments based on facts and their own forecasts.

"But at the same time," Bowman said, "analysts have a responsibility to be skilled and competent in conducting their research - to differentiate between fact and opinion, and to be fair and impartial in their analysis of companies. Analysts must not let outside pressures threaten their impartiality and influence their research conclusions or recommendations."

CFAI is the global, non-profit professional association that administers the Chartered Financial Analyst® curriculum and examination program worldwide and sets voluntary, ethics-based professional and performance-reporting standards for the investment industry. AIMR has almost 70,000 members in 116 countries. Its membership includes the world's more than 55,000 CFA charterholders, as well as 127 affiliated professional societies and chapters in 46 countries.

NIRI is the professional association of corporate officers and investor relations consultants responsible for communications among corporate management, shareholders, security analysts and other financial publics. NIRI's 4,700 members represent over 2,500 publicly held companies in the United States. As its mission states, "NIRI is dedicated to advancing the practice of investor relations and the professional competency and stature of its members."

Firms involved in the settlement include Bear Stearns Cos. Inc. (NYSE: BSC), Credit Suisse (NYSE CSR) Credit Suisse First Boston unit, Goldman Sachs Group Inc. (NYSE: GS), Lehman Bros. Holdings Inc. (NYSE: LEH), Citigroup's (NYSE: C) Citigroup Global Markets, J.P. Morgan Chase & Co. (NYSE: JPM), Morgan Stanley (NYSE: MWD), Merrill Lynch Cos. Inc. (NYSE: MER), UBS (NYSE: UBS) unit UBS Warburg and the Piper Jaffray unit of U.S. Bancorp (NYSE: USB).

The deadline for comments is May 31.