In case you missed the article below, BNA is reporting that the SEC is considering possible rulemaking or modification of SRO listing standards to address reports of retaliation against analysts by issuers and VC fund investors for unfavorable analyst reports.

SEC Is Weighing Possible Action
To Address Retaliation Against Analysts

The Securities and Exchange Commission is considering whether to act to address the problem of issuer retaliation against research analysts for unfavorable reports, Chairman Christopher Cox said in a Sept. 1 letter to Sen. Ron Wyden (D-Ore.)

"This is indeed a concern and we will tackle it," Cox said in the letter, which Wyden's office provided to BNA Sept. 23.

With the letter, Cox forwarded an Aug. 23 SEC staff memo from SEC Deputy Director of the Division of Market Regulation Robert Colby detailing industry feedback on issuer retaliation. The memo said that the staff is weighing whether to recommend an SEC rulemaking or modification of self-regulatory organization listing standards to combat the problem.

Firms Report Retaliation

Of the nine firms surveyed by the staff, six believed that issuer retaliation is an ongoing concern and provided specific examples. The firms, which were not named, observed that retaliatory conduct by companies is often subtle.

According to the staff memo, among the types of retaliation reported by the six firms were:

  • limitations on participation in company organized conference calls or events;
  • restricted access to senior management;
  • threats by senior executives to withdraw business from the firm of an analyst who has maintained unfavorable ratings or price targets;
  • criticism of the analyst's work product on conference calls and in the media; and
  • threats by company management of legal action alleging defamation as a result of statements made in a research report.
The staff recounted the firms' report that institutional customers may criticize analysts for a recommendation that is contrary to the institution's position in a particular security. The customer might withdraw or threaten to withdraw business from the firm for a period of time.

Finally, "[s]everal firms," the staff said, "reported increased pressure and retaliation by venture capital firms holding pre-IPO [initial public offering] shares of an issuer and the possibility that the analyst's firm may not be selected as the investment bank for the deal if the analyst is not optimistic about the transaction."

Some of the surveyed firms suggested that formal regulatory action likely was not a practical solution to the problem, the staff said.

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