Issuers warned against leaning on unfriendly analysts

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City regulators are to crack down on public companies that threaten analysts or their firms to try to ensure favourable research coverage.

City regulators are to crack down on public companies that threaten analysts or their firms to try to ensure favourable research coverage.

Analysts have told the Financial Services Authority that they are facing "significant issuer pressure to present 'positive' coverage", which the regulator believes is damaging market confidence and undermining investor protection.

The FSA has asked analysts to blow the whistle on companies that are cultivating favoured analysts, or banks, or freezing out perceived sources of negative news. The regulator said it would not rewrite its rules to stop such abuses, although it will continue to keep them under review. "But we take this issue very seriously, and so there are risks for issuers indulging in this kind of behaviour," the FSA warned in a note circulated to member firms this week.

The FSA said: "Some issuers tend to downgrade relations with firms, or 'freeze out' particular analysts, if they consider research coverage negative."

It said such practices were "unacceptable behaviour". It went on: "Issuers should not develop special relationships with selected analysts or take measures to keep analysts 'in line'. Such measures are detrimental to market confidence and investor protection and of concern to us."

Jonathan Boersma, of the Certified Financial Analyst Institute, said: "It's something we are very concerned about. Since the increased separation of investment banking from research over the past year or so, companies are no longer using their investment banking relationships to pressure analysts but are going directly to analysts. They don't have to go through the back door any more."

Previously there was an unspoken threat from some companies that a brokerage or bank would lose business if analysts were too negative. Now analysts are being attacked directly, said Mr Boersma. "As a journalist when you write something negative about a company they generally don't take too kindly to that. They tend not to talk to you, they sue you or threaten to sue you. The same thing is happening to analysts. Only when analysts are free from these pressures are investors really being served."

The most high-profile case was last year's legal action brought against Morgan Stanley by LVMH, the luxury goods group, which sued the investment bank over negative coverage by its analyst Claire Kent.

However Mr Boersma said there was plenty of less high profile, but nonetheless equally serious cases, where analysts were being victimised by companies.

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