Investment analysts are becoming increasingly uneasy about conducting research in certain industry sectors because of the fear that they will become the targets of legal "fishing expeditions."
A recent report described the harassment of tobacco analysts by plaintiffs' attorneys seeking information to help their cases against tobacco companies. Plaintiffs' attorneys, using subpoenas to gather data for use in their lawsuits, went far beyond merely requesting information directly relevant to building their case. They asked for all documents the analysts or their colleagues may have relied upon in forming their opinions. Clearly, this endangers the analysts' professional privacy and client confidentiality.
Analysts who follow the Association for Investment Management and Research's code of ethics and standards of practice are required to exercise diligence and thoroughness and to maintain appropriate records to support the reasonableness of their investment recommendations. Therefore, they are likely targets for "fishing expeditions."
In addition to trying to protect the proprietary nature of their work and the time, effort, and expense involved in preparing their reports, analysts face the dilemma of trying to keep client information confidential while trying to respond to legal requests for information. If plaintiffs' attorneys are not restrained, the same chilling effect that has troubled other professions may affect investment information.
Investment analysts play a critical role in the free flow of information in the marketplace. Analysts add value to publicly available information through diligent, thorough research and skilled, independent analysis. Typically, analysts review and organize information about a company from a broad range of sources. Then, using various analytical tools, analysts interpret the results and make judgments about the information.
The results are offered to the investment analysts' clients to assist them in making informed investment decisions. When the analyst cannot fully perform the role of bringing "value-added" information to the marketplace, then the investing community is hindered in its efforts to make fully informed decisions. Without fully informed investment decisions by investors, the efficiency of the capital markets is compromised. Ultimately, this affects the cost of capital.
There are ways to protect analysts and those who rely upon them for overreaching by plaintiffs' attorneys. Legislation that protects corporations from frivolous "strike suits" by plaintiffs' attorneys could cover analysts and others within the investment industry. Pending legislation in the House and Senate provides a "safe harbor" for forward-looking statements about corporate performance. The legislation also places strong burdens of proof on plaintiffs to prove the elements of their claims and, most importantly, limits discovery. Such limits would protect analysts' reports and preserve client confidentiality in matters that are not directly related to plaintiffs' litigation.
Analysts also face obstacles within the investment industry. Analysts are becoming increasingly concerned about the practice of selective disclosure within the corporate community. Analysts are wary of writing negative reports about corporate performance for fear that the corporations will retaliate by withholding information from the analyst and excluding the analyst from activities designed to foster the flow of information from the corporation to the marketplace.
This compromises analysts' duty, as outlined in the code and standards, to provide a fair, accurate and independent report based on a reasonable and adequate basis for such recommendations, supported by adequate research and investigation. Again, the obstacles to the flow of information to the marketplace ultimately harms all investors.
AIMR strives to elevate the integrity of the investment profession by promoting full, fair and timely disclosure of information to the investing public and ensuring that investment actions are taken in the best interest of employers, clients and the investing public. AIMR is working diligently to protect its members from attacks upon analyst's integrity and their ability to perform their important function of bringing information to the marketplace. Analysts' role in creating efficient markets should be protected, for ultimately such protection benefits the investing public.12
Michael S. Caccese is senior vice president, general counsel and secretary of the Association for Investment Management and Research, Charlottesville, Va.