Securities firms are still debating a global settlement over equity research with New York state attorney general Eliot Spitzer, the SEC and other US prosecutors seeking to avenge investors' losses. All the parties, though, seem to have lost sight of their true purpose. The changes proposed so far will neither restore faith in the system nor prevent future abuses. They are unworkable and thus irrelevant. Proposed reforms are targeted at the wrong level: at the institution not the individual.
If you really want to influence analysts' behaviour, there's only one route to follow - regulate their pay, focusing not so much on how much they are paid but what they are paid for.
These are the suggestions of Cary T Mills, managing director of an investment banking headhunting business who has specialized in the equity markets for eight years (Carytmills@aol.com).
First, tie analysts' pay directly to the quality and accuracy of their work through a bonus formula imposed across the market. This might be divided into four chunks. Say 30% paid according to accuracy of work (a set amount that diminishes according to the falling percentage of accuracy on earnings, share price and other forecasts), the next 30% actually invested precisely according to analysts' calls (watch those strong buys disappear), 30% on client reviews and 10% discretionary.