The securities analyst as agent: Rethinking the regulation of analysts

Recent press has highlighted shocking examples of bias, self-dealing, and inaccuracy in the behavior of the securities analyst. Critics have attributed the bubble and subsequent crash in the technology sector to analyst hype and posited that undue analyst optimism contributed to scandals such as Enron. After many years of minimal regulatory oversight, analysts are now the subject of extensive regulatory reform proposals, including a mandate in the Sarbanes-Oxley Act of 2002 requiring that the Securities and Exchange Commission adopt a variety of restrictions on analyst behavior. Despite the media attention, there have been few attempts to conceptualize carefully the analyst's role. This Article offers such an analysis. First, the Article challenges the traditional conception of the analyst as independent gatekeeper. The Article draws upon empirical, legal, and anecdotal evidence to evaluate critically the existing behavior of securities analysts and the extent to which their activities increase market efficiency. As the Article demonstrates, analysts are subject to a variety of conflicts of interest that constrain their behavior. The resulting costs imposed by these conflicts are classic agency costs. Accordingly, the Article develops a new conceptualization of the securities analyst as quasi-agent. Although analysts have not traditionally been treated as agents under standard agency law principles, from a broader economic perspective, analysts are properly understood to act in an agency capacity. Analysts act on behalf of multiple market participants, including their employers, issuers, and, investors. These interests are in tension. Agency principles illuminate breakdowns in the analyst's role and provide guidance in identifying appropriate solutions. In particular, we argue that reform efforts should focus on the minimization of agency costs, through the application of a quasi-agency approach including a duty of reliability.