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Bond Group Offers Ways To Foil Analyst Conflicts

To avert any potential scandals like those that have plagued equity analysts, the Bond Market Association has drafted its own guidelines for independent fixed income research. And these are slated for discussion this Friday at a BMA-sponsored Asset Managers Forum in New York.

The Washington-based organization hopes its guidelines, issued in December, will head off potential conflicts of interest by bond analysts and their brokerage firms. The association is accepting market comments on the voluntary guidelines through Feb. 17, and anticipates finalizing its recommendations by March 1.

"There have not been any problems of the sort that occurred with equity analysts," said Paul Saltzman, EVP and general counsel at BMA. "Bond pricing is more objective than equity pricing. The sophistication of bond market participants warrants a different approach than is used to prevent conflicts of interest on the equity side. It is better to get ahead of the game so that problems do not arise."

The guidelines complement existing regulations both in the United States and Europe, and are designed to enhance SEC, NASD and NYSE rules with a common set of standards that can be used globally to prevent conflicts of interest.

Unique characteristics of the bond market include: objective benchmarks and relative values; the ability to tap independent research resources for information; and the importance of the role of sales and trading functions in delivering information to investors.

BMA guidelines call for supervisory and management structures to insulate analysts from review, pressure and control by investment banking personnel. Firms would also be required to prevent inappropriate influence by non-research department personnel.

Analysts would be compensated in a way that fosters independence. Plus they should not act as marketers for their firms. The proposals also would impose personal trading restrictions on analysts.

Further, firms and analysts would be required to inform investors of potential conflicts of interest. There would be prohibitions against improperly trading securities and derivatives ahead of research reports. Commentary by non-analysts about fixed income issues would be be clearly identified, and firms would have enough supervisors in place to make sure there are no conflicts of interest.

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