Even before the landmark decisions against investment banks for conflict of interest cost them over $1.5B there was Disclosure Regulation or Reg. FD.  This regulation mandates that when a company or company employee disseminates information, it must be disseminated to everyone with prejudice.  This means that they can no longer tell the inside scoop to analysts allowing them to have information before the general public.  This was viewed as unfair to the average investor and the increase in awareness by the general public created the political situation that demanded action.  This was championed by former SEC Chairman Arthur Levitt. 

But that was just the tip of the iceberg to investment banks that were making fortunes in fees from bringing  IPO’s and other offerings to market.  What was obvious to all when the market took the plunge at the turn of the century that analysts weren’t all doing independent analysis.

For example, many call analysts recommendations a “coded language” as buy doesn’t really mean buy and hold is almost certainly a synonym for sell.  The SEC reports  that one study showed that, in the year 2000, less than 1% of brokerage house analysts’ recommendations were “sell” or “strong sell” recommendations.  And of course, 2000 was a horrible year for stocks.

The evidence is overwhelming that there is, in fact, bias.  First Call has determined that the ratio of buy-to-sell recommendations by brokerage analysts rose from 6:1 in the early 1990s to 100:1 in 2000.  Numerous academic studies have shown that there is statistical bias, a lack of contrary evidence, and possibly most damming of all, common sense dictates that analysts would do what is their own, and their firms, best interest.