Bond Market Association backs applying new analyst rules to fixed income research

New York, Sept. 23 - The Bond Market Association said Monday it supports applying the Securities and Exchange Commission's proposed Regulation AC on analyst conflicts of interest to fixed-income research.

The regulation would require analysts to certify that recommendations contained in research reports reflect their personal views and to disclose whether they have received compensation in exchange for expressing a particular view. The SEC has specifically asked for common on whether it should apply to fixed income research.

"The Association is committed to maintaining the highest standards of conduct in the fixed income markets, including standards of conduct as they relate to the publication of research," said John Ramsay, vice president and senior regulatory counsel of The Bond Market Association, in a news release. "The Association and its members believe the proposal establishes reasonable standards to which analysts of all types should be able to subscribe."

The Bond Market Association said it may also be appropriate to examine whether requirements recently adopted by the National Association of Securities Dealers and the New York Stock Exchange for equity research should also be applied to fixed income.

However Ramsay also noted that bond research differs in many respects from equity research and as a result conflict rules developed for the equity markets should be individually reviewed "to determine whether it would be sensible or practical to apply them in the fixed-income markets."

For example, the rule requiring research reports to include a line graph showing daily closing prices for the securities being reviewed would not be directly applicable to bonds because they are not traded on a centralized exchange so there is not a defined "closing price."

The Bond Market Association also said fixed income research does not pose the same potential for conflicts of interest between research and investment banking that may exist when firms issue equity research.

The great bulk of fixed-income research is used solely by institutions, unlike equity reports which are also read by individuals, the association said.

In addition, fixed-income research, particularly in the government, sovereign and mortgage-backed markets, tends to look at macroeconomic issues, such as interest rates or spreads between different types of investments, rather than individual companies. Institutional investors want this type of information because it helps them manage the composition of their portfolios in terms of average maturity, yield and credit quality, the association added.

Accordingly, fixed-income research has significantly less potential to influence bond prices compared to the effect of equity research on stock prices, and firms have less incentive to tailor their research to attract or retain investment banking business, the Bond Market Association said.

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