The market for initial public offerings has made a comeback, surging to levels not seen since before the financial crisis. At the same time, concerns have resurfaced over the role of Wall Street research analysts in these lucrative deals.
For years, stock analysts have been barred from pitching I.P.O. business, a big moneymaker for firms like Goldman Sachs, JPMorgan Chase and Citigroup. Banking fees from helping companies list their shares on stock exchanges have topped $1.7 billion in the United States so far this year.
The country's largest banks agreed to bar their analysts from I.P.O. solicitations a decade ago after regulators, led by Eliot Spitzer, then the New York attorney general, uncovered evidence that during the Internet boom some analysts issued overly optimistic reports about dot-com start-ups to help their colleagues on the investment banking side win underwriting assignments.
But some analysts say Wall Street is slipping back into its old ways.
Today, companies routinely interview analysts when selecting bankers to underwrite their I.P.O.'s. During these meetings, the analysts say, they increasingly feel pressure to say the right things to curry favor with a company's management and owners. They also see themselves as participating in their banks' efforts to win business, a potential breach of government regulations.
The enforcement department of the Financial Industry Regulatory Authority, or Finra, Wall Street's self-regulatory body, has sent an inquiry asking several firms for information on the issue, said people briefed on the matter who spoke on the condition of anonymity.
"The walls between research and banking can still be porous," said Jay R. Ritter, a professor at the University of Florida who studies the I.P.O. market. "It doesn't surprise me that there has perhaps been some backsliding."
Representatives for Goldman and JPMorgan declined to comment. A spokeswoman for Citigroup said that its research department acts independently of its banking unit.
The banks say that their analysts are supposed to discuss only broad industry trends at these meetings and not pitch the bank's underwriting services. If asked about specific views on a company, like earnings models or potential I.P.O. pricing, they are supposed to refer those questions to bankers.
Interviewing analysts as part of the process of going public has become more prevalent, several analysts said, with the proliferation of so-called I.P.O. advisers, firms that advise companies in the early stages of an offering. These firms are paid to help companies and, often, their private equity owners screen banks vying to take companies public. Among other things, they arrange for meetings between companies and the Wall Street analysts and bankers.
"If you are going to see the people who are screening the underwriters you are there for one purpose, to win banking business," said another Wall Street analyst, who also requested anonymity because his company prohibits employees from speaking to the media without prior approval. This analyst said he knew of the practice but had not taken part in any meetings.
Participants say company meetings with the analysts and bankers are held separately, but can happen within hours of each other, and banks rarely send compliance officers to monitor the discussions. Analysts say that when private equity executives are involved, the sessions can turn especially uncomfortable, veering into questions about a company's valuation.
Solebury Capital, Rothschild and Lazard are among the leading firms in this area. Solebury has recently guided a number of companies through the I.P.O. process, including the discount retailer Five Below; Bloomin' Brands, which owns Outback Steakhouse and Bonefish Grill; and HD Supply Holdings, according to regulatory filings.
In an interview, Solebury's co-chief executives, Alan Sheriff and Ted Hatfield, said that their corporate clients meet with analysts as well as bankers as they work through the offering process, but that the meetings with analysts are "informational," regarding general market trends.
"Pitching investment banking in analyst meetings is strictly off limits," Mr. Sheriff said.
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A senior research executive at one major Wall Street firm says he thinks it is acceptable for an analyst to have a broad chat with a company looking to go public, and the analyst can benefit from that meeting by learning more about the industry. But he expressed concern about meetings with companies in the process of choosing banks to underwrite their I.P.O.'s.
"I am not O.K. with a third party organizing a beauty contest with the express purpose of winning banking business," said the executive, whose firm has a policy against speaking to the media. "The problem is, the analyst going to the meeting knows the purpose and couldn't help but feel pressured. You are selling your bank."
Investors both large and small often rely on the recommendations of analysts, who issue buy and sell recommendations on stocks. Questions about the legitimacy of Wall Street research came into focus during the height of the Internet and telecommunications bubble. During that heady time, analysts worked closely with banking colleagues to secure profitable I.P.O. assignments from fast-growing tech companies.
Mr. Spitzer, as attorney general, spearheaded an investigation that helped solidify his reputation at the time as the "sheriff of Wall Street." He released incriminating e-mails that showed analysts privately disparaged the very companies they were publicly telling investors to buy. They also showed how influential investment bankers were in securing positive research reports for companies that were either clients of a firm or prospective customers.
In one e-mail, an investor asked Henry Blodget, then a Merrill Lynch analyst, what was so interesting about GoTo.com, an Internet company he was recommending, except for the banking fees that it generated.
"Nothing," Mr. Blodget replied.
In another e-mail message, Mr. Blodget called InfoSpace, an Internet company that he favored publicly, "a piece of junk."
Federal regulators barred Mr. Blodget, who now runs Business Insider, a business news Web site, and Jack B. Grubman, another prominent analyst who worked at Salomon Smith Barney, from the securities industry.
In 2003, 10 Wall Street banks agreed to pay a collective $1.4 billion to resolve the government's accusations. As part of the settlement, the firms agreed to separate their banking and research departments, a move that regulators said would ensure that analysts operated more autonomously.
Analysts were also expressly "prohibited from participating in efforts to solicit investment banking business," including pitches and road shows. Over the years, that language has been incorporated into rules policed by Finra, the regulator.
There are exceptions. A federal law backed by the banking industry and passed last year, the Jump-Start Our Business Start-Ups Act, watered down the rule. The law, known as the JOBS Act, allows analysts to attend an investment banking pitch in connection with the I.P.O. of an emerging growth company, defined as a firm with less than $1 billion in revenue. Still, Finra's rules say, "a research analyst may not engage in otherwise prohibited conduct in such meetings, including efforts to solicit investment banking business."
Questions about whether that rule is being flouted come as the market for initial public offerings is heating up. This year, 122 I.P.O.'s have come to market, raising about $29 billion, an increase of 33 percent over the same period in 2012, according to Thomson Reuters.
A huge chunk of those I.P.O.'s are companies owned by private equity firms, which are looking to cash out their holdings in a buoyant market. The $12.6 billion in proceeds generated by private equity-backed initial public offerings this year has already surpassed the $10.4 billion worth of deals during all of 2012, Thomson Reuters said.
Several big private equity-owned companies are preparing to file I.P.O.'s in the coming months, like the hotelier Hilton Worldwide and the luxury retailer Neiman Marcus. Research analysts have participated in meetings related to the selection of underwriters on those deals.
After being told that analysts were playing a role in I.P.O. solicitations, Mr. Spitzer, now a candidate for New York City comptroller, expressed concern.
"The structure sounds like a slightly too-clever way to circumvent the intent" of the rule, he said.
—By Peter Lattman and Susanne Craig, The New York Times.