U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21457 / March 19, 2010
SEC v. Bear, Stearns & Co. Inc., No. 03 Civ. 2937 (WHP) (S.D.N.Y.)
SEC v. J.P. Morgan Securities Inc., No. 03 Civ. 2939 (WHP) (S.D.N.Y.)
SEC v. Lehman Brothers, Inc., No. 03 Civ. 2940 (WHP) (S.D.N.Y.)
SEC v. Merrill Lynch, Pierce, Fenner & Smith Incorporated, No. 03 Civ. 2941 (WHP) (S.D.N.Y.)
SEC v. U.S. Bancorp Piper Jaffray, Inc., No. 03 Civ. 2942 (WHP) (S.D.N.Y.)
SEC v. UBS Securities LLC, f/k/a UBS Warburg LLC, No. 03 Civ. 2943 (WHP) (S.D.N.Y.)
SEC v. Goldman, Sachs & Co., No. 03 Civ. 2944 (WHP) (S.D.N.Y.)
SEC v. Citigroup Global Markets Inc., f/k/a Salomon Smith Barney Inc., No. 03 Civ. 2945 (WHP) (S.D.N.Y.)
SEC v. Credit Suisse First Boston LLC, f/k/a Credit Suisse First Boston Corporation, No. 03 Civ. 2946 (WHP) (S.D.N.Y.)
SEC v. Morgan Stanley & Co. Incorporated, No. 03 Civ. 2948 (WHP) (S.D.N.Y.)
SEC v. Deutsche Bank Securities, Inc., No. 04 Civ. 6909 (WHP) (S.D.N.Y.)
SEC v. Thomas Weisel Partners LLC, No. 04 Civ. 6910 (WHP) (S.D.N.Y.)
Court Approves Modifications to Global Research Analyst Settlement
The Securities and Exchange Commission today announced that the Honorable William H. Pauley III issued an Order on March 15, 2010 approving modifications to the final judgments entered against the twelve firms covered by the Global Research Analyst Settlement.
The final judgments first entered in October 2003 contained an extensive Addendum with provisions mandating structural and other reforms that addressed potential conflicts of interest between equity research analysts and investment banking.
The Global Settlement provided that with respect to any provision that had not been expressly superseded by subsequent rulemaking within five years, it was the expectation of the parties that, “the SEC would agree to an amendment or modification of such term, subject to Court approval, unless the SEC believes such amendment or modification would not be in the public interest.”
As set forth in an August 3, 2009 letter to the Court made public in connection with the Court’s decision, the Settling Firms “strongly believe[d]” that all existing operative provisions of the Addendum should be eliminated, but the Commission believed that it was in the public interest to retain a number of provisions in their current form or with certain modifications. The Settling Firms consequently did not seek elimination of all of the Addendum’s operative provisions, but instead requested specific modifications. The SEC did not oppose the resulting request by the Settling Firms.
In particular, there was no request for modification of the following provisions and firewalls, all of which remain in place under the modified Addendum approved by Judge Pauley:
- Investment banking input into the research budget is prohibited;
- The physical separation of research analysts and investment banking is required;
- Investment banking is prohibited from having input into company-specific coverage decisions;
- Research oversight committees are required to ensure the integrity and independence of equity research;
- Communications between investment banking personnel and research analysts regarding the merits of a proposed transaction or a potential candidate for a transaction are prohibited unless a chaperone from the firm’s legal and compliance department is present;
- Research analysts and investment bankers are prohibited from having any communications for the purpose of having research personnel identify specific potential investment banking transactions; and
- Research analysts must be able to express their views to a commitment committee about a proposed transaction outside the presence of investment bankers working on the deal.
The SEC supported the continued retention of these provisions in the Addendum.
The Court approved removing a number of provisions from the Addendum because rules issued by the National Association of Securities Dealers Inc. and New York Stock Exchange addressed the same concerns and provided comparable protections. As a result, the Addendum no longer includes prohibitions against investment banking input into research analyst compensation and the bar against research analysts participating in efforts to solicit investment banking business, among other things.
As noted above, the modified Addendum as ordered by Judge Pauley and supported by the SEC maintained the requirement that a chaperone from legal or compliance be present when investment banking seeks the views of research analysts concerning a proposed transaction or a potential candidate for a transaction. One proposed modification would have allowed investment banking to seek the views of research analysts regarding market or industry trends, conditions, or developments without the requirement of a chaperone, subject to certain limitations including the implementation of controls and training as described in the November 30, 2009 letter to the Court from the Settling Firms. In his March 15, 2010 Order, Judge Pauley did not approve this proposed modification.
As a result of the Court’s Order, the Settling Firms remain subject to a number of important restrictions that apply only to Global Settlement firms. Together with the rest of the industry, they also remain subject to all of the provisions of NASD Rule 2711, NYSE Rule 472, and the SEC’s Regulation AC that address research analyst conflicts of interest.