SEC, NY Attorney General, NASD, NASAA, NYSE and State Regulators Announce Historic Agreement To Reform Investment Practices; $1.4 Billion Global Settlement Includes Penalties and Funds for Investors


$1.4 Billion Global Settlement Includes Penalties and Funds for Investors

December 20, 2002 -- Securities and Exchange Commission Chairman Harvey L. Pitt, New York Attorney General Eliot Spitzer, North American Securities Administrators Association President Christine Bruenn, NASD Chairman and CEO Robert Glauber, New York Stock Exchange Chairman Dick Grasso, and state securities regulators announced an historic settlement with the nation's top investment firms to resolve issues of conflict of interest at brokerage firms.

The "global settlement" concludes a joint investigation begun in April by regulators into the undue influence of investment banking interests on securities research at brokerage firms. The settlement will bring about balanced reform in the industry and bolster confidence in the integrity of equity research.

Terms of the agreement include:

  • The insulation of research analysts from investment banking pressure. Firms will be required to sever the links between research and investment banking, including analyst compensation for equity research, and the practice of analysts accompanying investment banking personnel on pitches and road shows. This will help ensure that stock recommendations are not tainted by efforts to obtain investment banking fees.
  • A complete ban on the spinning of Initial Public Offerings (IPOs). Brokerage firms will not allocate lucrative IPO shares to corporate executives and directors who are in the position to greatly influence investment banking decisions.
  • An obligation to furnish independent research. For a five-year period, each of the brokerage firms will be required to contract with no less than three independent research firms that will provide research to the brokerage firm's customers. An independent consultant ("monitor") for each firm, with final authority to procure independent research from independent providers, will be chosen by regulators. This will ensure that individual investors get access to objective investment advice.
  • Disclosure of analyst recommendations. Each firm will make publicly available its ratings and price target forecasts. This will allow for evaluation and comparison of performance of analysts.
  • Settled enforcement actions involving significant monetary sanctions.

"This agreement will permanently change the way Wall Street operates," Spitzer said. "Our objective throughout the investigation and negotiations has been to protect the small investor and restore integrity to the marketplace. We are confident that the rules embodied in this agreement will do so. The cooperation among my colleagues at the SEC, NASAA, NYSE and NASD has enabled us to reach this important agreement."

SEC Chairman Pitt said: "This cooperative agreement in principle, navigated by Steve Cutler and Lori Richards of the SEC staff, is a tribute to the wonderful cooperative efforts of the NYSE, the NASD, the NYAG and the states in the public interest. I am pleased to recommend this to my colleagues on the Commission."

The agreement is subject to approval by the full Commission.

"This settlement marks a vital step in restoring investor confidence," said Robert R. Glauber, NASD Chairman and CEO. "It underscores that the industry's highest duty is to investors. It makes plain that cleaning up research and IPO practices is not just good ethics -- it's good business. And it demonstrates NASD's determination to investigate and sanction practices that harm investors and the integrity of the markets."

"This agreement represents the dawn of a new day on Wall Street. Our goal and the goal of this agreement are simple: investors, not investment banking fees, come first," said NASAA President Chris Bruenn. "This historic settlement and the real changes it will bring will help restore faith in our markets which, even with their problems, remain the envy of the world."

"Restoring investor confidence is paramount," said NYSE Chairman and CEO Dick Grasso. "Investors need to know that the firms they do business with act only with the highest standards of honesty and integrity, putting investors' interests ahead of all others. The NYSE is committed to making certain the system is stripped of those individuals and practices that harm investors, so America's equity culture can grow and prosper once again."

Each of the firms will pay a fine, pay monies toward investor restitution, and will be required to escrow funds that will be used to pay for independent research. The agreement that was reached totals more than $1.4 billion in penalties, restitution and monies to be used for investor education.

*  *  *  *  *

Settlement Payments

Name of FirmRetrospective Relief
($ millions)
Independent Research
($ millions)
Investor Education
($ millions)
Bear Stearns & Co. LLC50255
Credit Suisse First Boston Corp.150500
Deutsche Bank50255
Goldman Sachs505010
J.P. Morgan Chase & Co.50255
Lehman Brothers, Inc.50255
Merrill Lynch & Co., Inc.100*7525
Morgan Stanley50750
Salomon Smith Barney, Inc.3007525
UBS Warburg LLC50255

* Payment made in prior settlement of Research Analyst conflicts.


See Also:  Statement of SEC Enforcement Director Stephen M. Cutler
Last modified: 12/20/2002