Statement Regarding Global Settlement Related to Analyst Conflicts of Interest
U.S. Securities and Exchange Commission
April 28, 2003
Today the Commission announced enforcement actions against ten broker-dealers for failing to ensure that the research they provided their customers was independent and unbiased by investment banking interests. The settlements of these actions, which were brought in conjunction with proceedings by the NASD, the New York Stock Exchange (NYSE), the New York Attorney General (NYAG) and other states, impose significant monetary relief on the firms, including penalties that rank among the highest - and in the case of one firm, the single highest penalty - ever paid in civil securities enforcement actions. These landmark penalties reflect the serious nature of the misconduct, as well as the Commission's belief that securities firms must hold the interests of their customers paramount. Moreover, the settlement agreements make clear that the firms may not treat these penalties as tax deductible or seek reimbursement for them from an insurance carrier or other third party. Investigations of the roles played by individual securities analysts and their supervisors are ongoing.1
The federal portions of the penalties, and of the disgorgement the firms also are required to pay, will be deposited into distribution funds to help compensate customers of the firms who invested in equity securities identified in the Commission's complaints. The Commission has invited the states to contribute their portions of the civil penalties and disgorgement to the funds for investors as well.
These settlements mark an important milestone in the Commission's investigation, and in its regulatory initiatives to help ensure that research provided to investors is objective. The settlements include important structural requirements designed to insulate research analysts from pressures by investment banking, including:
- Separate reporting structures for analysts and investment bankers;
- A requirement that a significant portion of each analyst's compensation be based on the quality and accuracy of the analyst's research;
- A prohibition on the solicitation of investment banking business by analysts;
- A prohibition on analyst participation in investment banking road shows;
- Limitations on analysts' contacts with investment bankers designed to maintain the analyst's role as gatekeeper in the offering process but to prevent the analyst from serving as marketer or cheerleader for investment banking transactions; and
- The implementation of policies and procedures designed to prevent anyone from seeking to influence the contents of a research report for the purpose of obtaining or retaining investment-banking business.
The settlements also require the firms to pay to provide investors independent, third-party research whenever they solicit investors to purchase securities. Under the settlements, certain firms also are required to provide funding for investor education initiatives designed to arm investors with the knowledge and skills they need to make informed investment decisions.
In an effort to restore investor confidence in the underwriting process, each firm will voluntarily agree to cease allocating shares in "hot" IPOs to corporate executives who could direct investment banking business to a firm, a practice known as "spinning." The Commission intends to determine the need for specific rulemaking in this area, in light of these and other recent Commission enforcement actions that indicate abuses in the IPO allocation process. In addition, the Commission intends to review the implementation of the settlements, along with reforms adopted by the Commission and the NASD and NYSE over the last two years, to evaluate whether additional, harmonizing, or superceding rules are appropriate.
The Commission wishes to thank other regulators who participated in the investigations and in the settlements.
1 Also today, the Commission announced settled enforcement actions against two individual research analysts - Jack Grubman (formerly associated with Salomon Smith Barney Inc.) and Henry Blodget (formerly associated with Merrill Lynch, Pierce, Fenner & Smith Incorporated). The settlements of these actions include significant penalties (which the defendants may not treat as tax deductible or seek to recover from insurance carrier or other third party), disgorgement, injunctions, as well as lifetime bars from association with broker-dealers and investment advisers. The action against Jack Grubman was brought in conjunction with the NASD, NYSE and NYAG. The action against Henry Blodget was brought in conjunction with the NASD and NYSE.