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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Prepared for Delivery at SEC Press Conference Regarding Global Settlement


Chairman William H. Donaldson

U.S. Securities and Exchange Commission

Washington, D.C.
April 28, 2003

I am pleased to be here with some of the many people -- from the SEC, the New York Attorney General's Office, the NASD, the New York Stock Exchange, and the North American Securities Administrators Association and its member states -- who have worked so hard to bring to fruition the enforcement actions and settlements we announce today. These cases are an important milestone in our ongoing effort both to address serious abuses that have taken place in our markets and to restore investor confidence and public trust by making sure these abuses don't happen again in the future.

As you know, this settlement has been in the works for many months; indeed, much of the investigation and negotiation process that has resulted in today's announcement predates my arrival at the Commission. But, I believe that what we present today is a good outcome for investors and the markets.

Our unified action brings to a close a period during which the once-respected research profession became nearly unrecognizable to earlier generations of investors and analysts. As many of you know, I helped found an investment firm that bore my name and which was originally dedicated to research.

For that reason, I speak very personally, when I say that I am profoundly saddened - and angry - about the conduct that's alleged in our complaints. There is absolutely no place for it in our markets and it cannot be tolerated. When an analyst signs his or her name, and places the firm's name, on a research report expressing strong support for an issuer, while admitting privately to doubts about the company's viability, the only appropriate reaction is outrage.

When a firm publishes favorable research about a company without revealing to its customers that that research - far from being independent - was essentially bought and paid for by the issuer, we had no choice but to conclude that the research system was broken.

To impress upon the firms the seriousness with which we regard their misconduct and to help restore investor's faith in the objectivity of research, the settlement employs a multi-pronged approach, including both monetary and non-monetary forms of relief.

The monetary relief is substantial - totaling just short of $1 billion, 400 million dollars. Collectively, the ten firms will disgorge illegal proceeds of nearly $400 million, and pay well in excess of $400 million in civil penalties. I am pleased to note that the penalties alone - that is, not including the disgorgement, independent research, and investor education payments -- are among the largest ever obtained in civil enforcement actions under the securities laws. The $150 million penalty imposed against one firm is the largest ever imposed against a broker-dealer firm in a civil action.

The $75 million penalty to be paid by another firm is the third highest paid by a brokerage firm. And the $25 million penalties to be paid by the other settling firms are easily within the top ten largest obtained by the SEC against broker-dealers. I'm confident this enforcement action has delivered a message the firms won't soon forget.

The federal regulators - the Commission, the NASD, and the New York Stock Exchange - will place their share of the penalties and disgorgement - approximately $400 million -- into a distribution fund for payment to harmed investors.

While there are challenges and difficulties in establishing such a fund, the Commission feels strongly that those challenges and difficulties are worth taking on and that any funds paid by the settling firms should be used to compensate the investors harmed most directly by the misconduct uncovered in our investigations. We believe this is the right thing to do, and is consistent with the message sent by Congress when it recently authorized us to use penalties to repay investors.

In accordance with the settlement agreements, a Fund Administrator will be appointed to allocate funds to individual customers of each firm based primarily on whether each customer purchased any of the limited universe of securities identified in the Commission's complaint. The Fund Administrator's plan of distribution will be subject to approval by the court.

Although the monetary relief secured in the settlement is substantial, unfortunately the losses that investors suffered in the aftermath of the market bubble that burst far exceeds the ability to compensate them fully.

They can never fully be repaid. Their loss was more than monetary. It was a loss of confidence and a loss of the hopes and dreams they had built over a lifetime. And although the monetary relief obtained in the settlement is record-breaking, the structural reforms required by the settlement are, in my view more significant and far-reaching.

The numerous obligations we impose on the defendants, taken together, will fundamentally change the role and perception of research at Wall Street firms. Indeed, I believe these reforms will go a long way towards restoring the honorable legacy of the research profession. Let me take a moment to highlight a few of the most meaningful among them.

In order to eliminate the conflicts that arise when the banking function has the opportunity or means to influence the objectivity of research analysts, the settlement:

  • Requires firms to have separate reporting and supervisory structures for their research and banking operations;

  • Requires that research analysts' compensation be unrelated to investment banking business, and instead be tied to the quality and accuracy of their research;

  • Prohibits investment banking personnel from evaluating the performance of research analysts, and requires decisions concerning compensation of analysts to be documented and reviewed by an independent committee within the firm;

  • Prohibits research analysts from soliciting investment banking business or participating in so called "road shows;"

  • Prohibits communications between firms' research and banking operations except as necessary for an analyst to advise the firm concerning the viability of a transaction. Thus, the analyst will resume the role of "gatekeeper" and shed the recently acquired identity of cheerleader or marketer.

The settlement also imposes a series of requirements that will benefit investors by providing them better information concerning the limitations of research. For instance:

  • Firms must include on the first page of research reports a "warning notice" making clear that the reports are produced by firms that do investment banking business with the companies they cover, and that this may affect the objectivity of the firms' research reports; the disclosure must further state that "investors should consider the report as only a single factor in making their investment decision."

  • To provide the public with the tools necessary to assess the usefulness of an analyst's research, each firm must disclose quarterly the price targets, ratings, and earnings per share forecasted in its research reports. I expect that these disclosures will fuel development of private services to transform such raw data into investor-friendly report cards on the accuracy of the firms' research.

  • And finally, firms must adopt policies and procedures reasonably designed to ensure that its personnel cannot and do not seek to influence the contents of research reports in order to promote investment banking business.

    Another innovative and forward-looking aspect of this agreement is the commitment by the firms to purchase independent, third-party research for their customers over the next 5 years. Each firm will retain an independent research monitor, in consultation with the regulators, who will oversee this process to insure the research is independent, of high quality, and useful to the firms' various customer bases. Each independent research monitor also will report periodically to the regulators on his or her firm's compliance with this requirement.

To better arm investors to cope with the risks inevitably associated with participating in the capital markets, the settlement also provides for the establishment of an Investor Education Fund of $80 million. This initiative is particularly important because it has meaning beyond the context of this investigation; the federal portion of this fund will support educational efforts addressing not only the possible hazards of analyst conflicts, but also a broad range of other issues associated with informed investing. The fund will make grants to organizations to develop wide-ranging, neutral, and unbiased investor education programs nationwide.

In connection with the "spinning" of IPO shares -- that is, the allocation of sought after, "hot" IPOs to executives of potential investment banking clients -- the firms have agreed voluntarily to ban such allocations to executive officers and directors of public companies. I view this voluntary initiative as a temporary solution to the problem of spinning. In the months ahead we will explore addressing these issues with revised or new rulemaking.

The hallmark of our business and financial system is that the rule of law must prevail and when wrong-doing occurs, it must be confronted and punished. Today we do just that. These cases reflect a sad chapter in the history of American business - a chapter in which those who reaped enormous benefits based on the trust of investors - profoundly betrayed that trust.

The cases also represent an important new chapter in our ongoing efforts to restore investors' faith and confidence in the fairness and integrity of our markets.

Before I yield the floor to Attorney General Spitzer I must thank the many individuals who have labored to complete this critical process: Among them are the New York Attorney General Eliot Spitzer, and Beth Golden and Eric Dinallo of his dedicated staff; Bob Glauber, Mary Shapiro and Barry Goldsmith of the NASD; Dick Grasso, Ed Kwalwasser and Dave Doherty of the New York Stock Exchange; and Christine Bruenn, President of NASAA and the many state regulators with whom we have collaborated; and last, but certainly not least, the staff of the SEC, including Stephen Cutler, the Director of Enforcement; Lori Richards, the head of our Exam program; Toni Chion of our Enforcement Division; Wayne Carlin, the head of our New York office; John McCarthy of our Exam program; Annette Nazareth, our Director of Market Regulation, and her Deputy, Robert Colby; and the other tireless staff who conducted this complex and historic investigation. You all have served the investing public exceptionally well.

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Modified: 04/28/2003