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U.S. Securities and Exchange Commission

Speech by SEC Staff:
Statement at the Announcement of Agreement in Principle on Research Analyst Issues


Stephen M. Cutler

Director, Division of Enforcement
U.S. Securities & Exchange Commission

December 20, 2002

I am pleased to be here with some of the many people -- from the SEC, the New York Stock Exchange, the NASD, the New York Attorney General's Office, and the North American Securities Administrators Association and its member states -- who have worked so hard to reach the agreement in principle that we are announcing today. A number of months ago, SEC Chairman Harvey Pitt announced that we should work together to pursue a coordinated approach to address research analyst conflicts on Wall Street and so-called IPO "spinning" practices. We are now beginning to see the fruits of our collective labors. Although it has been a difficult process, it is one that has been characterized by good faith on the part of all parties -- regulators and firms alike. And if and when finalized, I believe it will result in significant reforms that will serve investors for many years to come.

While none of us has the power to undo the past, today we take an important step toward changing the future and restoring investor confidence and public trust in the capital markets. This agreement in principle is intended to bring new integrity to Wall Street research. First, it will impose structural reforms designed to ensure that research analysts are insulated from undue pressure by a securities firm's investment banking department. Analysts won't report to investment banking; won't be compensated based on a firm's investment banking business; won't be evaluated by investment banking personnel; won't solicit or sell investment banking business; won't attend road shows; and won't be permitted to communicate with investment banking personnel except in narrowly circumscribed and limited situations.

Second, the agreement will enhance required disclosures so that customers understand - clearly and plainly -- that the research reports they read 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.

Third, it will ensure that key data from research reports - including ratings, price targets and forecasts -- are made publicly available on a quarterly basis so that the accuracy and quality of each firm's research can be analyzed by the investing public.

Fourth, as a further safeguard for investors, this proposal would ensure that they have access to independent, third-party research.

In connection with the "spinning" of IPO shares -- that is, the allocation of hot IPOs to executives of potential investment banking clients -- the firms have agreed that they would ban altogether such allocations to executive officers and directors of public companies.

Of course, this agreement in principle also would require the firms to make significant monetary payments - in total, more than $1.4 billion will have been paid. $85 million of this money has been earmarked for investor education efforts intended to arm future investors with the knowledge and skills necessary to navigate Wall Street. $450 million of this money will be used to purchase the independent research I mentioned earlier. Most important is the so-called retrospective relief. And what I can say here is that the federal regulators are committed to ensuring that their allocable share of these funds is returned to investors, to the extent practicable. That's not going to be an easy process, and we'll need to do a lot of work in the next few weeks to make that a reality.

When a final agreement is reached among the parties, and the last details hammered out, the commitments among the parties will be articulated in formal, public documents. Those documents will describe the misconduct uncovered in our investigations. The documents also will articulate clearly the relief to be provided by the firms.

Although this announcement brings us a step closer to resolving these important issues, I must emphasize that the members of the Commission have not yet formally considered this proposal. Only with the Commission's approval can the agreement become final.

Nevertheless, it is appropriate at this juncture that I thank the many individuals who have labored to bring us to this critical point: Attorney General Eliot Spitzer and his dedicated staff; Christine Bruenn, President of NASAA and the many state regulators with whom we have collaborated; Dick Grasso, Ed Kwalwasser and Dave Doherty of the New York Stock Exchange; Bob Glauber, Mary Shapiro and Barry Goldsmith of the NASD; and last, but certainly not least, my colleagues at the SEC, including my partner, Lori Richards, the head of our Exam program; Toni Chion of Enforcement; Wayne Carlin, the head of our New York office; John McCarthy of our Exam program; Annette Nazareth, our Director of Market Regulation, and the tireless staff who conducted the painstaking but expeditious investigations that got us to this point.



Modified: 01/08/2003