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Spitzer's Solution: Team Research


Wall Street's research may be in for a major overhaul. On Oct. 24, New York State Attorney General Eliot Spitzer presented a plan to representatives of investment banks and regulators that will require big banks to fund and distribute research from independent boutiques free of ties to investment banking. The three-hour meeting, in which Spitzer spoke for an hour and a half, was led by Securities & Exchange Commission enforcement head Stephen M. Cutler.

Under Spitzer's plan, big brokerages will be required to pay as much as $100 million each over five years to an "oversight board." The board would be responsible for certifying the quality of the independent research. The brokerages would also have to cut off all contact between investment banking and their internal research staff. And research funding must also be divorced from investment banking revenues.

REDUNDANT ANALYSTS? The plan is the latest chapter in Spitzer's seven-month-long campaign to restore integrity to Wall Street. If adopted, it may radically alter the way investment banks conduct their own research. As part of the plan, banks would be required to distribute independent research and possibly post it on their Web sites, according to one source.

The new structure could make investment bank's own expensive analysts redundant. At present, major firms spend an estimated $800 million annually on their in-house research departments. "Why would banks want to conduct research if they have to pay for independent research under this plan?" asks someone close to negotiations at an investment bank. In fact, the allure of being able to cut costs could make the plan popular with struggling Wall Street firms.

Usually, when new rules are imposed on the securities industry, banks are permitted months to comment, followed by more months of negotiation over fine print. This time, however, investment banks have been given only until Wednesday, Oct. 30 to respond to the $1 billion plan, according to one source.

"WATCHING CLOSELY." Outside experts believe Spitzer's plan could be good for retail investors. But it's still unclear who'll make up the board, and that will be crucial to convincing investors that it's safe to return to the stock market (see BW Online, 10/24/01, "Rate the Analysts. It's the Only Cure").

"If someone is watching closely, it will be very useful," says D. Quinn Mills, a professor at Harvard Business School. But he adds that the plan's success hinges on the board's true independence. Warns Mills: "If the board gets captured by industry, nothing good is going to happen from it." By Emily Thornton and Heather Timmons in New York


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