SEC Weighs Rules on Analysts’ Dealings With Investment Bankers

The U.S. Securities and Exchange Commission may require Wall Street firms to keep a physical separation between their research analysts and investment bankers and ban bankers from influencing which companies the analysts cover.

The agency will review those and other provisions in a 2003 industry settlement with an eye toward applying them “to the entire industry,” according to a Jan. 6 letter from Robert Cook, chief of the SEC’s Division of Trading and Markets, to the Government Accountability Office.

The SEC said it would take that action as a result of a GAO report published today, which recommends that the agency look into writing industry-wide rules to head off potential conflicts of interest between analysts and investment bankers.

A dozen Wall Street firms including Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co., Citigroup Inc. (C) and UBS AG (UBSN) agreed to such provisions in 2003 to settle claims by regulators that their analysts published misleading research in an attempt to win business for the banking side.

The settlement in the U.S. District Court for the Southern District of New York separated analyst and banking departments, overhauled how firms evaluate and pay researchers and gave investors third-party research. The terms include a requirement that compliance chaperones be present at talks between research and investment-banking employees.

Several provisions were later dropped from the settlement after regulators established industry-wide rules on the same issues. The result is that practices aren’t uniform throughout the industry, the GAO said.

Finra Criticism

The GAO report said officials at the Financial Industry Regulatory Authority, the self-regulatory organization that polices broker-dealers under SEC authority, were critical of imposing all the remaining rules in the settlement on the entire industry. Finra is “concerned that some of the remaining terms are potentially costly and burdensome and would affect unfairly those firms that were not alleged to have engaged in wrongful conduct,” according to the GAO. It said Finra expects to propose a new rule on research-analyst conflicts to the SEC before July.

The GAO said SEC staff members explained that the settlement was meant to address bad conduct, not to create a competitive disadvantage. “At the same time, the SEC staff said that the Global Settlement’s terms provide useful protections that could benefit all investors if applied more broadly,” the report said.

To contact the reporter on this story: Jesse Hamilton in Washington at

To contact the editor responsible for this story: Lawrence Roberts at

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