Just remember, the SEC is here to protect
- The Securities and Exchange Commission joined 12 Wall Street firms in seeking to scrap a key portion of a landmark 2003 deal that put strict curbs on stock analysts, a move that could heighten the ongoing debate about a broad overhaul of the financial-regulatory system.
- In a ruling Monday, U.S. District Judge William H. Pauley III in New York rejected a proposed change to the legal settlement put in place to end abuses on Wall Street. The proposal would have allowed employees in investment-banking and research departments at Wall Street firms to "communicate with each other…outside of the presence" of lawyers or compliance-department officials responsible for policing employee conduct—an activity strictly prohibited by the settlement.
- The settlement came soon after the bursting of the technology-stock bubble, which was caused in part by overly optimistic reports from Wall Street analysts that sent stocks soaring. After the bust, it was revealed that many of those analysts were touting stocks at the behest of their firms' investment-banking operations, which were profiting from initial public offerings. One solution to the conflict of interest was separating the analysts from the investment-banking operations. (if you were not around at the time, many analysts were touting absolute junk to the masses so their investment banking arms could sell the crap, all the while sending internal emails to each other laughing at what was going on, knowing outright these companies brought public were complete jokes)
- The 2003 settlement led to changes in how securities firms operate. During the Internet bubble, some analysts publicly suggested investors buy stocks, even as the analysts disparaged the companies in private emails. The companies usually were investment-banking clients of the analysts' firms. (i.e. the same behavior that goes on in any good scam artist operation)
- The 2003 pact included a complete separation of research and banking staffs, budgets and chains of command—and a physical separation of the two operations. Analysts were prohibited under the settlement from even speaking to investment bankers unless someone from the firm's compliance department was present. The firewalls were aimed at prohibiting improper communications.
- "The parties' proposed modification would deconstruct the firewall between research analysts and investment bankers erected by the parties when they settled these actions," Judge Pauley wrote in his ruling. Approving the request by the SEC and securities firms "would be inconsistent with" the settlement "and contrary to the public interest."
- Securities firms covered by the settlement, including Goldman Sachs Group Inc., Morgan Stanley and the Merrill Lynch & Co. unit of Bank of America Corp., declined to comment.
- Some outsiders expressed surprise that the nation's top securities watchdog sided with Wall Street in an effort to unwind a major provision of the $1.4 billion settlement. (what outsiders are surprised? The SEC is basically a partner to the investment banks...err, I'm sorry - the watchdog) The agreement settled allegations that securities firms issued overly optimistic stock research in order to win lucrative investment-banking business. "I am all for judges being the hero, but isn't the SEC supposed to be?" said James D. Cox, a law professor at Duke University. "The issue of communication between analysts and bankers was at the heart of the entire issue that led to the global settlement. My initial question is: Who at the SEC allowed this to happen?"
- Harvey Goldschmid, a SEC commissioner when the settlement was reached, said the judge's ruling "was right." "The separation of investment banking from the analysts was a wise thing when we approved it in 2003, and I would not change it," he said. "The firms can argue it would be more efficient to allow the contact, but sometimes when you're talking about very marginal efficiency, there's reason to keep rules that are clear and enforceable."