The Global Analyst Research Settlement was an enforcement agreement reached in the United States on April 28, 2003, between the United States Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (NASD), New York Stock Exchange (NYSE), and ten of the United States's largest investment firms to address issues of conflict of interest within their businesses in relation to recommendations made by financial analyst departments of those firms.
Decision
The central issue at hand that had been judged in court was the conflict of interest between the investment banking and analysis departments of ten of the largest investment firms in the United States. The investment firms involved in the settlement had all engaged in actions and practices that had allowed the inappropriate influence of their research analysts by their investment bankers seeking lucrative fees. A typical violation addressed by the settlement was the case of CSFB and Salomon Smith Barney, which were alleged to have engaged in inappropriate spinning of "hot" initial public offerings (IPOs) and issued fraudulent research reports in violation of various sections within the Securities Exchange Act of 1934. Similarly, UBS Warburg and Piper Jaffray were alleged to have received payments for investment research without disclosing such payments in violation of the Securities Act of 1933.
Enforcement actions
As part of the settlement decision published on December 20, 2002, several regulations designed to prevent the abuse stemming from pressure by investment bankers on analysts to provide "favorable" appraisals were instantiated. Namely, these firms would have to literally insulate their banking and analysis departments from each other physically and with Chinese walls. Additionally, budget allocation via management in research departments will be independent of investment departments. Research analysts will also be prohibited from going on pitches and roadshows with bankers during advertising and promotion of IPOs. Similarly, the Global Settlement also increased the IPO "quiet period" from 25 days to 40 days. Finally, research analyst's historical ratings must be disclosed and made available.
Other than these regulatory actions, the firms involved in the settlement have been required to pay fines to their investors, to fund investor education, and to pay for independent third-party market research. A total fine of $1.435 billion was assessed and is described in the table below.
Payments
| Name of firm | Retrospective relief ($ millions) |
Independent research ($ millions) |
Investor education ($ millions) |
Total ($ millions) |
|---|---|---|---|---|
| Bear Stearns & Co. LLC | 50 | 25 | 5 | 80 |
| Credit Suisse First Boston Corp. | 150 | 50 | 0 | 200 |
| Deutsche Bank | 50 | 25 | 5 | 80 |
| Goldman Sachs | 50 | 50 | 10 | 110 |
| J.P. Morgan Chase & Co. | 50 | 25 | 5 | 80 |
| Lehman Brothers Inc. | 50 | 25 | 5 | 80 |
| Merrill Lynch & Co., Inc | 100 | 75 | 25 | 200 |
| Morgan Stanley | 50 | 75 | 0 | 125 |
| Salomon Smith Barney, Inc. | 300 | 75 | 25 | 400 |
| UBS Warburg LLC | 50 | 25 | 5 | 80 |
| Total | 900 | 450 | 85 | 1,435 |
References
- ^ Ten of Nation's Top Investment Firms Settle Enforcement Actions Involving Conflict of Interest, April 28, 2003, archived from the original on September 24, 2014, retrieved July 10, 2007
- SEC factsheet on Global Analyst Research Settlement, April 28, 2003, archived from the original on August 8, 2007, retrieved September 1, 2007
- "SEC, NY Attorney General, NASD, NASAA, NYSE and State Regulators Announce Historic Agreement to Reform Investment Practices". Office of New York State Attorney General. 2002-12-20. Archived from the original on 2009-10-15. Retrieved 2008-09-05.
- "Spitzer Returns, Taking Aim Again at Financial Analysts". Archived from the original on 2017-12-03. Retrieved 2017-03-05.
External links
- 2003 Global Settlement Archived 2016-10-24 at the Wayback Machine