The Securities and Exchange Commission is floating rule changes proposed by New York Stock Exchange and the National Association of Securities Dealers to extend the tenets of the 2003 “global settlement” to all registered brokerage firms.
The global settlement sought to resolve concerns about conflict of interest at 10 leading brokerage houses in which investment banking interests imposed too much influence over securities research. The settlement included a number of provisions to cut the ties between bankers and analysts to help produce more objective research for investors.
The recently proposed rule change would extend two key provisions of the global settlement to all registered brokerage firms, said Donald van Weezel, vice president of regulatory affairs for the NYSE. Those include prohibiting research analysts from attending or participating in road shows related to investment banking services and requiring certain communication about investment banking transactions to be fair, balanced and not misleading.
When adopted, the rule will apply to all registered members, brokers and/or dealers of the NYSE and NASD. According to a NYSE spokesman, that includes 3,400 members of the NASD and 250 members of the NYSE who represent about 90 percent of all customer accounts in the U.S. capital markets and about 92 percent of all customer assets.
Laurie Fiori Hacking, executive director of the Ohio Public Employees Retirement System, provided the only comment that the SEC received on the proposal. She supports the rule change, but emphasized she thinks the rule should apply to all brokerage firms, not just those doing business on the Big Board.
“We believe the proposed rule changes should apply to all investment banks to fortify the primary role of a research analyst, which is to provide objective analysis of companies and transactions and to value securities accurately,” Hacking wrote.
A "Non Event"
Wolff-Reid
Maureen Wolff-Reid, president of Sharon Merrill Associates, an investor relations and communications firm, said the rule change will represent a “non-event” for most companies. “Many of the investment banks have instituted safeguards to separate these two groups and are already working under the rule’s general guidelines,” she said. “What the rule will provide is a level playing field for all investment banking firms beyond those involved in the global settlement.”
Lubushkin
A recent entrant to the capital markets, ECC Capital Corp. noticed a distinct divide between investment banking and research personnel when it went through its initial public offering. “It was very apparent that our investment bankers were making a very careful point of staying clear of their analysts,” said Greg Lubushkin, chief accounting officer at ECC Capital. “The two groups weren’t even sharing information.”
However, separation rules can only achieve so much, Lubushkin notes. “As long as firms are permitted to provide investment banking services to sellers of securities and provide research to potential buyers of those securities, there will be an inherent conflict of interest, if not in fact, then appearance,” he said.
Lubushkin likened the scenario to current debate about whether accounting firms can offer both audit and tax services to a single client without facing a conflict of interest. “Nevertheless, it makes sense that accountants provide both services to their clients and that investment bankers can represent both the interests of sellers and buyers of securities,” he said. “It’s what they do. But it’s important that there be checks and balances to prevent conflicts of interest, and it appears that the proposed rules are designed to do just that.”
Thompson Jr.
Louis Thompson Jr., president and CEO of the National Investor Relations Institute, said he agrees in concept with creating greater separation between investment banking and research services, but has concerns about how the concepts of the global settlement are working in practice.
He referred specifically to the global settlement provision that requires brokerage firms for five years to buy and provide to their customers independent research conducted by third parties. It was a key provision of the global settlement, but it is not part of the current rule change being proposed for all brokerage firms.
Thompson said companies are frustrated with this particular requirement because they have no opportunity to interact with the independent research providers to give or correct information, nor do they even see the research in some cases.
“The independent research firms don’t even talk to the companies,” Thompson said. “The quality of the independent research is not great. I don’t disagree in concept with spreading the provisions of the global settlement to all brokerage firms, but I have to ask the question: Is it going to make a difference in the quality of sell-side research? I’m not so sure about that.”
No comments yet