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California To Hold Investment Banks To New Research Rules

May 8, 2003 | Mercury News

State Treasurer Phil Angelides is expected to require dozens of investment banks to beef up the integrity of the stock research they provide to investors, or lose their chance to do business with the state.

The change, scheduled to be announced at an afternoon news conference today, follows other officials' announcement last week that 10 large investment banks nationwide agreed to pay $1.4 billion in fines and improve the objectivity of their stock research. The 10 banks did so to settle charges brought by a group of state and industry regulators not including Angelides that the firms issued overly optimistic research to win investment-banking business, causing investors to lose untold millions of dollars in the process.

Now, it is likely that, in addition to the 10 firms nationwide that settled in that matter, dozens of additional investment banks doing business in California will have to abide by the new changes. If they don't, Angelides is expected to announce today, the state will stop using them for investment-banking or brokerage services.

Currently, California hires more than 100 banks or brokerage firms to help it issue bonds or manage a $60 billion investment account, according to a spokesman for the Treasurer's office.

Precise details about what Angelides will require of investment banks including whether he will impose additional requirements weren't available Wednesday. But Angelides widely viewed as a future gubernatorial candidate has the power to set mandatory standards for investment banks seeking to do business with the state.

But Angelides is expected to require firms he hires to follow the reforms imposed on the 10 firms in the nationwide settlement. Among them: Stock research analysts can have very limited contact with investment bankers, and the contact they do have must be monitored by lawyers or compliance staff. Stock analysts' pay can no longer be tied directly or indirectly to whether their research helps win investment-banking clients.

Many investment banks that weren't part of the settlement say they already were planning to make many changes to mirror the settlement, to stay in regulators' good graces. ``Most firms that were not part of the settlement are using it as a guidepost,'' said Chad Keck, head of technology investment banking for Needham & Co.

Meanwhile, at a Senate Banking Committee hearing Wednesday in Washington, D.C., a group of senators questioned whether the settlement went far enough and urged regulators to continue bringing penalties against Wall Street executives who oversaw such abuses.

``Without holding executives and CEOs personally accountable for the wrongdoing that occurred under their watch, I don't believe that Wall Street will change its ways or investor confidence will be restored,'' said Sen. Richard Shelby, the Alabama Republican who chairs the committee. ``I believe the Wall Street culture must change from the top down.''

Several regulators, including the chairman and head of enforcement for the Securities and Exchange Commission, said additional charges or penalties against individuals may be coming.

New York Attorney General Eliot Spitzer, who triggered the long-running probe of industry abuse, told the panel: ``There are continuing investigations in my office and in other offices.''

The 10 settling firms were Citigroup/Salomon Smith Barney, Credit Suisse First Boston, Morgan Stanley Dean Witter, Merrill Lynch, Goldman Sachs, Lehman Brothers, Bear Stearns, UBS Warburg, J.P. Morgan and U.S. Bancorp Piper Jaffray.

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