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Regulators, Wall Street Still Talking

Settlement Will Take Days, Sources Say

Nov 19, 2002 | The Washington Post

Settlement talks between state and federal securities regulators and Wall Street's major investment banks continued yesterday, but sources said a final agreement remains days away.

Officials from the Securities and Exchange Commission and the office of New York State Attorney General Eliot L. Spitzer met with the firms at the offices of the New York Stock Exchange as the two sides tried to hammer out a final accord. Any settlement is expected to include fines and new rules to prevent conflicts of interest between investment bankers and research analysts and to end several regulatory inquiries.

The firms again proposed the creation of an industry-funded and -run consortium that would do research that would be purchased by all the firms. But the idea was rejected by regulators, sources familiar with the meeting said.

The plan is separate from an earlier Spitzer proposal to create an independent committee that would oversee compliance with the terms of a settlement as well as provide research. Wall Street firms had rejected Spitzer's idea in earlier talks, complaining it would create a new bureaucracy.

At the meeting yesterday, regulators said they favor requiring each firm to buy independent research in a set dollar amount that would vary according to the size of the firm, the number of retail brokerage clients it had and how large its investment banking business was.

Each firm would be required to have an independent monitor who would oversee how the research was purchased in an effort to ensure the impartiality of the information given to investors. Regulators say this approach would foster competition among suppliers of independent information rather than rely on one source.

The settlement talks, which will continue this week, are intended to end inquiries by Spitzer, other state officials and the SEC into the practices of Wall Street firms that published overly optimistic reports on public companies to inflate stock prices.

The settlement is expected to impose large fines, including ones of several hundred million dollars against the companies most targeted, such as Citigroup Inc. and Credit Suisse First Boston. No amounts have been agreed upon, though the $100 million fine Merrill Lynch & Co. recently paid to settle a similar probe by Spitzer has become a benchmark, sources said.

The settlement also is expected to strictly limit interaction between bankers and analysts on Wall Street. For instance, analysts would not be allowed to attend meetings where bankers pitch their services to potential corporate clients. Critics have said that bankers in the past used the promise of positive research coverage to attract banking clients.

In a separate action, several Wall Street investment firms including Goldman Sachs & Co., Morgan Stanley and Citicorp are close to agreeing to pay more than $8 million in fines to settle an SEC inquiry into their failure to retain e-mail, sources confirmed.

The firms are negotiating the settlement with the SEC's enforcement division as the Securities Industry Association, the industry trade group, continues talks that have lasted more than five years with the SEC's division of market regulation to try to clarify what the agency's e-mail retention rules are, sources said.

Annette Nazareth, head the SEC's market regulation unit, had no comment yesterday.

The issue of e-mail retention is at the heart of the broader investigation by the SEC and state securities regulators into conflicts of interest at investment banking firms.

Goldman Sachs and Morgan Stanley would not comment yesterday. A spokesman for Citigroup could not be reached for comment.


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