Wall Street Reform Deal May Be CloserNov 12, 2002 | USA Today A sweeping reform settlement meant to clean up tainted Wall Street research and IPO practices could emerge as early as next week, people close to the negotiations say.
But the deal, crucial to restoring investor confidence in the nation's capital markets, is expected to be less ambitious than securities regulators had initially hoped.
After weeks of debate, the Securities and Exchange Commission and New York Attorney General Eliot Spitzer decided to drop a key but controversial measure to create a government-run watchdog to police Wall Street analysts. The oversight board, subsidized by $1 billion over five years from Wall Street, would also have bought stock research from independent boutiques to circulate to small investors.
Instead, Wall Street firms will each be responsible for buying independent research and distributing it alongside their own analysts' work to ensure investors get a second opinion.
The shift is expected create less of a regulatory and financial burden on Wall Street, but it is unlikely to prevent more layoffs as firms reduce the number stocks they cover.
Reform advocates worry the compromise won't fix the problem.
"The new solution won't end the conflicts of interest," Columbia University securities law professor John Coffee says. "The independent research boutiques will be apprehensive about whether they may lose their new business if their opinions contradict those of the Wall Street firm they were contracted to work for."
Nevertheless, with the most significant obstacle out of the way, the only remaining hurdle to a global settlement is agreement on how much each leading investment bank will be forced to pay in fines for using rosy research and hot IPO allocations to attract lucrative investment-banking business during the 1990s. The money would go to a restitution fund for retail investors.
Based on the $100 million fine Merrill Lynch paid in May to settle its research scandal, total fines could easily exceed $1 billion, with the most being paid by aggressive wrong-doers. Citigroup's Salomon Smith Barney, Merrill and Credit Suisse First Boston could pay the heaviest fines, people with knowledge of the situation say.
While fighting might erupt about the size of the fines, senior executives say privately that they are resigned to paying to close one of the most damaging chapters in Wall Street history.
An industrywide settlement looked in danger of unraveling last week following SEC Chairman Harvey Pitt's resignation and the Republicans' election sweep. Morgan Stanley led a hard lobby against the independent research panel. In the end, SEC enforcement chief Stephen Cutler and Spitzer decided it was not worth the battle.