WSJ: SEC Tried to Ease Curbs

From the Wall Street Journal:

The Securities and Exchange Commission joined 12 Wall Street firms in seeking to scrap a key portion of a landmark 2003 deal that put strict curbs on stock analysts, a move that could heighten the ongoing debate about a broad overhaul of the financial-regulatory system.

In a ruling Monday, U.S. District Judge William H. Pauley III in New York rejected a proposed change to the legal settlement put in place to end abuses on Wall Street. The proposal would have allowed employees in investment-banking and research departments at Wall Street firms to “communicate with each other…outside of the presence” of lawyers or compliance-department officials responsible for policing employee conduct—an activity strictly prohibited by the settlement.

The settlement came soon after the bursting of the technology-stock bubble, which was caused in part by overly optimistic reports from Wall Street analysts that sent stocks soaring. After the bust, it was revealed that many of those analysts were touting stocks at the behest of their firms’ investment-banking operations, which were profiting from initial public offerings. One solution to the conflict of interest was separating the analysts from the investment-banking operations.

“The parties’ proposed modification would deconstruct the firewall between research analysts and investment bankers erected by the parties when they settled these actions,” Judge Pauley wrote in his ruling. Approving the request by the SEC and securities firms “would be inconsistent with” the settlement “and contrary to the public interest.”

SEC spokesman John Nester said the agency believes there are other restrictions in place, such as keeping analysts and bankers physically separate and prohibiting bankers from influencing analyst coverage decisions. In a letter requesting the change, the SEC and banks had stated “it is appropriate to eliminate” certain provisions because the conduct is now covered by new rules and regulations.

Securities firms covered by the settlement, including Goldman Sachs Group Inc., Morgan Stanley and the Merrill Lynch & Co. unit of Bank of America Corp., declined to comment.

How nice. The SEC helps the guys who created the dot-com bubble to undo the changes that were introduced then. That’s not all, as writes the Wall Street Journal in a second article:

The Securities and Exchange Commission has failed to turn key parts of a landmark stock-research settlement into industrywide rules, a move that threatens to gut pieces of the pact.

The 2003 accord, reached with a dozen large Wall Street firms, sought to prevent Wall Street research analysts from improperly touting stocks to help their firms’ investment bankers win business from corporate clients. Besides not following through with additional rules, the SEC proposed to a New York federal court that parts of the settlement be stripped away.

In a ruling Monday, U.S. District Judge William H. Pauley III in New York approved several changes that weakened that enforcement action. Though it keeps a firewall that forbids stock analysts and investment bankers from talking without a rules-compliance officer present, the decision essentially eased other restrictions involving the dealings between investment bankers and analysts, including a clear separation between analysts and the firms’ investment-banking operations.

The judge’s ruling comes at a key time for the SEC. It illustrates that the agency didn’t put in place broader rules to cover some key parts of the enforcement settlement, much of which was open to review after five years. It was that review process that led to the ruling by Judge Pauley.

So first the SEC first fails to write the terms of the settlement into appropriate law, and then tries to remove the key terms of the original settlement. Seems they never had any plan to make that permanent anyway. From the second article we learn also (emphasis mine):

SEC spokesman John Nester said, “The settlement did not contemplate that all of its provisions would be applied industrywide to parties that had not engaged in alleged wrongdoing. In fact, the 2003 settlement explicitly states that it was the expectation of all the regulators that, after five years, the settling firms could seek modification of those provisions that were not applied industrywide.

The SEC only inept and understaffed? Hard to believe.

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