Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Sunday, April 6, 2008

Fanto on Broker-Dealer Professionalism in IPOs

The Continuing Need for Broker-Dealer Professionalism in IPOs, by JAMES A. FANTO, Brooklyn Law School, was recently posted on SSRN.  Here is the abstract:

In this essay, I contend that the IPO process and its abuses of the late 1990s reveal a fundamental problem in the brokerage industry. The abuses show the culmination of a concerted training in business, business schools, and even law schools and, more generally, in society: the acceptance of self-interested profit maximization as the sole goal for business and financial activities. I first review the IPO abuses from the perspective of individual self-interest and the group enhancement of it to show the fundamental motivation of the abuses. I then examine the regulatory responses to these abuses in order to point out their incompleteness. I argue that the reforms were incomplete because they established limited broker-dealer professionalism, focusing only on research analysts, which perversely encouraged those not directly touched to continue to engage in self-interested conduct. I also contend that this absence of full broker-dealer professionalism can lead to reputational risk that threatens these financial institutions and even the stability of the securities markets. I thus suggest that the professional reform for broker-dealers must be wide-ranging and must reach into the training of future bankers and brokers in the business schools. However, I also offer a practical, stopgap reform suggestion that can help alleviate reputational risk.

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