Securities Law Prof Blog

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

Thursday, March 18, 2010

Judge Rejects to Tear Down Firewall between Analysts and Investment Bankers

As the Wall St. Journal reported this morning, Judge Pauley, who is responsible for overseeing the 2003 Analysts' Settlement between major securities firms and the SEC that separated the investment banking from the research departments, rejected a modification that would have permitted:

Research personnel and Investment Banking personnel to communicater with each other, outside the presence of internal legal or compliance staff, regarding market or industry trends, conditions or developments, provided that such communications are consistent in nature with the types of communications that an analyst might have with investing customers.

The Judge said(Download Order1) such a proposed amendment (approved by the SEC) is "counterintuitive and would undermine the separation between research and investment banking."  The court did permit the other modifications proposed by the parties which the firms stated were appropriate to eliminate in light of existing SRO rules.

In its request(Download Requesttomodify2003Settlement) the firms state that they "strongly believe" that  all operative provisions of the settlement should be abrogated, and that the firms and the SEC agree that the remaining provisions will be reconsidered at the earlier of the Court's approval of these modifications or the effective date of new equity research analyst rules currently being considered by FINRA, with the expectation that if such rules address the remaining provisions, the SEC will agree to a further amendment or modification, unless the SEC believes the modification would not be in the public interest.

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