You need to follow along closely because this can get a bit confusing. As we all recall, in 2003, judgments were entered against 12 of the largest Wall Street firms that issued research and engaged in investment banking, commonly referred to as “The Global Settlement.” The Global Settlement imposed signficant restrictions on interactions between the research analysts and investment bankers at these firms in order to stymie the bankers from influencing analyst coverage decisions.
The Global Settlement provided that with respect to any provision that had not been expressly superseded by subsequent rulemaking within five years, it was the expectation of the parties that, “the SEC would agree to an amendment or modification of such term, subject to Court approval, unless the SEC believes such amendment or modification would not be in the public interest.”
Ultimately, the parties agreed to seek Court approval to modify specific provisions, rather than all, of the Global Settlement. In an order issued March 15, 2010 (pdf), U.S. District Judge William H. Pauley III approved all of the parties proposed modifications, with the exception of one.
What’s Staying In – there was no request from the parties for modification of the following provisions and therefore will all remain in place:
- Research and Investment Banking will be separate units with entirely separate reporting lines within the firm;
- Investment Banking will be prohibited from providing input into the Research budget;
- Research and Investment Banking will be physically separated;
- Investment Banking will have no input into company-specific coverage decisions;
- The firm must create and enforce firewalls between Research and Investment Banking reasonably designed to prohibit specific communications between the two, including communications made for the purpose of having Research personnel identify specific potential investement banking transactions;
- Research oversight committees will be required to review all changes in ratings, any material changes in price targets and monitor the overall quality and accuracy of the firm’s research reports;
- Reports must include certain disclosures stating that: 1) the Firm does and seeks to do business with companies covered in its research reports; 2) free independent research may be available; and 3) the report should only be one factor considered when making investment decisions.
Also Staying In – despite a request from the parties for modification:
- Communciations between Investment Banking and Research Analysts regarding the views of Research personnel about the merits of a proposed transaction, a potential candidate for a transaction, or market or industry trends, conditions or developments, must be in the presence of legal or compliance staff.