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As a solution to security analyst independence problems, lawmakers appear to be considering having investment banks spin off their research departments into separate companies that would then sell their analysis on the open market. During a Senate Governmental Affairs Committee hearing Wednesday on Wall Street analyst behavior during the collapse of Enron Corp., lawmakers wondered why analysts continued to urge investors to buy the company’s stock even after it began its descent into bankruptcy last December. They noted that 10 out of 15 analysts who follow Enron were still rating the stock a “buy” or a “strong buy” as late as Nov. 8. The lawmakers then honed in on investment banks’ dual role — and possible conflicts — of advising firms while their research analysts provide stock recommendations. Sen. Robert G. Torricelli, D-N.J., said the marketplace could determine which investment banks have the most credibility or the profession could regulate itself. “Failing all that, is there a role for government? Should [analyst and brokers] not merely be separated by a Chinese Wall, but a brick one?” Torricelli said. “Most of us believe such a role is reserved for extraordinary circumstances, but these are extraordinary circumstances.” Richard Gross, an analyst with Lehman Brothers Inc., urged lawmakers not to split up the investment banks and research departments, saying that industry methods of handling potential conflicts are adequate. Lehman advised Dynegy Corp. in its aborted acquisition of Enron. Gross, along with analysts from Citigroup’s Salomon Smith Barney Inc. unit, Credit Suisse First Boston, and J.P. Morgan Securities Inc., all defended themselves, saying they were misled by Enron’s management and financial statements and their investment banks did not pressure them to maintain buy ratings. J.P. Morgan was one of the advisers to Enron on the Dynegy merger. CSFB and Citigroup were also involved in various deals involving Enron. Beyond that, Gross said, Enron remained an attractive company to them because, despite the abrupt departure of chief executive Jeffrey Skilling and the subsequent massive restatement of its finances, the energy company had a solid management team and a good business model. In addition, the rampant stock sales of Enron’s management didn’t cause alarm because they were “normal, programmed, regular” sales, Gross said. Lawmakers lambasted the analysts’ defense that Enron was misleading, accusing the analysts of not being vigilant enough in seeking answers. They said there is likely a more systematic problem with analyst recommendations beyond what happened with Enron. Sen. Jim Bunning, R-Ky., said he doesn’t believe the so-called Chinese Wall is impenetrable, and was skeptical of the analysts’ testimony regarding what they knew about their respective investment banks’ involvement with Enron. “Some of what you’re saying, I’m having a hard time believing,” Bunning said. “We’re trying to solve this problem, and based on your testimony, you’re asking us to intercede.” Lawmakers said the Securities and Exchange Commission’s forthcoming proposals for greater corporate disclosure is a start, and the National Association of Securities Dealers Inc.’s recent proposal to improve analyst independence. Robert R. Glauber, chairman and chief executive of the NASD also testified, saying the group submitted its proposal to the SEC on Feb. 8, and the regulator is expected to issue them shortly for public comment. The crux of the proposal is limiting the relationship between investment banking departments and research departments within a firm. Also on Wednesday, the Senate Banking Committee debated barring the chairman of a company from also serving as chief executive officer. Ira Millstein, a partner at Weil, Gotshal & Manges in New York, broached the idea. “If you have a board where too much power is located in one place, it’s dangerous,” he said. Sen. Phil Gramm, R-Texas, panned the idea, saying it could create power struggles between the chairman and the CEO. “You have to question the cost to the company’s ability to grow and I have real concerns about whether it would impede the dynamic leadership of the firm,” he said. Sen. Jon Corzine, D-N.J., said separating the job of CEO and chairman would not restrain entrepreneurial efforts. Corzine, who headed Goldman, Sachs & Co. before running for office, said he would prefer more independent directors on boards. “Challenging questions by an independent board improves entrepreneurship and keeps management in check,” he said. – Ron Orol contributed to this report Copyright (c)2002 TDD, LLC. All rights reserved.

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