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The U.S. Securities and Exchange Commission voted unanimously Wednesday to adopt new rules the agency insists will dramatically change how research analysts will be regulated. The rules would prohibit a firm’s investment banking operation from having a supervisory role over research analysts. Under the new rules as well, analysts and their firms must reveal their financial interests in companies they cover. One of the more controversial provisions involves the imposition of a “quiet period” that would bar a firm acting as manager or co-manager of an initial public offering from issuing a report on a company for 40 days after the offering. Firms would also be required to disclose if they own 1 percent or more of a company’s shares or if they expect to receive, or intend to seek, compensation for investment banking services from a company during the next three months. “These rules are an impressive first step toward educating investors of, and protecting them from, potential conflicts analysts face, realigning the motivations of analysts, and preventing and detecting misconduct,” SEC Chairman Harvey Pitt said at the commission meeting Wednesday. The rule package will be phased in by year’s end. Some provisions will take effect immediately, others over a few months. The rules allow the SEC to reclaim part of a stage dominated by New York Attorney General Eliot Spitzer, who has been in settlement talks with Merrill Lynch & Co. over the analyst issue. But not everyone was happy. House Financial Services Committee Republicans Michael Oxley and Richard Baker applauded the rules, but their Democratic counterpart was more critical. “These rules take an important first step, but do not go nearly far enough to limit the ties between analysts and their firms’ investment banking departments,” said Rep. John J. LaFalce, D-N.Y., the committee’s ranking member. “More importantly, these rules are not sufficient to guard against the problems and egregious abuses that have been revealed in the ongoing investigation by New York Attorney General Eliot Spitzer.” Securities attorneys agree that the rules are warranted, but will drastically alter the culture of Wall Street. “These changes are extremely beneficial and long overdue for investors. It’s sad the SEC had to pass a rule that tells investment firms they have to be honest with their customers,” said Bill T. Singer, a partner at Duane Morris in New York. “But from the industry perspective, the rules are troubling,” he said. The rules “aren’t just a different and new way of doing business, but they go to the core of the way business has been conducted for generations. This type of tinkering could be a disaster.” Other attorneys are more forgiving. “They may be burdensome, and a number of firms may not be happy, but they’re hard to argue with,” said Frank Goldstein, a partner at Sidley Austin Brown & Wood in Washington, D.C. “More disclosure and more transparency are in the public interest and will be helpful.” Martin Budd, a partner in the Stamford, Conn., office of Day, Berry & Howard, said the rules are a big step forward. “They may or may not totally cure the problem because they don’t require a total separation of analysts and investment bankers. But we ought to wait and see before the SEC requires such a radical action.” Pitt said the SEC is still fully engaged in a joint investigation with the New York Stock Exchange and the National Association of Securities Dealers into analyst practices. The NYSE and the NASD will report to the SEC in a year on the effectiveness of the rules. Copyright (c)2002 TDD, LLC. All rights reserved.

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