BUS202: Principles of Finance

The Global Settlement was an enforcement agreement to address issues of conflict of interest within the SEC and other big investment companies.

TERMS

• IPOs

  An initial public offering (IPO) or stock market launch is a type of public offering where shares of stock in a company are sold to the general public, on a securities exchange, for the first time.

• conflict of interest

  A conflict of interest (COI) occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other.

The Global Settlement was an enforcement agreement reached on April 28, 2003 between the Securities and Exchange Commission (SEC), National Association of Securities Dealers (NASD), New York Stock Exchange (NYSE), and ten of the United States's largest investment firms. The agreement was meant to address issues of conflict of interest within their businesses.

The central issue at hand that had previously been decided in court was the conflict of interest between the investment banking and analysis departments of ten of the largest investment firms in the United States. The investment firms involved in the settlement had all engaged in actions and practices that had aided and abetted the inappropriate influence of their research analysts by their investment bankers seeking lucrative fees. A typical violation addressed by the settlement was the case of CSFB and Salomon Smith Barney, which were alleged to have engaged in inappropriate spinning of "hot"IPOs and issued fraudulent research reports in violation of various sections within the Securities Exchange Act of 1934. Similarly, UBS Warburg and Piper Jaffray were alleged to have received payments for investment research without disclosing such payments in violation of the Securities Act of 1933.

Enforcement Actions

As part of the settlement decision published on December 20, 2002, several regulations designed to prevent abuse stemming from pressure by investment bankers on analysts to provide "favorable" appraisals were put in place. Most importantly, these firms would have to literally insulate their banking and analysis departments from each other physically and with Chinese walls. In addition, budget allocation to management in research departments will be independent of investment departments. Research analysts will also be prohibited from going on pitches and roadshows with bankers during advertising and promotion of IPOs. Similarly, the Global Settlement also increased the IPO "quiet period" from 25 days to 40 days. Finally, research analysts' historical ratings must be disclosed and made available.

Other than these regulatory actions, the firms involved in the settlement were required to pay fines to their investors, to fund investor education, and to pay for independent third-party market research. A total fine of $1.435 billion was assessed and is described in the table below.