A legal agreement between Morgan Stanley (NYSE:MS), Citigroup (NYSE:C) and the Securities and Exchange Commission created a firewall which separated the investment banking units of the companies form research analysts. A request to have that firewall changed was denied by Judge William Pauley III of the Southern District of New York.
The reason the firewall was erected in the first place was the result of the bubble bursting in the tech industry where it was found by regulators that research analysts had publicly promoted some of these companies while in private e-mails they attacked them. Some of the companies were also clients of investment banks, which led the SEC to file the complaints.
What the firewall entails was for the investment banking units and research departments to not be allowed to communicate with one another unless in the presence of a compliance officer, and that there be separate staffs for each department.
What I found interesting in all of this is the SEC reviewed the request and had signed off on it before the banks made the request for the changes. The banks offered that approval from the SEC to the judge, which he obviously disregarded.
This is interesting because the SEC has done this in other unrelated cases concerning banks, with one being the first settlement agreement with Bank of America for $33 million in penalties for their role in acquiring Merrill Lynch. The SEC urged the judge to approve the settlement, which of course was rejected and a much higher settlement put in place.
It seems the SEC understands the inner workings of the banks better than judges, and know how some of the regulations and settlements have effected the banking industry, which makes it harder for them to do business.
Another element is it seems the judges aren’t trusting the SEC in these cases, as they’ve overridden them more than once when the SEC has dealt with settlement issues with the banks.
