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California Sets Rules for Investment Banks

The firms must comply with new standards of conduct to do business with the state.

May 09, 2003|Kathy M. Kristof and Tom Petruno | Times Staff Writers

California Treasurer Phil Angelides on Thursday imposed new conflict-of-interest and disclosure rules on investment banks that do business with the state -- mirroring the reforms required by last week's settlement between securities regulators and 10 of Wall Street's biggest firms.

Given California's status as one of the nation's largest bond issuers, and as a major investor via its pension funds, Angelides said the state was in a strong position to force changes in Wall Street behavior to protect investors, taxpayers and pensioners.

He gave the 100-plus firms that are eligible to buy, sell and underwrite securities for the state until Oct. 1 to come up with compliance plans.

The Angelides "investment protection standards" are largely based on the reforms 10 big brokerages agreed to implement as part of their settlement with federal and state regulators of cases of alleged misconduct in the late-1990s bull market.

Those reforms include requirements that investment firms physically separate their stock research and investment banking departments; pay stock analysts based on the accuracy of their research instead of their ability to bring in banking business; and regularly disclose how accurate their stock recommendations have been.

Many on Wall Street have been expecting the Securities and Exchange Commission and other regulators to extend all or part of the reforms to the entire securities industry.

"I hope that the SEC will adopt these standards as national standards, but I don't want to wait around," Angelides said.

California issued $32.3 billion in bonds and notes in 2002 and completed 3,181 security purchases worth some $143.3 billion through the state's Pooled Money Investment Account, Angelides said. Those transactions generated fees for investment banks and brokers.

The size of the state's dealings makes it a client worth reforming for, Angelides said.

What's more, he proposed that the state's two main pension funds, the California Public Employees' Retirement System and the California State Teachers' Retirement System, also adopt the standards.

Some investment firms applauded Angelides' move. "We are doing and have always done what California is requiring," said Don Crowell, head of brokerage Crowell, Weedon & Co. in Los Angeles. His firm's four senior analysts "never have" been tied in with the company's banking operations, he said.

At Banc of America Securities in San Francisco, spokesman John Roehm said the firm expected to work with Angelides "to implement the appropriate procedures."

But Ed Wedbush, president of Wedbush Morgan Securities in Los Angeles, said he wasn't sure how far Angelides expected firms to go to physically separate research from banking. He worried that the rules could force the creation of a separate business for research, which would "not be easy to do," he said. His firm employs 18 analysts.

Angelides' standards appear to allow smaller investment firms that only underwrite bonds to avoid some or all of the reforms. He also left the door open for firms to suggest "alternative" compliance methods.

New York Atty. Gen. Eliot Spitzer, who spearheaded the states' probe of Wall Street over the last year, joined Angelides' news conference by phone Thursday to lend support.

"No number of rules and regulations will change behavior as much as the impact of the marketplace," Spitzer said. "This is an effective mechanism to control market behavior."

Some federal regulators have previously voiced concerns about states acting independently and creating a hodgepodge of securities regulation. However, the SEC expressed support for Angelides' rules Thursday.

"Any move in the direction of compliance with the standards laid out in the settlement by a broader range of investment banks than those subject to the commission's action is welcome," an SEC spokesman said.

Spitzer said he wasn't concerned about the risk of a hodgepodge of state and federal securities reforms. "I haven't seen any patchwork development," he said. "There was an inadequate federal response to the problem. Quite frankly, if there wasn't a state response we would never have had a global resolution."

Angelides, widely seen as one of the leading Democratic contenders for governor in 2006, has tried to raise his statewide political profile as treasurer, casting himself as a successful businessman with a social conscience and a vision to address California's problems.

Times staff writer Gregg Jones contributed to this report.

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