(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

Global Settlement with Investment Banks Announced

Ten of the nation's top investment firms have settled enforcement actions involving conflicts of interest between their research and investment banking divisions, thereby finalizing the global settlement in principle reached and announced by state and federal regulators in December 2002. The settlement followed joint investigations by the regulators of allegations of undue influence of investment banking interests on securities research at brokerage firms. The total of all payments in the settlement will be approximately $1.4 billion. SEC Chairman William Donaldson emphasized that, in their totality, the numerous obligations imposed on the firms will fundamentally change the "role and perception " of research at Wall Street firms. Echoing this, New York Attorney General Eliot Spitzer said the settlement implements " far-reaching reforms that will radically change behavior" on Wall Street.

Pursuant to the enforcement actions, the ten firms will pay a total of $875 million in penalties and disgorgement, which includes Merrill Lynch's previous payment of $100 million in connection with its prior settlement with the states relating to research analyst conflicts of interest. Under the settlement agreements, half of the $775 million payment by the firms other than Merrill Lynch will be paid in resolution of actions brought by the SEC, the New York Stock Exchange and the National Association of Securities Dealers, and will be put into a fund to benefit customers of the firms. The remainder of the funds will be paid to the states.

The distribution funds will be administered by an SEC-recommended, court-appointed distribution fund administrator, who will formulate a plan to distribute the funds in an equitable manner to customers who purchased the equity securities of companies referenced in the complaint against the firm through which the customer bought the securities. The fund administrator's plan of distribution will be subject to court approval. The firms also agreed to make payments totaling $432.5 million to fund independent research, and payments of $80 million from seven of the firms will fund and promote investor education. The new mechanism for providing independent research to investors at no cost will guarantee that retail customers have alternative views and will let analysts know that they are being judged by comparative independent analysis.

Under the terms of the settlement, the firms will not seek reimbursement or indemnification for any penalties that they pay. In addition, the firms will not seek a tax deduction or tax credit with regard to any federal, state or local tax for any penalty amounts that they pay under the settlement.

The settlement also contains a ban on IPO "spinning" under which investment firms voluntarily agree to no longer allocate to officers or directors preferential access to valuable IPO shares of companies from which they have sought or obtained investment banking business. Chairman Donaldson views this voluntary initiative as a temporary solution to the problem of spinning, vowing that the SEC will explore addressing these issues with rulemaking.

The agreement will effect structural changes in the way business is done on Wall Street. For example, the firms agreed to create firewalls between research and investment banking reasonably designed to prohibit improper communications between the two divisions. In addition, investment bankers will not be able to evaluate analysts and will have no role in determining what companies analysts cover. In this way, the settlement effects a clear separation of the research and investment banking divisions at firms, which means that analysts will be insulated and no longer be allowed to solicit business or accompany investment bankers on roadshows.

Each firm agreed to retain an independent monitor to conduct a review to provide reasonable assurance that the firm is complying with the structural reforms. The review will be conducted eighteen months after the date of the entry of the final judgment, and the monitor must submit a written report to regulators within six months after the review begins.

Additionally, the settlement calls for enhanced disclosure, including possible conflicts of interest that could affect the objectivity of a research report. Moreover, when a firm decides to terminate coverage of an issuer, it must disclose the reasons for the termination. Finally, in an effort to increase transparency of rating information, firms must publish quarterly on their Web sites a chart showing their analysts' performance, including each analyst's name, ratings, price targets, and earnings per share forecasts for each covered company, as well as an explanation of the firm's rating system.