Research Still a Problem, NASD Fines Three Firms

If you are a rep who works for Citigroup or Morgan Stanley, you might be annoyed to see your company’s name in the papers for running afoul of the new conflicts of interest and research.

If you are a rep who works for Citigroup or Morgan Stanley, you might be annoyed to see your company’s name in the papers for running afoul of the new conflicts of interest and research. (Credit Suisse Securities, a predominantly institutional broker/dealer, was also named.) On the other hand, you might not care—since Registered Rep. magazine has found over the years that most financial advisors use many different research sources and generally don’t cite their own analysts to clients anymore. (For more on that, please read "Indie Research: A Non-Event So Far".)

The fines issued were small: $350,000 for Citigroup, $225,000 for Credit Suisse and $200,000 for Morgan Stanley; they are the result of the firms’ failures to review and certify proper disclosure of price target valuation methods and risks, despite repeated warnings from NASD. “The failures on the part of Citigroup, Credit Suisse and Morgan Stanley to abide by these rules undermine the important disclosure obligations mandated by NASD in the wake of the research analyst conflict-of-interest scandals,” says James Shorris, executive vice president and head of enforcement. “These cases should send a clear message to firms that NASD expects full compliance with the research disclosure requirements, especially after NASD notifies a firm that its practices violate our rules.”

Specifically, the firms violated provisions of rule 2711, the research analyst disclosure provision, which was established in 2002. That year New York Attorney General Eliot Spitzer began investigating Merrill Lynch for analyst improprieties and eventually uncovered widespread improprieties. The “global research settlement” was announced in April 2003 and implicated 10 Wall Street firms, resulting in $1.4 billion in fines. Citigroup paid $400 million, the largest fine; Credit Suisse paid $200 million; and Morgan Stanley paid $125 million. ( Click here for more information.)

One Smith Barney advisor in New York says he read a notice about the new fine last week, but says it hardly registered with reps. “It’s barely a rounding error,” he says. “It looks like their pickin’ up scraps from the settlements in 2003,” he adds.

Turns out that isn’t too far off. “This is a follow-up, in terms of compliance, to that settlement,” says NASD attorney James Day. These three firms were given repeated notices that their compliance measures weren’t sufficient and didn’t heed the warnings. There have been roughly 50 cases involving rule 2711 since it was established, says Day. Most recently, Sanford Bernstein and its banking industry analyst Brad Hintz were fined $550,000 for allegedly selling shares of a company he had a “buy” rating on.

“The rule is meant to give investors confidence when considering an analyst’s price target and how they reached that particular target,” says Day. Day says the nonmonetary portions of the fines are just as significant as the fines. “Citigroup and Credit Suisse must now undergo a certification process of all analyst reports,” says Day. “That further helps investor confidence and hopefully sends a message to other firms that compliance with this rule is important.”

For the Smith Barney advisor it amounts to little. He says his firm’s research is as good as any. But that doesn’t stop him from using other sources, though. “Since we’re managing the money for our clients, we get our research from wherever we please,” he says.

For more on the settlements, please read:

"Analyzing the Analysts"

"Historic Settlement Doesn’t Target Brokers—But You’re Hardly Home Free"

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