Big Brokerages Likely to Back Research Plan

NEW YORK -- Major Wall Street brokerages are expected to agree in theory today to a proposal that would force them to hand out stock research done by competing firms, the first step toward resolving allegations of widespread analyst misconduct, sources said Tuesday.

The plan would require large brokerages, such as Citigroup’s Salomon Smith Barney and Morgan Stanley, to make available to their individual-investor customers research reports written by independent firms, in addition to the brokerages’ own research. The plan also calls on the big firms to contribute to a fund that would subsidize the work of the boutique firms.

The plan was unveiled Thursday by federal and state regulators in settlement talks aimed at resolving multiple government probes of stock analysts’ conduct in the bull market of the late 1990s.

Those investigations have revealed that analysts at firms including Salomon Smith Barney, Merrill Lynch & Co. and Credit Suisse First Boston felt pressured to recommend stocks solely to please their firms’ investment bankers, who were competing to attract fee-rich underwriting business from companies.

By forcing brokerages to distribute the work of independent research rivals -- firms that do not have investment-banking arms -- regulators hope to prod the larger firms into giving more reliable and less biased advice on stocks.

The regulators gave the major brokerages until today to respond to the basic outline of the proposal.

The big brokerages will notify regulators that the “framework is acceptable,” one source said. That would lead to another meeting of the parties on Thursday.

However, the consent of the firms today would be only the initial step toward a hoped-for “global” settlement of analyst conflict-of-interest charges, and many obstacles would remain, sources said.

The firms would agree today only to the basic idea, with many details still in dispute among the firms themselves.

For example, there are wide differences of opinion among the brokerages over the amount each should pay to fund the smaller firms’ research, sources said.

According to some reports, the dozen or so largest brokerages would be expected to pay as much as $1 billion in total over five years.

Firms that cater only to large institutional investors have argued that they should not pay as much as those that have millions of individual investors as clients.

Also, some brokerages that have not been implicated in wrongdoing by the various federal and state probes of analysts’ practices have objected to paying large fines and to implementing far-reaching reforms, sources said.

The plan could be good for investors in the long run, said John Coffee, a Columbia University law professor.

“It would give investors more independent research,” he said. “More information is better than less.”

The proposal was pitched to the brokerages Thursday by Stephen Cutler, the Securities and Exchange Commission’s enforcement chief, and Eliot Spitzer, New York’s attorney general.

The plan calls for a consultant or panel of consultants to oversee independent stock research distributed by the major brokerages. The panel would collect the payments from the large firms, contract for research with the independent firms and ensure that no new conflicts of interest arise that would harm investors.