Oct 18

Will the Spitzer Wall Ever Come Down?

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Since the global settlement of various enforcement actions in the investment banking industry in 2003 and 2004 timeframe (known as the “Spitzer Settlement” or “Global Settlement”), the industry has maintained a Chinese wall between equity research and investment banking functions. The purpose of the firewall is to prevent firms from putting out misleading research in favor of firm clients.


Congress recently acted to change that rule for “emerging growth companies,” (EGCs). Section 105 of the JOBS Act specifically disallows any regulation or rule that would restrict securities research analysts from participating in any communication with management of an EGC that is also attended by an investment banker from the same organization.


FINRA recently amended its rules to bring them in-line with the mandates of Section 105, at least for those banks not subject to the Global Settlement.


But the SEC has refused to allow the full import of this change to take effect. Instead of adopting a rule to supercede the portion of the Global Settlement that sets up the Chinese wall, as would be permissible under its terms, the SEC has decided to use the Global Settlement as an excuse as to why Section 105 will not be effective to take down the firewall for most of the industry (all parties to the Global Settlement).


Thus, only small investment banks or new ones can take advantage of the loosened restrictions. And the Spitzer wall remains firmly in place for the rest of the industry.