SEC Urged to Take Lead in Reforms

A senior House Republican said Tuesday he fears “the precedent and ramifications” should New York Atty. Gen. Eliot Spitzer win concessions from securities firms to separate their investment banking and research departments.

Rep. Richard Baker, chairman of the House Financial Services subcommittee on capital markets, urged the Securities and Exchange Commission to lead any industry reform “because of the need for uniformity” in the markets, according to a letter he wrote to SEC Chairman Harvey L. Pitt.

Spitzer, a Democrat, has been negotiating with Merrill Lynch & Co. about structural changes since he released e-mails in April that he said portrayed the largest securities firm’s Internet analysts as “quasi investment bankers.” In the e-mails, analysts and their managers conceded Merrill’s research was influenced by the securities firm’s banking relationships.

New policy is best achieved through an open process “that welcomes diverse perspectives and the free exchange of ideas, not through dictates arrived at by the few and outside the public’s view,” Baker (R-La.) said in the letter, which was released by his office.

Pitt last week said the SEC started a formal inquiry into analysts’ potential conflicts of interest. Sources said Tuesday that the agency has begun to request documents from major brokerages.

On May 8, the SEC will consider a proposal Pitt has endorsed, forbidding analysts from reporting to investment bankers and being paid from banking revenue.

In a statement Tuesday, Spitzer said that while he agrees there’s a need for uniformity, before his investigation “it was abundantly clear that no serious fundamental reforms were occurring in the industry to address conflicts of interest in the securities markets.”

Hearings Baker chaired “failed to elicit any of the evidence necessary to bring about such reforms,” Spitzer wrote. “Moreover, no other regulatory body stepped forward to prevent abuse from occurring.”

Spitzer said in the statement that brokerage reform should include cutting any link between analysts’ compensation and banking, strengthening the “firewall” between banking and research and increasing supervision of analysts to detect pressure from banking.

He said the proposed regulations Pitt endorsed “fall short of what should be legislated in this area.”

Meanwhile Tuesday, the SEC proposed rules to make companies report “critical” accounting choices used to determine sales and other data. The proposal would require companies to reveal how they arrived at accounting estimates about “highly uncertain” finances, such as projected annual revenue over a five-, 10- or 20-year period.

The rule change also would mandate disclosure of accounting policies adopted in the last year that significantly affect a company’s financial condition.

The rules, which will undergo public comment over the next two months, follow Enron Corp.’s collapse last year amid charges that it hid massive financial problems.

Since then, the SEC has been under pressure from Congress to force companies to be more forthright with investors.