State Treasurer Puts Brokerage on Notice

NEW YORK -- California Treasurer Phil Angelides may suspend a large financial services firm from doing business with the state over what he said was the company’s refusal to adopt new stock analyst reforms.

Angelides also is expected to send letters today to 50 other securities firms warning of similar action if they do not adopt reforms by Jan. 15.

The moves are part of an effort by Angelides to force Wall Street to institute tough new rules governing the conduct of their stock analysts.

He is trying to use California’s clout as a major player in the municipal bond market to ensure that investment banks adopt meaningful reforms after a succession of scandals that have eroded investor trust in Wall Street.

In a letter Wednesday, Angelides told HSBC Securities (USA) Inc. that he would bar the firm from doing brokerage work for the state unless it agrees by mid-November to enact reforms involving analyst independence.

A spokeswoman for HSBC, a New York-based institutional brokerage, said the firm recently adopted the changes and was in the process of notifying Angelides that it had done so.

Several government investigations have turned up evidence that stock analysts in the late 1990s often recommended stocks of dubious merit to investors as a way to lure investment banking work to their firms.

State and federal regulators are holding settlement talks in which major Wall Street firms probably would agree to pay large fines and boost analyst independence.

A meeting between regulators and representatives of the leading firms is scheduled for today in Washington.

Angelides sent a letter to Securities and Exchange Commission Chairman Harvey L. Pitt on Wednesday urging that the SEC quickly adopt strict analyst rules.

Until new standards are developed, Angelides is trying to force firms to make changes by threatening to withhold business from them.

Angelides sent letters in July to 54 firms that either underwrite California bonds or provide brokerage services to the state.

He demanded that they adopt reforms that Merrill Lynch & Co. agreed to with New York Atty. Gen. Eliot Spitzer. The reforms include separating stock research from investment banking and prohibiting bankers from controlling analyst compensation.

The firms replied that they had either made the reforms or would do so by Dec. 15.

When Angelides studied the responses, however, he found that only three had fully complied.

“We want to make sure that we’re not just getting lip service,” Angelides said.

HSBC is one of many firms that trade securities as part of California’s management of its short-term finances.

The state did transactions worth $8.4 billion with HSBC between 1997 and this year.

Of the 53 brokerages the state dealt with last fiscal year, HSBC was ranked No. 14 based on dollar volume.

The HSBC spokeswoman said the firm recently had come into full compliance.

“We very much put an emphasis on integrity,” she said.