Compared with the brokerage industry's $1-billion annual advertising budget, the $85 million earmarked for investor education as part of December's landmark Wall Street settlement may seem a relative pittance.
Still, if it's worth having at all, it's apparently worth arguing about.
State and federal securities cops are clashing behind the scenes over how to split the investor-education portion of the $1.4-billion settlement of allegations of conflicts of interest among Wall Street analysts, people involved in the discussions say.
No one is arguing that the states should be allowed to spend the money however they wish -- building highways, for instance. But some states, including California and Texas, argue that they should be able to decide what types of investor-education programs would make the best use of the settlement money.
Other states and the Securities and Exchange Commission contend that a central fund, with grants doled out for specific education proposals, would provide the most rigorous oversight and biggest bang for the buck.
Final terms of the Dec. 20 settlement between regulators and Wall Street won't be known for weeks. But pitchmen for investor-education products -- including some national media outlets -- already have begun peppering the SEC with queries about potential grants.
"The hands are definitely out," SEC spokesman John J. Nester said.
To some skeptics, it doesn't much matter how the money is divided.
"Teaching people the ABCs of stock research is a waste of time," said Manhattan securities lawyer Jacob H. Zamansky, whose 2001 arbitration victory against Merrill Lynch & Co. and star Internet stock analyst Henry Blodget helped spark the probe by New York Atty. Gen. Eliot Spitzer that led to the mammoth settlement.
"The money would be better spent at least making a down payment on compensating investors for their losses," Zamansky maintained.
But such restitution, although compelling in principle, is all but unworkable in this case, many say.
"I feel bad about it, but there's no pragmatic way to get money back into the hands of those who lost it" because of shoddy or corrupt Wall Street stock-research practices, said Texas Securities Commissioner Denise Voigt Crawford.
Educating people to help prevent a recurrence, she added, is "the next best thing."
The $85 million, to be paid over five years, is by far the largest sum ever set aside for investor education in a securities settlement, yet the regulators will remain massively outgunned by Wall Street.
Brokerages, banks, mutual fund companies and the like spent more than $78 million a month on consumer-investment advertising last year -- and double that at the height of the bull market in 2000, according to Competitrack Inc., a New York advertising research firm.
Building investor education into the Wall Street settlement was an idea that surfaced fairly late in the months-long negotiations and was largely the brainchild of SEC Commissioner Cynthia A. Glassman, a former Cambridge University economics professor who believes that education can be the settlement's most durable legacy.
The stock market bust gave investors a painful lesson in the risks of owning individual stocks, but the lesson needs to be reinforced and supplemented, Glassman said in a recent interview.
"We want to educate investors, hopefully, to know that what they hear from one analyst is not the whole story," she said.
Glassman favors putting the money into a foundation with a board of advisors that would screen applications so the funds would go to "either a proven program or a program with an excellent chance of success."
She said research indicates that the most effective programs are done in small-group settings with an opportunity for participants to ask questions or otherwise interact with the material.
Christine A. Bruenn, Maine's securities administrator and president of the North American Securities Administrators Assn., the professional group for state regulators, said the organization has discussed a central education fund.
Under this arrangement, 50% of the money would be directed by federal authorities and the rest divvied up among the states according to population, with a minimum allotment for the smallest states.
Under such a scenario, California would get the largest state share, possibly about $5 million, depending on the size of the minimum for small states, according to one official's estimate.
But Crawford, the Texas commissioner, prefers direct control. "You can't have one-size-fits-all investor education," she said.
Texans dream about making a fortune in oil and gas investments and thus fall prey to shady wildcatting partnerships and similar schemes, Crawford said. Her staff has to tailor its education messages to that unusual corner of the securities business, she said, but such flexibility might be impossible under "a grant program with all the bureaucracy that entails."
California's top securities regulator, Demetrios A. Boutris, sides with Crawford.
"We believe each state is in the best position to decide what works for their consumers," said Kam Coveyou, spokeswoman for the California Department of Corporations.
Regulators believe that the negotiations over the final language of the Wall Street settlement may drag on through February or perhaps later, pushing back even further a decision on how to apportion the education money.
But the investor-education concept already proved useful in another context: as a bargaining chip during the settlement negotiations.
According to one state securities chief who spoke on condition of anonymity, several firms balked at the accord because they were being pressured to pay a higher fine than their rivals. However, in the case of at least one firm, when the offer was changed from a $60-million fine to a $50-million fine plus a $10-million investor-education contribution, the company readily agreed and the deal was struck, the state official said.
The brokerages evidently thought the public would view the size of the fine as a measure of a firm's relative guilt but would ignore the education assessment, the official said.
Besides the public relations advantage, investor-education contributions are cheaper than fines because they're tax deductible, noted Washington tax attorney Donald C. Alexander, former director of the Internal Revenue Service.
"Fines and penalties are bad words," Alexander said. "Education is a good word."