The Investment Protection Standards (IPS) – which are based on reforms negotiatedby New York Attorney General Eliot Spitzer, the Securities and Exchange Commission (SEC) and 10 major investment banks – are a set of 15 standards designed to prevent conflicts of interest and corporate abuse. Among the requirements is that banks physically and administratively separate their research and investment banking practices, creating “firewalls” to prevent any communication between the two, according to a news release.
Among the other requirements:
- research services must have their own dedicated legal and compliance staff
- research services are prohibited from participating in efforts to solicit investment banking business, and analysts may not participate in investment banking road shows
- written criteria must be established for compensation decisions
- investment banking units must have no input into an analyst’s professional evaluation
- the firm’s review committee is charged to review all changes in ratings, if any, and material changes in price targets, if any, contained in the firm’s research reports. The rules also call on that committee to conduct periodic reviews of research reports to determine whether changes in ratings or price targets, if any, should be considered – and to monitor the overall quality and accuracy of the firm’s research reports
- on a quarterly basis firms must post on their websites a chart showing their analysts’ performance, including each analyst’s name, ratings, price targets, earnings per share forecasts for companies, and an explanation of the firm’s rating system
- firms must conduct an annual review to provide reasonable assurance that the firm is in compliance.
“The settlement by the SEC covered the 10 largest investment banks and these standards will cover the rest of the firms we do business with,” said Sean Harrigan, President of CalPERS. “Our members can now be assured we will leave no stone unturned when it comes to evaluating which investments banks have the highest standards of ethics.”
The CalPERS requirements go beyond those contained in a deal struck between Wall Street firms and regulators. Drafted by California State Treasurer Phil Angelides, whose state did at least $170 billion in financing business in 2002 through investment and bond issues, the new guidelines are only the latest in a series of attempts by Angelides to strengthen corporate and investing reform policies (See A Call to Action) .
Last month, Angelides unveiled similar standards that were adopted bythe California State Teachers’ Retirement System(CalSTRS), which does business with about 300 banks and broker-dealers.In March he unveiled a plan to combine the resources of both CalPERS and CalSTRS to create an office charged with pushing aggressive corporate and market reforms to deal with scandals that have socked investors with huge losses (See Angelides Proposes CalPERS, CalSTRS Corporate Watchdog Unit ). Last December Angelides also put forth his ” Power of the Purse” principals, a set of guidelines for investors to follow when deciding which companies to invest (See Angelides Posits Purse Power ).
Angelides is far from alone in his crusade. In May,California State Controller Steve Westly – whosits on the board of both CalPERS and CalSTRS –asked the SEC to provide “reasonable safeguards” in the hedge fund industry. Among the safeguards that Westly supports is increased disclosure for hedge funds.
“I support more disclosure, transparency, and accountability for the hedge fund industry – not handcuffing the investment managers. The hedge fund industry is becoming a more important part of the investment landscape and we need to make sure that we protect pension funds and individual investors,” Westly said (See CA Comptroller Calls For Hedge Fund Disclosure ).