Veteran banker sees flaws in Spitzer reforms
NEW YORK (Reuters) - George Ball, the former E.F. Hutton president, wants people to listen to his ideas for reforming the 2003 research reforms.
Ball, chairman of Houston investment bank Sanders Morris Harris (SMHG.O), has lately grown worried that sweeping analyst research reforms imposed by then-New York Attorney General Eliot Spitzer and the Securities and Exchange Commission are doing more harm than intended.
The new rules, designed to make research more reliable by eliminating investment banking conflicts, are an obstacle to Wall Street firms and, by extension, have fueled an erosion in research coverage. Regulators, Ball told Reuters, need to amend the global research settlement.
"What happened five years ago was a little like a couple rushing to get married in Las Vegas," he said in a phone interview. "If you do something in haste, after a while you can see where some parts are unnecessary or just unwise."
As a top executive at Sanders Morris, a small investment bank specializing in energy companies, Ball says every day he sees the downside to the SEC's efforts to insulate analysts from the influence of investment bankers.
Ball joins a growing chorus of industry executives and politicians who complain that U.S. regulation is bad for business and drives listings to foreign markets.
This week Frank Quattrone, the star investment banker who fended off obstruction-of-justice charges for four years, at a Stanford University conference said "the Spitzer initiative" has made it tougher than necessary for start-ups to go public.
Small companies for years have complained that Wall Street, which under the reforms could not longer pay analysts with banking fees, responded by slashing research coverage.
KEEP IT SIMPLE
While Ball acknowledged brokerages let investors down with dishonest appraisals, he argues these problems can be better solved with a simpler set of rules backed by strong penalties.
The current rules, he said, can be circumvented by less ethical people and slow things down for everyone else.
For example, conversations between bankers and analysts must be monitored by a lawyer. Companies presenting information to a firm must participate in separate meetings for analysts and bankers. Email exchanges must be vetted by counsel.
"In hindsight, the rules have really hindered the proper flow of information between bankers and analysts. That's foolish and unnecessary," he said.
It also can lead to lost business opportunities, he said.
"If an analyst is constrained from giving information to a banker, the ability for this banker to gain business has been hurt," he said.
Instead Ball argues for a new set of regulation that would preserve the integrity of research while freeing the exchange of ideas within firms.
Among his suggestions, analysts should not be allowed to help solicit banking business or get paid for specific deals. Yet analysts and bankers would be allowed to communicate with each another on matters of investment or industry knowledge.
"The Spitzer settlements rectified wrongdoing. Time has shown that some of the strictures work against, not for, improved investor protection," he said. "Enough time has passed that we can make those protections better.
To be sure, it was only a few years ago that the likes of Jack Grubman and Henry Blodget touted stocks to please corporate clients despite private worries about their prospects. Investors demanded change after losing billions of dollars on speculative technology firms.
Ball meanwhile helped run Hutton, once the fifth-largest U.S. brokerage, which became ensnared in a check kiting scandal in the early 1980s.
So far, Ball said he has not made any formal complaints to regulators, though he intends to ask the Securities Industry and Financial Markets Association to take up the fight. He notes others in the industry also are starting to speak up.
"People are sensing the shoe no longer fits and they want relief," he said.
