Wall Street Tries to Block Probes Into Bad Analysts

WASHINGTON -- Major Wall Street firms have drafted amendments to U.S. federal legislation that would block state securities regulators from investigating whether stock analysts misled investors, the head of the state regulators' trade group charged Monday.

The proposals are a sign of the growing debate over the states' role in the investigation of the national securities markets, which is usually handled by the Securities and Exchange Commission.

New York state's attorney general, Eliot Spitzer, led an inquiry that forced Merrill Lynch & Co. to pay $100 million to settle charges that its analysts derided stocks privately while touting them to investors to win investment-banking fees from the companies that issued the stock.

"This is shameful, cynical and brazen attempt to shut down a legitimate investigation by the local cop on the securities beat," Joseph Borg, president of the North American Securities Administrators Association, which has a 40-state task force joining Spitzer, said at a briefing Monday. "Let the investigation go on."

Borg alleged that Wall Street giant Morgan Stanley and other unnamed brokerage firms authored the amendment, copies of which he released.

Morgan Stanley's spokeswoman, Diana Quintero, declined to comment on whether the company wrote the legislation. She said of the drafts: "We would favor language that is narrowly focused on preserving uniform national regulatory standards for securities research."

Wall Street firms and even some federal regulators have expressed concern over state efforts to regulate analysts, saying that a patchwork of differing rules in dozens of states would cripple investors and markets. The states counter that cleaning up the industry is too large a task for any one regulator.

The state regulators are coordinating their efforts with the SEC, the National Association of Securities Dealers and the New York Stock Exchange. Each has come up with its own rules to rein in analysts' conflicts of interest.

Among those who favor federal regulation only is Republican Representative Richard Baker, chairman of the House Financial Services subcommittee on capital markets. Late last month he threatened to introduce legislation that would ban state efforts to impose new rules on financial firms.

"If 30 different states come up with 30 different sets of rules regulating financial service firms, that's a calamity," Baker said at the time.

The legislation being considered Tuesday was drafted by Democrat Senator Paul Sarbanes, chairman of the Banking Committee, to cure problems in the accounting industry in light of Enron Corp.'s bankruptcy. The bill would subject the accounting industry to tougher rules, including a new independent regulatory board to oversee accountants, set audit standards and adopt ethics rules.

Banking Committee members proposed 47 amendments to the bill as of last Friday's deadline, according to Sarbanes spokesman Jesse Jacobs. Included are 20 "place holders," which can be filled in with amendments like those Borg complained aboutMonday.