As a member of the U.S. House Financial Services subcommittee on capital markets, Rep. Brad Sherman (D-Studio City) offered some cautious commentary on recent congressional hearings about whether investment banking considerations have unduly influenced brokerage analyst “buy” signals.
First off, any movement by the Congress to push industry reforms will be slow, said Sherman. “Inertia” was the word he chose to describe how the Hill would address perceived industry wrongdoings.
Sherman said he has no strong beliefs on whether Wall Street analysts even are in need of reform, although he found two practices troubling. First, he’s concerned about the current practice (still legal under securities law) where an analyst privately tells large clients that a stock is a dog, but keeps the “buy” signal on the retail public.
Additionally, Sherman wondered about brokers dutifully touting stock to clients based on nudges from branch managers and a “buy” signal from the brokerage analyst not a pretty picture, if the analyst “buy” signal is a result of pressure from the brokerage’s investment banking department.
One thing Sherman was strong about: “I would beef up the SEC, and allow the agency to pretend to be ordinary investors,” in ferreting out bad industry practices. (Currently, the SEC cannot even sign on the Web, let alone visit brokerage offices, under the guise of being an ordinary investor.)
By the way, this doesn’t appear to be a Republican vs. Democrat issue. The chairman of the House Financial Services subcommittee on capital markets, Richard Baker, is a Republican from Louisiana. It was Baker who asked the toughest and most trenchant questions of the industry representatives, and who was the most dismissive of their replies.
In particular, Baker laced into the Securities Industry Association’s “best practices” proposals for reforming analyst conflicts, presented at the two-hour session. Baker said that real estate brokers in Louisiana subscribe to higher ethical standards than those proposed by the SIA for the securities industry. Later, at a press conference, Baker joked that finding an honest analyst was harder than finding a honest insurance commissioner in Louisiana.
Some in Washington note that Wall Street, while not typically in the Democratic column, did give lots of money to President Bill Clinton’s campaigns. And Wall Street is in New York, perceived as a liberal bastion again, perceptions that may make this issue somewhat nonpartisan.
Additionally, many investors are Republican it doesn’t take too much a stretch to look at the analyst problem as one of New York sharp guys siphoning money out of the pockets of Midwestern investors.
The analyst bias issue promises not to go away; Baker vowed to hold two more hearings on the topic, Meanwhile, the problem of analyst ethics is now thought by many to be issue No. 1 on the plate in the upcoming Senate confirmation hearings for Harvey Pitt, President Bush’s selection for SEC chairman. Word is that Paul Sarbanes, (D-Md.), chairman of the Senate Financial Services Committee, may also hold separate hearings on analyst bias.
Even Gibson, Dunn?
Long a stout pillar of the Los Angeles business scene has been law firm Gibson, Dunn & Crutcher, founded here in 1890 and home to clients such as Times Mirror and Security Pacific. So it was a bit of a surprise last year when Gibson selected Wes Howell, from the New York office, to be managing partner.
Blame Wall Street one more time. “The center of gravity is shifting east, if you will, and the selection of Powell reflects that,” said Steve Glover, prominent securities partner in Gibson, Dunn’s Washington office. “It’s the globalization of the markets, and the Wall Street business.”
Trying to keep abreast of client needs, Gibson has a large practice in Washington (121 lawyers) to keep Wall Streeters and others apprised of law and regulation and another big office (141 lawyers) in the Big Apple. Together, the two East Coast offices eclipse the Gibson roll-call of legal talent in Los Angeles (219 lawyers).
Will Gibson, Dunn shift its HQ east? “No, no plans for that,” said Glover. “But the power center is somewhere over the Mississippi now.”
New at Wells
It’s a rarified atmosphere at Wells Fargo’s top-floor aerie on North Camden Drive in Beverly Hills: The private client group (minimum account size $1 million) has $8 billion under management and will handle anything for a customer from a commercial loan, to trust services, to stock trades.
A new face at Wells Fargo is Kellen Flanigan, vice president, known to many money mavens from her days at the old brokerage Drexel Burnham Lambert, then Salomon Smith Barney and, most recently, the short-lived Dabney Flanigan junk bond boutique.
But after years in the finance trade, Flanigan last week said she is delighted to work for a full-service, one-stop shop. “At Dabney Flanigan, or the brokerages in the old days, you had to turn away so much business, refer clients to somebody else,” she said.
Of course, the Glass-Steagall Act, which separated commercial banks from brokerages, is now in tatters. So Flanigan can entice her 100 or so clients with everything from checking accounts to mutual funds to private money management.
The youthful Flanigan (despite more than a decade in the trade, she is just 36) also sits on the National Association of Securities Dealers District 2 committee, an eight-member board which oversees NASD regional issues in California and adjoining states.
Relying on Professionals
The rich in America increasingly are turning to investment firms to help them manage their wealth, according to a recent report by Spectrem Group, a consulting firm.
The report found nearly 75 percent of high net worth individuals those with at least $1 million in investable assets employ the use of financial advisors, a 21 percent increase since 1998.
“There’s always a train wreck at the end of one of these bull markets,” said Leonard Brisco, first vice president and certified financial manager for Merrill Lynch in Westwood. “People look around and realize they’ve been reading magazines for advice.”
Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. His new book is “The Pied Pipers of Wall Street: How Analysts Sell You Down the River,” published by Bloomberg Press. He can be reached at [email protected].
