Thank you Mr. Chairman.
We are here today to learn more about the recent completion of enforcement actions against ten of the nation's top investment firms. These actions finalized the global settlement announced by regulators last December. The conflicts of interest between the investment bankers and securities analysts in these firms harmed investors who never suspected that the ratings and price targets were, to quote the words of one analyst, "…fairly meaningless…." This analyst went on to write "…the little guy who isn't smart about the nuances may get mislead, such is the nature of my business."
Starting with the House Financial Services hearings during the summer of 2001, case after case has revealed that the largest investment firms viewed their securities analyses, not as a vehicle to attract investors, but as a tool to attract investment banking business. This has been repeatedly demonstrated through common practices such as "investment banking bonuses" and other financial compensation purely based on the amount of investment-banking business an analyst could bring to the firm. Example after example has been uncovered of analysts who knew there was no truth to their reports and rarely, if ever, wrote a negative report on a company.
We are all thankful that this settlement contains strong improvements of investment firms to dramatically reform their future practices, including separating the research and investment banking departments at the firms, how research is reviewed and supervised, and making independent research available to investors. However, I am concerned that only half of the fines and disgorgements are going to compensation funds to benefit defrauded investors. For instance, though North Carolina law directs these fines toward investor education, unfortunately most other states do not ensure that such funds are used to benefit investors.
It would be my hope that more states could follow the example of North Carolina and use this money for greater investor education efforts and to assist investors who have been harmed.
I want to thank you all for the considerable time and effort it took to arrive at this settlement. I hope the fines and reforms are enough to ensure that fraud of this nature and magnitude can be prevented in the future.