Big banks see an opportunity in the law, which loosens
restrictions on disclosures related to some smaller companies. But
the banks are consulting lawyers before taking any action.
Wall Street is examining whether it will benefit from a little- known section of a broad new law that President Barack Obama was expected to sign Thursday.
Provisions tucked into the Jumpstart Our Business Startups, or JOBS, Act will roll back some major securities regulations and parts of a legal settlement reached almost a decade ago. That 2003 settlement built a wall between Wall Street research analysts and investment bankers, in an effort to prevent analysts from improperly promoting stocks to help their firms drum up business from corporate clients.
Under the new legislation, some of those restrictions would be eased in connection with initial public offerings of stock and other disclosures by smaller companies.
Wall Street senses an opportunity. Davis Polk, a large law firm that caters to Wall Street, wrote in a recent note to clients that the JOBS Act represented "the most significant legislative loosening in memory of restrictions around the I.P.O. process and public company reporting obligations."
Almost every big bank on Wall Street, including Bank of America, Goldman Sachs and Morgan Stanley, is poring over the provisions, which some firms say will open a new front for business. Several firms contacted Wednesday said they were studying the JOBS Act and were eager to see how regulators would begin to interpret the legislation. One Wall Street executive familiar with the JOBS Act but who declined to be identified said the law would give firms "more flexibility" in covering so-called emerging growth companies, which have less than $1 billion in annual revenue.
The new legislation passed through Congress over the objections of regulators, past and present, who warned of the potential risks to investors.
"It is a bad sequel to a bad movie," said Eliot Spitzer, the former New York State attorney general. "It shouldn't be called the JOBS Act. It should be called the Bring Fraud Back to Wall Street Act."
Mr. Spitzer was a crucial architect of the 2003 settlement, reached after the dot-com bubble's collapse, in which investors lost millions of dollars investing in companies that regulators later said had been improperly hyped by analysts. In some cases, analysts were privately disparaging the same stocks they were telling investors to buy.
Regulators contended that analysts had been influenced by their investment banking colleagues, who were seeking to win lucrative business from hot companies. The terms of the settlement, some aspects of which echoed the Sarbanes-Oxley Act of 2002 and other regulations, barred any communication between bankers and analysts in the same firm unless monitored by a compliance officer, a stricture aimed at reducing the influence of bankers on research.
There is concern that the JOBS Act will unwind that provision for emerging growth companies. Lawmakers argued that the current restrictions had stifled the ability of start-up companies to raise capital and amplify their profiles.
The JOBS Act also will allow banks to publish research reports about such companies while the bankers are helping take them public. The potential conflict, regulators say, is that bankers might use
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