HOT<<The Clinton hangover.Time to pay for the party>>
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Wednesday June 13, 12:15 am Eastern Time
TheStandard.com
Reining In the IPO
By Anya Schiffrin
If anyone can call Wall Street onto the carpet, it's Washington. Investment banks long have operated in a culture of secrecy and privilege. But when the banks get careless, regulators swarm in and - in extreme cases - legislators throw down more laws.
Banks are loath to confront either regulators or new laws. But in the wake of the IPO boom of the late '90s, they could end up facing both. Securities and Exchange Commission investigators have been probing several top banks over their IPO allocation practices. And this week, congressional hearings will take place on IPO allocations as well as potential conflicts of interest among investment banks' research analysts.
Just what happened and who acted inappropriately will take months to sort out. But if evidence of wrongdoing emerges, the SEC could push for new regulations to make sure the excesses of the '90s aren't repeated. "The SEC does not spend that much time and limited resources without wanting proof they have been successful," says Columbia University law professor John Coffee.
There will almost certainly be some SEC enforcement and indictments. If it turns out there were only a few transgressions, the agency will likely hold off on a raft of new rules, and the securities industry will instead adopt self-regulatory measures.
But if the SEC wants to get really tough, it could in theory make it impossible to allocate more IPO shares to clients willing to pay more for them. That's how the alleged transgressions came about, with dibs going to favored customers. Or the SEC could throw out this system altogether by mandating a blind auction system similar to that used by small banks like W.R. Hambrecht. It could even try to introduce rules preventing IPOs from surging several times over. For now, such extreme measures seem unlikely.
SEC investigators, as well as officials at the National Association of Securities Dealers and the U.S. Attorney's Office, have been trying to find out whether banks failed to properly disclose allocations of IPO shares to clients in exchange for higher-than-standard commissions or agreements to buy more shares in the open market.
Credit Suisse First Boston is a focal point in the probes, and Bear Stearns, Goldman Sachs and Morgan Stanley Dean Witter have also been contacted by regulators. "The SEC has its long knives out and is dying to get someone," says one West Coast tech banker.
Meanwhile, concerns are mounting over potential conflicts of interest by analysts who recommended speculative Internet stocks of their banks' clients. Laura Unger, SEC acting chairwoman, spoke out recently on such practices. And Harvey Pitt, likely to be appointed SEC chairman, is expected to be tough on fraud.
Whatever the measures to curb excesses, the SEC and Congress are unlikely to fix the more fundamental problem of small investors shut out of hot offerings. There will always be too few shares to go around for the best IPOs. "I don't think the government wants to systematically change the structure of the IPO market," says Coffee. "Retail investors will not get access to IPO shares as long as they are scarce."
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