Louisiana to Do Business Only with Firms That Separate Investment Bankers and Research Analysts

BATON ROUGE, LA – State Treasurer John Kennedy met with New York State Attorney General Eliot Spitzer in New York on Monday, August 12, to initiate ways Louisiana can protect investments of taxpayer money from investment banking and management firms that do not prevent internal conflicts of interest.

New York Attorney General Eliot Spitzer (l) joined by: North Carolina Treasurer Richard Moore; New York Comptroller Carl McCall; California Treasurer Phil Angelides; Louisiana Treasurer John Kennedy.

The goal of this meeting was for Louisiana and other states to come together to send a clear message to the leading financial firms in America, said Treasurer Kennedy. We will not invest our money with you unless you make a public effort to play by the rules, to play fair, and to tell us the truth about what’s going on in your company.

States are pushing for financial management firms to adopt the Merrill Standard that resulted from a $100 million settlement between Merrill Lynch and the State of New York. General Spitzer and Merrill Lynch reached an agreement requiring that the investment firm totally separate its stock analysts research from the firms underwriting and other business to prevent all potential investor damaging conflicts of interests.

National financial management firms such as investment banks have two main lines of business. One division, which develops buy and sell recommendations on stocks and bonds, focuses on research, where analysts study stocks in the U.S. and international markets and objectively give opinions and ratings on them. The other divisions focus is marketing, where investment bankers help public companies market their stock to investors in order to raise capital.

These two lines of business should operate separately and independently from one another. A conflict of interest can arise if analysts give good ratings to poor stocks so investment bankers will be better able to market them to the public. This practice improves the bottom line for a financial management firm and a company selling stocks, but it can hurt individual investors.

New York Attorney General Spitzer and I met for almost three hours, said Treasurer Kennedy. He explained in detail his negotiations with Merrill Lynch and Co. in which Merrill Lynch agreed to pay $100 million and eliminate the potential conflicts of interest between its investment bankers who sell stocks and bonds and its analysts who provide investors with investment advice.

I think we can really make a difference in stopping potential investment conflicts of interest involving the funds invested by our state, said Treasurer Kennedy. We invest a large amount of money in fixed income and equity markets, and we hire a significant number of firms to handle bond transactions for the state. Money talks, and hopefully, it will make investment firms listen.

Treasurer Kennedy serves as Chairman of the State Bond Commission, which issues millions of dollars in bonds for state and local government. The State Treasury also works with management firms to invest $1 billion in the Millennium Trust Fund, $900 million in the Louisiana Education Quality Trust Fund, $800 million in the Medicaid Trust Fund, and $3 billion in the State General Fund. In addition, Treasurer Kennedy sits on the board of trustees of Louisiana’s four state retirement systems. Investments in these pension funds total $18 billion.

Sarah Mulhearn
(225) 342-0012