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Wednesday, 30 October, 2002, 18:44 GMT
Citigroup separates research arm
Citigroup chief executive Sanford Weill
CEO Weill: Research will be independent of banking
US regulators and Wall Street's biggest brokerages are set to agree on an initial set of proposals to begin the process of separating stock research from investment banking operations.

But with a formal settlement weeks away, the world's largest financial services firm has announced its own plan to separate analyst operations to avoid conflicts of interest.

Citigroup said on Wednesday that it would split off its research division, and has named an analysis expert to lead the new unit, to be called Smith Barney.

New York attorney general Eliot Spitzer
Spitzer is working on a settlement with Citigroup
In establishing the stock research unit, Citigroup chief executive Sanford Weill said it was part of his goal to get past the current controversy over conflicts of interest.

Mr Weill named Sallie Krawcheck, chief executive at stock research firm Sanford Bernstein, to head the new division.

"This structure, under Sallie's leadership, will help assure that all equity research at Citigroup will be independent of corporate and investment banking and underwriting," Mr Weill said in a statement.

Resolving conflicts

But contrary to proposals from the Securities and Exchange Commission (SEC) and New York Attorney General Eliot Spitzer, the new division will still remain under the Citigroup umbrella.

It may yet be forced to divorce itself from its parent if regulators find there are still conflicts of interest.

Citigroup, along with other large investment banking firms such as Merrill Lynch and Credit Suisse First Boston, has been held up to scrutiny over its stock research this year.

Regulators have charged analysts with giving stocks a favourable rating in order to win lucrative investment banking and stock underwriting deals.

In May, Mr Spitzer reached an agreement with Merrill in which it agreed to pay a $100m fine and fully resolve alleged conflicts between its investment banking and research arms.

Mr Spitzer is in settlement talks with Citigroup over potential conflicts of interest within its subsidiary Salomon Smith Barney.

The New York attorney has charged former Salomon star telecoms analyst Jack Grubman with being at the centre of a scheme that bribed executives with shares of hot new stocks in exchange for lucrative investment banking business.

Voluntary adoption

Separately, the SEC is laying out new requirements for firms to disclose profits and certain types of accounting, known as off-balance sheet transactions.

The markets watchdog also wants public firms to use generally accepted accounting principals (GAAP).

The changes are required under the Sarbanes-Oxley Act, passed in July, which called for sweeping corporate accounting reforms.

Once the SEC makes its proposals known, the public will have 30 days to comment on them before they take effect early next year.

However, the agency has already asked companies to voluntarily adopt the new rules.

The changes are intended to help investors get a better picture of companies' financial situation and stop corporations from hiding debts and losses.

Edmund Cowart, Eagle Asset Management
"It's a step in the right direction but it doesn't solve all the problems."

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