Reshaping Research: SEC Settlement Seeks to Eliminate Conflicts; Goldman Sachs is Ahead of the Curve

Theme: Clients

A US$1.4 billion settlement is reached in 2003 between the Securities and Exchange Commission and ten of the nation’s largest investment firms, including Goldman Sachs, compelling them to address conflicts of interest between the firms’ securities and investment banking businesses. At Goldman Sachs, efforts to ensure research independence are already underway.

As the bursting of the dot-com bubble of the late 1990s reverberated through the financial services sector, certain of the industry’s practices came under heavy scrutiny. A major area of focus at the time was the inherent conflict of interest that existed between the investment research and investment banking divisions of the nation’s largest integrated investment banks.

In the early 2000s, individual investors brought lawsuits totaling hundreds of millions of dollars against firms and even individual analysts whom they argued misled them with compromised research. On April 28, 2003, the Securities and Exchange Commission (SEC) announced enforcement actions against ten of the United States’ largest investment firms, including Goldman Sachs. Among other things, the Global Analyst Research Settlement aimed to eliminate the potential for the inappropriate influence of fee-generating businesses on firms’ research recommendations. In addition to paying a collective total of US$1.4 billion, the ten firms would come under new ethics rules and be required to build barriers between their investment banking businesses and their equities analysts.

At Goldman Sachs, a movement was already afoot to reinforce the independence of the firm’s research efforts. In June 2002, Goldman Sachs Chairman and CEO Hank Paulson delivered remarks to the National Press Club in Washington, DC on the criticality of improved accounting and auditing practices, strong corporate governance, stressing transparency, integrity, and proper alignment of interests among management as key principles. That same year, the firm reorganized its Global Investment Research Division to further promote high-caliber, independent research in all areas of the firm.

In 2005, Goldman Sachs launched a new program for its senior leaders called the Chairman’s Forum. That year, the firm held 25 sessions, each more than six hours in length, with approximately 1,200 of the firm’s managing directors around the globe focused on business judgment and accountability. Through case studies and small group discussions, the Forum aimed to equip senior business leaders with the tools to exercise difficult judgments through teamwork and lead by example in managing conflicts of interest. In 2006, the program was extended to the firm’s 7,000+ vice presidents.


This article was originally published as part of a series commemorating the 150th anniversary of Goldman Sachs' founding in 1869.