It’s not often that federal and state securities regulators are on opposite sides of an issue regarding investor protection. But that’s the case with regards to the Securities and Exchange Commission proceedings which will decide whether to approve or strike down a FINRA plan to revamp its regulation of equity research reports and analysts.

FINRA, which is a private, national regulatory organization that oversees the securities industry and exists at the behest of the SEC, has oversight of stock research and to wants bring research of debt and bonds under its control for the first time. That effort is raising eyebrows among some regulators, who are concerned about age old conflicts of interest that exist between investment banks and research analysts who work for those banks.

Wall Street wants their cake and they want to eat it too. Wall Street’s investment banks want the fat, lucrative fees for “underwriting” public company’s stock offerings, most importantly initial public offerings, or IPOs and they want their analysts to write reports praising the very companies that are paying the bank’s fees.

Among the most significant changes in FINRA’s new plan are to shrink the so-called “quiet period” after an initial public offering, during which time analysts at investment bank underwriters cannot publish research reports or make public appearances commenting on the stock.

Under FINRA’s proposal, this period would shrink to a minimum of 10 days from the current 40-days. In addition, the current 10-day quiet period on managers of secondary offerings would shrink to a minimum of three days after the offering is complete. The rule also would drop the current 15-day quiet periods that occur before and after a lock-up agreement has expired.

In other words, the new rules would allow analysts at investment banks to start issuing reports and chattering publicly about companies that just paid huge underwriting fees much sooner than current rules permit. Investment fraud lawyers well know the damage that overzealous banks and analysts can do to the savings of Mom and Pop investors, particularly when brokers hype and sell those stocks.

State Securities regulators, the North American Securities Administrators Association or NASAA, opposed the shorter quiet periods in light of recent enforcement activity around research analyst conflicts of interest.

NASAA, is dead set against what FINRA, the national regulator, wants. Shortening the quiet periods would harm investors and provide them with less protection, according to NASAA.

The group points to FINRA actions last year fining Citigroup $15 million for numerous failures in the supervision of its research analysts and fining ten investment banks a combined $43.5 million worth of penalties over promises that they made to give positive research to win a piece of the potentially lucrative Toys “R” Us IPO.

These practices were supposed to have been prohibited in a 2003 stock analyst settlement with regulators, which exposed e-mails showing how investment banks used their research department ratings to generate IPO business.

In one stunning e-mail revealed in the Toys “R” Us case, a Citigroup analyst wrote: “I so want the bank to get this deal”. Another wrote: “I would crawl on broken glass dragging my exposed junk to get this deal.” He later added: “My whole life is about posturing for the Toys “R” Us IPO.

It seems like nothing much has changed this past decade when the investment banks were supposed to alter dramatically the practices and conduct of their research analysts.

FINRA has also announced that they plan to adopt much of the existing framework for equity research reports and analysts to proposed debt research rules. Doing so, would provide investors less protection in the sale of debt securities, such as the junk bonds and municipal bonds of issuers who are shaky, like Puerto Rico.

Investors are watching to see if the states – NASAA – will prevail in protecting them or whether the national regulator – FINRA – will water down existing rules that are supposed to protect investors. Wall Street banks will benefit from the rule changes, not investors.

Zamansky LLC are securities fraud attorneys representing investors in federal and state litigation and arbitration against financial institutions.