The U.S. Securities and Exchange Commission today announced a settled enforcement action against Banc of America Securities LLC for failing to safeguard its forthcoming research reports, including analyst upgrades and downgrades, and for issuing fraudulent research.

Under the terms of the settlement, BAS agreed to a censure, a cease-and-desist order, and payment of US$26 million in disgorgement and penalties. The US$26 million will be put into a Fair Fund to benefit customers of the firm. The firm will also retain an independent consultant to conduct a comprehensive review of the firm’s internal controls to prevent the misuse of material nonpublic information concerning forthcoming research. The firm also agreed to certify that it has implemented structural and other reforms of its investment banking and research departments to bolster the integrity of the firm’s equity research. BAS consented to the entry of the order without admitting or denying the commission’s findings.

The commission’s order finds that, from January 1999 through December 2001, BAS experienced a breakdown in its internal controls designed to detect and prevent the misuse of forthcoming research reports by the firm or its employees. BAS sales and trading employees learned of forthcoming research changes, including upgrades and downgrades, on multiple occasions during the period. At the same time, BAS did not provide clear or effective policies and procedures regarding the handling or control of such information. As a result, in at least two instances, BAS traded before research reports were issued. The commission’s order also finds that BAS failed to address conflicts of interest that compromised the independence and integrity of its analysts. These conflicts resulted in the publication of materially false and misleading research reports on Intel Corporation, TelCom Semiconductor, Inc., and E-Stamp Corp.

In 2004, in connection with this investigation, the commission censured BAS and ordered the firm to pay US$10 million for failing to produce documents and engaging in dilatory tactics. Today’s action ends the commission’s investigation, it said.

“We are determined to plug the improper leak of information on Wall Street,” said Linda Thomsen, director of the Commission’s Division of Enforcement. “Today’s action makes it clear that firms must have appropriate safeguards on all their nonpublic information, including upcoming research reports.”