Suggestions To Address Customer Concerns Raised by the $1.4 Billion Global Settlement

ews of the $1.4 billion global settlement is on the minds of everyone, including your customers. So what now? Reps really have three choices in addressing what undoubtedly will be scores of customer questions. Choice One: dodge all questions. Choice Two: deny that there is a problem. Choice Three: recognize that a serious problem exists and give advice.

I do not believe reps will benefit by dodging their customers' questions. Likewise, we know that the Philip Purcell approach backfired. After all, when on the same day that the global settlement was announced, Mr. Purcell told institutional investors that he did not "see anything in the settlement that will concern the retail investor about Morgan Stanley", he immediately was chastised, both in the press and by SEC Chairman Donaldson. The SEC chief wrote to Mr. Purcell, expressing that his views expressed a "troubling lack of contrition" for what were "extremely serious" allegations against Morgan Stanley. Purcell quickly changed his tune.

Clearly, the most sensible response for reps is Choice Three: recognize the problem and give advice. What kind of advice? I believe reps should do five things.

First, understand that you, the reps, were victims too of conflicted, unethical or fraudulent research. As victims, share with your co-victim customers the fact that you too were duped.

Second, assist your customers in preparing claims to be filed with the SEC Distribution Fund. Know the lists of stocks and brokerage firms for which claims may be filed with the Distribution Fund. Know that arbitration is a viable alternative for claims falling outside of the Distribution Fund, or for simultaneous filings if you believe (as most do) that the Distribution Fund will not be able to satisfy all customer claims.

Third, if you, the rep, is sued in arbitration, contest it vigorously, and not through your brokerage firm's "free" legal counsel, whose conflict of interest in representing you, and your brokerage firm, should be apparent to you. Along those lines, gather now the mountains of evidence that is available and becoming available on the Internet. These documents include all of the regulators' complaints against the brokerage firms as well as the exhibits, such as emails, which will help you prove that you, the rep, neither knew nor should have known about the investment banking and research analyst shenanigans.

Fourth, moving forward, know that your brokerage firm will be required to purchase independent, high quality, third-party research for customers over the next five years. I recommend that you routinely and carefully review this research and share it with your customers anytime you discuss your firm's own research with them. I discussed the important legal requirement of having a reasonable basis for your recommendations in one of my previous On Wall Street columns (What To Do About Research, June, 2002). I noted that reps face liability if they have "oversold" their firm's research. The third-party research requirement, on the firm's dime, is an excellent way for reps to avoid such liability.

Fifth, moving forward, know that your brokerage firm will be required to provide the public with the tools necessary to assess the usefulness of an analyst's research. In particular, firms will disclose quarterly the price targets, ratings, and earnings per share forecasted in their research reports. I recommend that reps stay current with these report cards, and share the results with their customers.

By following these suggestions, reps ultimately may be able to restore their customers' confidence, at least in the reps themselves!