Citigroup agrees to separate equity research from investment banking

Citigroup took a surprise step yesterday to answer conflict of interest concerns raised by US regulators, by announcing plans to hive off its stock research operations from its investment banking business and to put them under a different roof and a different brand name.

Sanford Weill, the Citigroup chairman and chief executive, said that the new equity research business, which would also include all global private client services, will be established under the old Smith Barney banner. It will be headed by Sallie Krawcheck, the chairman and chief executive of Sanford Bernstein.

The timing of the announcement was calculated. It came on the same day that all of the big Wall Street banks were due to respond to proposals from the New York Attorney General, Elliot Spitzer, for mandatory reforms on separating all research and investment banking functions.

Citigroup has come under particular scrutiny by Mr Spitzer in recent weeks. Its image has been especially tarnished by the summer downfall of its star telecoms analyst, Jack Grubman, who resigned after being accused of boosting stocks of communications giants to gain their investment banking business for the bank.

The choice of Ms Krawcheck was widely applauded. Only 37 years old, she was featured on the cover of Fortune magazine last May under the headline, "In search of the last honest analyst". Under her wing will be 12,500 financial consultants. The new Smith Barney will still fall beneath Citigroup's familiar red umbrella. And Ms Krawcheck will be answerable to Mr Weill.

He said: "This organisation change, with Sallie at the helm, is a giant step forward for Citigroup's continuing effort to rebuild investor confidence and provide our clients with the highest quality of service. Sallie is a strong advocate for research quality and independence."

It still wasn't clear whether the move would satisfy Mr Spitzer. He began his crusade to raise a wall between equity research and investment banking last spring when he unveiled internal e-mails at Merrill Lynch, in which analysts privately derided companies that they had been publicly touting. A spokeswoman for the Attorney General said of the Citigroup plan: "We'd evaluate it to see if it's part of what we're hoping to achieve."

As part of Mr Spitzer's proposed changes, the 10 biggest brokerage firms on Wall Street would pool as much as $1bn to subsidise smaller research companies that do not have investment banking arms. Moreover, the large banks would be obliged to make the research produced by their smaller rivals available to their own customers.

Ms Krawcheck has been a loud advocate of reasserting research independence. In an interview in August, she said: "I think that in order to regain confidence, the Street needs to make sure that they are serving the consumer of research; that they are keeping in mind that the person they are supposed to be serving with their research is the investor. And it's going to have to be a day-by-day, week-by-week effort to regain the confidence of the investor."