On July 22nd, the New York Society of Security Analysts (NYSSA) held a discussion panel concerning the expiration of the Global Research Analyst Settlement, a 2003 judgment against two individuals and 12 brokerage firms in connection with their research analyst practices. The settlement, which provided structural reforms in the relationship between investment banking and research, expired this month; and the NYSSA panel discussed the possibilities and opportunities ahead for independent research firms. Participating in the panel discussion was none other than Dave Gentry, RedChip’s President and CEO.
As noted on the NYSSA website, the panel discussed such questions as:
- How is independent research defined, measured, and valued by research purchasers?
- Which alternative research methods are in the greatest demand?
- Which business models are working and which ones aren’t?
- How will independent and alternative research firms be compensated for their work?
- Are distribution models in place that accurately measure and collect revenue based on contribution?
- How will companies view the loss of sell-side coverage and the growth of alternative research providers?
- What are the potential conflicts of interest and how are they managed?
In 2003, the Securities and Exchange Commission, New York Attorney General Elliot Spitzer, the New York Stock Exchange, and state securities regulators brought a $1.4 billion Global Settlement against ten of the nation’s largest investment firms to address conflicts of interest. Now that settlement is about to expire, and companies that offer independent research may reap the benefits.
The settlement came from allegations of conflicts of interest occurring between the investment banking and analysis departments of financial institutions Goldman Sachs, Bear Stearns, Credit Suisse, J.P. Morgan & Chase and others; one example of inappropriate actions was the spinning of “hot” initial public offerings by CSFB and Salomon Smith Barney, and the issuance of fraudulent research reports by same. UBS Warburg and Piper Jaffray were alleged to have received payments for investment research without disclosing the payments to the SEC. In addition to paying penalties under the terms of the settlement, banks were required to physically separate their research and investment banking departments and set up firewalls to ensure isolation.
What does this have to do with independent research?
The result of the settlement forcing apart research and investment departments was the creation of numerous small businesses offering unbiased, independent research, from whom the Big Ten regularly make research purchases. Now, these small businesses rely on the purchases the Big Ten make, and since the expiration of the settlement means the separation of research and investment departments is no longer required, the large banks will have no need to purchase independent research information from the small businesses. More than likely, many companies will be forced to close down, or find some other niche to fill.
RedChip was not among the 70 or so independent research firms who received monies as part of the settlement; and our unique business model, which includes both company-sponsored and independent research in addition to other lines of business, will allow RedChip to thrive beyond the settlement. However, it is the individual investor who will lose the most from the expiration of the settlement as smaller research firms close down and access to quality unbiased research is made more difficult. Of course, many quality analysts will find other outlets for their investment opinions, and you may even see some new additions to our own team of analysts.
Research remains a valuable tool for companies and investors; and, ultimately, the increased competition will narrow the field of available information sources, ensuring that the best research remains. RedChip looks forward to continuing our 17-year history of providing independent research, and we welcome you to join our investor community.
To learn more about RedChip’s independent research and our research magazine, The RedChip Review™, please visit http://www.redchip.com/research/researchmain.asp.
To learn more about the Global Research Analyst Settlement, visit http://www.globalresearchanalystsettlement.com/.