Expiration of Settlement is not Expiration of Research
August 5, 2009
In the wake of the expiration of the global settlement reached six years ago with regulators to resolve conflicts between the research and investment banking operations of Wall Street firms, Goldman Sachs is discontinuing its acquisition of third-party research and its distribution to its clients, the investment banking firm has told Securities Industry News.
The decision comes just as the requirement to provide independent research to customers ends.
Friday, July 31, marked the expiration date of the global research settlement involving 12 major brokerage houses reached in 2003 and instigated by Eliot Spitzer, then attorney general of New York.
But the move does not mean that investors have less research at their fingertips, particularly given the advance of online financial services and new research startups.
Spitzer investigated complaints of retail investors who lost significant money on Internet stocks on the advice of research analysts who recommended Pets.com and other startups with dubious business models. Salomon Smith Barney telecommunications analyst Jack Grubman got caught up in the furor, for allegedly recommending stocks that were not healthy.
The agreement called for investment banks to offer clients separate independent research along with their own in-house offerings on every company they follow. Five years later, bulge bracket firms have paid $460 million for this independent research.
While Goldman Sachs says it is now ending the practice of distributing third-party research, Morgan Stanley has not yet responded on whether it is following suit.
The landmark agreement originally had the effect of reducing in-house research staffs, noted one industry research executive.
“An immediate result was the reduction in the size of bulge bracket research departments as the investment banking departments had subsidized research departments,” recalled David Eisner, CEO of TheMarkets.com, an aggregator of research from multiple brokers for institutional investors.
A cottage industry sprang up as many laid off researchers banded together or hung up their own shingles forming research boutiques.
In addition, bulge brackets had to create a fund--almost half of billion dollars--to pay to independent research providers. “And this money ended up at the mass producers of research like ValueLine, S&P and Morningstar, with the thinking that it was easier to work with these firms who provide reports on many companies than to work with 40 different independents,” said Eisner.
Institutional investors largely became clients of the boutique firms, while retail clients saw reports from the heavy hitters in research. Growth of an independent research industry was encouraged.
Now that the five-year period of the settlement is over, very few investors are clamoring for the independent research, investment banks say they are finding. And the millions that the big and small independents were statutorily guaranteed as income is at an end.
