Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2023 Defined Contribution East
    • 2023 ESG Investing
Breadcrumb
  1. Home
  2. Print
December 28, 2009 12:00 AM

Advancing research after the analyst settlement

Bruce Aust
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    The expiration of the Global Research Analyst Settlement with major brokerage firms ends a troubled chapter in Wall Street history. The settlement, reached in 2002, concluded a joint investigation by the Securities and Exchange Commission, then-New York Attorney General Eliot Spitzer and other regulators into conflicts of interest and undue influence of investment banking interests on securities research.

    The expiration of the settlement forces us to ask: How will investors find reliable, independent information on securities and the companies that issue them?

    The settlement provided that 12 major firms would pay more than $430 million and provide independent research reports to their clients in response to charges that their research was biased toward their own investment banking clients.

    The settlement required the firms to pay fines totaling $1.435 billion to their investors to fund investor education and to pay for independent third-party market research. About a third of the fines went to paying for independent research. With the expiration of the settlement last July 31, the firms do not have to continue paying for and distributing third-party research.

    It's crucial that independent research continues — and the private sector must lead the way. Why? One key reason is market liquidity. The private sector should look for new ways to promote growth by ensuring that more information is available to help reduce the cost of capital. Research by Roger Ibbotson and Zhiwu Chen suggests that a company's cost of capital increases significantly if its stock is illiquid — and higher costs for capital can diminish valuations, as noted in the 2009 Ibbotson SBBI Classic Yearbook, published by Morningstar Inc. (Mr. Ibbotson, professor in the practice of management at Yale University's School of Management, is chairman and chief investment officer of Zebra Capital Management LLC, Milford, Conn. Mr. Chen is Zebra's director of research.)

    Institutional investors spend nearly $2 billion a year on research services. With the expiration of the settlement, there's a real danger that the research industry's focus on large institutional investors and hedge funds will only grow. But how can smaller, individual investors gain access to independent stock research? They too need insightful and trustworthy information to make investment decisions. Without their participation, the market is less liquid than it should be, and companies can lose early opportunities for growth simply because information about them is not readily accessible.

    For public companies, research coverage tends to be either a feast or a famine.

    Even before the economic downturn, investment banks were eliminating their analyst staffs. According to Integrity Research Associates LLC, which tracks the investment research industry, from 2001 to 2006 - during the market boom - the number of analysts fell to about 9,000 from 16,000. Currently about 1,000 public companies have no research coverage at all, and 2,000 have two or fewer research analysts covering them. Investment banks and broker-dealers have less reason to cover smaller companies and fewer analysts to do the work. All this concentrates more research attention on large, well-capitalized companies, while most others lose out.

    As much as some CEOs may privately grumble about research on their companies, the benefits of analyst coverage are well proven. Investors become more aware of companies, their products, and their financial situation. This generates a virtuous cycle of greater investor interest and potentially greater liquidity in the company's shares.

    It's time to fill the void left by the expiration of the global settlement to provide all types of investors with the information they need to make better decisions. There are solutions today that help address the market's need for independent research at no cost to the issuer. However, all public companies and investors alike deserve openness, visibility and credible research coverage. Just because the Global Analyst Research Settlement ended doesn't mean that independent research should not matter. The need for transparency is more important now than ever.


    Bruce Aust is executive vice president of NASDAQ OMX Group, New York.

    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    Gender diversity is improving on FTSE 350 boards
    Gender diversity is improving on FTSE 350 boards
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    The Institutional Investor's Guide to ESG Investing
    Sponsored Content: The Institutional Investor's Guide to ESG Investing

    Reader Poll

    January 25, 2023
    SEE MORE POLLS >
    Sponsored
    White Papers
    Show Me the Income: Discovering plan sponsor and participant preferences for cr…
    Morningstar Indexes' Annual ESG Risk/Return Analysis
    The Future of Infrastructure: Building a Better Tomorrow
    Outlook 2023: Opportunity in a volatile world
    Research for Institutional Money Management
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2023 Defined Contribution East
      • 2023 ESG Investing