Spitzer's "A" for Stock Research

Reforms are making Wall Street analysis more objective, says New York's crusading attorney general. But some grumble he could do more

By Amey Stone

Have the Wall Street research reforms instigated by New York Attorney General Eliot Spitzer's probe into conflicts of interest between analysts and investment bankers done any good? Spitzer certainly thinks so.

On Apr. 13, the second anniversary of the $1.4 billion global research settlement that Spitzer and the Securities & Exchange Commission reached with 10 of the largest investment banks, a characteristically chipper Spitzer pointed to signs that the reforms were working. The 2003 settlement required brokerage firms to fund and distribute independent research alongside their own in-house reports. Spitzer figured that would lead to increased competition among analysts (and thus, higher-caliber Wall Street research) and more dialogue between brokers and their customers.

Speaking at a conference sponsored by a trade group for independent research firms, Spitzer said Wall Street research is clearly better than it used to be. It's more original, less biased, and, by some measures, its advice would be more likely to see a typical portfolio outperform the Standard & Poor's 500-stock index than before the reforms were put in place. BusinessWeek Online came to the same conclusion in June, 2004 (see BW Online, 6/28/04, "Yes, Wall Street Research Is Better").


  Spitzer pointed to dramatic growth in the number of independent research firms that have sprung up in recent years as evidence of positive change. In fact, the conference he was speaking at was standing-room-only all day -- even before Spitzer stepped up to the podium.

He was especially pleased to note that some brokerages, such as Fidelity Investments, are advertising their ability to provide customers with free independent research -- even though they aren't bound by the terms of the global settlement. That's a sign the benefit of independent research is well established among the investing public, he said.

For Spitzer, this was the friendliest of groups, since a primary goal of his reforms was to bolster independent research. "I applaud you for what you do," he said to the independents in concluding his speech. "We will continue to look to make sure that firms are living up to the terms of the global settlement."


  Nonetheless, Spitzer took some jabs from audience members who think he's not doing enough to enforce the settlement's terms. A few questioners alleged that the Wall Street firms are slow in getting the independent research into the hands of their customers. "I hope this is not the case," said Spitzer.

Another questioner asked Spitzer if he would do more to monitor the independent consultants (known in industry parlance as "ICs") that each firm was required to hire to pick the independent research firms and supervise handing the material out to customers.

"It's not my job to micromanage the ICs" said Spitzer. He said he was aware of some grumbling, but added, "I believe the ICs are doing what they should be doing."


  The real test of whether the improvements to research have any staying power, said Spitzer, will be three years from now when the term of the settlement is up and the $400 million allocated to fund independent research is spent. Will the independent research still be distributed, Spitzer asked. "I hope so," he said, answering his own question.

Some of the independents crowding the room worry that if Wall Street firms don't make sure that investors actually get the research, they won't know to demand it once Spitzer moves on to bigger and better things. At least now those concerned know that Spitzer heard their worries, even if they'll have to wait and see if he does anything about them.

Amey Stone is a senior writer for BusinessWeek Online in New York

Edited by Beth Belton

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