After the dot-com bubble burst of the early 2000s, regulators took action against conflicts of interest in equity research. Now, the U.S. Securities and Exchange Commission (SEC) is seeking to pare back those restrictions.
In 2004, the SEC reached a series of settlements with the major Wall Street banks that, among other things, sought to address conflicts between the banks’ research analysts and their investment bankers. At the time, it was found that analysts were under pressure to produce favourable research coverage to help bankers win lucrative investment banking mandates — and the settlements introduced restrictions to mitigate these conflicts.
The terms of these settlements have been modified a couple of time since then, in 2010, and in 2015. Certain restrictions were lifted — most recently after the U.S. industry self-regulatory organization, FINRA, adopted its own rules to address analyst-investment banker conflicts.
This year, the 12 firms that were part of the global settlement filed motions seeking to eliminate the remaining restrictions, based in part on the adoption of the FINRA rules. The SEC has consented to this, saying in court filings that it believes that the proposed changes, which require court approval, are “in the public interest.”
In a statement, SEC commissioner Mark Uyeda, endorsed the move, saying that, “the regulatory framework in this area has developed dramatically” since the original settlements were reached — including the introduction of FINRA’s rules on analyst conflicts, and the SEC’s adoption of analyst disclosure requirements — along with the development of rules in the U.K. and Europe on asset managers buying research.
By supporting the industry’s motions, the SEC has taken “an important step toward eliminating outdated and costly requirements on firms and improving the availability of equity research,” he said — noting that research coverage, particularly for smaller companies, has declined since the settlements were reached.
“[FINRA’s rules] now provides a robust framework for managing research analyst conflicts, disclosures, and supervision, but does so through a principles-based SRO rule that can be updated through notice-and-comment and interpreted consistently across member firms,” he said.
“The commission’s action will lower compliance friction, promote more consistent interpretations, and, ultimately, expand the availability of research coverage that helps investors make better decisions,” he added.