Thursday, March 18, 2010

SEC, firms, work to unwind research-scandal settlement

Why is this not shocking?

The WSJ reports that the SEC is working with securities firms to unwind key provisions in the 2003 research-scandal settlement.

1 Comments:

Blogger Unknown said...

The independent research provision feature of the Global Research Analyst Settlement (GRAS) was destined to evaporate after the expiration of its mandated 'forced provision' time period.

Under the current regulatory enforcement regime full-service brokers cannot be expected to facilitate the provision of independently produced investment research to advisors. Independently produced research competes with full-service firms' proprietary research, and may be less biased than full-service brokers' research. Full-service brokers' proprietary research is sometimes used to assist in the cross selling of other brokerage services (for instance, investment banking, IPO allocation, wrap account introductions, mutual fund shelf space)at the sacrifice of research objectivity

Without regulatory changes which mandate disclosure and transparency in ALL institutional brokerage commission arrangements, independently produced research will continue to be a weak competitor to full-service brokerage firms' bundled undisclosed proprietary reasearch -and other services - brokerage commission arrangements.

The opportunity to package non-research related services, and favors, and to add extra profit in bundled, undisclosed and non-transparent commission arrangements contributes to the "community of interests" shared by brokerage firms and institutional advisors. This community of interests is not always aligned with the investment goals of advisors' clients. This mis-alignement can produce conflicts of interest for advisors.

In contrast, institutional agency brokerage firms (also known as soft dollar converters)evolved specifically to comply with Section 28(e)of The Securities Exchange Act of 1934(an amendment added after "May Day" in 1975). Subsequent to 1975 these institutional agency brokerage firms have been the primary brokerage intermediary used to pay for independently produced research.

However, because these institutional agency brokerage commission arrangements have a very high level of transparency, and are very auditable, they are not as popular with institutional advisors as the bundled undisclosed institutional brokerage arrangements offered by full-service brokerage firms.

May 25, 2010 at 8:26 AM  

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