SEC Comes
Out In Support of Research Intermediation
Shareholders Research Alliance Named in Decision*
http://www.shareholdersresearch.com
http://integrityresearch.blogdrive.com/
Darien, CT - Much to our surprise, the SEC has
recently released guidance to the independent
consultants hired under the terms of the Global Research
Settlement that will enable them to choose independent
research providers as part of the Settlement, that also
produced "issuer paid" research through the growing
group of research intermediaries.
The SEC noted that if an IRP wishes to participate in
both the Settlement and one of the up and coming
research intermediaries (including the NRE, the IRN, or
the Shareholders Research Alliance), the following
conditions must be adhered to.
- The research
intermediary used must offer a true "blind pool"
approach where companies requiring research coverage
would pay a fee for access to research from a group
of qualified research providers. In this regard, an
issuer would have no choice on which IRP or IRPs
would cover it. Additionally, an IRP would have no
say as to which firm(s) it would be willing to
cover. In this model, the decision about who would
provide research coverage to any issuer would be
made by a trusted outside group of "experts".
- There would need to
be a complete "wall" between the issuer and the
research provider to mitigate undue influence the
issuer might exert over the IRP.
- An IRP could not
provide research for inclusion under the terms of
the Settlement that was itself "paid for" by an
issuer in any way.
- The IRP would need
to disclose in its research reports that any "paid
for" research it produces IS NOT BEING PROVIDED to
investors as part of the Global Research Settlement.
It must be highlighted that
the SEC's guidance is a complete turnaround from its
previous stance where it did not allow the independent
consultants to consider research produced by "paid for"
research providers as part of the Settlement. This must
be seen as immensively constructive for both the
independent research industry, and micro and small cap
companies, as the SEC has implicitly acknowledged the
problem of declining research coverage, and has tried to
take steps to allow the marketplace to develop solutions
to this problem.
However, it must also be noted that the SEC's guidance
in no way means that IRPs will definitely be able to
participate in both the Settment and the NRE, IRN or
SRA. Ultimately, the SEC left the independent
consultants with final authority to choose the type of
research he or she feels is most appropriate for
distribution to the customers of the specific investment
bank they worked for. In other words, if the IC doesn't
like it, the IRPs will not be able to join the NRE, IRN
or SRA with out risking their business with that
consultant.
Initially, we were
surpised to see that the SEC had basically supported the
underlying business model espoused by the IRN with its
"blind pool" concept versus the NRE's model promoting
"choice" for issuers. However, we have since received
word from the NRE that they have communicated to the
SEC, that if required, they would adopt a "blind pool"
approach to enable the IRPs who are part of the
Settlement to use their platform.
We would also be remiss
if we didn't mention that many IRPs who currently
participate in the Global Research Settlement may decide
that membership in the IRN may not be worth the risk --
either of current settlement business, or potential
future business from ICs that have not yet selected that
IRP. Thus, it is difficult to tell if the SEC's move
will have a real impact on freeing indie research firms
to compete to produce research coverage for uncovered
and under covered companies.
Despite all of this, the
SEC's decision must be seen as a bold move that protects
the original spirit of the Settlement, while accepting
the changing realities of the research industry.
* Shareholders
Research Alliance Providers Exclusively distributed by
Investrend Research Syndicate (http://www.investrendresearch.com)
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