Where’s the buy-side outrage?
If equity research is quarantined from sales, will institutional investors feel the pinch? Many feign indifference to the crackdown, which was partly triggered by their own apathy. If pressed, though, they admit new structures could be costly and fundamentally change the way they do business.
NEW YORK ATTORNEY general Eliot Spitzer's well-publicized crusade to expose, punish and eradicate sell-side equity research tainted with a conflict of interest has met with a mixed reception. Retail investors who lost out when the tech bubble burst may feel vindicated, if not reimbursed, but institutional fund managers - the chief consumers of much of this now discredited investment advice - have been strangely silent.
The managers attribute all the fuss to the lack of sophistication among retail investors, who were too witless or ill informed to translate the Wall Street language of buy, strong buy and hold. They didn't seem to realize, a common argument goes, that you had to call analysts to get their private views, not merely read their reports.
Figures published by Greenwich Associates in December showed that 51% of in-house equity analysts and senior managers at 51 US buy-side firms polled in November favoured sell-side research remaining within investment banks, with stricter enforcement of Chinese walls. This is somewhat surprising given that only 34% felt that this would be sufficient to improve the independence and quality of broker research.
Spitzer and his supporters might want to change the rules to force a physical separation of research from selling but the institutional buy side doesn't seem to share his zeal.