In July, I wrote an article on analyst’s research to whom analysts owe fidelity and to whom they don’t and that the majority opinion and SEC view on this issue is both unconstitutional and bad policy. You can find it here:
The firing of two Citib analysts last week make my July article even more relevant because it deals with many of the same issues. If these analysts opinions had no more legal status than the political opinion of your barber or some stranger at a bar none of this would have happened and valuable time and money would be saved by taxpayers and companies; or arguably, if it has as much legal status in terms of constitutional protection of free speech, there would be no issues. Before I get to the Facebook IPO issue and IPO treatment at large. just let me state generally that opinions on the revenues of a Google subsidiary (You Tube) to which Mr. Mahaney had no inside or confidential information on, is not a subject that FINRA or Citibank should have rules against him talking about to anyone at any time. Meaning most of the time analysts have no more information than is available to anyone else, they are wrong often and I said in my July piece – their opinions should not be held in the same regard as factual statement from companies on earnings, acquisitions etc or government data like unemployment, natural gas supplies, crop reports etc.
The Facebook IPO is actually prima facie evidence that all Spitzer/SEC actions from the internet bubble have failed to produce change that matters. It simply made investment banking and research more costly to deliver, less efficient and a less pleasant place for people to work, but failed to address the core problems. I know firms where investment bankers cannot call an analyst in the firm to wish them a happy birthday or to discuss how the Jets did without a compliance officer in as a third party to the conversation. Yet, under the rules particularly FINRA 2711 which was cited in the Massachusetts complaint, it remains permissible to bring analysts “over the wall” and give them proprietary confidential information about an issuer.
We need to stop trying to be half pregnant. Either research should be a completely separate function and analysts NEVER should be given non-public information or we should acknowledge the analysts at major banks are marketing agents more than stock pickers and just warn the public of such.
In actuality, both analysts got fired for doing their jobs but tripping over technical rules. Neither one was trying to line their own pockets or do anything nefarious. What the junior analyst did in providing work in progress to a media source even if it was just to “brainstorm”, was inappropriate, but what the senior analyst was terminated for which is answering some basic questions for a reporter while technically a rule violation as he did not receive pre-clearance, did not rise to a level where he should have lost his job.
The better question is why are sell-side analysts talking to the media at all? If there was a pure research driven model paid for by cash or trading commissions – they would not or should not be giving away for free what clients are paying for. There are small boutique research firms many operated by former bulge bracket sellside analysts that never talk to the press for this reason. But the reality is the big bank analysts are talking to the press, because their job is still to market, and help snag IB business. In some part, being in the press may even help their firms snag some trading business or perhaps get new “research” clients.
In my view this should all be simplified – sellside analysts should never be taken “over the wall” Anything a company discloses to an investment banker or to a ratings agency should be disclosed to the public at large. While there is always the “trade secrets” argument, the reality is most companies competitors already know this stuff. If it so secret it can’t be public, companies should not tell the bankers either. Everyone gets to know, but the public investor. It always amazed me that the credit agencies got more information than the people and institutions buying the bonds.
On the flip side, once the above is achieved and the sellside analyst has no inside information, they should be able to speak to whomever they want, whenever they want. Even if they tell some clients about an upcoming rating change, we should let this happen – force the market to adjust. Analyst recommendations are not information, if people buy or sell on this, it is their problem. Every piece of information that can move a market is not proprietary. What would happen if more people started making stock picks on astrologer forcecasts –would the astrologers then fall under SEC regulation too?