Company-Sponsored Equity Research Reduces Conflict of Interest

November 7, 2019 13:10:31

In reference to company-sponsored equity research – the company that the research is profiling pays for writing the research – the perception may be the exact opposite of the headline of this article. To be clear, we’re not talking about Public Relations, propaganda-pieces commissioned by the subject company, we’re talking about the kind of research that institutional investors have relied on for decades. Research that’s produced and distributed by analysts from SEC-regulated and FINRA licensed broker-dealers. When it’s this level of research, the fact that the company is paying the broker-dealer is irrelevant as it relates to the opinion of the analyst. There’s far too much on the line for a broker-dealer to compromise its integrity in exchange for a few thousand dollars a month. But if a broker-dealer is leveraging its research, in exchange for the engagement of lucrative investment banking deals, that could net millions for the BD, the motivation to produce a more favorable report is much more apparent. And that’s a clear conflict of interest that could taint the equity research reporting process.

So why, seemingly all-of-a-sudden, has the popularity of company-sponsored research risen so dramatically? As the saying goes; “Necessity is the mother of invention.” The broker-dealers issuing research, particularly research written on small and micro-cap companies, were no longer getting paid through trading commissions or direct payment from institutional investors. It was either shut it down or approach the companies themselves to help offset their costs. According to Peter Sidoti, CEO at Sidoti & Company, a company that has adopted the company-sponsored model, “Clearly, broker-dealers are continuing to find it less profitable, and even unprofitable, to provide securities research to companies whose coverage several years ago was economically viable.” ‘With passively managed funds [ETFs] becoming a greater factor in the investing landscape every day, active money managers simply do not have…


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