Does analyst independence sell investors short?

UCLA Law Review

Volumn 55, Issue 1, 2007, Pages 39-97

  Fisch, Jill E ^a,b,c,d  

^a The Earth Institute at Columbia University   (United States)

^b UNIVERSITY OF PENNSYLVANIA   (United States)

^c Fordham Law School ^*

^d Fordham Corporate Law Center

Author keywords

[No Author keywords available]

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EID: 37149035812     PISSN: 00415650     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (373)

1. Press Release, Office of N.Y. Att'y Gen. Eliot Spitzer, Merrill Lynch Stock Rating System Found Biased by Undisclosed Conflicts of Interests (Apr. 8, 2002), available at http://www.oag.state.ny.us/press/2002/apr/apr08b_02. html.
2. The results of the investigation were detailed in Petitioner's Affidavit in Support of Application for an Order Pursuant to Gen. Bus. Law Section 354, at 10-13, Spitzer v. Merrill Lynch & Co., No. 02-401522 (N.Y. Sup. Ct. Apr. 8, 2002), available at http://www.oag.state.ny.us/investors/press/2002/apr/ MerrillL.pdf.
3. See infra Part III (describing the regulatory reforms).
4. See infra Parts II, IV (describing empirical studies).
5. See infra Part IV (describing market responses to the regulatory changes).
6. FINAL REPORT OF THE ADVISORY COMMITTEE ON SMALLER PUBLIC COMPANIES TO THE U.S. SECURITIES AND EXCHANGE COMMISSION 65 n.126 (2006), http://www.sec.gov/info/smallbus/acspc/acspc-finalreport_d.pdf [hereinafter FINAL REPORT].
7. Id.
8. See infra notes 182-189 and accompanying text (describing research services targeted to institutional clients).
9. See, e.g., Monica Schulz, New Firms Push Exclusive Research (Luring Hedge Funds), WALL ST. LETTER, Sept. 4, 2006, available at http://www.westlaw.com (search for citation 2006 WLNR 17089489) (stating that the growth of customized research costs as much as $250,000 to $350,000 per quarter and is aimed at hedge fund investors).
10. See infra notes 229-250 (describing issuer-paid research).
11. See Judith Burns, "Independent" Stock Research Hasn't Been Must-See, WALL ST. J., Nov. 26, 2005, at B3.
12. See, e.g., Matthew Keenan, Momingstar's Net Soars as Research Takes Off, INT'L HERALD TRIB., May 5, 2006, at 19 (explaining that six of ten Wall Street investment banks are buying research from Morningstar as part of their obligations under the Global Research Settlement).
13. See SEC, Fact Sheet on Global Analyst Research Settlements (Apr. 28, 2003), http://www.sec.gov/news/speech/factsheet.htm (describing settlement terms);
14. Global Research Analyst Settlement Final Judgment Addendum A (approved on Sept. 24, 2004), available at http://www.sec.gov/litigation/litreleases/ finaljudgadda.pdf (describing settlement requirements in more detail).
15. Stephen J. Choi & Jill E. Fisch, How to Fix Wall Street: A Voucher Financing Proposal for Securities Intermedaries, 113 YALE L.J. 269 (2003).
16. Id. at 321-23.
17. The approach developed in this Article is designed primarily to increase information flow in the capital markets and to protect retail investors. As the Article demonstrates, institutional and retail investors are not similarly situated with respect to analyst research. Institutional customers have sufficient sophistication to detect and evaluate conflicts of interest and to protect themselves by contract from conflicts that they view as harmful. As a result, there is no justification for regulators to impose structural limits on these marketplace transactions.
18. See Jill E. Fisch & Hillary Sale, The Securities Analyst as Agent: Rethinking the Regulation of Analysts, 88 IOWA L. REV. 1035, 1040-43 (2003) (describing the role of the analyst).
19. Regulation Analyst Certification, 17 C.F.R. § 242.500 (2005).
20. Id.
21. See IOSCO TECHNICAL COMM., STATEMENT OF PRINCIPLES FOR ADDRESSING SELL-SIDE SECURITIES ANALYST CONFLICTS OF INTEREST 1 (2003), http://www.iosco.org/pubdocs/pdf/IOSCOPD150.pdf [hereinaftet IOSCO PRINCIPLES] (identifying conflicts faced by sell-side analysts as posing "special problems with respect to investot protection").
22. IOSCO TECHNICAL COMM., REPORT ON ANALYST CONFLICTS OF INTEREST 3 (2003), http://www.iosco.org/pubdocs/pdf/IOSCOPD152.pdf [hereinafter IOSCO REPORT].
23. Id. at 3-4. Some analysts produce and sell information on a fee or subscription basis, primarily to institutional clients. These analysts are sometimes described as independent analysts,
24. see id. at 4, although the nature and scope of this category varies depending on the particular issue involved. For example, regulators have generally interpreted as independent, for purposes of the Global Research Settlement, any analyst who is not employed by a firm that engages in investment banking business.
25. Ann Davis & Susanne Craig, Analyze This: Research Is Fuzzier Than Ever-'Independent' Label Becomes a Mantra After the Crackdown, but Conflicts Have Emerged, WALL ST. J., Apr. 26, 2004, at C1.
26. See, e.g., Stuebler v. Xcelera.com (In re Xcelera.com Sec. Litig.), 430 F.3d 503, 511 (1st Cir. 2005) (identifying the number of analysts covering an issuer as one factor to be considered in determining whether the market for the issuer's stock was efficient (citing Cammer v. Bloom, 711 F. Supp. 1264, 1286-87 (D.N.J. 1989))).
27. See, e.g., Delta, Analyst Coverage, http://www.delta.com/ about_delta/investor_relations/analyst_coverage/index.jsp (last visited Aug. 8, 2007) (listing names, firm affiliations, and phone numbers of individual analysts covering Delta);
28. Onyx Pharmaceuticals, Analyst Coverage, http://www.onyxpharm.com/wt/page/ analyst (last visited Aug. 8, 2007) (listing names of analysts and their firms).
29. See infra Part II (discussing analyst optimism).
30. See infra note 136 and accompanying text.
31. See infra Part IV (citing statistics on analyst recommendations).
32. See infra Part II.
33. See Robert Cooter 6k Thomas Ulen, LAW AND ECONOMICS 40 (2d ed. 1977) (defining public goods as characterized by nonrivalrous consumption and nonexcludability of benefits);
34. see also Choi &. Fisch, supra note 13, at 279, 286 (describing the consequences of the public good problem for the provision of analyst research).
35. As the U.S. Supreme Court noted in Dirlcs v. SEC, 463 U.S. 646 (1983), "[i]t is the nature of this type of information [that is contained in an analyst's reports], and indeed of the markets themselves, that such information cannot be made simultaneously available to all of the corporation's stockholders or the public generally." Id. at 659.
36. John C. Coffee, Jr., Market Failure and the Economic Case for a Mandatory Disclosure System, 70 VA. L. REV. 717, 725 (1984).
37. Id. at 726.
38. See Caren Chesler, Back to the Drawing Board; Independent Research Firms Are Still Struggling to Find a Model That Will Put Money in the Bank, INVESTMENT DEALERS' DIG., Mar. 27, 2006, at 26, 29 (citing a 2004 Integrity Research Study showing that some big investment banks spend as much as $600 million a year to run their research departments).
39. But see Ann Davis, Increasingly, Stock Research Serves the Pros, Not 'Little Guy'-In the Wake of Spitzer Pact, Wall Street and Upstarts Are Catering to Elite Few-Ordering 'Bespoke' Reports, WALL ST. J., Mar. 5, 2004, at Al (reporting annual research budgets ranging from approximately $150 to $300 million). Some commentators have argued that by reducing selective information flow from issuers to analysts, the adoption of Regulation Fair Disclosure (FD) has made the generation of quality research substantially more costly, patticularly for small issuers.
40. See, e.g., Armando Gomes et al., SEC Regulation Fair Disclosure, Information and the Cost of Capital (Working Paper, July 8, 2004), available at http://w4.stern.nyu.edu/emplibrary/Gomes.pdf (empirically studying the effect of Regulation FD on information flow).
41. See Chesler, supra note 32 (stating that "[i]t's no secret that providing research on its own is a money-losing proposition fot the big banks").
42. Id.
43. See Karen Richardson, Why Does Tech Teem With Analysts! Despite Settlement, IPO Fees Still Lure, WALL ST. J., May 25, 2006, at C1 (quoting Scott Cleland, president of the research firm Precursor, as stating that Wall Street research "isn't necessarily driven by where the best investment opportunities are ... . It's driven by what coverage areas they can get paid for").
44. But see infra Part IV (identifying conflicts of interest at so-called independent firms).
45. T. Clifton Green, The Value of Client Access to Analyst Recommendations, 41 J. FIN. & QUANTITATIVE ANALYSIS 1, 23 (2006). In contrast, "profit opportunities dissipate within seconds" following a release to the public through a medium such as a television broadcast.
46. Id. at 2
47. (citing J.A. Busse & T.C. Green, Market Efficiency in Real Time, 65 J. FIN. ECON. 415, 435 (2002)).
48. See Choi 6k. Fisch, supra note 13, at 286-87 (describing the history of subsidizing research through fixed brokerage commissions).
49. Id. at 287.
50. See, e.g., Davis, supra note 32, at Al (stating that the average commission has dropped from fifteen cents per share in the early 1990s to five cents per share).
51. Soft dollars are the use of brokerage commissions to pay for research products and services. Letter from Matthew P. Fink, President, Inv. Co. Inst., to William H. Donaldson, Chaitman, SEC, Request for Rulemaking Concerning Soft Dollars and Directed Brokerage (Dec. 16. 2003) [hereinaftet Request for Rulemaking], available at http://www.sec.gov/rules/petitions/petn4-492. htm.
52. According to the Wall Street Journal, soft dollars can have the effect of doubling the commissions paid by mutual funds. See Charles Gasparino, Mutual-Fund Investors Risk Bite From 'Soft-Dollar' Deals, WALL ST. J., Sept. 16, 1998, at C1 (quoting financial adviser Robert Levitt as stating that money managers typically pay around six cents per share for soft-dollar commissions and three cents per share for commissions that do not include soft dollars).
53. NASD REPORT OF THE MUTUAL FUND TASK FORCE, SOFT DOLLARS AND PORTFOLIO TRANSACTION COSTS 3 (2004), http://www.nasd.com/stellent/ groups/rules_regs/documents/rules_regs/nasdw_012356.pdf.
54. 15 U.S.C. § 78bb(e) (2000). The statute was adopted, in connection with the elimination of fixed commissions, to protect mutual fund managers who paid more than the lowest possible commission. NASD REPORT OF THE MUTUAL FUND TASK FORCE, supra note 43, at 2.
55. See Request for Rulemaking, supra note 41 (calling for SEC rulemaking to address abuses in the use of soft dollars).
56. Id. Indeed, the SEC found examples of institutional investors using soft dollars to pay for travel, entertainment, and limousine services. SEC, Inspection Report on the Soft Dollar Practices of Broker-Dealers, Investment Advisers and Mutual Funds (1998), http://www.sec.gov/news/studies/ softdolr.htm.
57. MUTUAL FUND DIRECTORS FORUM, BEST PRACTICES AND PRACTICAL GUIDANCE FOR MUTUAL FUND DIRECTORS 17-22 (2004), http://www.mfdf.com/UserFiles/File/best_pra.pdf. The Forum reasoned that its "guiding principles-that brokerage commissions are an asset of a fund, that best execution is the most important factor and that transparency is important-weigh strongly in favor of abandoning soft dollar arrangements involving fund assets."
58. Id. at 20-21.
59. NASD REPORT OF THE MUTUAL FUND TASK FORCE, supra note 43.
60. Richard Beales, Fidelity Hardens Its Stance on Soft Dollars: Fund Manager Has Decided to Pay Lehman Brothers Separately for Research, FIN. TIMES (London), Oct. 24, 2005, at 20.
61. See, e.g., Jessica Papini, Fido/Lehman Move May Squeeze Analyst Comp, WALL ST. LETTER, Oct. 31, 2005, available at http://www.westlaw.com (search for citation 2005 WLNR 19182391) (quoting Morgan Stanley analyst Chris Meyer describing the move to unbundling as "a strong trend because soft dollars are too dangerous").
62. See Chesler, supra note 32, at 30 (describing Fidelity Investments as the only firm to have unbundled research payments from commissions and reporting results of a January 2006 Integrity Research survey of asset managers finding that 85 percent "say they still pay for research with soft dollars").
63. See, e.g., Judith Burns, Business Isn't Bustling as SEC May Move to Curb Soft-Dollar Arrangements, WALL ST. J., Sept. 20, 2004, at C15 (describing possible SEC ban);
64. Serena Ng, 'Soft Dollars' Flow to Independent Researchers-Hedge Funds Give Firms a Boost With Commissions Frowned on by Regulators, WALL ST. J., June 17, 2005, at C3 (describing the SEC task force created to examine the use of soft dollars). The U.S. Congress also held hearings on the use of soft dollars and considered legislation that would have made their use illegal. See Mutual Fund Reform Act of 2004, S. 2059, 108th Cong., 2d sess. § 311 (2004) (proposing ban on soft dollars).
65. See, e.g., Arden Dale, Wall Street Makes 'Soft Dollar' Pitch-Brokers, Money Managers Urge SEC to Tread Lightly in Overhaul of Fee Deals, WALL ST. J., July 11, 2006, at C3 (describing efforts by brokers and research firms to dissuade SEC from the ban). Industry insiders warned that a soft-dollar ban would seriously impact independent research firms.
66. See, e.g., Burns, supra note 52, at C15 (describing a 2004 survey of independent research firms by Investorside Research Association reporting that "70% said they would consider quitting the business if the SEC bans soft-dollar transactions").
67. SEC, GUIDANCE REGARDING CLIENT COMMISSION PRACTICES UNDER SECTION 28(E) OF THE SECURITIES EXCHANGE ACT OF 1934, at 3-4 (2006), http://www.sec.gov/rules/interp/2006/34-54165.pdf.
68. TD Ameritrade, for example, charges a commission of $9.99 for an online equity trade. See TD Ameritrade, http://www.tdameritrade.com/ welcomel.html (last visited Aug. 8, 2007).
69. See, e.g., Brad Barber et al., Can investors Profit From the Prophets? Security Analyst Recommendations and Stock Returns, 56 J. FIN. 531, 562 (2001) (demonsttating that, although in theory brokerage research has investment value, implementing analyst recommendations requires high transaction costs and that, after accounting for those costs, research is unlikely to generate positive abnormal returns).
70. See Eleanor Laise &. William Mauldin, Hook the Right Broker, SMARTMONEY, Aug. 2005, at 2, available at http://www.edwardjones.com/cgi/getData.cgi?file-/pdf/SmartMoney_Reprints_FINAL. pdf (stating that 28 percent of U.S. households use a full-service broker).
71. See, e.g., id. (describing the services and accounts provided by full-service brokers).
72. Many retail investors purchase mutual funds through full-service brokers, for example, despite empirical evidence demonstrating that broker-recommended funds have higher fees and inferior performance. Daniel Bergstresser et al., Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry (HBS Finance Working Paper No. 616981, Mar. 15, 2005), available at http://ssrn.com/abstract=616981.
73. See Green, supra note 37, at 1-3 (describing the fact that institutions pay for prior access to analyst recommendations and that these recommendations have investment value, but that the investment value has dissipated by the time the information is released to the general public).
74. See Gayle Essary, Financial Research: State of the Industry, Keynote Address at Institutional Investors Forum 2004 (Feb. 25, 2004) (transcript available at http://www.investrend.com/Admin/Topics/Articles/ Resources/688_1128883186.doc) (criticizing this practice and arguing that analyst upgrades and downgrades are material information that should be equally available to all investors).
75. PETER LYNCH, ONE UP ON WALL STREET (1989).
76. Essary, supra note 61 (describing the "long-established industry practice of announcing 'upgrades' or 'downgrades' to the general public while making the full research report... available only to a select group of clientele").
77. Investment banks may also use merger and acquisition (M&A) fees to subsidize analyst research. As Adam Kolasinski and S.P. Kothari explain, "in every year since 1994, M&A fees in the U.S. have been at least as large as equity underwriting fees and in recent years significantly larger." Adam Kolasinski & S.P. Kothari, Investment Banking and Analyst Objectivity: Evidence From Analysts Affiliated With M&A Advisors 7 (MIT Sloan Sch. Working Paper No. 4575-06, Mar. 2007), available at http://ssrn.com/abstract=499068. Kolasinski and Kothari describe the incentives for analyst bias based on M&A business,
78. id. at 35,
79. and report findings that M&A affiliates and analysts bias their recommendations in ways that benefit their M&A clients, id. at 29-30.
80. SEC Complaint paras. 16-19, SEC v. Henry Blodget No. 03 CV 2947 (S.D.N.Y. Apr. 28, 2003), available at http://www.sec.gov/litigation/complaints/ comp18115b.htm [heteinafter Blodget Complaint] (describing how Merrill Lynch analysts assisted in investment banking deals);
81. Randall Smith & Aaron Lucchetti, Analysts' Picks of Enron Stock Face Scrutiny, WALL ST. J., Feb. 26, 2002, at C1 (explaining how analysts met "with chief executives and chief financial officers of companies that are preparing initial public offerings of stock, vetting the companies so their firm doesn't agree to underwrite an IPO [initial public offering] they can't recommend").
82. Smith & Lucchetti, supra note 65, at C1 (explaining that analysts "routinely" attended pre-IPO roadshows "often helping company executives schedule 'one-on-one' meetings with institutional investors that might buy the stock").
83. Blodget Complaint, supra note 65.
84. See, e.g., Martin Sosnoff, Analyze This, FORBES, March 6, 2000, at 188 (describing how Wall Street's "celebrity analysts... lasso investment banking clients, then hawk the clients' stocks 30 days after an initial public offering").
85. SEC Complaint para. 40, SEC v. Citigroup (S.D.N.Y. Apr. 28, 2003), available at http://www.sec.gov/litigation/complaints/comp18111.htm.
86. Id. para. 41;
87. see also Complaint for Dep't of Enforcement at 4, Dep't of Enforcement v. Quattrone, No. CAF030007 (Mar. 6, 2003), available at http://news.findlaw.com/hdocs/docs/csfb/nasdquatt30603spincmp.pdf (stating that Quattrone earned compensation of more than $200 million from July 1998 to the end of 2001).
88. Trading on the market effect of an investment recommendation is known as front-running or scalping, which is prohibited by the Investment Advisers Act. 15 U.S.C. § 80b-6 (2000); see also SEC v. Capital Gains Research Bureau, 375 U.S. 180 (1963) (interpreting scalping as a fraudulent practice under the Investment Advisors Act). Most analysts, however, are not covered by the Act. Fisch & Sale, supra note 16, at 1057.
89. See Jessica Sommar, Red-Faced SEC Targets Two-Faced Analysts, N.Y. POST, May 24, 2002, at 41 (reporting that an SEC investigation found widespread personal trading by analysts contrary to their public recommendations). In February 2006, the National Association of Securities Dealers (NASD) fined Sanford C. Bernstein & Co. and analyst Brad Hintz a combined $550,000 for personal trading by Hintz contrary to the firm's published recommendation.
90. Susanne Craig, Moving the Market: Brokerage House, Analyst Are Fined in Conflict Case, WALL ST. J., Feb. 9, 2006, at C5.
91. See, e.g., IOSCO REPORT, supra note 20, at 9 (reporting on how a firm "may take advantage of pending research and position themselves ahead of its publication").
92. Mark Maremont, Raising the Stakes: As Wall Street Seeks Pre-IPO Investments, Conflicts May Arise, WALL ST. J., July 24, 2000, at Al.
93. Id.
94. See generally Jill E. Fisch, Regulatory Responses to investor Irrationality: The Case of the Research Analyst, 10 LEWIS & CLARK L. REV. 57 (2006) (evaluating the extent to which investor reliance on analyst research may be irrational);
95. Michael B. Mikhail et al., When Security Analysts Talk, Who Listens? (Working Paper, April 2005), available at http://ssrn.com/abstract=709801 (finding that sophisticated investors respond differently to analyst releases than unsophisticated investors).
96. See Fisch & Sale, supra note 16, at 1045 (explaining the effect of analyst incentives on recommendations). Although the availability of short selling would appear to mitigate the incentive for optimism generated by brokerage commissions, a variety of impediments to short selling limit the ability of investor to profit from negative information.
97. See, e.g., Eli Ofek & Matthew Richardson, DotCom Mania: The Rise and Fall of Internet Stock Prices, 58 J. FIN. 1113, 1118-20 (2003) (explaining the costs to institutional investors of shorting Intetnet stocks during the dot-com bubble);
98. Lynn Stout, Why the Law Hates Speculators: Regulation and Private Ordering in the Market for OTC Derivatives, 48 DUKE L.J. 701, 728-32 (1999) (describing regulatory restrictions that limit short selling). In addition, analysts who have generated information used by short sellers have been subject to some high-profile instances of issuer and regulatory pressure.
99. See infra notes 89-90 and accompanying text (discussing Gradient Analytics).
100. Empirical research supports this conclusion. See Narasimhan Jegadeesh et al., Analyzing the Analysts: When Do Recommendations Add Value?, 59 J. FIN. 1083, 1083 (2004) (finding that analysts favor "glamour" stocks over value stocks).
101. See Richardson, supra note 35, at C1 (citing report by Francois Trahan, chief investment strategist at Bear Stearns, showing that analyst coverage is "clustered] around industries that yield the greatest volume of IPOs and brokerage fees").
102. Interestingly, however, at least one study has found that analyst optimism does not increase the firm's likelihood of obtaining underwriting business. Alexander Ljungqvist et al., Competing for Securities Underwriting Mandates: Banking Relationships and Analyst Recommendations, 61J. FIN. 301 (2006).
103. An analyst may also jeopardize the credibility of his or her future stock picks by frequent downward revisions.
104. See Fisch & Sale, supra note 16, at 1050-51 (describing "booster shots").
105. See CFAI-NIRI Guidelines Not Nearly Tough Enough, Comments Independent Research Provider, FINANCIALWIRE, May 24, 2004,http://financialwire.net/articles/article.asp?analystld-0&id- 8823&topicld=160&level=160 (describing the LVMH suit as one of "a spate of lawsuits and threats, mostly in France ... designed to squelch professional criticism").
106. John Carreyrou, Stock Analyst Ruled Too Critical, WALL ST. J., Jan. 13, 2004, at C1.
107. Rodney Dalton, Analyst Thumped by French Handbag, AUSTRALIAN, Jan. 26, 2004, at 28.
108. Id.
109. See, e.g., Matthew McClearn, Legal Weapon, CAN. BUS., Feb. 16, 2004, at 23 (quoting Jonathan Boersma, vice president of professional standards of the Association for Investment Management and Research, as stating that some firms are "either suing or threatening to sue analysts for negative coverage");
110. Stockgate: Greenberg Suggests Hambrecht Analyst Forced Out Over Overstock Downgrades, FINANCIALWIRE, Jan. 23, 2006, available at http://www.investrend.com/articles/article.asp?analystld- 0&id-22279&topicld=160&level-160 (reporting allegations that analysts were fired for producing negative research about Overstock.com).
111. See, e.g., Robby Boyd, AG, SEC Looking Into Analyst's Firing, N.Y. POST, Oct. 4, 2006, available at http://www.nypost.com/seven/10042006/business/ ag__sec_looking_into_analysts_firing_business_roddy_boyd.htm (describing ongoing investigations into allegations).
112. See Brooke A. Masters, 2 Firms Claim Conspiracy in Analyst Reports; Short-Sellers and Researchers Colluded, the Companies Say, WASH. POST, Apr. 26, 2006, at D1 (describing allegations in the lawsuits and pending SEC investigation).
113. See, e.g., Kara Scanneil, SEC Subpoenas Research Firm, WALL ST. J., Mar. 27, 2006, at C3 (describing the SEC investigation).
114. Many studies use the Institutional Brokers Estimate System (I/B/E/S) database maintained by Thomson Financial, which contains a substantial amount of data, but relies on information voluntarily submitted by analysts. Researchers recently claimed that data in I/B/E/S had been manipulated and that names of poorly performing analysts had been removed. See Christopher Brown-Humes, 20,000 Analyst Names 'Missing,' FIN. TIMES, Nov. 8, 2006.
115. See, e.g., Alistair Barr, Signs of Success Scarce for Global Research Settlement, INVESTOR'S BUS. DAILY, Oct. 24, 2005, available at http://www.investors.com/breakingnews.asp? journalid=32406560&brk=l (quoting Investars Chief Executive Kei Kianpoor as stating that "[b]ecause all independent firms . . . aren't forced to make [their stock ratings] public, any analysis and ranking of their stock-picking performance is compromised").
116. As a result, independent recommendations and forecasts often constitute a small percentage of the data in empirical studies. See, e.g., Amanda Cowen et al., Which Types of Analyst Firms Are More Optimistic?, 41 J. ACCT. & ECON. 119, 121 (2006) (explaining that less than 0.5 percent of the forecasrs studied were provided by independent analysts).
117. The SEC Analyst Website (SECAW), the disclosure mechanism advocated by this Article, would directly address these information limitations.
118. See Fisch, supra note 76, at 64-65 (describing studies finding excessive analyst optimism). Importantly, the studies do not incorporate noncoverage as a mechanism for conveying negative information.
119. Lynn E. Turner, Chief Accountant, SEC, Speech at the Third Annual SEC Disclosute & Accounting Conference: The State of Financial Reporting Today: An Unfinished Chapter III (June 21, 2001) (transcript available at http://sec.gov/news/speech/spch508.htm) (reporting that only 0.8 percent of 26,000 analyst recommendations surveyed as of March 1, 2000, were sell or strong sell).
120. Brad M. Barber et al., Buys, Holds, and Sells: The Distribution of Investment Banks' Stock Ratings and the Implications for the Profitability of Analysts' Recommendations 3 (Working Paper, Sept. 2005), available at http://ssrn.com/abstract=495882.
121. See, e.g., id. (reporting that buy recommendations numbered 42 percent at the end of June 2003, while sell recommendations had increased to 17 percent);
122. see also Ohad Kadan et al., Conflicts of Interest and Stock Recommendations-The Effects of the Global Settlement and Recent Regulations 15-16 (AFA 2006 Boston Meetings Paper, May 2007), available at http://ssrn.com/absttact=568884 (finding that analyst optimism decreased following the adoption of various regulatory reforms).
123. Mark T. Bradshaw et al., Pump and Dump: An Empirical Analysis of the Relation Between Corporate Financing Activities and Sell-Side Analyst Research (Working Paper, May 2003), available at http://ssrn.com/ abstract-410521.
124. Anup Agrawal & Mark A. Chen, Analyst Conflicts and Research Quality 25 (Robert H. Smith Sch. Research Paper No. RHS 06-042, August 2005), available at http://ssrn.com/abstract=559412.
125. See, e.g., id. at 3 (citing studies demonstrating the investment value of analyst forecasts and recommendations);
126. Scott E. Stickel, The Anatomy of the Performance of Buy and Sell Recommendations, FIN. ANALYSTS J., Sept.-Oct. 1995, at 25, 25 (concluding that buy and sell recommendations influence stock prices);
127. Kent L. Womack, Do Brokerage Analysts' Recommendations Have Investment Value?, 51 J. RN. 137, 164 (1996) (finding "strong evidence that stock prices are significantly influenced by analysts' recommendation changes").
128. Paul Ryan & Richard J. Taffler, Are Economically Significant Stock Returns and Trading Volumes Driven by Firm-Specific News Releases?, 31J. BUS. FIN. & ACCT. 49, 51 (2004).
129. See, e.g., Peter Cohen, Apple Stock Jumps Following Analyst Report, MACWORLD, Nov. 22, 2004, available at http://www.macworld.eom/news/2004/1- 1/22/applestock/index.php (reporting that Apple Computer stock reached a four-year high after the release of an analyst report).
130. Jeffrey A. Busse & T. Clifton Green, Market Efficiency in Real Time, 65 J. FIN. ECON. 415 (2002).
131. See Scott Gibson & Assem Safieddine, Does Smart Money Move Markets?, 29 J. PORTFOLIO MGMT. 66 (2003) (finding that the magnitude of the price response to earnings announcements is related to the extent and nature of institutional ownership).
132. See, e.g., Green, supra note 37, at 1 ("Institutional investors pay significant amounts to obtain real-time access to brokerage firm research through providers such as First Call....");
133. id. at 3 ("Trading activity more than doubles following recommendation changes . . . .");
134. Paul J. Irvine, Analysts' Forecasts and Brokerage-Firm Trading, 79 ACCT. REV. 125, 126, 147-48 (2004) (finding that clients of brokerage firms, including institutional investors, increase trading in response to recommendations and forecast revisions of brokerage firm analysts).
135. See Yingmei Cheng et al., Buy-Side Analysts, Sell-Side Analysts, and Investment Decisions of Money Managers (Working Paper, Mar. 2004), available at http://ssrn.com/abstract-383060 (modeling the manner in which fund managers use sell-side research and empirically testing the factors that influence reliance on sell-side analysts).
136. See, e.g., Amitabh Dugat & Siva Nathan, The Effect of Investment Banking Relationships on Financial Analysts' Earnings Forecasts and Investment Recommendations, 12 CONTEMP. ACCT. RES. 131 (1995) (finding the earnings forecasts and stock recommendations issued by analysts affiliated with investment banks are more optimistic than those by unaffiliated analysts);
137. Hsiou-wei Lin & Maureen F. McNichols, Underwriting Relationships, Analysts' Earnings Forecasts and investment Recommendations, 25 J. ACCT. & ECON. 101 (1998) (showing that affiliated analysts issued significantly more favorable growth fotecasts and recommendations);
138. Anup Agrawal & Mark A. Chen, Do Analyst Conflicts Matter? Evidence From Stock Recommendations 33 (Working Paper No. RHS-06-038, July 2006), available at http://ssrn.com/abstract-654281 (finding that "analysts respond to investment banking and brokerage conflicts by inflating their stock recommendations").
139. See, e.g., Roni Michaely & Kent L. Womack, Conflict of Interest and the Credibility of Underwriter Analyst Recommendations, 12 REV. FIN. STUD. 653, 657 (1999) (finding that lead underwriter analysts make 50 percent more buy recommendations than unaffiliated analysts).
140. Brad M. Barber et al., Comparing the Stock Recommendation Performance of Investment Banks and Independent Research Firms 3-4 (Working Paper, Sept. 2005), available at http://ssm.com/abstract-572301. Significantly, however, the study found no significant bias by affiliated analysts in the pre-2000 bull market.
141. Id. at 3.
142. Kolasinski & Kothari, supra note 64, at 2.
143. But see Jonathan Clarke et al., Are Analyst Recommendations Biased? Evidence From Corporate Bankruptcies, 41 J. FIN. & QUANTITATIVE ANALYSIS 169 (2006) (finding that analyst recommendations for firms filing for bankruptcy during the 1995-2001 time period were not overly optimistic and that affiliated analysts were not influenced by conflicts of interest).
144. At least one study has found that brokerage-affiliated analysts were even more optimistic than analysts affiliated with investment banks. See Jeffery Abarbanell & Reuven Lehavy, Biased Forecasts or Biased Earnings? The Role of Reported Earnings in Explaining Apparent Bias and Over/Underreaction in Analysts' Earnings Forecasts 7-8 (Working Paper, Jan. 2003), available at http://ssrn.com/abstract=232453 (finding that the distribution of negative forecast errors by analysts is inconsistent with hypotheses of analyst optimism based on investmentbanking conflicts and other incentives).
145. Agrawal & Chen, supra note 107, at 5.
146. Id.
147. Dugar & Nathan, supra note 107, at 152.
148. Cowen et al., supra note 92.
149. Jonathan Clarke et al., The Good, the Bad and the Ugly? Differences in Analyst Behavior at Investment Banks, Brokerages and Independent Research Firms 4 (Working Paper, Sept. 2004), available at http://ssrn.com/abstract= 562181.
150. But see Roger K. Loh & G. Mujtaba Mian, Do Accurate Earnings Forecasts Facilitate Superior investment Recommendations?, 80 J. FIN. ECON. 455 (2006) (demonstrating a correlation between forecast accuracy and the investment value of an analyst's recommendations).
151. John Jacob et al., Do Analysts at Independent Research Firms Make Better Earnings Forecasts? 5 (Working Paper, July 2003), available at http://ssrn.com/abstract=434702.
152. See, e.g., Brad Barber et al., Can Investors Profit From the Prophets? Security Analyst Recommendations and Stock Returns, 56 J. FIN. 531, 561 (2001) (finding that purchasing stocks with the most favorable consensus recommendations produces higher returns absent transaction costs).
153. Some studies have found underperformance for discrete time periods. For example, Roni Michaely and Kent Womack's widely cited study finds that affiliated analyst recommendations led to lower returns than those of unaffiliated analysts for the 1990-1991 time period. Michaely & Womack, supra note 108;
154. see Maureen F. McNichols et al., The Performance of Underwriter Analyst Recommendations 19 (Working Paper, Aug. 2004), available at http://home.business.utah.edu/actmp/wconf05/micnicholsobrienpanalsysts.doc (suggesting that Michaely and Womack's findings may be specific to the time period of their sample). Similarly, Brad Barber and others found that analyst-recommended stocks underperformed less-favored stocks during the 2000-2001 time period.
155. Brad Barber et al., Reassessing the Returns to Analysts' Stock Recommendations, FIN. ANALYSTS'J., Mar.-Apr. 2003, at 18.
156. See Womack, supra note 100.
157. McNichols et al., supra note 120, at 18.
158. Id. at 19.
159. Leslie Boni & Kent L. Womack, Analysts, industries, and Price Momentum, 41 J. FIN. & QUANTITATIVE ANALYSIS 85, 106 (2006);
160. see also Chul W. Park & Morton Pincus, Market Reactions to Changes in Analyst Consensus Recommendations Following Quarterly Earnings Announcements 1 (Working Paper, Oct. 2000), available at http://www.biz.uiowa.edu/accounting/papers/workingpapers/00-10.pdf (finding that analyst consensus revisions have information content and concluding that this "finding is consistent with the capital market viewing consensus analyst recommendation revisions as reflecting valuable expertise to process and interpret public signals").
161. Cf. Steven Drucker & Manju Puri, On the Benefits of Concurrent Lending and Underwriting, 60 J. FIN. 2763 (2005) (identifying synergies when a financial institution provides both loans and underwriting services to an issuer and concluding that such synergies benefit the issuer through lower underwriter fees and loan costs).
162. See Murali Jagannathan & Srinivasan Krishnamurthy, Investment Banker Directors and Affiliated Analysts' Forecasts, 3 J. INV. MOMT. 4, 19 (2005) (finding that firms with investment banker directors issue more accurate forecasts and attributing that accuracy to better access to firm-specific information);
163. Erik Sirri, investment Banks, Scope, and Unavoidable Conflicts of Interest, (Working Paper, 2004), available at http://www.frbatlanta. org/news/CONFEREN/fm2004/sirri.pdf (describing potential synergies and economies of scale that can result from integrating investment banking, securities sales, and proprietary trading within a single financial firm);
164. see also Dugar & Nathan, supra note 107, at 152.
165. In re Credit Suisse-AOL Sec. Litig., 465 F. Supp. 2d 34 (D. Mass. 2006).
166. See Jacob et al., supra note 118, at 5 (suggesting that their findings are consistent with higher skill levels and resources at investment banks).
167. See Nina Mehta, Sellside Research Must Try Harder: Rocked by Scandals, Institutional Sellside Research Will Never Be the Same, TRADERS MAG., Dec. 1, 2003, at 32,38 (describing analyst compensation as dropping by 30 percent during 2003, as firms began to implement regulatory reforms).
168. Mark A. Chen & Robert Marquez, Regulating Securities Analysts (Working Paper, Mar. 2004) (copy on file with the UCLA Law Review).
169. This perhaps explains Alexander Ljungqvist and other's finding that analyst optimism does not enable investment banks to attract underwriting business. See Ljungqvist et al., supra note 80 (finding no evidence that aggressive analyst recommendations or upgrades increased their employer's ability to win an underwriting contract).
170. Lily H. Fang & Ayako Yasuda, Are Stars' Opinions Worth More? The Relation Between Analyst Reputation and Recommendation Values (AFA 2006 Boston Meetings Paper, Dec. 2005), available at http://ssrn.com/abstract= 687491.
171. Sorin Sorescu & Avanidhar Subrahmanyam, The Cross-Section o/Analyst Recommendations, 41 J. FIN. & QUANTITATIVE ANALYSIS 139, 141 (2006).
172. See Carl R. Chen et al., Are AU Security Analysts Equal?, 25 J. FIN. RES. 415, 426 (2002) (finding that national brokerage firm analysts have the greatest ability to affect stock prices, but that buy recommendations from such analysts do not have a significant effect on firm valuation);
173. Dugar & Nathan, supra note 107, at 150 (showing that market participants seem to discount optimism in investment banker analysts' research more heavily, but the difference is not statistically significant);
174. Michael J. Ho & Robert S. Harris, Market Reactions to Messages From Brokerage Rating Systems, FIN. ANALYSTS J., Jan.-Feb. 1998, at 49 (finding that stock prices react more significantly to ratings downgrades than to upgrades).
175. Hedge funds, for example, are reportedly bringing some former sell-side analysts in-house. Identifying short-selling opportunities for hedge funds can be lucrative; top analysts are reportedly commanding compensation packages of $1 to $4 million. Ann Davis, Negative Analysts Score Points, WALL ST. J., Nov. 23, 2004, at C5.
176. For a further description of the analyst scandals, see Jill E. Fisch, Fiduciary Duties and the Analyst Scandals, 58 ALA. L. REV. 1083, 1083-84 (2007).
177. Evaluating the rationale for and effect of the U.S. regulatory reforms is important from a global perspective because a number of countries are examining potential analyst conflicts of interest and considering the extent to which they should follow the U.S. regulatory approach. See, e.g., AUSTL. SEC. & INV. COMM'N, MANAGING CONFLICTS OF INTEREST: AN ASIC GUIDE FOR RESEARCH REPORT PROVIDERS 4 (2004), http://www.asic.gov.au/asic/asic.nsf/lkuppdf/ASIC+PDFW? opendocument&key-managing_conflicts_interesr_guide_pdf;
178. AUSTL. SEC. & INV. COMM'N, RESEARCH ANALYST INDEPENDENCE 8 (2003), http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/ Analyst_Independence_Report.pdf/$file/Analyst_Independence_Report.pdf;
179. FOREIGN GROUP TO THE EUROPEAN COMM'N, FINANCIAL ANALYSTS: BEST PRACTICES IN AN INTEGRATED EUROPEAN FINANCIAL MARKET (2003), http://europa.eu.int/comm/internal_market/securities/ docs/analysts/bestpractices/report_en.pdf;
180. IOSCO TECHNICAL COMM., REPORT ON ANALYST CONFLICTS OF INTEREST 2 (2003), http://www.iosco.org/library/pubdocs/pdf/IOSCOPD152.pdf;
181. IOSCO TECHNICAL COMM., STATEMENT OF PRINCIPLES FOR ADDRESSING SELL-SLDE SECURITIES ANALYST CONFLICTS OF INTEREST (2003), http://www.iosco.org/library/pubdocs/pdf/IOSCOPD150.pdf;
182. Fin. Serv. Auth., Conflicts of Interest: Investment Research and Issues of Securities (Consultation Paper 171, Feb. 2003), available at http://www.fsa.gov.uk/pubs/cp/cpl 71.pdf.
183. It is not clear that this characterization is warranted. Cf. Jerome P. Kassirer, Financial Conflict of Interest: An Unresolved Ethical Frontier, 27 AM. J.L. & MED. 149, 152 (2001) (defining a conflict of interest as "a condition in which an individual's professional judgment is unduly influenced by some personal gain").
184. See SEC, Statement Regarding Global Settlement Related to Analyst Conflicts of Interest (Apr. 28, 2003), available at http://www.sec.gov/ news/speech/spch042803com.htm (describing limitations on investing banking contacts as "designed to maintain the analyst's role as gatekeeper in the offering process but to prevent the analyst from serving as marketer or cheerleader for investment banking transactions").
185. See SEC, supra note 12 (describing settlement terms); Global Research Analyst Settlement Final Judgment Addendum A, supra note 12 (describing settlement requirements in more detail).
186. Importantly, the reforms described in this Part apply only to the investment banks that participated in the settlement. Initially, the settlement applied to ten banks, but two additional banks subsequently agreed to be bound by the settlement. See Press Release, SEC, Deutsche Bank Securities Inc. and Thomas Weisel Partners LLC Settle Enforcement Actions Involving Conflicts of Interest Between Research and Investment Banking (Aug. 26, 2004), available at http://www.sec.gov/news/press/2004-120.htm.
187. Some states are imposing the provisions of the settlement more broadly. Former California treasurer Phil Angelides, for example, imposed the requirements, including the physical separation of investment banking and research, on all investment banks that do business with the State of California. Press Release, Phil Angelides, Cal. Treasurer, Treasurer Angelides Announces Tough New Requirements for Investment Banks That Do Business With State of California (May 8, 2003), available at http://www.treasurer.ca.gov/news/ releases/2003/20030508ips.pdf;
188. Press Release, Off. of the N.J. Att'y Gen., New Jersey to Receive $561,458 in Wachovia Settlement (Sept. 7, 2006), available at http://www.nj.gov/oag/newsreleases06/pr20060907a.html (describing efforts by North American Securities Administrators Association (NASAA) Analyst Research Task Force Steering Committee in organizing and coordinating efforts of state regulators to address research analyst conflicts of interest).
189. See SEC, supra note 12. The physical separation requirement has resulted in firms constructing separate offices and even bathrooms. As one banker only "half-jokingly" stated, "he was not even allowed to go into the bathroom with a research analyst without a compliance officer tagging along, although that is not quite how he phrased it." Landon Thomas, Jr. & Gretchen Morgenson, 2 Analysts Likely to Pay $20 Million in Fraud Case, N.Y. TIMES, April 28, 2003, at C1.
190. Indeed, the SEC only subsequently conceded that a chaperone was not required to supervise a phone call in which an analyst and an investment banker merely scheduled a future chaperoned conversation. Letter from James A. Brigagliano, Assistant Dir. of SEC Div. of Mkt. Regulation, to Dana G. Fleischman, SEC Answer to Question 12 (Nov. 2, 2004), available at http://www.sec.gov/divisions/marketreg/mr-noaction/grs110204.htm.
191. William Donaldson, Chairman, SEC, Address Prepared for Delivery at SEC Press Conference Regarding Global Settlement (Apr. 28, 2003) (transcript available at http://www.sec.gov/news/speech/spch042803whd.htm).
192. Id.
193. Id.
194. Pub. L No. 107-204, § 501, 116 Stat. 745 (2002).
195. Id. § 501(a)(1).
196. Id.
197. Id. § 501(a)(3).
198. Id. § 501(b).
199. See implementation of the Sarbanes-Oxley Act of 2002: Hearings Before the S. Comm. on Banking, Hous. and Urban Affairs, 108th Cong. 43 (2003) (statement of William H. Donaldson, Chairman, SEC), available at http://www.sec.gov/news/testimony/090903tswhd.htm (describing the SECs approval of the self-regulatory organizations (SRO) rules and explaining that "[t]he Commission worked closely with the SROs to conform their rules to meet the directives of the Act").
200. See Self-Regulating Organizations; Order Approving Proposed Rule Changes by the National Association of Securities Dealers, Inc. and the New York Stock Exchange, Inc. and Notice of Filing and Order Granting Accelerated Approval of Amendment No. 2 to the Proposed Rule Change by the National Association of Securities Dealers, Inc. and Amendment No. 1 to the Proposed Rule Change by the New York Stock Exchange, Inc. Relating to Research Analyst Conflicts of Interest, Exchange Act Release No. 34-45908, 67 Fed. Reg. 34,968 (May 10, 2002), available at http://www.sec.gov/rules/sro/34-45908.htm [hereinafter First SRO Analyst Release];
201. Self-Regulatory Organizations; Order Approving Proposed Rule Changes by the New York Stock Exchange to Rules 344 ("Supervisory Analysts"), 345A ("Continuing Education for Registered Persons), 351 ("Reporting Requirements") and 472 ("Communications with the Public") and by the National Association of Securities Dealers, Inc. Relating to Research Analyst Conflicts of Interest and Notice of Filing and Order Granting Accelerated Approval of Amendment No. 3 to the Proposed Rule Change by the New York Stock Exchange, Inc. and Amendment No. 3 to the Proposed Rule Change by the National Association of Securities Dealers, Inc. Relating to Research Analyst Conflicts of Interest, Exchange Act Release No. 34-48252, 68 Fed. Reg. 45, 875 (July 29, 2003), available at http://www.sec.gov/rules/sro/34-48252.htm [hereinafter Second SRO Analyst Release].
202. NASD Rule 2711, NASD Manual (CCH) 4516-25 (Dec. 2006).
203. NYSE Rule 472, 2 N.Y.S.E. Guide (CCH) ¶ 2472 (Oct. 2006).
204. NYSE Rule 351, 2 N.Y.S.E. Guide (CCH) ¶ 2351 (Mar. 11, 2004).
205. See First SRO Analyst Release, supra note 153 (summarizing rule changes);
206. Second SRO Analyst Release, supra note 153 (same).
207. See sources cited supra note 157.
208. See sources cited supra note 157.
209. NYSE Rule 472(k)(l)(i)(f), 2 N.Y.S.E. Guide (CCH) ¶ 2472 (Oct. 2006).
210. Id. at 472(k)(l)(i)(g).
211. Id. at 472(k)(l)(i)(h);
212. see also Brad Barber et al., supra note 96 (describing the distribution disclosure required by NASD Rule 2711 and empirically analyzing its effect).
213. See Fisch & Sale, supra note 16, at 1043-44 (describing the prior disclosure requirements).
214. First SRO Analyst Release, supra note 153. It is unclear exactly what this disclosure requirement means. As the SEC noted in its release, previously the New York Stock Exchange (NYSE) had allowed the use of conditional language, such as the firm or its analysts "may own" covered securities. Id.
215. The Release does not explicitly reject the use of such language, and it appears that some firms are continuing to structure their disclosures in this way. In addition, firms are only required to disclose ownership positions of 1 percent of the issuer's equity securities. Id.
216. Id.
217. Selective Disclosure and Insider Trading, Exchange Act Release No. 34-43154, 65 Fed. Reg. 51,716 (Aug. 24, 2000), available at http://www.sec.gov/rules/final/33-7881.htm.
218. Id. For a detailed discussion of Regulation FD and the history of its adoption,
219. see Fisch & Sale, supra note 16.
220. SEC, Fact Sheet: Regulation Fair Disclosure and New Insider Trading Rules (Aug. 10, 2000), available at http://www.sec.gov/news/extra/seldsfct. htm.
221. Regulation Analyst Certification, Securities Act Release No. 33,8193, 68 Fed. Reg. 9482 (Feb. 20, 2003), available at http://www.sec.gov/rules/ final/33-8193.htm.
222. Harvey L. Pitt, Chairman, SEC, Statement at SEC Open Meeting: Proposal of Regulation AC (July 24, 2002) (transcript available at http://www.sec.gov/news/ speech/spch578.htm).
223. Regulation Analyst Certification, Securities Act Release No. 33,8193, 68 Fed. Reg. 9482 (Feb. 20, 2003), available at http://www.sec.gov/rules/ final/33-8193.htm.
224. Kadan et al., supra note 97, at 26.
225. Id. at 15.
226. Barber et al., supra note 109, at 14.
227. On the other hand, Leslie Boni found that the ten investment bank signatories to the Global Research Settlement both reduced coverage and increased the optimism of their recommendations. See Janet S. Kidd, With Analyst 'Sell' Signals Rare, Investors Need to Be Alert, ASSOCIATED PRESS, Sept. 10, 2006, available at http://www.baltimoresun.com/business/yourmoney/ sns-yourmoney-0910analysts,0,1718220.story?coll=bal-business-headlines (reporting Boni's findings).
228. Kadan et al., supra note 97, at 1.
229. As the authors explained, "eight out of the original ten participants in the Global Settlement adopted a new rating system in 2002, and ten of the next twenty biggest brokerage houses adopted a new rating system starting in 2002." Id. at 9.
230. In every case, the new system reflected a change from a five-point scale to a three-point scale. Id. Interestingly, the authots found that the market failed to respond to these massive reclassifications. Id. at 10-11.
231. Id. at 32 (reporting that, even postregulation, analysts are reluctant to issue pessimistic recommendations).
232. Kidd, supra note 174.
233. See Jane J. Kim, Stock Research Gets More Reliable: Third-Party Reviews Suggest Improvement in Performance of Buy-Sell Recommendations, WALL ST. J., June 7, 2005, at D1 (describing results of Investars.com study).
234. Barr, supra note 92.
235. Leslie Boni, Analyzing the Analysts After the Global Settlement (Sept. 28, 2005), available at http://www.tcf.or.jp/data/20050928_Leslie_Boni. ppt#9.
236. Second SRO Analyst Release, supra note 153.
237. See Schulz, supra note 8 (describing customized research created for hedge funds).
238. See, e.g., Chesler, supra note 32 (identifying hedge funds' interest in research but describing the traditional research model as unviable because research is distributed too broadly).
239. See, e.g., Davis, supra note 32 (explaining that "the most pioneering, market-moving research is going exclusively to big mutual funds and the private investment pools known as hedge funds, not to the small investor").
240. See, e.g., Schulz, supra note 8 (stating that approximately twenty research firms operate under this model, directing their research primarily to hedge fund clients, and charging quarterly subscription fees of $250,000 to $350,000).
241. See US Analysts, FIN. TIMES, May 5, 2006, at 18 (describing "desk analysts").
242. See Davis, supra note 32 (describing custom research projects with six-figure annual fees).
243. Chesler, supra note 32.
244. Id.
245. Some critics have questioned whether the information provided through these firms extends beyond legal bounds. See, e.g., Laurie Cohen, Private Money: The New Financial Order; In the Know: Seeking an Edge, Big Investors Turn to Network of Informants, Mark Gerson Assembles Web of Moonlighting Managers; Applebee's Bars Practice; Drawing a Line at 'Nonpublic,' WALL ST. J., NOV. 27, 2006, at A1 (detailing Gerson Lehrman's practices in obtaining and compensating consultants).
246. The SEC and the New York attorney general recently began investigating the consulting arrangements of Vista Research and Gerson Lehrman. Gregory Zuckerman & Peter Lattman, Research Firms' Consultant Ties Draw Scrutiny; New York, SEC Examine Information Disclosures to Hedge Funds, Others, WALL ST. J., Jan. 16, 2007, at C1.
247. The problem is analogous to the problem observed in the mutual fund area, where segmentation limits the market's ability to discipline fees charged by funds to less sophisticated investors. Donald Langevoort, Private Litigation to Enforce Fiduciary Duties in Mutual Funds: Derivative Suits, Disinterested Directors and the Ideology of Investor Sovereignty, 83 WASH. U. L.Q. 1017, 1034 (2005).
248. See, e.g., Pam Abramowitz, Sink or Swim: Demand for Independent Research Is Up, but Supply Is Up Even More, 40 EUROMONEY INSTITUTIONAL INVESTOR 77 (Dec. 1, 2006) (describing Telsey Advisory Group's clients as having "exclusive access" to the firm's research because it is not disseminated to First Call or other public sources).
249. See, e.g., Mylene Mangalindan, Oracle Hires Software Analyst, WALL ST. J., May 16, 2003, at B2 (explaining that "many veterans in equity research are facing lower salaries and an image tarnished by conflict-of-interest scandals").
250. See, e.g., Beth Piskora, Age of Analysts Comes to Close, N.Y. POST, Feb. 8, 2003, at 20 (describing how established analysts are leaving investment banks as a result of the regulatory reforms).
251. See, e.g., Abramowitz, supra note 191 (describing how many veteran analysts have left investment banks to "strike out on their own").
252. See Emily Thornton, Wall Street's Research Conundrum, BUS. WK., Oct. 21, 2002, at 120 (describing why investment banks need to keep top analysts as part of their investment banking teams, and predicting that "most talented and experienced analysts are likely to metamorphose into bankers, who earn roughly twice what they do").
253. See, e.g., Hulus Alpay & Gene Marbach, Sell-Side Coverage Remains as Elusive as Ever, O'DWYER'S PR SERVICES REP., Jan. 2007, at 14 (stating that "analysts have been leaving the sell-side to join the buy-side and hedge funds");
254. Chris Hughes, Rubinstein Jumps Ship for Hedge Fund, FIN. TIMES, June 22, 2006, at 22 (describing the departure of several sell-side analysts to hedge funds).
255. Boris Groysberg et al., Do Buy-Side Analysts Out-Perform the Sell-Side? 45 (Working Paper, Mar. 2007), available at http://ssrn.com/abstract-806264 (finding that the buy-side firm analysts made markedly more optimistic and less accurate earnings forecasts than their sell-side counterparts, even after controlling for analyst- and firm-specific factors). The authors found that sell-side recommendations were more optimistic, but that the lesser optimism of buy-side analysts did not translate into improved return performance. Id. They concluded that the shift toward greater use of buy-side research may not be desirable. Id. at 34.
256. See, e.g., Ken Brown, Stock Research Goes From Frothy to Frugal, WALL ST. J., May 27, 2003, at C1 (describing research cuts by Wall Street firms);
257. Andrew Capon, Research Less Besmirched, EUROMONEY, June 1, 2006, at 70 (citing National Research Exchange statistics indicating that the number of analysts at Wall Street firms fell by 30 percent from 2001 to 2005);
258. Marie Leone, The Flight of the Sell-Side Analyst, CFO.COM, July 8, 2004, http://www.cfo.com/printable/article.cfm/3015019?f=options (estimating a drop in the number of sell-side analysts at 15 to 20 percent).
259. Thor Valdmanis, Few Believe $1.4 Billion Deal Will Change Wall Street, USA TODAY, Apr. 29, 2003, at 1B, available at http://www.usatoday.com/money/industries/brokerage/2003-04-29-settle-cover_x. htm (quoting Zacks Investment Research as reporting a 23 percent increase since 2000 in the number of issuers with no coverage);
260. Spelman Research, Independent Investment Research, http://www. spelmanresearch.com/learn-about-investment-research.html (last visited Aug. 8, 2007) (claiming that four out of five companies with market caps of $100 million have no analyst coverage).
261. FINAL REPORT, supra note 5, at 65 n.126.
262. Id. (citing 2004 statistics provided by SEC Office of Economic Analysis).
263. Susanne Craig, Moving the Market: Firm to Research Stock "Orphans," WALL ST. J., June 7, 2005, at C3.
264. IPOHome, Renaissance Capital Study Shows IPOs Are Losing Research Coverage, http://www.ipohome.com/press/iporesearch.asp (last visited Aug. 8, 2007) (describing the absence of coverage for new IPOs).
265. See Joint Press Release, NASAA, NASD, NYAG, NYSE, & SEC, Ten of Nation's Top Investment Firms Settle Enforcement Actions Involving Conflicts of Interest Between Research and Investment Banking (Apr. 28, 2003), available at http://www.sec.gov/news/press/2003-54.htm.
266. See Judith Burns, Independent Research Hits Snags: Business Isn't Bustling as SEC May Move to Curb Soft Dollar Arrangements, WALL ST. J., Sept. 20, 2004, at C15 (citing a 20 to 30 percent reduction in the industry).
267. Jesse Eisinger, Long & Short: Why Independent Research Is Drying Up, WALL ST. J., Mar. 8, 2006, at C1.
268. See Abramowitz, supra note 191, at 77.
269. See Valdmanis, supra note 199, at 1B (quoting several independent firms as stating that their research was inappropriate for retail investors or that participation in the settlement would detract from the value of their research and cost them institutional clients).
270. See Eisinger, supra note 206, at C1.
271. See Burns, supra note 10, at B3.
272. Chris Kentouris, Seeking Soft Dollar Clarity, SEC. INDUSTRY NEWS, Nov. 6, 2006, at 4, 4. The SEC removed one substantial risk when it decided not to require that institutions pay cash for third-party research rather than bundling those payments with their brokerage commissions through the use of soft dollars.
273. See Guidance Regarding Client Commission Practices, Exchange Act Release No. 54,165, 71 Fed. Reg. 41,978, 41,993 (July 24, 2006).
274. Commentators had warned that the proposal "would cripple the independent research industry." Christopher Oster, Small Researchers Face a Threat; Mutual-Fund Industry Proposal on "Soft-Dollars" Could End Revenue Source, WALL ST. J., Dec. 18, 2003, at D9 (quoting The Alliance in Support of Independent Research, a trade group).
275. See, e.g., Cheryl Winokur Munk & Lynn Cowan, The Stock-Research Pact: Independent Firms Aim to Divide Spoils, WALL ST. J., May 1, 2003, at C9 (describing how only the largest independent firms offer coverage anywhere close to that offered by the Wall Street investment banks);
276. Randall Smith, Quality of Morningstar's Research May Suffer, WALL ST. J., May 26, 2004, at C1 (describing the claim that Morningstar would not be able to maintain research quality as it stretched coverage to meet the demands of the settlement).
277. Smith, supra note 212, at C1 (quoting a letter sent to the federal judge overseeing the settlement as stating that Morningstar analysts were receiving only $22,000 extra to double their coverage, an amount "far below typical compensation standards for investment research").
278. See, e.g., Kentouris, supra note 211 (identifying diffetences in research approach and financial structure between Wall Street firms and independent analysts).
279. Valdmanis, supra note 199, at 1B.
280. Some independent firms have attempted to ptovide greater assurance of their independence. For example, Investorside Research Association has come up with a certified provider seal. The seal certifies that member firms are "free of investment banking, consulting, and tesearch-for-hire conflicts." See Investorside Research Association, http://www.investorside.org/ about_us/index.htm (last visited Aug. 8, 2007) (describing Investorside certification).
281. See generally Choi & Fisch, supra note 13, at 284-86 (describing various business relationships that can compromise the objectivity of so-called independent analysts).
282. See, e.g., Davis & Craig, supra note 21, at C1 (describing how mutual fund Alliance Capital's ownership of research firm Sanford C. Bernstein could compromise independence of Sanford C. Bernstein's research);
283. Randall Smith & Ann Davis, Dark Horse Leads Stock-Research Sweepstakes, WALL ST. J., Dec. 16, 2003, at C1 (reporting that the size of Alliance's trading operation has disqualified Sanford C. Bernstein from qualifying as independent for purposes of the Global Research Settlement).
284. Davis & Craig, supra note 21, at C1 (reporting statements by analysts that pressure from institutional clients has grown as trading business becomes a bigger factor in analyst compensation).
285. See, e.g., Hedge Funds and Independent Analysts: How Independent Are Their Relationships? Hearing Before the S. Judiciary Comm., 109th Cong. 19 (2006) (testimony of Marc Kasowitz, Senior Partner, Kasowitz, Benson, Torres & Friedman, LLP, Alliance for Investment Transparency) (describing a "a pattern of egregious collusion between certain influential hedge funds and certain supposedly independent analysts" in which research is "bought and paid for by the hedge funds");
286. Jenny Anderson, True or False: A Hedge Fund Plotted to Hurt a Drug Maker?, N.Y. TIMES, Mar. 26, 2006, § 3, at 1 (describing allegations that hedge fund clients are influencing the content of research disseminated by independent analysts).
287. Matthew Goldstein, Second Curve: Hedge Fund on the Edge, BUS. WK. ONLINE, Apr. 18, 2007, available at http://www.businessweek.com (describing writing by analyst Thomas Brown on his bankstocks.com website about stocks owned by his hedge fund).
288. John Spence, Morningstar Focus of Spitzer Inquiry, CBS MARKETWATCH.COM, Dec. 16, 2004.
289. MARTIN D. WEISS, RESEARCH ANALYST REFORMS AND THE SETTLEMENT: WHY REFORMS DONT ADEQUATELY PROTECT INVESTORS (2003), available at http://www.weissratings.com/settlement.asp.
290. See supra notes 152-165 and accompanying text (describing SRO rules).
291. See, e.g., SEC, Statement Regarding Global Settlement Related to Analyst Conflicts of Intetest (Apr. 28, 2003), available at http://www.sec.gov/news/speech/spch042803com.htm (describing the analyst's role as a "gatekeeper").
292. See, e.g., Dirks v. SEC, 463 U.S. 646, 659 n.17 (1983) ("The SEC expressly recognized that '[t]he value to the entire market of [analysts'] efforts cannot be gainsaid; market efficiency in pricing is significantly enhanced by [their] initiatives to ferret out and analyze information, and thus the analyst's work redounds to the benefit of all investors.'" (quoting In re Dirks, Exchange Act Release No. 17,480, 21 SEC Docket 1401, 1406 (Jan. 22, 1981)).
293. See Fisch, supra note 76, at 70-71 (describing investor reliance on websites, chat rooms, and phony telephone messages).
294. See, e.g., Robert M. Bowen et al., Analyst Coverage and the Cost of Raising Equity Capital: Evidence From Underpricing of Seasoned Equity Offerings 5 (Sauder Sch. of Bus. Working Paper, Jan. 2006), available at http://ssrn.com/abstract-417860 (finding that "greater analyst coverage is associated with a significantly lower cost of raising equity capital");
295. see also Stephen Taub, Analyst (Un)coverage Hurting Small Firms, CFO.COM, July 16, 2004, http://www.cfo.com/article.cfm/3015231 (reporting a National Bureau of Economics Research finding that "[t]he decline in analyst coverage of small companies has cost those businesses roughly 138 basis points per year").
296. See Susanne Craig, Stock Analysis: Left Out of Shrinking Research Pool, Companies Resort to Buying Coverage, WALL ST. J., Mar. 26, 2003, at C1 (describing the increasing use by issuers of purchased coverage).
297. See FIRST Research Consortium, http://www.firstresearchconsortium. com/members.html (last visited Aug. 8, 2007) (listing member firms who provide fee-based research to issuers). Significantly, the costs of issuer-paid research are far less than the $165,000 to $185,000 it costs a Wall Street firm annually to cover a stock.
298. John Dutton, Small Cap Strategy, CALIFORNIA CEO, Winter 2006, at 13, 13, available at http://www.jmdutton.com/PDF_Files/CaCEO- 1206.pdf.
299. See Headline Maker: Dutton Associates Announces Qiao Xing Universal Telephone Raised to Strong Buy Rating, INVESTORS.COM, January 17, 2007, http://www.investors.com/breakingnews.asp?journal=47899882 (describing the services offered by Dutton Associates).
300. Spelman Research, supra note 199.
301. Essary, supra note 61, at 2.
302. See, e.g., SEC Told 'No Crisis in Disclosure,' but Non-Disclosures Almost Daily Now, FINANCIALWIRE, Sept. 10, 2004 [hereinafter No Crisis], available at http://www.investors.com/breakingnews.asp? journalid=23034610&brk=1 (describing concerns about the adequacy of the disclosure that research is paid for by the issuer).
303. Karen Richardson, In Quiet Niche, Paid-for Stock Research Persists, WALL ST. J., Dec. 13, 2006, at C1.
304. See, e.g., No Crisis, supra note 234. SEC Regulation 17(b) requires analysts who provide research for compensation to disclose that compensation, but it is unclear whether the regulation requires similar disclosure by the issuer itself when it distributes the analyst's report.
305. See id. In addition, analyst compensation may not be disclosed when investors access the analyst's research through sites such as Yahoo! Finance or Thomson Financial. Richardson, supra note 235, at C1.
306. See, e.g., Richardson, supra note 235, at C1 (describing coverage of Qiao Xing Universal Telephone by two issuet-paid analysts, one of which owned $20,000 worth of company stock).
307. See Veronica Belitski, Thomson Financial Snubs Paid-for Researchers; First Domino?, WALL STREET LETTER, Apr. 1, 2005, available at http://www.westlaw.com (search for citation 2005 WLNR 6883086) (reporting Thomson Financial's decision to exclude issuer-paid research providers from First Call and I/B/E/S databases).
308. Richardson, supra note 235, at C1.
309. FIRST Research Consortium, Standards of Practice for Research Providers, http://www.firstresearchconsortium.com/standards.html (last visited Aug. 8, 2007).
310. Id.
311. CFA CTR. FOR FIN. MKT. INTEGRITY & NAT'L INVESTOR RELATIONS INST., BEST PRACTICE GUIDELINES GOVERNING ANALYST/CORPORATE ISSUER RELATIONS (2004), http://www.niri.org/irresource_pubs/pdfs/CFAI-NIRIGuidelines.pdf.
312. See, e.g., CFAI-NIRI 'Analyst-Issuer Best Practices Guidelines' Violated Within 4 Hours of Release, FINANCIALWIRE, Dec. 9. 2004, available at http://www.investrend.com/articles/article.asp?analystId= 0&id-12139&topicId=160&level=160 (describing the publication of Spelman's research of issuer Consortium Service Management Group without disclosing that the issuer had paid for the research).
313. Finextra.com, Reuters and Nasdaq Form JV to Deliver Independent Analysis (June 7, 2005), http://www.finextra.com/fullstory.asp?id=13786.
314. Id.;
315. see also Paid Research You Can Trust?, BUS. WK., Oct. 3, 2005, available at http://www.businessweek.com/bwdaily/dnflash/ sep2005/nf20050930_5622_db008.htm (describing the Independent Research Network's (IRN) role as an intermediary in an interview with IRN president, Daniel Blank).
316. Paid Research You Can Trust?, supra note 245.
317. Id.
318. Karen Richardson, Research Providers Get Green Light-Some 'Independent' Firms Will Be Allowed to Work With Clients on Coverage, WALL ST. J., Oct. 13, 2005, at C5.
319. See Fixing Wall Street Research Years After Global Settlement, Critics Say Conflicts Remain, WALL ST. J., NOV. 12, 2006 (quoting Jonathan Boersma as stating that "it is yet to be seen if these models will take hold").
320. Finextra.com, Reuters and Nasdaq to Shut Down Independent Research Network (Sept. 12, 2007), http://www.finextra.com/fullstory.asp?id=17423.
321. Choi & Fisch, supra note 13.
322. U.S.C. §§ 77a-77aa (2000).
323. LOUIS D. BRANDEIS, OTHER PEOPLE'S MONEY AND HOW THE BANKERS USE IT 92 (1914).
324. Adam Winkler, Corporate Law or the Law of Business?: Stakeholders and Corporate Governance at the End of History, LAW & CONTEMP. PROBS., Autumn 2004, at 109, 113-14.
325. See, e.g., Troy A. Paredes, Blinded by the Light: Information Overload and Its Consequences for Securities Regulation, 81 WASH. U. L.Q. 417, 420-30 (2003) (criticizing existing disclosure requirements as excessive).
326. Merritt B. Fox, Retaining Mandatory Securities Disclosure: Why Issuer Choice Is Not Investor Empowerment, 85 VA. L. REV. 1335, 1338 (1999).
327. Id. at 1339.
328. 15 U.S.C. §§ 80a-8, 80a-29 (2000).
329. Id.
330. 15 U.S.C. § 78o(a) (2000).
331. Id.
332. Registration also subjects brokers to various requirements regarding recordkeeping, financial reporting, and net capital. See Alexander C. Dill, Broker-Dealer Regulation Under the Securities Exchange Act of 1934: The Case of Independent Contracting, 1994 COLUM. BUS. L. REV. 189, 208-22 (describing the importance of a broker-dealer registration requirement in enabling oversight of the financial services industry);
333. see also David A. Lipton, A Primer on Broker-Dealer Registration, 36 CATH. U. L. REV. 899 (1987) (describing registration requirements).
334. 15 U.S.C. § 80b-3 (2000).
335. Id.;
336. see Goldstein v. SEC, 451 F.3d 873, 876 (D.C. Cir. 2006) ("By keeping a census of advisers, the Commission can better respond to, initiate, and take remedial action on complaints against fraudulent advisers.").
337. See Fisch & Sale, supra note 16, at 1056-57 (describing regulation of analysts employed by broker-dealers).
338. See, e.g., Letter from Rebecca McEnally, Vice President, CFA Inst. Ctr. for Fin. Mkt. Integrity, to Jonathan G. Katz, Sec'y, SEC (Sept. 30, 2004), available at http://www.sec.gov/rules/proposed/s73004/rmcenally093004. pdf (commenting, in the context of a proposed hedge fund registration, that registration requirements have increasingly widespread acceptance in the securities industry, impose a relatively minimal burden on firms, and offer valuable increased transparency).
339. The SEC justified its hedge fund registration requirement (Hedge Fund Rule) on this basis, stating that registration would enable oversight and the identification of conflicts without impeding legitimate hedge fund investment activities. See Registration Under the Advisers Act of Certain Hedge Fund Advisers, 69 Fed. Reg. 72,054 (Dec. 10, 2004) (codified at 17 C.F.R. pts. 275, 279). The D.C. Circuit recently invalidated the Hedge Fund Rule as inconsistent with the Investment Advisors Act. Goldstein v. SEC, 451 F.3d 873 (D.C. Cir. 2006).
340. Pub. L. No. 107-204, § 501, 116 Stat. 745 (2002).
341. See supra notes 104-106 and accompanying text.
342. A catchall provision could require registration by other analysts who disseminate information in a manner targeted to or calculated to reach the investing public.
343. See supra Subpart I.B.
344. Funding for SECAW could come from imposing a modest fee in connection with the registration requirement.
345. The definition of public dissemination would be consistent with that used in the registration requirement, see supra Subpart V.A, and would include dissemination of research to one thousand or more customers, as well as any dissemination reasonably calculated to reach the investing public.
346. This would address the problem apparently faced by Brad Hintz, who seemingly wanted to realize substantial gains and diversify his portfolio, but was unable to do so because of the firm's favorable rating on the subject securities. Press Release, NASD, Sanford C. Bernstein & Co., Research Analyst Brad Hintz Fined $550,000 for Violations of Research Analyst Conflict of Interest Rules (Feb. 8, 2006), available at http://www.nasd.com/PressRoom/NewsReleases/2006NewsReleases/NASDW_015940.
347. See Green, supra note 37, at 4 (explaining the methodology used by Thomson to compile consensus figures).
348. Thomson, for example, accepts forecasts from any analyst who works for a major brokerage firm. PAUL GLASSERMAN & COSTIS MAGLARAS, ANALYZING THE ANALYSTS 2 (2001), available at http://www2.gsb.columbia.edu/faculty/pglasserman/B6014/ TheAnalysts.pdf. Thomson does not, however, include research from issuer-paid analysts, except for a few firms that were grandfathered in. See Belitski, supra note 238 (describing Thomson's exclusion of issuer-paid research);
349. Richardson, supra note 235, at C1 (describing Thomson's decision to continue including research provided by Dutton and several other firms).
350. U.S. Chamber of Commerce v. SEC, 412 F.3d 133, 143-45 (D.C. Cir. 2005).
351. Id.
352. See also Fisch, supra note 76, at 81 (criticizing regulators for attempting to determine appropriate information sources for investors).
353. Donald C. Langevoort, Ego, Human Behavior, and Law, 81 VA. L. REV. 853, 880 (1995);
354. see also Susanna Kim Ripken, The Dangers and Drawbacks of the Disclosure Antidote: Toward a More Substantive Approach to Securities Regulation, 58 BAYLOR L. REV. 139, 187-88 (2006) (criticizing disclosure-based securities regulation for failing to address investor irrationality).
355. Fisch, supra note 76.
356. James D. Cox & John W. Payne, Mutual Fund Expense Disclosures: A Behavioral Perspective, 83 WASH. U. L.Q. 907, 930-31 (2005).
357. See id. (identifying problems with investor use of investment information);
358. cf. Eric D. Roiter, An Apology for Mutual Funds: Delivering Fiduciary Services to Middle and Working Class Investors, 23 ANN. REV. BANKING & FIN. L. 851, 860 (2004) ("Some issues should more properly be seen as customer or consumer issues. The traditional approach in this respect is promoting effective disclosure and informed choices by consumers, rather than imposition of corporate governance rules or, for that matter, creation of new fiduciary duties."). Concededly, the effectiveness of mutual fund disclosure has been mixed, but many of those failures can be attributed to flaws in the disclosure process.
359. See, e.g., Edmund W. Kitch, The Theory and Practice of Securities Disclosure, 61 BROOK. L. REV. 763, 834-35 (1995) (observing that it took the SEC twenty years to require disclosure of the identities of those persons making investment decisions for the fund);
360. Douglas Litowitz, The Corporation as God, 30 J. CORP. L. 501, 526 (2005) (quoting former SEC Chair Arthur Levitt describing mutual fund disclosures as "impossible to understand"). Notably, studies suggest that the most problematic mutual fund investment patterns are in broker-directed investments, in which investors appear to rely on professional advice as an alternative to reviewing disclosure.
361. See, e.g., Bergstresser et al., supra note 59, at 36 (finding that funds sold through brokers have higher fees and lower returns).
362. See, e.g., Donald C. Langevoort, Private Litigation to Enforce Fiduciary Duties in Mutual Funds: Derivative Suits, Disinterested Directors and the Ideology of Investor Sovereignty, 83 WASH. U. L.Q. 1017, 1034 (2005) (suggesting that segmentation of the mutual fund market may prevent institutional investors from disciplining fees and returns in funds marketed primarily to retail investors).
363. See Fisch & Sale, supra note 16, at 1053 n.107 (describing the methodology of Institutional Investor magazine's analyst rating system);
364. Li, Performance, Herding, and Career Concerns of Individual Financial Analysts (EFA 2002 Berlin Meetings Discussion Paper, Jan. 15, 2002), available at http://ssrn.com/abstract=300889 (explaining that analyst rankings are based primarily on reputation and recognition).
365. See Melissa Lee & John Metaxas, Quality of Analysis Gradually Improving; Firms Publishing Accuracy of Research Predictions, CNBC, Apr. 30, 2004, available at http://www.investars.com/articles/ article30042004.asp (describing Investars as one of many firms now supplying performance-based analyst rankings).
366. For example, Investars offers some performance information to retail investors but its Internal Performance Measurement platform is sold to institutional clients. See Investars, http://www.investars.com/synopsis.asp. StarMine used to provide free limited information to retail investors, but discontinued that service in favor of selling a more complete service to portfolio managers and other professional investors. See StarMine, http://www.starmine.com/index.phtml?page_set=investor (last visited Aug. 8, 2007) (explaining that StarMine's analyst rating service for individual investors has been discontinued because it was "currently focusing [its] resources on [its] institutional-grade StarMine Professional research service"). Some of StarMine's information is also available free through Yahoo! Finance, http://finance.yahoo.com/q/sa?s=YHOO (last visited Aug. 8, 2007).
367. A further existing limitation is that analyst ratings, when available, are not provided to investors together with the analyst's recommendation and report, creating search costs. SECAW would provide a readily identifiable and reliable source of this information.
368. See Alistair Barr, Rating the Independent Researchers; Despite Restrictions, Some Researchers Are Tracked, CBS MARKETWATCH, Aug. 6, 2004, available at http://www.investars.com/articles/article08062004- 2.asp (stating that the independent firms restrict rating service access to the necessary information if the service is going to provide ratings to retail investors).
369. See Barr, supra note 92 (explaining that independent research providers are not required to disclose their recommendations or their performance).
370. Barr, supra note 288.
371. See supra note 286 (describing StarMine's decision to stop providing free analyst ratings to retail investors).
372. One recent example is a pending class action against Credit Suisse and its analysts in connection with research about America Online (AOL). The district court recently rejected the defendant's motion to dismiss, finding that the plaintiffs had sufficiently alleged both transaction and loss causation. In re Credit Suisse-AOL Sec. Litig., No. 02-12146-NG, 2006 U.S. Dist. LEXIS 86363 (D. Mass. Dec. 7, 2006).
373. The extent to which public enforcement or criminal litigation serves as a substitute for private civil liability is beyond the scope of this Article. For an analysis of the interplay and potentially complementary roles of government enforcement actions and private civil litigation, see Jill E. Fisch, Class Action Reform, Qui Tam, and the Role of the Plaintiff, LAW & CONTEMP. PROBS., Autumn 1997, at 167, 198-202.