Citi Post-Settlement Back to Business as Usual?

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New York – A Financial Times Article this morning discusses a plan by Citi to reverse the changes it made in response to the Global Research Settlement, spearheaded by Elliot Spitzer when he was New York’s Attorney General.  As a consequence of the settlement, Citi’s equity research department had been moved to Smith Barney’s wealth management group. Now, Citi is considering moving the equity research department back to the institutional securities division.

The main reasons for the expected changes are the economies of scale and economies of information within the research function—including fixed income, economic and equity—that would be achieved if all the groups were together. Additionally, the move would place the equity research group within the group—institutional securities–that mostly pays for the research services.

In some investment banks, involved in the settlement, the equity research team had been separated from the bankers organizationally rather than moving them to another department. The Sarbanes Oxley legislation enforced theses “Chinese walls” between the bankers and the equity research team, but did not force them to physically move to other divisions within the bank.

Between the Lines

Citi’s expected move could be an initial salvo in reference to how investment banks in general will react to the end of the settlement. Citi seems to be indicating that the perhaps things will revert somewhat to business as usual after the settlement expires in the summer of 2009.

We expect that the main trend will be for the IBs to unwind their relationships with independent research providers that were solely a result of the settlement. Those relationships that do work may be maintained and the platforms that have been developed by Goldman and Merrill will continue to exist. One saving grace for the alternative research providers has been the development of CCAs and CSAs in the interim. These vehicles give the alternative research shops more scope to go direct-to-client without the need for broker dealer status and make easier for buyside clients to get highly valued alternative research while maintained limited brokerage relationships.

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