GAO Report Supports Analyst Independence


The U.S. Government Accountability Office (GAO) issued a report last week recommending potential improvements to regulation safeguarding analyst independence.  The GAO concluded that current regulation is effective, but that the Securities and Exchange Commission (SEC) needs to review those aspects of the Global Research Analyst Settlement (GRAS) which have not been codified into regulation and decide which are warranted, if any.

A provision of the Dodd-Frank Act directed the GAO to examine the effectiveness of regulations implemented to address research analyst conflicts and suggest additional actions regulators could take.  The GAO reviewed academic literature, regulatory examinations and enforcement actions, as well as speaking with a variety of market participants, including four independent research firms (unnamed).

The 65 page report concludes that current regulation is generally effective, although noting that not all conflicts between investment banking and research can be eliminated and certain restrictions can be circumvented.  The findings were based on academic studies indicating improvements in stock recommendations, reduced levels of exam deficiencies and enforcement actions, reports from the independent consultants appointed as part of the GRAS, and commentary from market participants.

The GAO said that the Financial Industry Regulatory Authority (FINRA) has been working since 2008 to combine the regulations originally issued by its predecessors, the National Association of Securities Dealers and the New York Stock Exchange, into a consolidated rule, along with a few tweaks.  At the same time, FINRA has been working on rules applying to fixed income research.  The GAO report indicated that FINRA plans to integrate these initiatives with the goal of submitting a proposed rule covering both equity and debt markets to the SEC in the first half of this year.

According to the GAO, FINRA had no intention of having these rules supersede current GRAS regulation which is largely still in force for the investment banks which participated in the settlement.  The report therefore recommends that the SEC review those provisions of GRAS which are not incorporated in current regulation and decide whether those provisions should be included in the regulation that FINRA is preparing.  The SEC agreed with this recommendation, and is presumably acting upon it.

The GRAS provisions are more prescriptive in outlining information and organizational barriers between research and investment banking than current regulation and contain additional disclosure requirements.

Some in the independent research community had hoped for some continuation of the GRAS provisions requiring the distribution of independent research.  The GAO report does not include any recommendations along those lines, and includes no discussion of independent research.

At the other end of the spectrum, there are those who favor abolishing the GRAS provisions The GAO report offers little support for this either.


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