New York – While the systemic credit crunch continues, there are already significant signs of second tier impact on the research industry. We wrote yesterday about the direct impact on sell-side research shops as a result of the bankruptcy of Lehman, Bear and the Acquisition of Merrill by Bank of America. The next shock wave for the research industry will be the impact of the potential removal of three firms from participating in the Global Research Settlement, which was prosecuted by Elliot Spitzer.
Given that the settlement would have ended in July 2009, many of the research firms participating in the settlement have already been mulling over what the landscape in a post settlement world will look like. The settlement for the RPs involved in three of the 12 sell-side firms involved has come into question if not dissolved.
As one might expect, for the people involved, there are more questions than answers. The main question on the minds of the RPs involved is whether they will continue to get paid under the settlement from these firms.
An unofficial opinion from the SEC is they believe that the obligation under the settlement travels with the acquired firm and resides with the purchasing firm. Indeed, at least some of the contracts that were penned have survivorship clauses in them, implying that the acquiring firm would be saddled with the obligation. But it is clearly a stretch for an RP that had arrangements with Bear and JP Morgan or Merrill and Bank of America to assume that they would receive double payment from the combined entity.
The table below highlights a few of the research provides that have multiple contracts under the settlement with the firms currently in flux.
The lists that we have are from early in the settlement and may not reflect the current status of the research firms being hired.
| Provider |
Bear |
Lehman |
Merrill |
# Contracts |
| Argus |
X |
x |
x |
3 |
| Atlantis |
X |
x |
x |
3 |
| IPO Financial |
X |
x |
x |
3 |
| Boyers |
X |
|
x |
2 |
| BDR |
|
x |
x |
2 |
| Ross Smith |
|
x |
x |
2 |
Other firms that are likely at risk of taking significant revenue hits are Morningstar, Standard and Poor’s, TheStreet.com, Renaissance and Zacks.
Many feel that the independent consultant (IC) would have latitude to decide what firms to keep versus which to let go, as long it related to the coverage that RPs are providing for clients. Under this logic, the IC could discard duplicate firms or at least duplicate coverage of the research providers they are following. This assessment may be the case for Bear and Merrill, but the Lehman situation is less certain.
The Lehman story is confused even further by the Chapter 11 filing of the holding company over the weekend. In the news, we have heard that firms, such as Independent II Research, have been affected deeply by the Lehman bankruptcy because Lehman is one of IIIR’s largest clients. Fortunately for IIIR, they have an agreement with the LSE in place.
Lehman’s investment banking business, notably the research sales and trading area (brokerage) has received a bid from Barclays, prompting some to call for a quick resolution to the counterparty issues faced by Lehman’s trading partners. Whether this extends to the resumption of the research settlement payments is doubtful. And in any case the resolution to the situation will need to be resolved by the bankruptcy judge, not the board of directors. As such, Lehman is likely to remain in limbo for some time.
Others in the know indicate that the contracts are more likely to be renegotiated. This renegotiation could be between the ICs and the RPS or could also include the regulators. If the latter is the case, there is a small risk to the RPs that the Settlement could dissolve altogether.
If not, one final question for the RPs is what will happen to the money that has not been expended in the global settlement. The IBs are well behind schedule in purchasing research over the 5 year plan. Many RPs are concerned that this commitment might evaporate along with their contracts. Ultimately, it will be a regulatory decision that will throw light on this concern. Many of the RPs are attempting to revive the concept that the exchanges could offer independent research on the stocks they trade and that perhaps the excess global settlement funds could help fund this. After all, excess funds were originally bequeathed to the NASD and the NYSE.
We will have to wait until a little more of the dust settles to see where the SEC, the ICs, bankruptcy courts come out on these issues. Until then buckle up.