New York – At the recent Investorside Members Day conference held April 6th, Chairman Richard Leggett hosted a working lunch dedicated to two items: 1) a discussion of the major issues facing the independent research industry, and 2) a discussion of what Investorside should focus on in terms of serving its members in the most effective manner. Today’s blog outlines this discussion.
Members were asked what their main challenges were in the current environment. These comments related to 4 broad categories. The first was sales and distribution, where members discussed how to reach the right client base, the fact that a smaller pool of research dollars was being spent on independent research, how to grow sales, and how to expand demand for independent research among nontraditional research buyers.
Second were payment issues such as how to get paid, soft dollar transparency (or lack thereof), CSA allocations and non-payment for research services. This is a consistent concern with IRPs and speaks to their lack of negotiating power with clients. Additionally, sales taxes were raised. In New York State subscription services are taxable, while commission allocations are not. The burden of collection is placed on the vendor (i.e. the IRP) and many of the firms have been recently audited by New York State. In London, the same interpretation being enforced and the VAT is currently about 17%. In both cases, sales tax audits represent a significant financial risk for IRPs.
The third issue was compliance. Many of the members have been asked about their compliance practices by their clients, leading many members to try to beef up their compliance practices. In fact, we have heard from some buy-side clients that they will not hire research providers that are non-B/Ds simply because brokers must register and report to FINRA. Others commented on the negative press that the independent research industry has been subjected to as a result of recent and ongoing insider trading litigation.
The fourth category is related to a number of comments covering how to replace sales lost at the end of the GRAS, document security and lack of access to capital for research shops.
What should Investorside Focus On?
The next segment of the meeting was used to clarify what services Investorside could provide to best serve its membership. Again comments can be sorted into four broad categories. First and foremost, the members would like Investorside to have a voice in Washington to be active in education and lobbying in DC on regulations affecting independent research providers. In addition, discussants would like Investorside to communicate regulatory developments back to the membership, as well as track government funding that might apply to IRPs.
The participants thought Investorside could help with sales and distribution issues, such as being proactive in promoting research to pension funds and money managers, potentially helping with distribution, organizing events around best practices where the buy-side would be in attendance, and generally supporting the sales efforts of IRPs. Some of the participants thought that Investorside could help in setting up meetings between providers and potential clients.
Getting paid was another topic of discussion, where members discussed whether there was a way to get paid for performance of their research. IRPs felt that Investorside might be able to help in clarifying the costs and benefits around bundling vs. unbundling of the payments system.
Compliance was another area where the members felt Investorside could help, by potentially including a verification of compliance best practices as part of the Investorside certification process.
Over the years that Integrity has discussed ongoing issues and concerns related to the independent research business model, this meeting elicited a sense of déjà vue all over again, but also dealt with the new development of research compliance. On the business side of the equation are the sales, distribution and payment concerns that have seemed to improve with age. On the litigation/regulation front the new issue to be deal with is research best practices. The buy-side is near-paralyzed by compliance officers that have a new gravitas within their organizations these days. They are primarily concerned about insider trading and the use of research that could be tainted by contact with material non-public information. As such, making the sale or even maintaining the sales IRPs already have has become more difficult. What seems clear from the working lunch is that members would like Investorside focus on an expanded role in working the DC interface and in promoting research best practices for its members in the coming months.