Regulation FD Boosts Alternative Research


New York, NY – Last week we wrote a blog about a new paper by Professor Paul Healy of Harvard Business School which reviewed all of the academic studies in recent years to determine how Regulation Fair Disclosure has impacted the U.S. capital markets.  However, one topic that has never been addressed by other authors is how Regulation Fair Disclosure has actually been one of the most influential forces spurring the growth of the Alternative Research industry in recent years.  The following article discusses this topic.

Reduces Value of Sell-Side Research

Before we discuss how Regulation Fair Disclosure has prompted growth in the Alternative Research industry, we need to discuss what Regulation FD has done to sell-side and buy-side research.

Most analysts who discuss this topic agree that Reg FD had a significant impact on sell-side research as analysts could no longer build their research franchises on the strong relationships they had with company managements, and the preferred access they had to material non public company information.  Consequently, after Reg FD was passed, many sell-side analysts have been forced to reinvent themselves by developing other ways to add value to their clients.

Of course, another development which has had a significant impact on the quality and value of sell-side research has been the Global Research Analyst Settlement.  The GRAS eliminated the direct link between investment banking and the compensation received by sell-side analysts.  The lower compensation which resulted encouraged many sell-side analysts to leave the business – a brain drain that had a huge impact on the quality of sell-side research.  As a result, the number of sell-side analysts has plunged in recent years.  The number of sell-side analysts has dropped from more than 16,000 in 2001 to just over 9,000 in 2006, according to a Tabb Group report.

In the wake of these developments, many buy-side clients have decided that post Reg FD (and post GRAS) sell-side research has been decreasingly less useful.  Numerous surveys have shown this.  In fact, a survey conducted last summer by industry consultant, Greenwich Associates, revealed that 18% of all buy-side analysts planned to spend less of sell-side research over the following 12 months.  Close to 30% of all hedge Fund analysts surveyed also planned to reduce their use of investment bank and brokerage research over the same time frame.

Forces Buy-Side to Increase Internal Research Spend

Historically, buy-side firms relied on the sell-side for much of their investment research input.  However, the impact of Reg FD on the sell-side led many buy-side firms to increase their investment on their internal research capabilities.  As a result, countless buy-side firms have expanded the number of analysts under their employ.

For example, Boston-based Fidelity, embarked on an aggressive campaign a few years ago to increase their number of full-time research analysts.  Now Fidelity employs close to 500 analysts, up from 315 analysts in mid 2005.  Denver-based Janus Funds increased the number of senior analysts on staff from 19 in 1999 to 48 in late 2007.  Elsewhere, buy-side firms continues hiring research analysts.  T. Rowe Price has hired 34 analysts since 2005, and now has 120 research professionals worldwide. DWS Scudder added 30 U.S. analysts in 2006 alone, bringing the New York-based shop to 138 U.S. analysts.

This data is consistent with surveys conducted last year of buy-side analyst hiring plans.  A survey conducted by Greenwich Associates revealed that U.S. buy-side institutions increased the number of equity analysts they employed from just under 10 analysts in 2006 to between 11 and 12 analysts in 2007.  This result reflected no change in the number of equity analysts at  hedge funds, while mutual funds saw close to a 50% increase from just over 12 analysts in 2006 to slightly more than 18 analysts in 2007.Buy-side institutions also expect to continue hiring equity analysts in the coming years.  In fact, the Greenwich survey shows that 47% of buy-side firms plan to increase the number of equity analysts they hire over the coming 12 months.  Of this total, slightly more than half of all mutual funds and close to two-thirds of hedge funds expect to increase their hiring of equity analysts in the coming 12 months.

Boosts Demand for Alternative Research

One of the great paradoxes of the investment research business is the fact that increasing the number of buy-side analysts actually increases the amount of alternative research consumed by institutional investors.  This is consistent with a Greenwich Associates survey conducted last summer which reported that over the next twelve months, close to 40% of buy-side firms plan to increase their use of independent research.

However, the impact of Reg FD has been evident in the alternative research industry for quite a few years. In fact, since 2000, the absolute number of alternative research firms in the US has expanded by 46% as 167 new firms have opened for business.

One of the research segments which has seen the most robust growth since the passing of Reg FD has been the primary research industry.  For example, the number of Expert Network providers has grown by 260% from 2000 to the present, while the number of Channel Check providers has surged 320% over that same time period.

Reg FD versus Global Research Analyst SettlementOf course, some might argue that bulk of the growth in the alternative research industry in recent years was a result of the Global Research Analyst Settlement. And while it is true that the GRAS had some impact on the alternative research industry, it is by no ways the whole story.

During the period January 1, 1999 to April 31, 2008, 181 new Alternative Research Providers were founded.  However, a large proportion of these firms were not eligible to participate in the Settlement.

 Types of New ARPs: 1999 – 2008

Type of Research Firms

% of Firms













As is evident from the table above, 51% of the firms formed since the beginning of 1999 were either Fundamental or Quantitative Research – the type of research that was deemed allowable under the terms of the Research Settlement.  As a result, 49% of the firms that have started up in recent years were formed not as a response to the Settlement, but in response to the increased demand of buy-side analysts, portfolio managers, and hedge fund managers.


It is our view that Regulation Fair Disclosure was successful in leveling the information playing field by eliminating (or at least drastically reducing) the practice of selective disclosure of material non-public information by company management and their favorite sell-side analysts.

However, the regulation also had a few unintended consequences including reducing the value of sell-side research while also forcing the buy-side to invest in their own research capabilities.  Strangely enough, Reg FD also had an unintended benefit of boosting buy-side demand for alternative research, as numerous entrepreneurs did a great job of filling the information void that was created by the passing of this regulation


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