What Makes an Indie?

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New York—The NASD has announced that it will exempt independent investment research from its requirement of supervisory review of third party research under Rule 2711. In recent amendments to this Rule, the NASD beefed up its supervisory and disclosure requirements, and third party research was subject to review by supervisory analysts in the broker dealer distributing the third party research.

Research providers such as Argus Research and Standard & Poor’s which license their research to broker dealers for distribution to retail clients were concerned that the rule would hurt their business. According to John Eade, President of Argus Research, the proposed exemption should address the concern—subject, of course, to implementation.

The exemption will define independent research as being distinct from the distributing broker, with no input from the distributing broker on coverage or content. Research from other broker dealers could qualify for the exemption under this definition.

While solving the research distribution problem created by Rule 2711, the exemption creates a new definition of independent research, distinct from the definition used in the Global Research Settlement, which primarily focused on an absence of investment banking. When the Settlement was implemented 3 years ago, the term “independent research” was the organic food label of research. People assumed that independent research was better for you than Wall Street research. However, as the ‘independent consultants’ who implemented the Settlement found out, independent research can have other potential conflicts besides investment banking, such as asset management or paid-for research, which are not addressed in the Settlement definition.

Many research firms still cling to the indie label, but the cache has faded over the last few years. The term has been overused. The most fervent users are the paid for research providers. If you see a firm that aggressively labels itself independent, look at the fine print to see if it is paid for. More often than not, it is. The bigger issue is that independence from investment banking does not guarantee that research is good. Undifferentiated, me-too research is not going to thrive, whether it is affiliated with investment banking or not. Prudential marketed its research as independent, but it ultimately didn’t help.

So it is not the end of the world that the NASD is creating another, even weaker definition of independent research. Third party research has moved on—it is now alternative research.

Comment by David Miller:
For the record, BSR is “aggressively independent” and a big part of that is taking no money from anyone but our subscribers.

I’m aware you’d like the “alternative research” tag to stick for a myriad of reasons, but please take care in painting research firms like ours with overly broad statements that diminish our independence.

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