“It’s been ten years since prosecutors announced a $1.4 billion settlement with the Wall Street’s biggest investment banks and two individual stock analysts over accusations that the firms and analysts had duped investors to curry favor with corporate clients. Under the terms of the settlement, twelve investment banks agreed to separate their securities analysis from their investment banking business.
One of the key reforms put in place in the settlement was the bar on basing the compensation of stock analysts on their contribution to investment banking revenue. This was meant to prevent analysts from becoming shills for the corporate clients that were paying fees to the investment banks for stock and bond underwriting deals.
A new study suggests that this part of the settlement may have fallen by the wayside.
Four researchers—Lawrence Brown of Temple University, Andrew Call of Arizona State University, Michael B. Clement of the University of Texas at Austin and Nathan Y. Sharp of Texas A&M University—surveyed 365 sell-side analysts to see how the business of stock analysis is conducted these days. Startlingly, they found that 44 percent of the analysts indicated that their success at generating underwriting business or trading commissions is “very important” to their compensation.
Only 20 percent indicated that underwriting and commissions were “not important” to their compensation. Which means that another 36 percent said these things—supposedly walled off ten years ago—were somewhat important. That’s a total of 80 percent who said that generating underwriting business and trading commissions play some role in their compensation.
In other words, the so-called Chinese walls between analysis and investment banking appear to have come crashing down—and almost no one has noticed….”
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