Minnesota Public Companies: Can You "Pay For" Research Coverage?
By: JOHN W. LUNDQUIST
November 2003
There is a local slant to the historic settlement reached last April among leading investment firms on one hand, and the SEC, NASD, NYSE, and New York Attorney General’s office on the other.
In that highly publicized settlement, ten of the largest investment firms in the country (including U.S. Bankcorp Piper Jaffray) agreed to pay nearly $1.4 billion to settle allegations that research analysts at brokerage firms were inappropriately influenced by the investment banking arms of their firms. Some were alleged to have issued fraudulent research reports on companies who had paid hefty investment banking fees to them. Others were accused of issuing research reports that were not based on principles of fair dealing and good faith and that contained exaggerated or unwarranted claims about the covered companies. Still others were alleged to have received undisclosed payments for research. According to the NYSE, the settlement establishes “a clear bright line – a banker is a banker and an analyst is an analyst. The two shall never cross.”
This issue has now come uncomfortably close to home.
The SEC is ringing up a number of small and mid-size Minnesota public companies to inquire about their dealings with an investor relations firm that also provides research coverage. The SEC has not made allegations against any of the parties involved. To date, it has only gathered documents and information pertaining to the nature of the relationship and whether there was any direct or indirect quid pro quo for research coverage.
Among the issues that can arise when a firm “pays for” research is whether the reports could be viewed as inaccurate and, thus, in violation of anti-fraud laws. Investment advisors may also be viewed as having breached their fiduciary duty to customers by recommending stocks simply because they receive fees from the issuers, particularly if those fees were not disclosed. Lastly, Regulation FD (Fair Disclosure) may be violated if an analyst is getting information in advance of the market via an investor relations or investment banking employee of his or her firm.
While, to date, the focus of the SEC has been on investment banking firms and investment advisors, it is likely that, in the future, companies who are perceived to have pressured analysts to provide favorable coverage could find themselves under scrutiny as well.