New rules aimed at cleaning up research scams are causing a brain drain on Wall Street -- but this is a good thing, some say.
Regulations such as the Analyst Certification Rule, adopted earlier this month, have sent many experienced analysts scurrying. Banking analyst Diane Glossman recently left
, while Deepak Raj, head of stock research at
, exited the company's brokerage division following the departure of Robert McCann, Merrill's top research director.
While the exodus may temporarily dent the industry as newcomers try to learn the ropes, it's an acceptable price to pay to fix a system that was broken for so long, some market watchers say.
"The field could be losing some smart people, but if they were really smart, they would've been doing the right thing," said Alex Shapiro, a finance professor at New York University's Stern School of Business. Shapiro said research analysts had to stretch their muscles to justify some reports in the past, and now "people will be more realistic."
Securities and Exchange Commission's
new certification rule, which requires analysts to certify the accuracy of their research reports and disclose any related compensation, was passed following New York State Attorney General Eliot Spitzer's investigation into the sector last year. A slew of Wall Street firms were targeted for allegedly issuing tainted stock research connected to their investment banking business. This resulted in a $1.4 billion settlement with 12 firms, as well as a pact forbidding certain types of interaction between analysts and investment bankers. The agreement should be finalized within the next few weeks.
Estimates on how many grumpy analysts have left the field can be skewed, given the layoffs following the economic downturn, but experts calculate that approximately 10% of the departures happened after the recent overhaul in the industry. Among the recent high-profile defections: software analyst Chris Shilakes and media analyst Neil Blackley, both of Merrill Lynch.
"There is tremendous uncertainty over where the analysts are going. I believe different players will come into the industry, more academically oriented and less of the salesperson type of analyst," said Alan Johnson, managing director at Johnson Associates, a Wall Street consulting firm. Johnson said he welcomes the fact that the overhaul will "make clear what the profession is all about."
Nonetheless, changes aren't being readily accepted by either the research analysts or the banking industry. "Both fields dislike regulation," said Kei Kianpoor, chief executive of Investars, a Web site that tracks analyst research. "Analysts might find it pointless to certify their reports and could resent the bureaucracy. But in the long run, the rules will overcome the initial resistance and will become the industry's standard."
Wall Street firms
Salomon Smith Barney
Credit Suisse First Boston
, UBS Warburg and Merrill Lynch declined to comment.
Opponents of the new rules note that some of the analysts quitting the industry are among the best informed in the field. Also, they say, analysts' increased level of responsibility due to the new regulations will pose a bigger challenge for novices. Plus the stock market's recent decline and the aura of scandal surrounding the industry may scare smart people away from joining the field, some argue.
Bernadette Murphy, chief market analyst at Kimelman & Baird, said, "It's always bad to lose talent." Murphy believes it will take time for the industry to rebuild, and she sees young people seeking employment in fields outside the research industry. However, she noted that many of the more capable analysts who have left the large brokerages will probably set up their own boutiques to offer enhanced research. Murphy, who has been in the industry since the 1970s, thinks this could lead to more independent and thorough reports in the future. "Still, if somebody wants to be dishonest, will these rules make much of a difference?" she asked.
To be sure, New York University's Shapiro said, "There will still be crooked analysts out there, selling wishful thinking instead of real analysis, but the mentality has definitely changed in the right direction."
In fact some analysts themselves are in favor of the changes, saying that they consider the exodus to be positive if the analysts leaving are the ones who didn't adhere to a code of ethics. Brad Hintz, a brokerage analyst at Sanford Bernstein, said everyone should be accountable for what they put out. "The world of an analyst is an easy one. The new rules are nothing more than what other professionals of regulated entities in the financial industry have been doing for years. There's nothing new here," he said.
Timothy Curtiss, chief operating officer of Wall Street Investor Relations, said of the old-school analysts, "These analysts could go over the Chinese Wall, which is exactly what they are prohibited to do now."