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Note to the SEC on Research for Dollars: Keep it Simple

Traders Magazine Online News, August 28, 2017

David Weisberger

Bloomberg reports on the SEC “working on” resolving the conflict between the US policy on paid research and MiFID II.  The US rules require that those who sell research be a registered investment adviser, and the European rules require that investment managers pay for non-adviser, broker research directly.  The simple answer for the SEC is to provide “guidance” that research can be sold to registered investment advisers, registered investment managers, or the equivalent of those when registered in a foreign jurisdiction. Simply put, brokers should be able to sell research to professionals, whose job requires them to determine its value anyway.

That said, while it would be simple and reasonable to provide this “exemption” to current broker rules, in the longer term, it could be justified to conduct a more holistic review of investor protection.  Whatever one might think of brokers, there is a mechanism for the SEC to review their research production and distribution process to protect investors.  NON-broker competition, however, has no such regulator and they are becoming more important in the investment ecosystem.

Whether it is newsletters or websites producing research that retail investors consume or multi-billion-dollar companies like my ex-employer (IHS Markit) producing research on companies, sectors, economic data, or stock price predictions, there is no SEC oversight on the quality or potential conflicts created by that research.  It is hard to understand how regulated brokers selling their research could undermine investor protection more than the “wild west” of research sales being developed by non-brokers… NOTE that I am not calling for government regulation of all financial information, but do think that it is important that regulation be consistent.  More important, IF the government determines the need to regulate information,  it should be developed with a recognition of evolving business models, including financial technology providers that are neither brokers nor investment advisers.

The World is not “Normal”…

One of my favorite axioms to explain things to either my own children or others when confronted with failure, is that the world is not fair.  In August 2007, I modified that expression, to explain to my statistical arbitrage team, that the world is not normal, either.   Of course, in that context, I was describing the “distribution” of possible outcomes in a statistical sense to some of my researchers.  They had just breathlessly explained that the losses we had just experienced in our small value-based, long/short strategy were a 15 standard-deviation event.   (To put this in perspective, based on the probability function used in that model, it was roughly the probability of a devastating meteor strike hitting the Citigroup building during the same conversation we were having)

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