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Expert Networks

:
Industry Barometer

Adam Sussman/ Cheyenne Morgan
TABB Group
Credit Default Swaps: Industry Projections | March 2009 1

January 2011 | www.tabbgroup.com

Executive Summary: Recent investigations are another blow to confidence and add to the negative perception of equity markets
Views of Expert Networks
 More

Regulation
 Participants

The Impact on the Industry
 Almost

than half of respondents agree it is a legitimate business in need of some guidance. than two-thirds of participants believe publiclytraded corporations should not allow employees to collect fees from expert networks. participants concur that expert networks will need more rigorous compliance standards.

 More

believe that there will only be limited arrest among investment advisers and banks; most arrests will be of those who divulged material, non-public information. But this is probably not for lack of trying by investigators. industry expects additional regulation to follow the current investigation. from nervous clients will also prompt expert networks to tighten up their compliance policies. regulators will need to be careful in weeding out the bad seeds without unintentionally outlawing proper research.

half of investment professionals who responded to the survey believe investigations will have only a limited impact on expert network revenue. need to invest in costly compliance measures could have the most negative repercussions on the industry. could be temporary as managers take time to reassess how expert networks are used and ensure they are in compliance.

 The

 The

 Industry

 This

 Pressure

 Federal

TABB Group

Expert Networks: Industry Barometer | January 2011 2

There is an overwhelming belief that the recent insider trading probe has put a damper on investor confidence
Are the current investigations harming investor confidence in equity markets?
 With

prominent mutual funds and hedge funds mentioned in the expanding federal probe of insider trading, ordinary investors could be concerned about their investments in those funds. enforcement actions can have positive or negative influence on confidence, respondents agree the current probe is having an overwhelmingly negative impact. a result of the expert networks investigation (and recent arrests), investment firms and sell-side analysts are reexamining their practices.

 While

 As

TABB Group

Expert Networks: Industry Barometer | January 2011 3

Insider trading, however, is viewed as having less of an impact on sentiment than other “negative” events
Which events have had the most negative impact on equity markets?
 Each

of the three “events” to the left have called into question different parts of the investment community. and a number of smaller cases are the most detrimental because most investors access the markets through investment advisers. Trust at that level is critical to the markets. like the Flash Crash make equity markets look like a casino where even the most prudent investor can lose it all in seconds. trading is relatively low on the list because the cost to investors is hard to calculate. are addressing each through additional regulations and enforcement actions.

 Madoff

 Events

 Insider

 Regulators

TABB Group

Expert Networks: Industry Barometer | January 2011 4

TABB Group conducted its third Industry Barometer to gauge current opinion on expert networks
Survey Demographics
 112

Broker/Dealer

26%

individuals responded to the poll from across a wide spectrum of the trading community. were emailed invitations during week of Dec. 20, 2010. Invitations were selected from the TABB Group database and responses were automatically grouped into the categories listed. In addition, links to questions were also available through our industry website, www.tabbforum.com. selected their segmentation. TABB Group could not validate the selfselected segmentation category includes: Advisory Firms, Consultants, Regulators, Exchanges and Media.

 Participants

Professional Services

24%

Technology

19%

 Participants

Other

17%

 *Other

Investment Professional Private Equity/VC
TABB Group

13%

1%

Expert Networks: Industry Barometer | January 2011 5

Industry pros believe expert networks are legitimate but there is concern over public perception and proximity to gray areas
Which of the following best describes your opinion on ‘talking to experts’?

 As

competition has grown, so has the pressure on firms to find the best consultants with the best information. designed to level the playing field for research providers may have inadvertently helped pave the way for a new form of insider trading. than half of participants agree it is a legitimate business in need of some guidance. are concerned that the government may be pushing the boundaries of what constitutes insider information and insider trading. industry clearly believes that the business practices of expert networks walk a fine line between legitimate and illegitimate research and that the industry is in need of a clear code of conduct.

 Regulations

 More

 Respondents

 The

TABB Group

Expert Networks: Industry Barometer | January 2011 6

Obtaining information regarding sales and revenue trends is an accepted practice but who you ask is critical
An analyst goes to a retail outlet and starts talking to employees. Indicate whether the following actions are acceptable or unacceptable:

 Very

few respondents believe asking questions on sales trends is crossing the line into inappropriate business practices. this ‘mosaic’ approach to research, a firm can collect small pieces of information from several sources to draw conclusions. a consultant goes to a retail store and asks about sales at that store, whether that information is considered an insider tip or an acceptable research method is murky. the 59% of respondents who find that approach acceptable probably assume there is not information being gleaned from any one store that would constitute unfair advantage.

 Using

 If

 However,

TABB Group

Expert Networks: Industry Barometer | January 2011 7

Firms should be wary of employees passing on non-public, material information
Should all employees of a company be banned from collecting fees from expert networks and investment firms?
 Publicly

traded companies need to carefully examine their policies regarding employees collecting fees from expert networks. than two-thirds of respondents believe employees should be banned from collecting such fees. prime example can be found in the highly publicized case against ex-Dell employee Daniel Devore, who pleaded guilty to divulging material, non-public information about Dell and its suppliers for a fee. employees may not know what constitutes nonpublic, material information, the safest thing to do is eliminate the risk.

 More

A

 Since

TABB Group

Expert Networks: Industry Barometer | January 2011 8

The impact of the investigation on expert network revenues has yet to be seen but participants anticipate some degree of decline
What impact will the current investigations have on expert network revenue?

 Almost

half of the investment professionals who responded to the survey believe investigations will lead to only a limited decline in expert network revenue. decline could be temporary as managers take time to reassess how expert networks are used and ensure they are in compliance. the need to invest in costly compliance measures – post regulation – could have a negative impact on the use of expert networks.

 This

 But

TABB Group

Expert Networks: Industry Barometer | January 2011 9

Arrests stemming from the investigation will be limited to a few bad apples, most likely the experts themselves
What do you think will be the result of the current investigations?
 The

majority of participants agree that arrests resulting from the current investigation will be limited. and investment banks do not appear to be the primary target; most people arrested so far have been the experts. a number of hedge funds and investment firms have been raided and served subpoenas. far, other than employees from Galleon Group, no one at a major hedge fund or investment firm has been accused of wrongdoing.

 Advisers

 However,

 So

TABB Group

Expert Networks: Industry Barometer | January 2011 10

Current compliance practices of expert networks are clearly viewed as insufficient
Are the current compliance processes at expert networks sufficient to prevent all but the most egregious violations?
 Respondents

concur that expert networks need more rigorous compliance standards. practices on confidentiality policies and vetting consultants are among respondents’ primary concerns. industry expects to be over-regulated following this highly publicized investigation. from clients will also prompt expert network firms to tighten their compliance policies.

 Best

 The

 Pressure

TABB Group

Expert Networks: Industry Barometer | January 2011 11

Most respondents anticipate some additional regulation on the use of expert networks
What is the likelihood that additional regulations will be passed governing the use of experts within the investment process?
 All

participants, including industry professionals, agree that there will be an increase in regulatory oversight of the use of expert networks. regulators will need to be careful in weeding out the bad seeds without unintentionally outlawing proper research. most recent investigation could potentially change how some investors do research. respondents believe the latest probe is simply a repeat of the usual back and forth between regulators and the financial industry.

 Federal

 The

 Some

TABB Group

Expert Networks: Industry Barometer | January 2011 12

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TABB Group

Credit Default Swaps: Industry Projections | March 2009 13

January 2011 | www.tabbgroup.com