TABB Group Industry Barometer: Expert Networks

8/8/2019 TABB Group Industry Barometer: Expert Networks

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TABB Group Credit Default Swaps: Industry P rojections | March 2009 1

Expert Networks:Industry Barometer

Adam Sussman/ Cheyenne Morgan

January 2011 | www.tabbgroup.com



TABB Group Expert Networks: Industry Barometer | January 2011 2

Executive Summary: Recent investigations are another blow toconfidence and add to the negative perception of equity markets

Views of Expert Networks

More than half of respondentsagree it is a legitimatebusiness in need of some

guidance.

More than two-thirds ofparticipants believe publicly-traded corporations should notallow employees to collect

fees from expert networks. Industry participants concur

that expert networks will needmore rigorous compliancestandards.

Regulation The Impact on the Industry

Participants believe that there willonly be limited arrest amonginvestment advisers and banks;

most arrests will be of those whodivulged material, non-publicinformation. But this is probably notfor lack of trying by investigators.

The industry expects additionalregulation to follow the currentinvestigation.

Pressure from nervous clients willalso prompt expert networks totighten up their compliancepolicies.

Federal regulators will need to becareful in weeding out the badseeds without unintentionallyoutlawing proper research.

Almost half of investmentprofessionals who responded tothe survey believe investigations

will have only a limited impact onexpert network revenue.

The need to invest in costlycompliance measures could havethe most negative repercussionson the industry.

This could be temporary asmanagers take time to reassesshow expert networks are usedand ensure they are incompliance.




Are the current investigations harming investor confidence in equity markets?

With prominent mutualfunds and hedge fundsmentioned in the expanding

federal probe of insidertrading, ordinary investorscould be concerned abouttheir investments in thosefunds.

While enforcement actions

can have positive ornegative influence onconfidence, respondentsagree the current probe ishaving an overwhelminglynegative impact.

As a result of the expertnetworks investigation (andrecent arrests), investmentfirms and sell-side analystsare reexamining theirpractices.

There is an overwhelming belief that the recent insider tradingprobe has put a damper on investor confidence




Which events have had the most negative impact on equity markets?

Each of the three “events” to theleft have called into questiondifferent parts of the investment

community.Madoff and a number of smaller

cases are the most detrimentalbecause most investors accessthe markets through investmentadvisers. Trust at that level is

critical to the markets.

Events like the Flash Crashmake equity markets look like acasino where even the mostprudent investor can lose it all in

seconds. Insider trading is relatively low

on the list because the cost toinvestors is hard to calculate.

Regulators are addressing each

through additional regulationsand enforcement actions.

Insider trading, however, is viewed as having less of an impact onsentiment than other “negative” events




26%

24%

19%

17%

13%

1%

Broker/Dealer

Professional

Services

Technology

Other

Investment

Professional

Private

Equity/VC

TABB Group conducted its third Industry Barometer to gaugecurrent opinion on expert networks

Survey Demographics

112 individuals responded to the poll fromacross a wide spectrum of the tradingcommunity.

Participants were emailed invitations duringweek of Dec. 20, 2010. Invitations wereselected from the TABB Group database andresponses were automatically grouped intothe categories listed. In addition, links toquestions were also available through our

industry website, www.tabbforum.com.

Participants selected their segmentation.TABB Group could not validate the self-selected segmentation

*Other category includes: Advisory Firms,

Consultants, Regulators, Exchanges andMedia.


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Industry pros believe expert networks are legitimate but there isconcern 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 thepressure on firms to find the bestconsultants with the best information.

Regulations designed to level theplaying field for research providers mayhave inadvertently helped pave theway for a new form of insider trading.

More than half of participants agree it isa legitimate business in need of someguidance.

Respondents are concerned that thegovernment may be pushing theboundaries of what constitutes insider

information and insider trading.

The industry clearly believes that thebusiness practices of expert networkswalk a fine line between legitimate andillegitimate research and that theindustry is in need of a clear code of

conduct.



An analyst goes to a retail outlet and starts talking to employees. Indicate whether the followingactions are acceptable or unacceptable:

Very few respondents believe askingquestions on sales trends is crossingthe line into inappropriate businesspractices.

Using this ‘mosaic’ approach toresearch, a firm can collect smallpieces of information from several

sources to draw conclusions.

If a consultant goes to a retail store andasks about sales at that store, whetherthat information is considered aninsider tip or an acceptable researchmethod is murky.

However, the 59% of respondents whofind that approach acceptable probablyassume there is not information beinggleaned from any one store that wouldconstitute unfair advantage.

Obtaining information regarding sales and revenue trends is anaccepted practice but who you ask is critical



Should all employees of a company be banned from collecting fees from expert networks andinvestment firms?

Publicly traded companiesneed to carefully examinetheir policies regarding

employees collecting feesfrom expert networks.

More than two-thirds ofrespondents believeemployees should be bannedfrom collecting such fees.

A prime example can befound in the highly publicizedcase against ex-Dellemployee Daniel Devore, whopleaded guilty to divulging

material, non-publicinformation about Dell and itssuppliers for a fee.

Since employees may notknow what constitutes non-public, material information,the safest thing to do iseliminate the risk.

Firms should be wary of employees passing on non-public,material information



What impact will the current investigations have on expert network revenue?

Almost half of theinvestment professionalswho responded to the

survey believeinvestigations will lead toonly a limited decline inexpert network revenue.

This decline could be

temporary as managerstake time to reassesshow expert networks areused and ensure theyare in compliance.

But the need to invest in

costly compliancemeasures – postregulation – could have anegative impact on theuse of expert networks.

The impact of the investigation on expert network revenues hasyet to be seen but participants anticipate some degree of decline



What do you think will be the result of the current investigations?

The majority of participantsagree that arrests resultingfrom the current

investigation will be limited.

Advisers and investmentbanks do not appear to bethe primary target; mostpeople arrested so far havebeen the experts.

However, a number ofhedge funds andinvestment firms have beenraided and servedsubpoenas.

So far, other thanemployees from GalleonGroup, no one at a majorhedge fund or investmentfirm has been accused ofwrongdoing.

Arrests stemming from the investigation will be limited to a fewbad apples, most likely the experts themselves



Are the current compliance processes at expert networks sufficient to prevent all but the mostegregious violations?

Respondents concur thatexpert networks need more

rigorous compliancestandards.

Best practices onconfidentiality policies andvetting consultants are among

respondents’ primaryconcerns.

The industry expects to beover-regulated following thishighly publicized investigation.

Pressure from clients will alsoprompt expert network firmsto tighten their compliancepolicies.

Current compliance practices of expert networks are clearlyviewed as insufficient



Most respondents anticipate some additional regulation on theuse of expert networks

What is the likelihood that additional regulations will be passed governing the use of experts withinthe investment process?

All participants, includingindustry professionals, agree

that there will be an increase inregulatory oversight of the useof expert networks.

Federal regulators will need tobe careful in weeding out the

bad seeds withoutunintentionally outlawing properresearch.

The most recent investigationcould potentially change howsome investors do research.

Some respondents believe thelatest probe is simply a repeatof the usual back and forthbetween regulators and thefinancial industry.


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TABB Group Industry Barometer: Expert Networks