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Expert Networks:

Industry Barometer

Adam Sussman/ Cheyenne Morgan

January 2011 | www.tabbgroup.com


TABB Group Credit Default Swaps: Industry Projections | March 2009 1
Executive Summary: Recent investigations are another blow to
confidence and add to the negative perception of equity markets
Views of Expert Networks Regulation The Impact on the Industry

 More than half of respondents  Participants believe that there will  Almost half of investment
agree it is a legitimate only be limited arrest among professionals who responded to
business in need of some investment advisers and banks; the survey believe investigations
guidance. most arrests will be of those who will have only a limited impact on
divulged material, non-public expert network revenue.
 More than two-thirds of information. But this is probably not
participants believe publicly- for lack of trying by investigators.  The need to invest in costly
traded corporations should not compliance measures could have
allow employees to collect  The industry expects additional the most negative repercussions
fees from expert networks. regulation to follow the current on the industry.
investigation.
 Industry participants concur  This could be temporary as
that expert networks will need  Pressure from nervous clients will managers take time to reassess
more rigorous compliance also prompt expert networks to how expert networks are used
standards. tighten up their compliance and ensure they are in
policies. compliance.
 Federal regulators will need to be
careful in weeding out the bad
seeds without unintentionally
outlawing proper research.

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.
 While enforcement actions
can have positive or
negative influence on
confidence, respondents
agree the current probe is
having an overwhelmingly
negative impact.
 As a result of the expert
networks investigation (and
recent arrests), investment
firms and sell-side analysts
are reexamining their
practices.

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.
 Madoff 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.
 Events like the Flash Crash
make equity markets look like a
casino where even the most
prudent investor can lose it all in
seconds.
 Insider trading is relatively low
on the list because the cost to
investors is hard to calculate.
 Regulators are addressing each
through additional regulations
and enforcement actions.

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 individuals responded to the poll from


Broker/Dealer 26% across a wide spectrum of the trading
community.
 Participants were emailed invitations during
Professional week of Dec. 20, 2010. Invitations were
Services
24% 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
Technology 19% industry website, www.tabbforum.com.
 Participantsselected their segmentation.
TABB Group could not validate the self-
Other 17% selected segmentation
 *Other category includes: Advisory Firms,
Consultants, Regulators, Exchanges and
Investment Media.
13%
Professional

Private
Equity/VC
1%

TABB Group 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.
 Regulations designed to level the
playing field for research providers may
have inadvertently helped pave the
way for a new form of insider trading.
 More than half of participants agree it is
a legitimate business in need of some
guidance.
 Respondents are concerned that the
government may be pushing the
boundaries of what constitutes insider
information and insider trading.
 The 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.

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.
 Using this ‘mosaic’ approach to
research, a firm can collect small
pieces of information from several
sources to draw conclusions.
 Ifa 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.
 However, 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.

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.
 More than two-thirds of
respondents believe
employees should be banned
from collecting such fees.
A 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.
 Since employees may not
know what constitutes non-
public, material information,
the safest thing to do is
eliminate the risk.

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.
 This decline could be
temporary as managers
take time to reassess
how expert networks are
used and ensure they
are in compliance.
 But the need to invest in
costly compliance
measures – post
regulation – could have a
negative impact on the
use of expert networks.

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.
 Advisers and investment
banks do not appear to be
the primary target; most
people arrested so far have
been the experts.
 However, a number of
hedge funds and
investment firms have been
raided and served
subpoenas.
 So far, other than
employees from Galleon
Group, no one at a major
hedge fund or investment
firm has been accused of
wrongdoing.

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.
 Best practices on
confidentiality policies and
vetting consultants are among
respondents’ primary
concerns.
 The industry expects to be
over-regulated following this
highly publicized investigation.
 Pressure from clients will also
prompt expert network firms
to tighten their compliance
policies.

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.
 Federal regulators will need to
be careful in weeding out the
bad seeds without
unintentionally outlawing proper
research.
 The most recent investigation
could potentially change how
some investors do research.
 Some respondents believe the
latest probe is simply a repeat
of the usual back and forth
between regulators and the
financial industry.

TABB Group Expert Networks: Industry Barometer | January 2011 12


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January 2011 | www.tabbgroup.com


TABB Group Credit Default Swaps: Industry Projections | March 2009 13