Investment Advisor Agrees to End Survey of Investment Banks' Research Analysts (with Lofchie Comment)

BlackRock and New York Attorney General, Eric Schneiderman, reached an agreement regarding BlackRock's analyst survey that allegedly enabled the firm to obtain market-moving information about companies from research analysts ahead of investors. The agreement includes the termination of the survey program and BlackRock agreed to pay for the attorney general's investigation costs, which amounted to around $400,000. The survey asked analysts questions about management, competition, earnings and other aspects, which Mr. Schneiderman's office determined allowed BlackRock to obtain useful market information potentially not available to other clients.

Lofchie Comment: To the extent that a policy issue is raised by the conduct discussed here, it seems that this is more the type of issue that should fall within the purview of the SEC rather than the NY Attorney General.This enforcement action raises a straightforward question. What are the economics of investment banks producing research? If the research produced by the investment banks is required to be made available to the general public at the moment it is produced, the research cannot have any value, since no one would be willing to pay for it. If no one is willing to pay for the research, then why should the investment bank produce it? Most of the recent regulatory pronouncements on the publication of research seem to presume that it should be free to all, which is not a workable economic model and which discourages investment banks from spending money on research. We start with the premise that the publication of research is a good thing since it has the long-term effect of directing investment towards good companies and away from bad ones. Query: how can we have a system for the publication of research that is honest, but that allows investment banks to make a profit by its publication?

See: Assurance of Discontinuance; Attorney General Press Release.