WALL STREET JOURNAL.
New Wall Street Conflict: Analysts Say ‘Buy’ to Win Special Access
for Their Clients
Securing face time for investors with top executives has become a
vital revenue source for securities firms; ‘brand ambassadors’ at
Coach’s headquarters in New York City in May. The luxury handbag
maker doesn’t let analysts who have a sell rating on its stock
host private meetings between their investor clients and top
PHOTO: MICHAEL NAGLE/BLOOMBERG NEWS
Serena Ng and
Updated Jan. 19, 2017 11:31
Analysts who want top
executives at Coach Inc. to
attend private events with their investor clients have to show they
are “brand ambassadors,” as the luxury
handbag retailer dubs it. You can’t be a brand ambassador
if you have a sell rating on Coach’s stock.
Coach investor-relations chief
Andrea Resnick says it takes that approach because of “the sheer volume of
requests” from analysts to have its management meet mutual funds, hedge funds
and other clients. Coach can’t say yes to everyone, she adds, so it has to
decide who gets access—and who doesn’t.
In 2003, a
$1.4 billion settlement between Wall Street securities firms and
regulators sought to eradicate conflicts of interest that led analysts to issue
overly positive research on companies, a phenomenon designed to help win
investment-banking deals. More than a decade later, the impact of the settlement
has helped exacerbate another set of potential conflicts.
Securities firms have struggled ever
since the settlement to make their research profitable. As a result, analysts’
relationships with company executives, including the ability to line up private
meetings for investor clients, have become an increasingly vital revenue source.
And that is increasing the pressure for analysts to be bullish on the publicly
traded companies they follow.
U.S. investors paid $2 billion in
brokerage commissions for corporate access in 2016, or more than a third of all
the money spent on stock research and related services, according to consulting
firm Greenwich Associates.
Many securities firms tally the
number of times their analysts take company executives on the road to meet
clients and use the number to help decide analysts’ annual bonuses.
At some firms, as much as one-third
of analysts’ yearly pay can be tied to corporate access, says James Valentine,
the founder of training and consulting firm AnalystSolutions LLC. Analysts
generally earn in the six figures a year, but pay ranges widely by experience
and securities firm.
Current and former analysts say
those forces can cause them to err on the side of producing rosy research
reports rather than jeopardize lucrative relationships with investor clients.
“It’s a decision I have to make on
my sell-rated stocks: whether I will forgo the opportunity for corporate access,
which clients will explicitly pay for,” says Laura Champine, a retail analyst at
Roe Equity Research. Some previous bosses at other firms told her to “just drop
coverage” instead of putting out sell ratings, she says, while declining to
comment on where that happened.
“When your compensation is in part
based on how many meetings you set up in a given year, it’s really tough to
stick to your guns,” says Eric Hollowaty, a former analyst at Stephens Inc. who
covered consumer companies.
Warren Stephens, the securities
firm’s chairman, president and chief executive, says in a statement that
analysts at Stephens “are encouraged to stay true to their convictions…even if
it means less access for us.”
Analysts’ ability to arrange private
events with management for clients is just a “minor aspect of compensation,” he
says, adding that “turnover is very low among our analysts.”
A federal rule bars companies from selectively
disclosing material nonpublic information but doesn’t prohibit
private conversations with investors. Companies also are allowed to control how
analysts and investors get access to corporate executives. Mutual funds and
hedge funds, meanwhile, are happy to pay for the opportunity to pepper top
executives with questions out of earshot of rival investors, possibly
gleaning information to inform trading decisions.
Coach’s Ms. Resnick says any analyst
may meet one-on-one with management, even if the analyst has a sell rating.
About 50 analysts currently cover Coach, she adds, and it has held investor
events with analysts who have buy or neutral ratings. Such analysts make up the
vast majority of those with a rating on the stock.
Just 6% of the roughly 11,000
recommendations on stocks in the S&P 500 index are sell or equivalent ratings,
according to research firm FactSet.
Last year, Deutsche
Bank AG agreed
to pay a $9.5 million penalty to settle civil charges that the firm “published
an improper research report” from an analyst who kept a buy rating on
Lots Inc. despite
telling some traders and hedge funds he had new concerns about the discount
retailer, according to the Securities and Exchange Commission.
A Big Lots store in Alhambra, Calif., on Thanksgiving morning.
Regulators suspended an analyst who kept a buy rating on Big
Lots despite telling some investor clients that he had new
concerns about the discount retailer.PHOTO: FREDERIC
J.BROWNAGENCE FRANCE-PRESSE/GETTY IMAGES
Those qualms were based on
information from investor meetings with Big Lots management hosted by
The SEC said Deutsche Bank’s
performance-evaluation system for analysts “assigned significant weight to
analysts’ access to and relationships with the senior management of the
companies they covered and the feedback that the firm received from its
Analysts received additional credit
for securing meetings with chief executive officers and chief financial
officers, the SEC said. The enforcement action didn’t conclude that the practice
of investors paying analysts for corporate access creates a potential for
conflicts of interest or other problems.
The Financial Industry Regulatory
Authority says securities firms need to be proactive about identifying and
defusing conflicts of interest that could affect the objectivity of their
Amanda Williams, a spokeswoman for
Deutsche Bank, says the firm “takes its research analyst communications and
conduct very seriously and has a robust policy and control framework.”
The analyst, Charles Grom, paid a
$100,000 penalty to the SEC, was fired by Deutsche Bank and is serving
a one-year suspension from the securities industry. Mr. Grom and
Deutsche Bank didn’t admit or deny wrongdoing. The analyst’s lawyer, Patrick
Smith, said Mr. Grom had no comment.
Analyst recommendations often carry
weight with small investors, says John Bajkowski, president of the American
Association of Individual Investors, a nonprofit group with 180,000 members.
Most retail investors tend to lack sophisticated financial data and seldom dig
through corporate filings, he says.
Some hedge funds and smaller money
managers also get trading and investment ideas from analysts. “As much as we can
screen the fundamentals of a company, those analysts are going to know far more
than me and my colleagues,” says Kevin Mahn, president of Hennion & Walsh Asset
Management Inc., which oversees $800 million in investment trusts held mostly by
Upgrades and downgrades by analysts
often move stock prices, says Mark Bradshaw, a Boston College accounting
professor who has researched the securities industry. That is one reason why top
executives care deeply about what analysts are saying, investor-relations
Mr. Valentine of AnalystSolutions, a
former analyst and managing director at Morgan
coaches analysts across the industry.
Many of them have a goal of
increasing the number of “non-deal roadshows,” or marketing trips that aren’t
tied to specific corporate transactions or stock sales but feature analysts
taking executives to the offices of current and potential investors. The
meetings allow executives to pitch an analyst’s clients on the company’s
strategy and investment value.
More than 90% of companies go on
such roadshows, according to a 2014 survey conducted by the National Investor
Relations Institute trade group.
Banks and brokerages often poll
large investors on the services they value most highly. Private meetings
arranged by analysts are cited among the top reasons why investors steered
trades through the banks and brokerages.
That decision is important because
commissions from such trades are part of the lifeblood at many financial firms.
Competition has intensified since the financial crisis because the pool of
available commissions is shrinking from price cuts and the rise of automated
Christopher King, a former Stifel
Financial Corp. analyst,
recalls asking Sprint Corp. for meetings with clients when he had a hold rating
on the wireless telecommunications company a few years ago. He says a Sprint
investor-relations officer asked why it should oblige when he didn’t have a buy
Two analysts who still follow Sprint
say their investor-meeting requests also were been rebuffed when their ratings
were negative. Twenty analysts have a buy or hold rating on Sprint, while nine
rate the stock a sell, according to Thomson Reuters.
Sprint’s head of investor relations,
Jud Henry, says he doesn’t recall telling analysts that they wouldn’t get
corporate access because they didn’t have a buy rating on the company. He says
Sprint executives recently attended conferences hosted by analysts with neutral
and sell ratings.
Meredith Adler, a longtime
retail analyst who retired from Barclays PLC
in early 2016, says companies sometimes reacted to sell ratings by cutting
analysts off, which was “a hardship because your questions go unanswered and
you’re deprived of information,” she adds.
The former analyst recalls that
Family Dollar Stores Inc. wouldn’t let analysts with negative ratings take
executives on the road to meet with investors, though the discount retailer
would still maintain contact with those analysts.
Family Dollar was acquired by Dollar
Tree Inc. for
about $9 billion in 2015. Randy Guiler, Dollar Tree’s head of investor
relations, says the company considers executives’ availability, analysts’
ratings and other factors when making decisions about corporate-access events.
Media analyst Richard Greenfield of
BTIG LLC says his emails, phone calls, and a request for an investor meeting
Disney Co. have
gone unanswered since he issued a sell rating on the company in December 2015.
The rating went out on the same day
as the world-wide release of “Star
Wars: The Force Awakens.” Before then, when Mr. Greenfield had a buy
rating on the stock, he was regularly invited to Disney events and once hosted a
meeting between a group of investors and a Disney executive, the analyst says.
“Everything changed when we went to
a sell,” says Mr. Greenfield. When Disney invited more than 50 analysts and
investors to the opening of its Shanghai
Disneyland resort last summer, Mr. Greenfield was left out.
Disney did invite Barclays analyst
Kannan Venkateshwar, who had an “underweight” rating on Disney last spring,
according to people familiar with the matter.
In November, Mr. Venkateshwar
boosted his Disney rating, and he is scheduled to hold an investor meeting with
Disney next month, one of the people says.
David Strasser, a former retail
analyst at Janney Montgomery Scott LLC, says some investors told him they had
little interest in his research and were only paying for meetings he could set
up with companies.
“I wanted to be valued for my
analytical abilities, but arranging meetings became such a critical part of the
job,” says Mr. Strasser, adding that he was sometimes asked to sit outside the
room so investors could ask questions without him. In 2015, he left the research
industry to join a venture-capital firm.
When Steve West was an analyst
covering restaurants and grocery chains, many companies did roadshows only with
analysts who had buy ratings, he says. Corporate access “became part of the
overall calculus,” he adds.
Mr. West is trying to change things
now that he is Panera
Bread Co.’s vice
president of investor relations. He says Panera’s policy is that all analysts
can get their clients face time with management regardless of their rating on
“It shouldn’t be a popularity
contest,” he says.
Write to Serena
Ng at firstname.lastname@example.org and
Thomas Gryta at email@example.com