In response to the spate of recent scandals in the telecommunications sector, a group of investment researchers has formed the Investorside Research Association, in a bid to restore investor trust.
"We're all here today because there is an obvious and serious problem of investor distrust towards investment research," said Precursor Group chairman Scott Cleland, chairman of the Investorside Research Association.
"It is unfortunate and unacceptable that the investment research industry failed miserably in warning investors early of deep problems at Enron [Corp.], WorldCom [Corp.], Global Crossing [Inc.], Adelphia [Communications Corp.] and others," he said.
Last Wednesday —the day of Cleland's press conference — five former Adelphia senior executives were arrested on federal fraud and conspiracy charges. The criminal complaint accused the executives of looting the MSO on a massive scale.
In the past, research companies worked closely with investment banks because they were more profitable than individual investors, said Cleland.
But in the wake of the recent accounting scandals, representatives from investment research companies are asserting that there are conflicts of interest inherent in such arrangements.
The IRA is a way to "insure that the research [investors] are using is conflict-free and independent," said Argus Research president John Eade, vice chairman of the association.
The association would establish a "robust" certification process to ensure that investment-research companies are not linked to banking interests, Cleland said.
Researchers would be required to submit proof certifying that their revenue comes primarily from investors, and not from investment banking.
A membership committee would review samples of the companies' research, its marketing materials, the provider's Web site and any other disclaimers.
Upon certification, research produced by companies would bear the association's seal, which would be registered with the U.S. Patent and Trademark Office and serve as a "legal check" on companies, which would be subject to truth-in-advertising laws, Eade said.
Ultimately, the association hopes to pacify investors by ensuring that research is not intended to benefit banking interests.
"The association's mission is to promote investor trust in capital markets through the use of investment research, which is aligned with investor interests," Cleland said. "If competitive investorside-research providers don't serve investor interests, they'll go out of business."
States News Service