The Analyst as Fiduciary: A Misguided Quest for Analyst Independence?

The role of the research analyst has come under extensive scrutiny. Analyst conflicts of interest have been blamed for distorting analyst reports and recommendations, and undermining the analyst's role as an information conduit for investors and a gatekeeper of the integrity of the securities markets. The regulatory response has been a call for mandated analyst independence from conflicts of interest, particularly those relating to investment banking. This Article challenges the regulatory goal of analyst independence. The Article questions the extent to which so-called analyst business relationships are inconsistent with their client obligations and the degree to which the supposed conflicts reduce the quality of analyst information. The Article also demonstrates that the independence requirement can only be predicated on a conception of the analyst a fiduciary - a conception that is inconsistent with the nature of the research industry. More importantly, the Article argues that the costs of imposing fiduciary status on research analysts are too high. By removing viable sources of funding analyst research, mandated independence is likely to be counter-productive and to reduce market efficiency. As an alternative, the Article identifies several more limited regulatory changes that are likely to increase the value of analyst research to the market while maintaining its financial viability.