1

Staff Report on the Issues Affecting the Provision of and Reliance Upon 

Investment Research Into Small Issuers

As Required by Section 106 of the Consolidated Appropriations Act, 2021

DISCLAIMER: This is a report of the Staff of the U.S. Securities and Exchange Commission. 

Staff reports, Investor Bulletins, and other staff documents (including those cited herein)

represent the views of Commission staff and are not a rule, regulation, or statement of the 

Commission. The Commission has neither approved nor disapproved the content of these 

documents and, like all staff statements, they have no legal force or effect, do not alter or amend 

applicable law, and create no new or additional obligations for any person. The Commission 

has expressed no view regarding the analysis, findings or conclusions contained herein.

February 18, 2022
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Table of Contents

I. Introduction ..................................................................................................................3

A. Congressional Mandate ..........................................................................................3

B. Overview ................................................................................................................4

II. Importance and Benefits of Research...........................................................................8

Research Generally.................................................................................................8

B. Importance and Benefits of Research...................................................................10

1. Liquidity .........................................................................................................11

2. External Governance Mechanism ..................................................................13

III. Conflicts of Interest Related to Research ...................................................................15

IV. Legislative and Regulatory Measures Addressing Conflicts and Their Impacts on 

Research Coverage .....................................................................................................18

Legislative and Regulatory Measures Addressing Conflicts ...............................18

1. Global Research Analyst Settlement..............................................................18

2. Sarbanes-Oxley and FINRA Rule 2241 .........................................................19

3. Regulation Analyst Certification....................................................................22

4. JOBS Act........................................................................................................22

5. State Regulation of Analysts..........................................................................24

Impacts of Measures on Research Coverage........................................................25

V. Payment Mechanisms and Costs of Research ............................................................28

Brokerage Commissions or “Soft Dollars” for Research.....................................29

B. “Hard Dollars” for Research ................................................................................32

C. Impacts of MiFID II on Payment Mechanisms and Research Costs....................36

1. Payment Mechanisms for Research ...............................................................37

a. Research Use ............................................................................................39

b. Issuer-Sponsored Research.......................................................................42

2. Research Costs ...............................................................................................43

VI. Research Coverage Trends.........................................................................................45

Recent General Trends.........................................................................................47

Coverage Trends by Issuer Size ...........................................................................49

VII. Recommendations................................................................................................56

VIII. Appendix ..............................................................................................................58
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I. Introduction

A. Congressional Mandate

Section 106 of the Consolidated Appropriations Act, 20211 (“Section 106”) requires the 

U.S. Securities and Exchange Commission (“SEC” or “Commission”) to submit to Congress a 

report that includes a study evaluating the issues affecting the provision of and reliance upon 

investment research into small issuers (“Report”).

Specifically, Section 106 provides:

(a) STUDY REQUIRED. —The Securities and Exchange Commission shall 

conduct a study to evaluate the issues affecting the provision of and reliance upon 

investment research into small issuers, including emerging growth companies and 

companies considering initial public offerings.

(b) CONTENTS OF STUDY. —The study required under subsection (a) shall 

consider —

(1) factors related to the demand for such research by institutional and retail 

investors;

(2) the availability of such research, including —

(A) the number and types of firms who provide such research;

(B) the volume of such research over time; and

(C) competition in the research market;

(3) conflicts of interest relating to the production and distribution of investment 

research;

(4) the costs of such research;

(5) the impacts of different payment mechanisms for investment research into 

small issuers, including whether such research is paid for by —

(A) hard-dollar payments from research clients;

(B) payments directed from the client’s commission income (i.e., “soft 

dollars”); or

(C) payments from the issuer that is the subject of such research;

(6) any unique challenges faced by minority-owned, women-owned, and veteranowned small issuers in obtaining research coverage; and

 1 Consolidated Appropriations Act, 2021, Pub. L. No. 116-260, Div. Q, tit. I, § 106, 134 Stat. 1182 (2020).
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(7) the impact on the availability of research coverage for small issuers due to —

(A) investment adviser concentration and consolidation, including any 

potential impacts of fund-size on demand for investment research of 

small issuers;

(B) broker and dealer concentration and consolidation, including any 

relationships between the size of the firm and allocation of resources for 

investment research into small issuers;

(C) Securities and Exchange Commission rules;

(D) registered national securities association rules;

(E) State and Federal liability concerns;

(F) the settlement agreements referenced in Securities and Exchange 

Commission Litigation Release No. 18438 (i.e., the “Global Research 

Analyst Settlement”); and

(G) Directive 2014/65/EU of the European Parliament and of the Council 

of 15 May 2014 on markets in financial instruments and amending 

Directive 2002/92/EC and Directive 2011/61/EU, as implemented by the 

European Union (“EU”) member states (“MiFID II”).

(c) REPORT REQUIRED. —Not later than 180 days after the date of the 

enactment of this Act, the Securities and Exchange Commission shall submit to 

Congress a report that includes—

(1) the results of the study required by subsection (a); and

(2) recommendations to increase the demand for, volume of, and quality of 

investment research into small issuers, including emerging growth companies 

and companies considering initial public offerings.2

B. Overview

Investment research (also referred to as “research” hereinafter) can be created and 

provided by broker-dealers or independent research providers for use by investment 

professionals, which may include professionals at other broker-dealers, investment advisers, 

insurance companies, pension funds and other institutional investors.

3

 Some of these end users 

 2 Id.

3 See generally Larry Harris, CFA Institute, Chapter 13: Structure of the Investment Industry (2014), 

https://www.cfainstitute.org/-/media/documents/support/programs/investment-foundations/13-structure-of-theinvestment-industry.ashx (discussing buy-side and sell-side firms); see also Janelle Veasey & John B. Mason, 

Refinitiv, Connected Data: Challenges Remain for Buy-Side Market and Reference Data Strategies (2021), 

https://www.refinitiv.com/content/dam/marketing/en_us/documents/reports/connected-data-buy-side-firms-
5

of research, such as investment advisers, may alternatively conduct research in-house for their 

own consumption. Broadly speaking, research and its prompt and fair dissemination to 

investors has been recognized as valuable to an efficient system of securities markets.4 There is 

substantial evidence that research coverage of issuers is beneficial.5 Research coverage may be 

particularly important for a small issuer that seeks to increase its stock liquidity or gain 

investors’ recognition.

At the same time, however, the provision of research may have associated conflicts of 

interest that may create incentives for firms providing research (“analyst firms”) and analysts6

to issue biased research. For example, analysts may issue favorable research to retain or 

generate investment banking business, particularly if their compensation or status within a firm 

are tied to investment banking revenues.

7 Various legislative and regulatory measures have 

been taken in the United States to, among other things, address these conflicts of interest, with a

view to improving the quality of research and restoring public confidence. Additionally, the EU

enacted MiFID II in 2018 to, among other things, address potential conflicts of interest 

associated with money managers8 purchasing research.

As required by Section 106, Commission staff has conducted a study evaluating the 

issues affecting the provision of and reliance upon investment research into small issuers.9 This

 

ebook.pdf (noting that buy-side firms include hedge funds, insurance companies, mutual funds, pension funds and 

sovereign organizations).

4 SEC, Future Structure of Securities Markets, 37 Fed. Reg. 5286 (Mar. 14, 1972) (“1972 Commission Statement”).

5 Academic literature has shown, for example, that (1) research coverage of an issuer may affect the liquidity of its 

stock, and (2) research analysts provide an external governance mechanism by monitoring issuers’ management. 

See, e.g., Robert C. Merton, A Simple Model of Capital Market Equilibrium with Incomplete Information, 42 J. FIN.

42, 483 (1987) (“Merton”); Rustom M. Irani & David Oesch, Analyst Coverage and Real Earnings Management: 

Quasi-Experimental Evidence, 51 J. FIN. & QUANTITATIVE ANALYSIS 589, 590 (2016) (“Irani & Oesch”). For a 

detailed discussion of the benefits of research coverage, including the benefits of multiple analysts covering a 

single issuer, see infra Section II.B.

6 Research is created by financial market professionals commonly referred to as “research analysts,” or simply 

“analysts.”

7 For a discussion of analysts’ conflicts of interest related to research, see infra Section III.

8 Money managers may also be referred to as “asset managers” or “portfolio managers.”

9 For purposes of this Report, “small issuers” are issuers that have equity securities listed on national securities 

exchanges that are registered with the SEC under Section 6 of the Securities Exchange Act of 1934 (“exchangelisted stocks”) and market capitalization of less than $250 million. There is also a definition of “smaller reporting 

company” in the SEC rules and regulations, which covers issuers with a public float of less than $250 million or 

with less than $100 million in annual revenues and no public float or public float of less than $700 million. See 

SEC, Smaller Reporting Company Definition, 83 Fed. Reg. 132 (Jul. 10, 2018). The staff selected the definition of 

“small issuers” that use the market cap metric to be consistent with the definition of “smaller public companies” in 

the SEC Small Business Advocate Act of 2016, and the scope of issuers served by the SEC’s Office of the 
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Report outlines the results of the staff’s study evaluating these issues based upon available data,

as well as the staff’s recommendations for increasing the demand for, volume of, and quality of 

investment research into small issuers.

The staff conducted an extensive review of publicly available sources10 and engaged in 

data analysis of research coverage trends of issuers generally and trends by issuer size11 to 

evaluate whether, and to what extent, various factors have impacted research coverage of small 

issuers. The staff’s evaluation suggests that a number of factors may have impacted research 

coverage of small issuers, including legislative and regulatory measures, MiFID II and other 

variables, such as the rise of client commission arrangements (“CCAs”), a decline in the overall 

number of IPOs until 2020,

12 falling equity commissions, fewer institutional investors that 

invest in small issuers, a shift from active to passive investment strategies, an increase in 

reliance on in-house research and an increase in alternative data sources. It is difficult to isolate

 Advocate for Small Business Capital Formation. See Pub. L. No. 114-284, 130 Stat. 1447 (2016) (codified at 15 

U.S.C. § 78qq(a)(2)(A)(i)); see also Off. of the Advoc. for Small Bus. Cap. Formation, Annual Report for Fiscal 

Year 2020, SEC, 2 (2020) (“OASB 2020 Annual Report”), https://www.sec.gov/files/2020-oasb-annual-report.pdf. 

Conversely, all other issuers are considered “large issuers.”

10 The staff reviewed academic literature, studies, articles and other publicly available sources discussing, among 

other things, the impacts of legislative and regulatory measures on research coverage and the impacts of MiFID II 

on payment mechanisms for research and research costs. See infra Sections IV.B and V.C. The staff’s review of 

publicly available sources did not find materials that addressed some of the factors identified in Section 106, 

including, for example, factors related to the demand for research of small issuers by institutional and retail 

investors; unique challenges faced by minority-owned, women-owned, and veteran-owned small issuers in 

obtaining research coverage; and impact on the availability of research coverage for small issuers due to investment 

adviser and broker-dealer concentration and consolidation. For a general discussion of some of these factors in a 

broader context (i.e., capital formation), see Off. of the Advoc. for Small Bus. Cap. Formation, Annual Report for 

Fiscal Year 2021, SEC (2021) (“OASB 2021 Annual Report”), https://www.sec.gov/files/2021-OASB-AnnualReport.pdf (discussing minority-owned and women-owned business formation and ownership trends and 

challenges as well as investors’ increasing focus on environmental, social and governance considerations for public 

companies); Sophia Kunthara, The Market Minute: A Historic Year (So Far) for Woman-Led IPOs, But There’s a 

Ways to Go, CRUNCHBASE NEWS (Aug. 11, 2021), https://news.crunchbase.com/news/the-market-minute-ahistoric-year-so-far-for-women-led-ipos-but-theres-a-ways-to-go/ (discussing challenges that women entrepreneurs 

face in raising funds for their businesses).

11 See infra note 14 (discussing the scope and limitations of the staff’s data analysis). Although the data was 

extensive and the staff was able to consider most of the factors identified in Section 106, the data was limited in 

several respects. For example, while emerging growth companies (“EGCs”) disclose their EGC status in their SEC 

filings, this information was not available in the two databases that the staff used for this Report. The available 

data was also limited to only issuers that have already completed initial public offerings (“IPOs”) and issuers with 

exchange-listed stocks. Accordingly, the staff’s evaluation of the data did not cover EGCs and companies 

considering IPOs specifically.

12 There has been a noticeable increase in IPOs, including IPOs of small issuers, in 2020 and 2021. See OASB 

2021 Annual Report, supra note 10 (including charts that show a marked increase in IPOs, including IPOs of small 

issuers, in 2020 and the beginning of 2021); see also Sanghamitra Saha, 2021 Likely to be a Record Year for IPOs: 

ETFs to Win, NASDAQ, Oct. 22, 2021, https://www.nasdaq.com/articles/2021-likely-to-be-a-record-year-foripos%3A-etfs-to-win-2021-10-22 (discussing the IPO market in 2021).
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with precision the individual effect of legislative and regulatory measures, or any individual 

factor, on the research coverage of small issuers, particularly since certain declining trends in 

research coverage may have existed before some of these measures.13 Thus, the extent of the 

impact of these measures have had to date is unclear.

Further, the staff observed a number of trends based on its data analysis.14 For instance, 

small issuers are less likely than large issuers to be covered by research coverage. Specifically,

the availability of research coverage and the number of analysts covering an issuer correlate

with market capitalization.15 In recent years, approximately 60% of small issuers have received 

research coverage while approximately 90% of large issuers have received coverage.16 

Furthermore, small issuers received coverage by approximately two analyst firms on average 

while large issuers received coverage by approximately nine analyst firms on average.17

In light of the staff’s findings, the staff recommends that the staff continue to monitor 

research trends, with the goal of furthering the staff’s (1) evaluation of factors that may impact 

the provision of and reliance upon research into small issuers and (2) consideration of what, if 

any, potential actions may be appropriate to increase the demand for, volume of, and quality of 

investment research into small issuers. As part of this evaluation, the staff recommends that the 

staff continue to engage with global regulators and industry participants to better understand 

any developments in the research marketplace.

This Report proceeds as follows: Section II provides an overview of research generally 

and explains its importance and benefits. Section III discusses the conflicts of interest related to

research. Section IV describes the legislative and regulatory measures addressing such conflicts 

and their impacts on research coverage. Section V addresses payment mechanisms and costs of 

research, and the impacts of the EU’s implementation of MiFID II on payment mechanisms and 

 13 See infra note 110 and corresponding text discussing decline in analysts and research coverage of small issuers 

before legislative and regulatory measures; see also infra note 170 discussing certain downward trends that existed 

before MiFID II.

14 In conducting the study, the staff relied primarily on two widely-used databases that contain, among other things, 

analyst estimates, financial information on public issuers and data on issuers with exchange-listed stocks. The staff 

focused its analysis of data in recent years (i.e., 2016 to 2020). See infra Section VI (discussing the scope and 

limitations of the staff’s data analysis and research coverage trends).

15 Market capitalization, or “market cap,” is the value of a corporation determined by multiplying the current public 

market price of one share of the corporation by the number of total outstanding shares. Off. of Inv. Educ. & 

Advoc., Market Capitalization, SEC, https://www.investor.gov/introduction-investing/investingbasics/glossary/market-capitalization. See infra Section VI.B (discussing research coverage trends of small issuers 

and large issuers).

16 See Figure 6a, infra Section VI.B.

17 See Figure 6b, infra Section VI.B.
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research costs. Section VI includes the staff’s data analysis of research coverage trends. Lastly, 

Section VII contains the staff’s recommendations for increasing the demand for, volume of, and 

quality of investment research into small issuers, including EGCs and companies considering 

IPOs: specifically, the staff recommends that the staff continue to monitor research trends and 

evaluate these issues as part of its further consideration of what, if any, potential actions may be 

appropriate to increase the demand for, volume of, and quality of investment research into small 

issuers.

II. Importance and Benefits of Research

Research Generally

Research generally fits into one of three categories based on the type of firm that is 

involved in its creation and/or provision: (1) research provided by full-service broker-dealers, 

commonly referred to as “sell-side research,” often for consumption by others;

18 (2) research 

created in-house by institutional money managers (who are typically investment advisers in the 

United States) to assist them with their own investment decision-making process, commonly 

referred to as “buy-side research”; and (3) research provided by firms that are neither, 

commonly referred to as “independent research.”19 As discussed further below, money 

managers in the United States may purchase sell-side or independent research with “soft 

dollars” (i.e., bundled commission payments using client assets to acquire brokerage and 

research services) or “hard dollars” (i.e., payments in cash for services such as research, which 

may include direct payments from a money manager’s own resources).

Many analysts specialize in a particular industry and provide research on a subset of 

issuers in that industry (“subject companies”) on an ongoing basis by, for example, publishing 

periodic written work product on the subject company. Such research may contain, for 

example, a narrative describing market developments, projections of financial metrics, a target 

price, and an overall rating or recommendation, such as buy, hold, or sell.20 The exact items 

 18 “Sell-side research” is also referred to as proprietary or “Street” research.

19 Div. of Trading & Mkts., Analyzing Analyst Recommendations, SEC (Aug. 30, 2010) (“Analyzing Analyst 

Recommendations”), https://www.sec.gov/tm/reportspubs/investor-publications/investorpubsanalystshtm.html. 

“Independent research” is also referred to as “third-party research.” See infra Section V.A. This Report focuses on 

research concerning securities such as sell-side research and, to a lesser extent, independent or buy-side research as 

it responds most directly to Congress’s mandate in Section 106. While data concerning independent research is 

included in the figures in this Report and tables in the Appendix, data concerning buy-side research is excluded 

because it is typically not disseminated publicly or made available in commercial databases.

20 See Analyzing Analyst Recommendations, supra note 19; Alastair Lawrence et al., Investor Demand for SellSide Research, 92 ACCT. REV. 2, 4 (2017) (“Lawrence et al.”) (noting that “forecasting earnings is prevalent 

because investors prefer analyst estimates to recommendations and target prices at earnings-related financial 

reporting events”).
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included in this research, the terms used, and the meanings of these terms vary.

21 The research 

can be published at any time, including, for example, in response to corporate events such as 

earnings releases.

22 Analyst firms may limit the distribution of such research to institutional

clients, but even in those instances, financial projections, target prices, and overall ratings are 

widely accessible through third-party data providers and the media.

23 Retail investors may

incorporate such research into their investment decision-making process to resolve uncertainty 

about an issuer.24 They may look to research for an interpretation of attention-grabbing events, 

such as media coverage about an issuer or bold predictions from other analysts.25

Analysts may also perform tasks other than drafting and publishing written research. 

For instance, they may facilitate their institutional clients’ access to subject companies’

management by hosting conferences and arranging one-on-one meetings or conference calls.26 

 21 Analyzing Analyst Recommendations, supra note 19. While definitions of certain terms vary among analyst 

firms, Financial Industry Regulatory Authority (“FINRA”) Rule 2241(c)(2) requires analyst firms that are brokerdealers to clearly define in each research report the meaning of each rating in the system, including the time 

horizon and any benchmarks on which a rating is based. FINRA, Rule 2241(c)(2) (2015). Broker-dealers are 

subject to regulation under the Securities Exchange Act of 1934 (“Exchange Act”) and the rules of each selfregulatory organization (“SRO”) of which the broker-dealer is a member. Generally, all registered broker-dealers 

that deal with the public must become members of FINRA. See Section 15(b)(8) of the Exchange Act, 15 U.S.C. 

§ 78o(b)(8), and Rule 15b9-1 under the Exchange Act, 17 C.F.R. § 240.15b9-1.

22 See Beyer et al., The Financial Reporting Environment: Review of the Recent Literature, 50 J. ACCT. & ECON.

296, 326-327 (2010) (“Beyer et al.”) (reviewing academic literature concerning analysts’ decisions on when to 

issue forecasts); Lawrence et al., supra note 20 (stating that “demand for analyst information on Yahoo Finance is 

highest on days with management guidance, earnings announcements, and Form 8-Ks” and “lower demand for 

analyst information following the release of Forms 10-Ks and 10-Qs”). FINRA Rule 2241(f) requires analysts to 

publish a report when terminating coverage of an issuer. FINRA, Rule 2241(f) (2015).

23 See, e.g., Analysis Webpage for Alphabet, Inc., YAHOO FIN., https://finance.yahoo.com/quote/goog/analysis/

(containing aggregated analyst estimates for a single issuer); Upgrades/Downgrades, WALL ST. J.,

https://www.wsj.com/market-data/stocks/upgradesdowngrades (listing upgrades and downgrades by analysts); 

Street Notes, BARRON’S, https://www.barrons.com/topics/street-notes (including short media summaries of certain 

analyst opinions).

24 See, e.g., Lawrence et al., supra note 20, at 3 (finding that retail investors’ overall demand for analyst ratings and 

target prices is substantially higher than for analyst earnings and sales estimates and that small investors rely on 

analysts to interpret financial reporting information instead of reading SEC filings).

25 See id. at 11 and 13.

26 See Stephen Taub, Hedge Funds Disdain (Most) Sell-Side Analysts. Here’s Who They Actually Like., INST’L 

INV’R, Oct. 10, 2018, https://www.institutionalinvestor.com/article/b1b9qqjbdrpc5b/Hedge-Funds-Disdain-MostSell-Side-Analysts-Here-s-Who-They-Actually-Like (“[W]here the sell side is perceived to provide the most value 

to hedge funds is through corporate access – the meetings with corporate executives, field trips to see firm 

operations, and non-deal roadshows organized by sell-side firms on behalf of buy-side investors.”); see also SEC, 

Selective Disclosure and Insider Trading, Exch. Act Rel. No. 43154 (Aug. 15, 2000), 65 Fed. Reg. 51716 (Aug. 24, 

2000) (reshaping the ways in which issuers conduct their conference calls and meetings with analysts and 

investors).
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Analysts may also make recommendations or offer opinions concerning subject companies in 

public appearances, such as radio, television or print media interviews.

27 Further, sell-side 

analysts who are associated with broker-dealers that provide investment banking services may, 

subject to regulatory requirements,28 be involved in investment banking transactions.29

B. Importance and Benefits of Research

Research and its prompt and fair dissemination to investors has been recognized as 

valuable to an efficient system of securities markets.30 The Commission has frequently 

acknowledged the important role of research to U.S. capital markets, in particular its 

 27 See SEC, Regulation Analyst Certification, Exch. Act Rel. No. 47384 (Feb. 20, 2003), 68 Fed. Reg. 9482, 9492

(Feb 27, 2003) (“Reg. AC Adopting Release”) (defining “public appearance” to mean “any participation by a 

research analyst in a seminar, forum (including an interactive electronic forum), or radio or television or other 

interview, in which the research analyst makes a specific recommendation or provides information reasonably 

sufficient upon which to base an investment decision about a security or an issuer”). See also infra Section IV.A.3

(discussing Reg. AC).

28 See FINRA, Rule 2241 (2015), Supplementary Material .02, https://www.finra.org/rulesguidance/rulebooks/finra-rules/2241. Involving research analysts in the investment banking process creates 

conflicts of interest. Broker-dealers must identify and manage these conflicts pursuant to regulatory requirements. 

For a discussion of such conflicts of interest and regulatory requirements, see infra Sections III and IV, 

respectively.

29 See Benjamin J. Catalano, The Promise of Unfavorable Research: Ramifications of Regulations Separating 

Research and Investment Banking for IPO Issuers and Investors, 72 BUS. LAW. 31, 32 (2016) (“Catalano”).

30 See 1972 Commission Statement, supra note 4, at 5290 (“It is, therefore, the Commission’s premise that broadbased securities research and its prompt and fair dissemination to large and small investors is indispensable to an 

efficient system of securities markets.”); Commission Guidance Regarding Client Commission Practices Under 

Section 28(e) of the Securities Exchange Act of 1934, Exch. Act Rel. No. 54165 (Jul. 18, 2006), 71 Fed. Reg.

41978 (Jul. 24, 2006) (“2006 Release”) (“Recognizing the value of research in managing client accounts . . . 

Congress enacted Section 28(e) of the Exchange Act . . . .”); Interpretive Release Concerning the Scope of Section 

28(e) of the Securities Exchange Act of 1934 and Related Matters, Exch. Act Rel. No. 23170 (Apr. 28, 1986), 51 

Fed. Reg. 16004 (Apr. 30, 1986) (“1986 Release”) (“In adopting Section 28(e), the Congress acknowledged the 

important service broker-dealers provide by producing and distributing investment research to money managers 

and created a safe harbor to permit money managers, in certain circumstances, to continue to use commission 

dollars paid by managed accounts to acquire research as well as execution services.”). See also Technical Comm., 

Report on Analyst Conflicts of Interest, International Organization of Securities Commissions (“IOSCO”) 2 (2003)

(“IOSCO Report”), https://www.iosco.org/library/pubdocs/pdf/IOSCOPD152.pdf (“Information is the lifeblood of 

modern capital markets. The flow of timely and accurate information among market participants promotes investor 

confidence in the markets, which aids in the flow of capital to businesses. However, the volume and complexity of 

information and raw data which is available – including, issuer disclosure statements, economic and employment 

statistics from governments, and marketing and purchasing trend reports from private sources – can often be 

overwhelming and confusing for investors. As a result, research analysts play an important role in the relationship 

between companies and investors, both retail and institutional.”).
11

significance in discovering issuer information and sifting, digesting and transmitting it in a

manner that may be used by investors.

31

Investors may view research as an important component of the information environment 

and use accounting-based information (e.g., analyst forecasts, earnings announcements, 

earnings pre-announcements, management forecasts, SEC filings) for investment decisions.32

Further, academic literature has detailed the benefits of research coverage of publicly traded

issuers. It has shown, for example, that (1) research coverage of an issuer may affect the 

liquidity of its stocks, and (2) research analysts provide an external governance mechanism by 

monitoring issuers’ management.

1. Liquidity

Studies have shown that research coverage of an issuer is positively related to its stock 

liquidity33 and that a reduction in research coverage of an issuer may reduce its stock 

liquidity.

34 For instance, one study found that issuers that lose analyst coverage for at least one 

year suffer a “significant deterioration in bid-ask spreads, trading volumes, and institutional

 31 See, e.g., 1972 Commission Statement, supra note 4; 2006 Release, supra note 30.

32 See Beyer et al., supra note 22 (estimating the impact of various accounting-based sources of information based 

on data from 1994 to 2007 and finding that analyst forecasts constituted almost a quarter of the accounting-based 

information used by investors).

33 See, e.g., Tung L. Dang et al., Analysts and Stock Liquidity – Global Evidence, COGENT ECON. & FIN. (2019), 

available at https://www.tandfonline.com/doi/full/10.1080/23322039.2019.1625480 (finding that firms’ analyst 

coverage is positively related to stock liquidity, which confirms “the notion suggested in previous studies that 

analyst activities provide public information that reduces information asymmetries between firms and market 

participants”); see also Beyer et al., supra note 22 (discussing empirical evidence finding that “firms with sustained 

improvements in analysts’ ratings of disclosure quality . . . show an increase in stock liquidity, analyst following, 

institutional ownership, and stock performance”).

34 See, e.g., Inv’r Advisory Comm., Recommendation of the SEC Investor Advisory Committee Structural Changes 

to the US Capital Markets Re Investment Research in a Post-MiFID II World, SEC, 3 (Jul. 25, 2019), 

https://www.sec.gov/spotlight/investor-advisory-committee-2012/investment-research-post-mfid-ii-world.pdf (“A 

reduction of Research coverage has a knock-on effect on liquidity, which is also an essential component of our 

capital markets ecosystem . . . .”); Merton, supra note 5 (finding that the loss of analyst coverage for a stock will 

reduce investor interest, with adverse effects on liquidity); see also The IPO Task Force, Rebuilding the IPO OnRamp: Putting Emerging Companies and the Job Market Back on the Road to Growth, SEC (Oct. 20, 2011) (“IPO 

Task Force”), https://www.sec.gov/info/smallbus/acsec/rebuilding_the_ipo_on-ramp.pdf (“Lack of research 

coverage adversely impacts trading volumes, company market capitalizations and the total mix of information 

available to market participants.”); Jeffrey M. Solomon, Cowen, Inc., Capital Formation, Smaller Companies, and 

the Declining Number of Initial Public Offerings, SEC, 14 (Jun. 22, 2017) (“Cowen Presentation”), 

https://www.sec.gov/spotlight/investor-advisory-committee-2012/jeffrey-solomon-presentation.pdf (“Little or no 

research coverage generally corresponds with lower stock liquidity.”).
12

presence.”35 Other studies have found that one reason for this deterioration is that decreases in 

analyst coverage increases information asymmetry,

36 which can cause issuers to switch to 

financing that is less sensitive to information asymmetry, including decreasing their use of 

equity and long-term debt, or cause issuers to decrease their total investment (e.g., capital, 

research and development and acquisitions expenditures) and financing.37 This decline in 

liquidity was shown in one study to be more significantly pronounced for smaller issuers, 

issuers with relatively less analyst coverage, and issuers with a bigger increase in information 

asymmetry resulting from the loss of an analyst.

38

In addition, studies have found that research coverage corresponds to liquidity by 

increasing investors’ recognition of issuers.

39 For example, one study found that market 

reactions to coverage changes are significantly correlated with the time and effort analysts 

devote to directing investors’ attention to issuers that they are covering, suggesting that 

coverage changes affect issuer value because they affect investors’ recognition.40 Issuer 

visibility (e.g., news, extreme returns, initiations and drops of analyst coverage) has been shown 

to be a significant determinant of investors’ demand for analyst information.

41 Having noticed 

 35 Simona Mola et al., Is There Life After the Complete Loss of Analyst Coverage?, 88 ACCT. REV. 667, 670 (2013) 

(“Mola et al.”) (finding that “firms that lose all analyst coverage for one year are significantly more likely to delist 

than their covered peers”).

36 See, e.g., Francois Derrien & Ambrus Kesckes, The Real Effects of Financial Shocks: Evidence from Exogenous 

Changes in Analyst Coverage, 89 ACCT. REV. 1407, 1408 (2013) (“Derrien & Kesckes”) (discussing empirical 

evidence finding that “a decrease in analyst coverage—through the resulting increase in information asymmetry 

and thus the cost of capital—causes a decrease in investment and financing”); Beyer et al., supra note 22, at 306-

307 (“Economic theory suggests that voluntary disclosures and increased information quality reduce information 

asymmetries (either between the firm and market participants or between informed and uninformed investors.). 

This reduction in information asymmetries in turn increases the firm’s stock liquidity.”); see also 1972 Commission 

Statement, supra note 4, at 5290 (noting the important information sifting role of analysts).

37 See Derrien & Kesckes, supra note 36, at 1409 (discussing how changes in analyst coverage cause changes in 

corporate policies).

38 See id.

39 See, e.g., Mola et al., supra note 35, at 670 (“[W]e find that the loss of analyst coverage reduces the number of 

investors who recognize and trade the firm’s stock, with attendant effects of widening the bid-ask spread and 

decreasing trading volume and institutional presence.”).

40 Kevin K. Li & Haifeng You, What is the Value of Sell-Side Analysts? Evidence from Coverage Initiations and 

Terminations, 60 J. ACCT. & ECON. 141, 155 (2015) (finding that “analysts create value for the firms they cover 

through improving investor recognition, rather than reducing information asymmetry or improving fundamental 

performance”).

41 Lawrence et al., supra note 20, at 4 (“Media is a significant determinant of demand, supporting the inference that 

investors seek analyst guidance to provide resolution to news or possible uncertainty resulting in heightened 

visibility.”).
13

the importance of research to investors’ recognition, certain issuers have endeavored to find 

non-traditional methods to direct investors’ attention to their stocks, including by paying analyst 

firms to initiate coverage.42

2. External Governance Mechanism

Studies have shown that monitoring and coverage of an issuer’s management by 

research analysts can serve as a beneficial external governance mechanism.43 Specifically, 

analysts’ scrutiny increases corporate transparency, which may make it more difficult for 

corporate managers to engage in self-dealing activities such as asset transfers, excessive 

compensation and perquisite consumption.44 Additionally, analysts can provide direct 

monitoring by, for example, tracking issuers’ financial statements on a regular basis and directly 

interfacing with management by raising questions in earnings announcement conference calls.45 

Analysts can also provide indirect monitoring by, for example, distributing information to 

 42 See Autorité des Marchés Financiers (“AMF”), The AMF Adopts its Action Plan to Promote Investment Research

(Jan. 27, 2020) (“AMF News Release”), https://www.amf-france.org/en/news-publications/news-releases/amfnews-releases/amf-adopts-its-action-plan-promote-investment-research (AMF, the securities market regulator in 

France, noting the trend of issuer-paid research); Tim Human, AMF Pushes for New Charter on Issuer-Sponsored 

Research, IR MAG. (Feb. 12, 2020) (“Human Article”), https://www.irmagazine.com/small-cap/amf-pushes-newcharter-issuer-sponsored-research (discussing AMF’s action plan to promote investment research); NIRI Guidelines 

Regarding Company-Sponsored Research, NAT’L INV’R REL. INST. (Mar. 2020), 

https://www.niri.org/NIRI/media/NIRI-Resources/NIRI-Company-Sponsored-Research-Guidelines-final.pdf

(providing guidelines to assist companies considering commissioning research from third-party firms); Mola et al., 

supra note 35 (discussing the value that issuers place on analyst coverage). In the absence of research coverage, 

issuers may seek to gain recognition through information sources that are outside traditional research sources (e.g., 

sources not provided by research analysts that are the focus of this Report), but may not be based on company 

fundamentals. For example, one study found that the attention generated through Twitter activity significantly 

impacts trading volume of small, volatile, and difficult-to-arbitrage stocks for which institutions are least likely to 

be actively invested. David Rakowski et al., Twitter Activity, Investor Attention, and the Diffusion of Information, 

50 FIN. MGMT. 3, 34 (2021) (“Twitter activity is a unique and meaningful source of investor attention that has a 

statistically and economically significant association with trading volume and asset prices. This impact is best 

explained by the interpretation that Twitter increases investor attention and facilitates the diffusion of information 

among investors in ways that are not captured by traditional measures of attention.”).

43 See, e.g., Irani & Oesch, supra note 5, at 590 (noting the view that “analysts deter misreporting and discipline 

managerial misbehavior by serving as monitors alongside traditional mechanisms of corporate governance”); Tao 

Chen et al., Do Analysts Matter for Governance? Evidence From Natural Experiments, 115 J. FIN. ECON. 383

(2014) (“Chen et al.”) (finding that “financial analysts play an important governance role in scrutinizing 

management behavior”).

44 Chen et al., supra note 43, at 385.

45 Id. at 384-385.
14

investors through research reports and media outlets, thereby helping investors detect 

managerial misbehavior.46

One study observed that after an issuer loses analyst coverage, markets factor in an 

increase in expected agency costs47 by, for example, anticipating that with less analyst 

coverage, corporate managers are more likely to misuse their cash reserves.48 This study also 

found that declines in the number of analysts covering an issuer (i.e., less scrutiny from 

analysts) increase chief executive officers’ total and excess compensation49 and the likelihood

of issuers engaging in corporate acquisitions that destroy shareholders’ wealth for private 

benefits.

50 Similarly, there is evidence that issuers increase their overall levels of earnings 

management51 when research coverage decreases because of decreased analysts’ monitoring.

52 

 46 Id. at 385.

47 Broadly speaking, agency costs result when an agent fails to act in the best interests of his principal. See, e.g., 

Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and 

Ownership Structure, 3 J. FIN. ECON. 305, 309-10 (1976). Examples of agency costs in the corporate context 

(where the corporation is the principal and management is the agent) include corporate managers paying 

themselves extravagantly, working as little as possible, or even stealing from the company, all to the detriment of 

the corporation. Andrew A. Schwartz, Mandatory Disclosure in Primary Markets, 19 UTAH L. REV. 1069, 1071 

(2019).

48 Chen et al., supra note 43.

49 “Excess compensation” has been defined as “compensation in excess of [the] equilibrium (economic) wage rate.”

John E. Core et al., Corporate Governance, CEO Compensation, and Firm Performance, 51 J. FIN. ECON. 371, 390 

(1999).

50 Chen et al., supra note 43, at 407 (finding that “with less monitoring from analysts, managers are more likely to 

extract private benefits at the expense of outside shareholders, indicating that analyst coverage plays an important 

role in protecting shareholder value by scrutinizing management behavior and reducing the costs for others to do 

so”).

51 Earnings management occurs “when managers use judgment in financial reporting and in structuring transactions 

to alter financial reports to either mislead some stakeholders about the underlying economic performance of the 

company, or to influence contractual outcomes that depend on reported accounting numbers.” Paul M. Healy & 

James M. Wahlen, A Review of the Earnings Management Literature and its Implications for Standard Setting, 13 

ACCT. HORIZONS 365, 368 (1999). Earnings management is described by researchers to be either accrual-based or 

real activities-based. Accrual-based earnings management involves an issuer’s managers making decisions 

concerning discretionary accruals to meet analyst targets. Real activities earnings management involves employing 

real operational activities to meet analyst targets. See John R. Graham et al., The Economic Implications of 

Corporate Financial Reporting, 40 J. ACCT. & ECON. 3 (2005). Earnings management that is inconsistent with 

GAAP accounting may violate provisions of the federal securities laws. See Div. of Enf’t, 2020 Annual Report, 

SEC, 9-10 (2020), https://www.sec.gov/files/enforcement-annual-report-2020.pdf (describing matters alleging 

potential accounting and disclosure violations caused by, among other things, earnings management practices to 

mask unexpectedly weak performances).

52 Chen et al., supra note 43, at 405-06 (finding that when a firm experiences a decrease in analyst coverage, 

managers are more likely to engage in earnings management activities, which is “significantly more pronounced 

for firms with smaller initial analyst coverage”). While studies found that analyst coverage decreases result in 

increases in overall earnings management, one study found that issuers that lose analyst coverage are less likely to 
15

Another study found that issuers that regained research coverage following a complete loss of 

coverage only decreased earnings management when they regained coverage by multiple

analysts, suggesting the benefits of incremental analyst coverage for issuers that are already 

followed by at least one analyst.

53

III. Conflicts of Interest Related to Research

As beneficial as research can be for issuers and investors, the provision of research, 

particularly by sell-side analysts, may also raise investor protection and other concerns, notably 

the potential associated conflicts of interest. Business pressures on analyst firms, especially 

those with multiple lines of business such as full-service broker-dealers, create potential 

conflicts of interest that can reduce the objectivity of analysts’ recommendations.54 

Highlighting the conflicts of interest applicable to sell-side analysts, IOSCO described these 

conflicts of interest as follows:

[A]nalysts . . . employed by full-service investment firms often face 

conflicts of interest that can interfere with the objectivity of their 

analysis. Conflicts arise because [analyst firms] often undertake many, 

potentially conflicting, roles – for example, firms may act as retail 

brokerage houses for individuals wishing to purchase or sell securities, 

while at the same time offering underwriting services to issuers of those 

securities – and research analysts are often called upon to assist with 

these conflicting activities. If an analyst’s firm’s activities place the 

analyst in conflict situations – for example, if the analyst has powerful 

 

engage in real activities earnings management than firms with analyst coverage. The authors of this study 

suggested that managers may respond to analyst pressures by engaging in real activities manipulation through 

decreasing their expenditures by, for instance, disincentivizing innovative activity. Irani & Oesch, supra note 5, at 

594.

53 Laura Lindsey & Simona Mola, Analyst Competition and Monitoring: Earnings Management in Neglected Firms

2 (SEC, DERA Working Paper No. 2013-04, 2013), https://www.sec.gov/files/rsfi-wp2013-04.pdf (providing a 

disclaimer on the views expressed in staff working papers, which are “preliminary materials circulated to stimulate 

discussion and critical comment,” and finding, based on a sampling of firms that lost all research coverage and then 

regained coverage, that “dropped firms reverse their earnings management practice from significantly managing 

earnings downward to managing earnings upward”; and “[a]fter resumption of coverage, upward management is 

attenuated, but only for firms regaining coverage by multiple analysts”). See also Fang Yu, Analyst Coverage and 

Earnings Management, 88 J. FIN. ECON. 245, 268 (2008) (finding, based on a sampling of firms with and without 

research coverage, that “a higher level of analyst coverage is related to less earnings management and that change 

of analyst coverage is negatively related to change of earnings management”).

54 See generally Analyzing Analyst Recommendations, supra note 19 (discussing factors that can create pressure 

on an analyst’s independence and objectivity, including investment banking relationships, brokerage commissions, 

analysts’ compensation and ownership interests in companies covered by an analyst); Fred Naffziger & Mark A. 

Fox, Securities Analysts’ Conflicts of Interest: Ethical and Legal Issues and International Regulatory Reactions, 11 

J. LEGAL STUD. IN BUS. 1 (2004) (providing an overview of analysts’ conflicts of interest and legislative and 

regulatory measures addressing the conflicts).
16

financial incentives to direct clients towards specific securities, or if the 

analyst’s job security depends on dissuading clients from selling certain

shares – the advice the analyst offers may no longer be objective.55

Specifically, increased or retention of investment banking business could benefit 

analysts to the extent that their compensation or position within a firm are tied to investment 

banking revenues and brokerage commissions.

56 Analysts may also have a conflict of interest if 

they own pre-IPO shares of the issuers that they cover or intend to purchase the shares before 

publishing their reports.

57 Moreover, analysts’ objectivity may be compromised if their reports 

are reviewed and approved before publication.58

Studies have identified a number of these conflicts of interest, with considerable 

evidence suggesting that some research may be tainted or biased. For instance, studies have 

found that analysts may issue overly optimistic stock research or favorable research in an effort

to generate future investment banking business.59 Similarly, studies have found that analysts 

 55 IOSCO Report, supra note 30, at 2.

56 See Armen Hovakimian & Ekkachai Saenyasiri, Conflicts of Interest and Analyst Behavior: Evidence from 

Recent Changes in Regulation, 66 FIN. ANALYST J. 96 (2010) (“Hovakimian & Saenyasiri”) (discussing studies 

documenting why analysts make overoptimistic earnings forecasts); Analyzing Analyst Recommendations, supra

note 19 (“Brokerage firms’ compensation arrangements can put pressure on analysts to issue positive research 

reports and recommendations. For example, some firms link compensation and bonuses – directly or indirectly –

to the number of investment banking deals the analyst lands or to the profitability of the firm’s investment banking 

division.”); The Fall of Enron: How Could It Happened?, Hearing before the S. Comm. on Governmental Aff., 

107th Cong. 376 (2002) (statement of Arthur Levitt, Jr.) (“For years, we have known that analysts’ compensation is 

tied to their ability to bring in or support investment banking deals. . . . As long as analysts are paid based on 

banking deals that they generate or work on, there will always be a cloud over what they say.”). Analysts face 

these same pressures when making public appearances. See, e.g., Reg. AC Adopting Release, supra note 27.

57 See Lori Richards, Director, SEC Off. of Compliance Inspections and Examinations, Analysts Conflicts of 

Interest: Taking Steps to Remove Bias (May 8, 2002) (“Richards Speech”), available at 

https://www.sec.gov/news/speech/spch559.htm (noting SEC exam staff’s finding that “if [a] company went public 

and the analyst’s firm underwrote the IPO, the analyst always issued positive research on the company”); see also 

IOSCO Report, supra note 30 (“Because research recommendations often have the ability to impact the price of a 

company’s securities, analysts may be inclined to produce favorable reports and recommendations in an attempt to 

maintain or boost the value of the securities held by the firm, or its clients. Similarly, a firm may take advantage of 

pending research and position themselves ahead of its publication, effectively ‘front-running’ their own 

recommendations.”).

58 Richards Speech, supra note 57. See also Analyzing Analyst Recommendations, supra note 19 (discussing 

analysts’ potential conflicts of interest).

59 See, e.g., Yuyan Guan et al., Regulations and Brain Drain: Evidence from Wall Street Star Analysts’ Career 

Choices, 65 MGMT. SCI. 5766 (2019) (“Guan et al.”) (“Sell-side analysts from investment banks have long been 

suspected of issuing overly optimistic stock research in exchange for investment banking business, especially 

during the Internet bubble period in the late 1990s . . . .”); Chih-Ying Chen & Peter F. Chen, NASD Rule 2711 and 

Changes in Analysts’ Independence in Making Stock Recommendations, 84 ACCT. REV. 1041, 1046 (2009) (“Chen 
17

with investment banking ties to issuers that they cover tend to issue more favorable stock 

recommendations than analysts who do not have such ties; the affiliated analysts may also be 

reluctant to provide negative comments on issuers that they cover.

60 These studies found, in 

particular, that analysts affiliated with acquirers in merger and acquisition deals were more 

likely than unaffiliated analysts to upgrade their recommendation of the acquirers.61

Some broker-dealers’ failure to manage analysts’ conflicts of interest may have led to 

publications of tainted or biased research that contributed to the market exuberance of the late 

1990s and subsequent declines during the early 2000s.62 Studies suggest that these incidents

significantly eroded investor confidence in research, which, in turn, harmed the market for IPOs 

and capital formation.63

 & Chen”) (“analysts may . . . have incentives to issue favorable research reports to induce future investment 

banking business”).

60 See Chen & Chen, supra note 59 (discussing studies finding analysts’ conflicts of interest); Shane A. Corwin et 

al., Investment Banking Relationships and Analyst Affiliation Bias: The Impact of the Global Settlement on 

Sanctioned and Non-sanctioned Banks, 124 J. FIN. ECON. 614, 616 (2017) (“Corwin et al.”) (citing studies showing 

that “affiliated analysts issue more optimistic recommendations, earnings forecasts, and long-term growth forecasts 

than unaffiliated analysts . . . and are slower to reveal negative news”); Hovakimian & Saenyasiri, supra note 56

(same); see also IOSCO Report, supra note 30 (discussing ways that analysts’ conflicts can lead to false and 

misleading reports).

61 See Chen & Chen, supra note 59; Corwin et al., supra note 60.

62 See Federal Court Approves Global Research Analyst Settlement, SEC Litig. Rel. No. 18438 (Oct. 31, 2003)

(“Global Settlement Release”), https://www.sec.gov/litigation/litreleases/lr18438.htm; NYSE/NASD IPO Advisory 

Comm., Report and Recommendations of a Committee Convened by the New York Stock Exchange, Inc. and NASD 

at the Request of the U.S. Securities And Exchange Commission, FINRA, 1-3 (2003) (“NYSE/NASD Report”),

http://www.finra.org/sites/default/files/Industry/p010373.pdf (providing overview of market practices, including 

apparently biased recommendations by research analysts, during the stock market bubble of the late 1990s and 

early 2000s); Catalano, supra note 29, at 32 (discussing the wide belief that “compromised research by some 

investment banks contributed to the technology stock bubble of the late 1990s and its inevitable deflation beginning 

in 2001”).

63 See NYSE/NASD Report, supra note 62; see also Cowen Presentation, supra note 34, at 12 (showing the 

decrease in IPOs after 2000).
18

IV. Legislative and Regulatory Measures Addressing Conflicts and Their Impacts on 

Research Coverage

Multifaceted legislative, regulatory and other measures (collectively, “Measures”) have 

been taken that focused on the identification and management of conflicts of interest related to 

research.

64 The discussion that follows provides a brief overview of some of the notable 

features of the Measures that directly and uniquely govern the conduct of analysts, including 

sell-side analysts.

65

Legislative and Regulatory Measures Addressing Conflicts

1. Global Research Analyst Settlement

In 2003 and 2004, the SEC and other regulators brought enforcement actions, which 

were later settled, against twelve major investment banks (“Global Settlement Firms”)66 for 

engaging in acts and practices that created or maintained inappropriate influence by investment 

banking over equity research analysts, thereby creating conflicts of interest on analysts that the 

firms failed to manage in an adequate or appropriate manner.67 The settlement agreements that 

were reached in these enforcement actions, known as the Global Research Analyst Settlement 

(“Global Settlement”), included wide-ranging reforms that were designed to insulate sell-side 

 64 See, e.g., The Impact of the Global Settlement, Hearing before the S. Comm. on Banking, Hous., and Urb. Aff., 

108 Cong. 611 (2003) (statement of Sen. Richard Shelby) (discussing the effect of the Global Research Analyst 

Settlement on improving investor confidence); Reg. AC Adopting Release, supra note 27 (noting that the 

regulatory reforms were intended “to address conflicts of interest affecting the integrity and objectivity of research 

by securities firms”); FINRA, Rules and Guidance: Research Analyst Rules (“FINRA Guidance”), 

https://www.finra.org/rules-guidance/key-topics/research-analyst-rules (“The aim of FINRA’s [research rules] is to 

foster objectivity and transparency [. . .]”).

65 The discussion that follows focuses on the Measures that the staff believes are most pertinent to Congress’s 

directive in Section 106 and the Measures applicable to sell-side research. See infra note 19 (discussing the 

Report’s focus on sell-side research). For example, this section of the report does not provide an overview of 

Regulation Fair Disclosure (17 C.F.R. § 243.100 et seq.) (“Reg. FD”) because Reg. FD governs the conduct of 

issuers and imposes certain disclosure requirements on issuers, not research analysts. Nor does this section cover 

Regulation Best Interest (17 C.F.R. § 240.15l-1) (“Reg. BI”), which applies to broker-dealers’ recommendations to 

retail customers, and thus would not generally apply to broker-dealers’ recommendations to customers that are 

institutional money managers to advise their advisory clients. To the extent that a broker-dealer or its associated 

person (who could be a research analyst) makes a recommendation to an institutional customer, the 

recommendation would be subject to FINRA Rule 2111 (suitability), which is not covered in more detail in this 

section because it does not uniquely govern the conduct of analysts. For a more detailed overview of the

legislative, regulatory and other measures pertaining to research, see Dana G. Fleischman, TA Panel: Research ReImagined (CLE Outline), Securities Industry and Financial Markets Association (“SIFMA”), Compliance & Legal 

Society Annual Seminar (Mar. 17, 2020), https://www.sifma.org/wp-content/uploads/2020/03/TA11-Research-ReImagined.pdf.

66 Due to acquisition of one Global Settlement Firm by another, eleven Global Settlement Firms remain.

67 See Global Settlement Release, supra note 62.
19

analysts from investment banking pressure and make research more objective.68 The original 

terms of the addendum to the Global Settlement set forth many undertakings. For example, the 

Global Settlement Firms were required to physically separate research and investment banking 

departments; prohibit analysts from participating in efforts to solicit investment business; create 

and enforce communications firewalls between analysts and investment bankers; not base 

analysts’ compensation directly or indirectly on investment banking revenues or input from 

investment banking personnel; and, for a five-year period, contract with no fewer than three 

independent research firms at a time in order to make available independent research to the 

firms’ customers.69

The Global Settlement, which remains in place today, was modified in 2010, after the 

Global Settlement Firms asked a federal district court to repeal or alter certain specific 

provisions.70 The court approved all of the Global Settlement Firms’ requested changes, except 

the proposed modification to the firewalls provision, because the then-existing SRO research 

analyst rules71 addressed the same concerns as the Global Settlement and provided comparable 

protections.72

2. Sarbanes-Oxley and FINRA Rule 2241

On July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley Act of 

2002 (“Sarbanes-Oxley”), which contains a number of provisions regulating analysts’ conflicts 

of interest. The provisions, codified in Section 15D of the Exchange Act,73 direct the 

Commission, or upon authorization and direction of the Commission, a registered securities 

 68 See id. The Global Settlement also included injunctive relief, monetary penalties and/or undertakings for the 

Global Settlement Firms and individual defendants. Id.

69 Global Research Analyst Settlement Addendum A, SEC, Section I (Sept. 24, 2004) (“Global Settlement 

Addendum A”), available at https://www.sec.gov/litigation/litreleases/finaljudgadda.pdf.

70 See Order Modifying Global Settlement, SEC (Mar. 15, 2010) (“Global Settlement Order”), available at

https://www.sec.gov/info/smallbus/acsec/acsec-020112-global-settlement.pdf.

71 The then-existing SRO research analyst rules were replaced by FINRA Rule 2241. See infra note 77.

72 The court stated that approving the proposed modification to the firewalls provision “would be inconsistent with 

the Final Judgments and contrary to the public interest.” Global Settlement Order, supra note 70, at 4-5. See also

Gov’t Accountability Off., Securities Research: Additional Actions Could Improve Regulatory Oversight of Analyst 

Conflicts of Interest, GAO 12-209, 11-12 (Jan. 12, 2012) (“GAO Report”), http://www.gao.gov/products/GAO-12-

209 (discussing the Global Settlement and the Global Settlement Firms’ requested modifications).

73 Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, § 501, 116 Stat. 745 (codified as amended at 15 U.S.C. § 

78o-6).
20

association or national securities exchange, to adopt rules reasonably designed to address nine 

general topic areas relating to research analysts’ conflicts of interest.74

Specifically, the “analyst protections” portion of Sarbanes-Oxley addresses: (1) preapproval of draft research reports by investment banking; (2) supervision and compensation of 

analysts; (3) retaliation against analysts; (4) quiet periods on the issuance of research reports; 

and (5) structural and institutional safeguards. The “disclosure” portion of Sarbanes-Oxley

addresses: (1) disclosure of analysts’ financial interests; (2) disclosure of firms’ and analysts’

compensation from an issuer; (3) disclosure of whether a subject company is a client of a firm; 

and (4) disclosure of analysts’ compensation from their firms. Sarbanes-Oxley further directs

the Commission or SROs to adopt any additional rules to address conflicts of interest and to 

require disclosures as the Commission or SROs deem appropriate.75

Among other rules that the Commission and FINRA adopted to implement various

requirements of Sarbanes-Oxley,

76 FINRA Rule 2241, in particular, is relevant to this Report 

because it directly and uniquely governs analysts’ conduct.77 Among other things, FINRA Rule 

2241 mandates separation between research and investment banking, proscribes conduct that 

could compromise a research analyst’s objectivity, and requires specific disclosures in research 

 74 Id.

75 Id.

76 FINRA, which is currently the only registered securities association, has adopted research analyst rules that 

implement provisions of Sarbanes-Oxley. See FINRA, Research Analyst Rules, https://www.finra.org/rulesguidance/key-topics/research-analyst-rules#overview. See also SEC, SEC Implements Internal Control Provisions 

of Sarbanes-Oxley Act; Adopts Investment Company R&D Safe Harbor (May 27, 2003), 

https://www.sec.gov/news/press/2003-66.htm (discussing Rule 3a-8 under the Investment Company Act of 1940 

(“Investment Company Act”)); SEC, Commission Approves Rules Implementing Provisions of Sarbanes-Oxley Act, 

Accelerating Periodic Filings, and Other Measures (Aug. 27, 2002), https://www.sec.gov/news/press/2002-

128.htm (discussing Rules 13a-14, 13a-15, 15d-14 and 15d-15 under the Exchange Act and Rule 30a-2 under the 

Investment Company Act).

77 FINRA Rule 2241 was adopted in 2015 and replaced rules that were first adopted in 2002 and amended over the 

years: NASD Rule 2711 and NYSE Rule 472. See SEC, Order Approving a Proposed Rule Change, as Modified 

by Amendment No. 1 Thereto, to Adopt FINRA Rule 2241 (Research Analysts and Research Reports) in the 

Consolidated FINRA Rulebook, Exch. Act Rel. No. 75471 (Jul. 16, 2015) (“Rule 2241 Order”), 

https://www.sec.gov/rules/sro/finra/2015/34-75471.pdf. See also SEC, Notice of Filing of a Proposed Rule Change 

to Adopt FINRA Rule 2241 (Research Analysts and Research Reports) in the Consolidated FINRA Rulebook, 

Exch. Act Rel. No. 73622 (Nov. 18, 2014), https://www.sec.gov/rules/sro/finra/2014/34-73622.pdf. FINRA stated 

in its 19b-4 filing that FINRA Rule 2241 “would retain the core provisions of [NASD Rule 2711 and NYSE Rule 

472], broaden the obligations on members to identify and manage research-related conflicts of interest, restructure 

the rules to provide some flexibility in compliance without diminishing investor protection, extend protections 

where gaps have been identified, and provide clarity to the applicability of existing rules.” Id. at 6. FINRA also 

stated that, where consistent with protection of users of research, it believed that the proposed rule change reduces

burdens on member firms where appropriate. Id.
21

reports and public appearances.78 The rule also applies some requirements imposed by the 

Global Settlement more broadly to all FINRA members.79

Specifically, FINRA Rule 2241 requires broker-dealers80 to establish, maintain and

enforce written policies and procedures reasonably designed to identify and effectively manage 

conflicts of interest related to the preparation, content and distribution of research reports; 

public appearances by research analysts; and the interaction between research analysts and those 

outside of the research department. Such policies and procedures must “be reasonably designed 

to promote objective and reliable research that reflects the truly held opinions of research 

analysts and to prevent the use of research reports or research analysts to manipulate or 

condition the market or favor the interests of the member or a current or prospective customer 

or class of customers.”81 For example, such policies and procedures must restrict or limit 

research analysts’ activities that can reasonably be expected to compromise their objectivity, 

including prohibiting analysts from participating in pitches and other solicitations of investment 

banking services transactions; while analysts may attend pitch meetings in connection with an 

IPO offering of an EGC that is also attended by investment banking personnel, the analysts may 

not engage in otherwise prohibited conduct in the meetings, including efforts to solicit 

investment banking business.

82 Such policies and procedures must also be reasonably designed 

to ensure that broker-dealers disclose, in any research report, an analyst’s financial interest in 

the issuer covered by the report.83

 78 See FINRA, Regulatory Notice 17-14 (2017), https://www.finra.org/rules-guidance/notices/17-14.

79 See id. (noting that “some provisions of the Global Settlement continue to apply only to members subject to the 

settlement (e.g., the Global Settlement requirements with respect to chaperoning communications between research 

and investment banking personnel are not incorporated into FINRA rules and apply only to Global Settlement 

firms)”).

80 FINRA Rule 2241 is applicable to all broker-dealers that are FINRA members, but broker-dealers with limited 

investment banking activity (as defined in FINRA Rule 2241) are exempt from certain provisions because the 

potential conflicts with investment banking are minimal. See Rule 2241 Order, supra note 77, at 22.

81 FINRA, Rule 2241(b)(2) (2015).

82 FINRA, Rule 2241(b)(2)(L)(i) (2015). Analysts employed by the Global Settlement Firms may not attend pitch 

meetings because such attendance is prohibited by the Global Settlement. See Global Settlement Addendum A, 

supra note 69, Section I.9 (prohibiting analysts from participating in pitch meetings). See also infra Section IV.A.4

(discussing provisions of the JOBS Act that prohibit the Commission or a registered national securities association 

from adopting or maintaining any rule or regulation in connection with an IPO restricting an analyst from 

participating in any communications with the management of an EGC that is also attended by any other associated 

person of a broker, dealer, or member of a registered national securities association whose functional role is other 

than as an analyst).

83 See FINRA, Rule 2241(c)(4) (2015).
22

3. Regulation Analyst Certification

In 2003, the Commission adopted Regulation Analyst Certification (“Reg. AC”) to 

ensure that the views that analysts express in their reports accurately reflect their personal views 

“in order to promote the integrity of research reports and investor confidence in those reports.”84 

As the Commission stated in the adopting release, “Regulation AC is intended to complement 

other rules governing conflicts of interest disclosure by research analysts, including [SRO rules] 

and the anti-fraud provisions of the federal securities law.”85

Reg. AC requires broker-dealers and certain persons associated with broker-dealers that 

publish, circulate or provide research reports to include in those reports a certification by a 

research analyst that (1) all of the views expressed in the report accurately reflect the analyst’s 

personal views about any and all of the subject securities or issuers; and (2) no part of the 

analyst’s compensation was, is, or will be, directly or indirectly, related to the specific 

recommendations or views expressed by the analyst in the report.86 Alternatively, if part or all 

of the analyst’s compensation was, is, or will be, directly or indirectly, related to the specific 

recommendations or views expressed by the analyst in the report, the analyst’s certification 

must attest to this; identify the source, amount, and purpose of such compensation; and disclose 

that the compensation could influence the recommendations or views expressed in the report.87 

Reg. AC also requires quarterly certification by a research analyst regarding views expressed by 

the analyst in all public appearances during the prior quarter if a broker-dealer publishes, 

circulates, or provides a research report prepared by the analyst to a U.S. person in the United 

States.88

4. JOBS Act 

The Jumpstart Our Business Startups Act (“JOBS Act”)89 was enacted in 2012 to, 

among other things, facilitate capital formation for EGCs by improving the availability and flow 

 84 Reg. AC Adopting Release, 68 Fed. Reg. at 9482.

85 Id. (noting that the Commission voted to propose Reg. AC before the passage of Sarbanes-Oxley, and citing to 

the related proposing release, Exch. Act Rel. No. 46301 (Aug. 2, 2002), 67 Fed. Reg. 51510 (Aug. 8, 2002), in 

which the Commission expressed that it would abide by Sarbanes-Oxley’s directives “as it continues to address 

analyst conflicts of interest issues”).

86 17 C.F.R. § 242.501.

87 Id.

88 17 C.F.R. § 242.502 (“U.S. person” is defined in § 230.902(k), which includes, among other persons, “any 

natural person resident in the United States”).

89 Pub. L. No. 112-106, 126 Stat. 306 (2012).
23

of research coverage of EGCs to investors. It contains two provisions concerning the 

publication of research reports about EGCs.90 Both of these provisions prohibit the 

Commission or a registered national securities association (“RNSA”)91 from adopting or 

maintaining any rule or regulation that prohibits certain activities in connection with an IPO of 

the common equity of an EGC.92

One of these provisions, Section 105(b), amends Section 15D of the Exchange Act to 

prohibit the Commission or an RNSA from adopting or maintaining any rule or regulation in 

connection with such an IPO: (1) restricting, based on functional role, which associated persons 

of a broker-dealer or RNSA member may arrange for communications between a securities 

analyst and a potential investor,93 or (2) restricting a securities analyst from participating in any 

communications with the management of an EGC that is also attended by any other associated 

person of a broker-dealer or RNSA member whose functional role is other than as a securities 

analyst.94 This provision was intended to allow analysts to participate in EGC management 

presentations with sales force personnel so that the management would not need to make 

 90 Under the JOBS Act, an EGC is an issuer that had total annual gross revenues of less than $1,070,000,000 during 

its most recently completed fiscal year. An issuer continues to be an EGC for the first five fiscal years after it 

completes an IPO, unless one of the following occurs: its total annual gross revenues are $1.07 billion or more; it 

has issued more than $1 billion in non-convertible debt in the past three years; or it becomes a “large accelerated 

filer,” as defined in Exchange Act Rule 12b-2. See 17 C.F.R. § 230.405.

91 “RNSA” is referenced in the Exchange Act as “national securities association” or “registered securities 

association.” Since FINRA is an RNSA, these provisions of the JOBS Act impact FINRA’s rules, including Rule 

2241.

92 While the JOBS Act prohibits the Commission or an RNSA from adopting or maintaining the rules and 

regulations mentioned in this section, the Global Settlement Firms may not engage in activity that the JOBS Act 

allows if such activity is inconsistent with the terms of the Global Settlement because the JOBS Act did not alter 

the terms of the Global Settlement. See Div. of Trading & Mkts., Jumpstart Our Business Startups Act Frequently 

Asked Questions About Research Analysts and Underwriters, SEC (Aug. 22, 2012) (“JOBS Act FAQs”), 

https://www.sec.gov/divisions/marketreg/tmjobsact-researchanalystsfaq.htm (“The JOBS Act does not amend or 

modify the Global Settlement.”). Additionally, certain FINRA’s rules, including Rule 2241, conform to the JOBS 

Act. See FINRA Guidance, supra note 64 (“FINRA’s equity research rules also conform to the JOBS Act . . . .”); 

FINRA, Regulatory Notice 15-30 at 7 (2015), 

https://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-15-30.pdf (interpreting the joint due 

diligence provision of Rule 2241 to apply only to the extent it is not contrary to the JOBS Act).

93 Exchange Act § 15D(c)(1), 15 U.S.C. § 78o-6(c)(1).

94 Exchange Act § 15D(c)(2), 15 U.S.C. § 78o-6(c)(2). One example of such interactions is a pitch meeting. While 

this provision of the JOBS Act prohibits rules that restrict analyst attendance at such meetings, Commission staff 

has stated as follows: “Section 105(b) does not, however, permit analysts to engage in otherwise prohibited conduct 

in such meetings. Section 105(b) does not, for example, affect SRO rules that otherwise prohibit an analyst from 

engaging in efforts to solicit investment banking business.” See JOBS Act FAQs, supra note 92, Question 4.
24

separate and duplicative presentations to analysts at a time when senior management resources 

are limited.

95

The other provision, Section 105(d), amends Section 15D of the Exchange Act to 

prohibit the Commission or an RNSA from adopting or maintaining any rule or regulation that 

prohibits a broker-dealer or RNSA member from publishing or distributing research reports or 

making public appearances, with respect to the securities of an EGC, in two circumstances: (1) 

within any prescribed period of time following the EGC’s IPO date,96 or (2) within any 

prescribed period of time prior to the expiration date of any agreement between the brokerdealer or RNSA member and the EGC or its shareholders that restricts or prohibits the sale of 

securities held by the EGC or its shareholders after the IPO date.97 This provision was intended 

to fully address the quiet periods imposed by the SRO rules on research relating to EGCs.98

5. State Regulation of Analysts

Besides the Measures discussed above, analysts are subject to applicable state 

regulations. States may impose, for example, registration, licensing or qualification

requirements on sell-side analysts that are broker-dealers and their agents.

99 The staff is not 

aware of any state regulations directly and uniquely governing the conduct of analysts that 

would impact the availability of research coverage for small issuers. However, state regulators 

 95 See JOBS Act FAQs, supra note 92.

96 JOBS Act § 105(d)(1).

97 JOBS Act § 105(d)(2).

98 See JOBS Act FAQs, supra note 92. FINRA subsequently amended NASD Rule 2711 to eliminate certain quiet 

periods with respect to an IPO of an EGC in order to conform to the JOBS Act requirements regarding quiet 

periods. See FINRA, Regulatory Notice 12-49 (2012), https://www.finra.org/rules-guidance/notices/12-49.

99 See, e.g., Staff of the SEC, Study on Investment Advisers and Broker-Dealers, at 84-92 (Jan. 2011), 

https://www.sec.gov/news/studies/2011/913studyfinal.pdf (discussing state regulation of broker-dealers and noting 

that “many states require broker-dealers and their agents to observe high standards of commercial honor and just 

and equitable principles of trade in the conduct of business, and/or prohibit a variety of enumerated unethical or 

fraudulent practices”). 
25

have brought a number of enforcement actions involving analysts’ misconduct100 – notably, 

actions in conjunction with the Global Settlement.

101

Impacts of Measures on Research Coverage

The Measures address, among other things, the potential conflicts of interest related to 

research, with a view to improving the quality of research and restoring public confidence.102 In 

 100 See, e.g., Citigroup Global Markets Inc., Docket No. 2012-0090 (Oct. 26, 2012), available at 

https://www.sec.state.ma.us/sct/archived/sctciti/Citi_Consent.pdf (consent order by The Commonwealth of 

Massachusetts (“Mass.”) finding that Citigroup violated, among other things, federal securities laws, and state 

securities laws prohibiting “unethical or dishonest conduct” and requiring reasonable supervision of its employees

and SRO rules in connection with its analyst’s improper disclosure of research on Facebook IPO and information 

on other tech companies); Citigroup Global Markets Inc., Docket No. 2013-0014 (Oct. 2, 2013), available at 

http://online.wsj.com/public/resources/documents/citiconsent1003.pdf (consent order by Mass. finding that 

Citigroup violated, among other things, federal securities laws, state securities laws prohibiting “unethical or 

dishonest conduct,” a prior consent order and SRO rules in connection with its analyst’s disclosure of confidential, 

unpublished research views to certain clients); see also Morgan Stanley & Co. LLC, Docket No. 2012-0042 (Dec. 

17, 2012), available at https://www.sec.state.ma.us/sct/archived/sctms/Dkt-2012-0042-Consent-Order.pdf (consent 

order by Mass. finding that Morgan Stanley violated, among other things, state securities laws prohibiting 

“unethical or dishonest conduct” and requiring reasonable supervision of its employees and a prior consent order in 

connection with the firm’s selective disclosure of confidential information about Facebook to analysts before its 

IPO). See generally Wall Street Analyst Conflicts of Interest Global Settlement, Hearing before the S. Comm. on 

Banking, Hous., and Urb. Aff. (2003) (testimony of Christine A. Bruenn, President, North American Securities 

Administrators Association, Inc. (“NASAA”)), available at https://www.nasaa.org/882/wall-street-analystconflicts-of-interest-global-settlement/ (providing brief overview of state securities regulation and noting that “the 

states historically and in the current cases, investigate and bring enforcement actions – they do not engage in 

rulemaking for the national markets”).

101 See generally The Role of State Securities Regulators in Protecting Investors, Enforcement Overview, Hearing 

before the S. Comm. on Banking, Hous., and Urb. Aff. (2004) (testimony of Joseph P. Borg, Chairman of the Enf’t 

Sec., NASAA), available at https://www.nasaa.org/872/the-role-of-state-securities-regulators-in-protectinginvestors-enforcement-overview/ (discussing states’ role in the Global Research Analyst Settlement). 

102 For example, evidence suggests that stock recommendations became less affected by conflicts of interest and 

more consistent with intrinsic value estimates based on analyst forecasts following certain regulatory reforms. See, 

e.g., Chen & Chen, supra note 59 (finding that the implementation of NASD Rule 2711, which prohibits NASD 

and NYSE members from tying analysts’ compensation to their company’s investment banking transactions and 

from offering favorable research or a specific rating or price target to a company as consideration or inducement 

for future business, enhanced analysts’ independence). Studies have also generally found that sell-side analysts’ 

stock recommendations became less optimistic after certain regulatory reforms, suggesting that the reforms may 

have helped address analysts’ conflicts. See, e.g., Guan et al., supra note 59 (stating that since the Global 

Settlement, “[s]ell-side analysts [were] more likely to issue neutral and pessimistic recommendations,” but “the 

overall informativeness of analyst recommendations has decreased”); GAO Report, supra note 72, at 11-12, 15

(finding that the Global Settlement and other regulatory actions were associated with improvements in analysts’ 

stock recommendations, but noting that “some studies arrived at different conclusions about the effectiveness of the 

regulatory reforms on factors other than analyst independence and objectivity”); Corwin et al., supra note 60, at 

621 (finding that affiliated analysts’ bias was reduced by as much as 81% following the Global Settlement for 

analysts at sanctioned banks while analysts at non-sanctioned banks exhibited strong affiliation bias before and 

after the settlement). See also Analyzing Analyst Recommendations, supra note 19 (discussing the significance of 

some of the NYSE and FINRA rules aimed at increasing analysts’ independence and managing conflicts of 

interest).
26

addition to state enforcement actions, there have been a number of SEC and FINRA 

enforcement actions holding analysts accountable for their misconduct in this area.103

There is evidence that some of these Measures – as well as other factors such as MiFID 

II104 – may have impacted research coverage of small issuers,105 but the extent of the Measures’

impact generally appears to be inconclusive, unclear, or difficult to isolate and individually

measure.

106 Studies found that the number of analysts declined significantly in response to 

 103 See, e.g., FINRA Fines 10 Firms a Total of $43.5 Million for Allowing Equity Research Analysts to Solicit 

Investment Banking Business and for Offering Favorable Research Coverage in Connection With Toys“R”Us IPO, 

FINRA (Dec. 11, 2014), https://www.finra.org/media-center/news-releases/2014/finra-fines-10-firms-total-435-

million (noting FINRA’s “commitment to policing the boundaries between research and investment banking to 

ensure that research is not improperly influenced”); Charles P. Grom, Exch. Act Rel. No. 77150 (Feb. 17, 2016)

(finding that analyst violated Reg. AC by certifying research report’s recommendation that was inconsistent with 

his personal views); First Montauk Securities Corp. and Herbert Kurinsky, Exch. Act Rel. No. 57710A (Apr. 24, 

2008) (finding that broker-dealer violated Reg. AC by distributing research report without its analyst’s 

certifications). But see GAO Report, supra note 72 (detailing FINRA and SEC enforcement actions involving 

analysts’ conflicts of interest and noting FINRA officials’ and SEC staff’s remarks that “the limited number of 

enforcement actions involving conflicts between equity research and investment banking suggests that the 

regulatory reforms have been effective”).

104 See infra Section V.C (discussing impacts of MiFID II on payment mechanisms and research costs) and Section 

VI (discussing different theories about factors that impact research coverage of small issuers, such as a decline in 

the overall number of IPOs until 2020); see also Xiaohui Gao et al., Where Have All the IPOs Gone?, 48 J. FIN. &

QUANTITATIVE ANALYSIS 6 (2013) (“Gao et al.”) (finding that “while [Sarbanes-Oxley] and the combined effects 

of decimalization and the Global Settlement on analyst coverage may have had some effect on small-company 

IPOs in the United States, the more fundamental problems are the absence of profitable small companies and the 

paucity of small companies that grow and become highly profitable, earning high returns for investors”); Craig 

Doidge et al., Has New York Become Less Competitive in Global Markets? Evaluating Foreign Listing Choices 

Over Time 42 (National Bureau of Economic Research, Working Paper No. 13079, 2007), available at 

https://www.nber.org/system/files/working_papers/w13079/w13079.pdf (finding that the characteristics of firms 

listing on U.S. exchanges have not significantly changed since the adoption of Sarbanes-Oxley and that “[i]f 

anything has changed in the aftermath of [Sarbanes-Oxley], it is that the non-listed firms have become smaller and 

are therefore less likely to list on the U.S. exchanges”).

105 See, e.g., IPO Task Force, supra note 34, at 14 (“As a result [of the Global Settlement], most sell-side research 

analysts have shifted their attention to the high-volume, high-liquidity large-cap stocks that now drive revenues for 

their institutions and provide the basis for their compensation. This shift has resulted in less research coverage of 

emerging growth companies . . . .”); see also American Securities Association et al., Expanding the On-Ramp: 

Recommendations to Help More Companies Go and Stay Public (Spring 2018), available at 

http://www.centerforcapitalmarkets.com/wp-content/uploads/2018/04/IPO-Report_EXPANDING-THE-ONRAMP.pdf (stating that “[b]y many measures, the JOBS Act has successfully breathed much-needed life into the 

IPO market” while acknowledging that “very few investment banks have published any pre-IPO research” and 

recommending ways to increase “[t]he amount of analyst research concerning small public companies[, which] has 

significantly declined in recent years for a host of reasons”).

106 See Ehud Kamar et al., Sarbanes-Oxley’s Effects on Small Firms: What is the Evidence? (2007), available at

https://scholarship.law.columbia.edu/cgi/viewcontent.cgi?article=2479&context=faculty_scholarship (finding that 

while there is evidence to support the proposition that Sarbanes-Oxley had a disproportionately negative impact on 

smaller issuers, the evidence is not conclusive, especially with regard to the long-term effects of the legislation); 

Hovakimian & Saenyasiri, supra note 56, at 105 (“Although disentangling the impact of the Global Settlement 

from that of related rules and regulations [(e.g., Reg. AC and SRO rules)] aimed at mitigating analysts’ conflicts of 
27

some of the Measures and the remaining analysts focused on large issuers, leaving many small 

issuers without coverage.107 As some studies explained, talented analysts left the sell-side 

research industry after the Measures led to a significant reduction in analysts’ compensation and 

financial firms’ research budgets, which, in turn, decreased the overall informational benefit of 

research.108 Additionally, reforms to separate research from investment banking may have 

“prevented issuers from taking full advantage of their underwriters’ expertise in [IPOs] and 

diminished the important role research analysts traditionally have played in the IPO 

underwriting process.”109 However, as one study indicated, there was a decline in analysts and 

research coverage of small issuers well before the Measures, but this study did not address the 

reasons for the decline or whether there was any one factor contributing to that decline.

110 

Moreover, another study found, in the context of MiFID II, that analysts who produced lowquality research, in terms of forecast accuracy, were more likely to leave the research industry 

and the remaining analysts produced better research.111

 

interest is impossible, forecast bias clearly declined around the time the Global Settlement was announced. These 

results suggest that the recent efforts of regulators have helped neutralize analysts’ conflicts of interest.”).

107 See, e.g., IPO Task Force, supra note 34, at 26 (noting the dramatic decline of research coverage before 2011 

was due to economic and regulatory pressures that reduced research budgets); Jill E. Fisch, Does Analyst 

Independence Sell Investors Short?, 55 UCLA Law Review 39 (2007) (“Fisch”) (finding that the regulatory 

reforms addressing analysts’ conflicts of interest eliminated investment banking revenues as a source of funding 

research, resulting in dramatic reduction of research coverage of small issuers).

108 See Fisch, supra note 107, at 75 (noting that financial firms’ reduction of analysts’ compensation was a natural 

response to the inability of analysts to participate in investment banking); see also Guan et al., supra note 59

(concluding that the restrictions imposed by the reforms led to a significant reduction in sell-side analysts’ bonuses 

and total compensation and their departure may have led to a decrease in the overall informativeness of analysts’ 

recommendations). But see Garnet Roach, European Small-Cap Coverage Increases Since Mifid II, IR MAG., Feb. 

10, 2021, https://www.irmagazine.com/small-cap/european-small-cap-coverage-increases-mifid-ii (citing a report 

showing, based on a survey of more than 900 corporate investor relations professionals, that research coverage of 

EU small-cap issuers has increased since MiFID, after a reduction in coverage globally of issuers of all cap sizes in 

2019 and 2020).

109 Catalano, supra note 29, at 32 (“The consequences for issuers and investors are manifest in IPO pricing 

inefficiency and in research by underwriters that often conflicts with their recommendations to buy the stock on the 

offering.”). See also Cowen Presentation, supra note 34.

110 See U.S. Gov’t Accountability Off., Report to the Committee on Small Business and Entrepreneurship, U.S. 

Senate 24, n.25 (Apr. 2006), https://www.gao.gov/assets/gao-06-361.pdf (“Well before the passage of the 

Sarbanes-Oxley Act, analysts noted . . . a decline in analyst and research coverage of smaller companies . . . .”).

111 Yifeng Guo & Lira Mota, Should Information be Sold Separately? Evidence from MiFID II, 142 J. FIN. ECON.

97, 99 (2021) (“Guo & Mota”) (finding that after MiFID II, “analysts who produce worse research are more likely 

to leave the market” and “analysts who remain in the research market produce better research”). For further 

discussion of analysts’ behavior and research coverage in the post-IPO context, see Daniel J. Bradley et al., Analyst 

Behavior Following IPOs: The “Bubble Period” Evidence, 21 Rev. of Fin. Studies 1 (2008) (finding, based on 

analysts’ recommendations following IPOs from 1999 to 2000, that “there is no reliable relation between the 

number of managing underwriters and the number of brokers who follow a firm by the end of its first anniversary 
28

V. Payment Mechanisms and Costs of Research

Money managers may use various mechanisms to pay for sell-side and independent 

research. In the United States, research provided by broker-dealers typically has not been 

“priced” separately from other broker-dealer services.

Specifically, as discussed in more detail below, many money managers have historically 

used client assets to pay for brokerage and research services through bundled commission 

payments, commonly known as “soft dollars,” pursuant to a safe harbor provided by Section 

28(e) of the Exchange Act, which allows a money manager to pay a negotiated, variable 

commission rate in which order execution is bundled along with “brokerage and research 

services,” if the manager determines in good faith that the amount of the commission paid is 

reasonable in relation to the value of the brokerage and research services received.112 In 

addition to soft dollars, money managers in the United States may use “hard dollars” to pay for 

sell-side and independent research by making direct payments from their own resources.

113

An EU law known as MiFID II, which went into effect in 2018, has influenced the use 

of these payment mechanisms in the United States.

114 Specifically, in an effort to address

potential conflicts of interest associated with money managers purchasing research, MiFID II 

permits money managers to use hard dollars or funds from a separate research payment account 

(“RPA”) to pay for research; MiFID II has, in effect, banned money managers subject to the 

legislation from using bundled commission payments to pay for research with respect to their 

EU clients.

115 This led to an increasing number of U.S. money managers to ask U.S. brokerdealers if they would accept hard dollars for their research. Some broker-dealers have been 

reluctant to accept hard dollars for their research,

116 expressing concerns that accepting hard 

dollars for research could subject the broker-dealers to regulation and registration under the 

 as a publicly traded company,” and suggesting that “firms going public may be under the illusion that they are 

paying for research at the time of the IPO, but within a very short period of time other factors are the more 

important determinants of analyst coverage”).

112 15 U.S.C. § 78bb(e).

113 As discussed below, money managers can rely on the Section 28(e) safe harbor to use client assets to pay for 

research; additionally, some U.S. broker-dealers have refused to accept hard dollars for their research because it 

raises questions regarding their status as an “investment adviser” under the Advisers Act.

114 See Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in 

financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (recast), O.J. (L 173) 349 

(Dec. 6, 2014) (“MiFID II”), available at https://eur-lex.europa.eu/legalcontent/EN/TXT/?uri=celex%3A32014L0065.

115 See also infra notes 151 and 152 and corresponding text discussing amendments to MiFID II.

116 See infra note 144.
29

Advisers Act. In particular, a broker-dealer is excluded from the definition of “investment 

adviser” under the Advisers Act so long as its provision of investment advice is “solely 

incidental” to the conduct of its business as a broker-dealer and it receives no “special 

compensation” for the advice.117 Some broker-dealers have registered as investment advisers, 

enabling them to accept hard dollars for research.

118

Although the staff does not have access to data to ascertain the costs of research paid for 

through soft dollars or hard dollars,119 studies have found that MiFID II has had impacts on 

research beyond the EU. In particular, as discussed below, studies have found that MiFID II 

has impacted the payment mechanisms for research and research costs for money managers and 

research providers subject to U.S. law.

Brokerage Commissions or “Soft Dollars” for Research

In 1972, the Commission released a policy statement about the U.S. securities markets

“and the direction in which the public interest requires that they evolve.”120 The Commission 

acknowledged that it was a “fundamental element of the brokerage function” for broker-dealers 

to provide research, and expressed the view that it was appropriate for broker-dealers to be 

compensated for the research through their receipt of commission payments.121

 117 See Section 202(a)(11) of the Advisers Act, 15 U.S.C. § 80b-2(a)(11).

118 See Michael Mayhew, Integrity Research Associates, Can Asset Managers Not Subject to MiFID II Use Cash to 

Pay for US Research?, Jan. 27, 2020, https://www.integrity-research.com/can-asset-managers-not-subject-mifid-iiuse-cash-pay-us-research/ (“At least five US brokers including Bank of America Merrill Lynch, Deutsche Bank, 

Jefferies, Nomura Securities and BMO Capital Markets previously decided to register their research departments as 

investment advisers to enable any asset manager to use cash to pay for their investment research.”); see also Peter 

Smith & Robin Wigglesworth, BofA Breaks Ranks to Take Investment Adviser Status Ahead of Mifid, FIN. TIMES, 

Oct. 24, 2017, https://www.ft.com/content/b840973e-b803-11e7-8c12-5661783e5589 (“BofA’s decision to make 

its research unit a registered investment adviser allows the bank to accept hard dollars for US research services 

from any investor in the world.”); Laura J. Keller, BofA Inches Closer to U.S. Research Fees as MiFID Looms, 

BLOOMBERG, Nov. 5, 2017, https://www.bloombergquint.com/markets/bofa-makes-legal-move-to-charge-for-u-sresearch-as-mifid-looms (observing that Deutsche Bank AG’s investment bank included its research services in its 

investment adviser registration, but indicated in its SEC filing that its research is provided through its broker-dealer 

status, not as an investment adviser).

119 Cf. Howell E. Jackson & Jeffrey Y. Zhang, The Economics of Soft Dollars: A Review of the Literature and New 

Evidence from the Implementation of MiFID II 19 (2020) (“Jackson & Zhang”), available at

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3673470 (noting that “researchers do not have a good line of 

sight into the amount of research funded with soft dollars at the fund level either at the individual fund level or in 

the aggregate”).

120 1972 Commission Statement, supra note 4.

121 Id. at 5290.
30

In the United States, institutional money managers historically used brokerage 

commissions to pay broker-dealers for sell-side research along with order execution.122 Up 

until 1975, brokerage commission rates were fixed, and broker-dealers competed for 

institutional business on the basis of providing services, including non-execution services such 

as research reports.123 As the end of the fixed-rate era drew near in the early 1970s, institutional 

money managers and broker-dealers questioned how competition over commission rates would 

disrupt these practices.124 Fiduciary principles require money managers to seek best execution 

for client trades and limit money managers from using client assets for their own benefit.125 

Money managers expressed concern that in an environment of competitive commission rates, 

they would be forced to allocate brokerage solely on the basis of lowest execution costs, or that 

paying more than the lowest commission rate would be deemed a breach of fiduciary duty, and 

that useful research might become more difficult to obtain.126 Broker-dealers expressed concern 

that they could no longer be compensated in commissions for their work product if orders were 

routed to broker-dealers that provided execution-only service at lower rates.127

Congress addressed these concerns by enacting Section 28(e) of the Exchange Act to 

allow money managers to use client funds to purchase “brokerage and research services” for 

their managed accounts under certain circumstances without breaching their fiduciary duties to 

clients.128 Following the enactment of Section 28(e), money managers used – and continue to 

use – client funds to pay brokerage commissions for both order execution and other “brokerage 

and research services” that inure to the benefit of advisory clients.

In the years since Congress enacted Section 28(e), the Commission has issued 

interpretations and guidance on the application of the safe harbor to money managers’ 

acquisition of research for the benefit of their advised accounts.129 In its most recent 

 122 See generally 2006 Release, supra note 30.

123 Id. at 41980.

124 Id.

125 Id. at 41978. See also Commission Interpretation Regarding Standard of Conduct for Investment Advisers, 

Advisers Act Rel. No. 5248 (Jun. 5, 2019), 84 Fed. Reg. 33669, 33675 (Jul. 12, 2019).

126 2006 Release, 71 Fed. Reg. at 41980.

127 Id.

128 15 U.S.C. § 78bb(e). Section 28(e) provides a safe harbor that protects money managers from liability for a 

breach of fiduciary duty solely on the basis that they paid more than the lowest commission rate in order to receive 

“brokerage and research services” provided by a broker-dealer, if the managers determine in good faith that the 

amount of the commission is reasonable in relation to the value of the brokerage and research services received. 

2006 Release, 71 Fed. Reg. at 41978.

129 See 2006 Release, supra note 30; Commission Guidance on the Scope of Section 28(e) of the Exchange Act, 

Exch. Act Rel. No. 45194 (Dec. 27, 2001), 67 Fed. Reg. 6 (Jan. 2, 2002); 1986 Release, supra note 30; Report of 

Investigation in the Matter of Investment Information, Inc. Relating to the Activities of Certain Investment 

Advisers, Banks, and Broker-Dealers, Exch. Act Rel. No. 16679, 19 SEC Docket 926 (Mar. 19, 1980); Use of 
31

interpretation in 2006, the Commission interpreted the scope of the safe harbor based upon 

changing market conditions, industry practices, and the purposes underlying Section 28(e).130 

The Commission highlighted the importance of money managers’ access to greater breadth and 

depth of research by stating that the Section 28(e) safe harbor “encompasses third-party research 

and proprietary research on equal terms.”131 The Commission interpreted the safe harbor to 

“permit the industry to flexibly structure arrangements that are consistent with the statute and 

best serve investors,” in particular, through CCAs.132

The Commission’s 2006 interpretation stated that Section 28(e) applies to arrangements 

involving “commissions paid to full service broker-dealers that provide brokerage and research 

services directly to money managers, and to third-party research arrangements where the 

research services and products are developed by third parties and provided by a broker-dealer 

that participates in effecting the transaction.”133 The 2006 Release observed that the industry 

had developed CCAs that allowed money managers to have their trades executed by one brokerdealer and obtain research and other services from another broker-dealer.134 In some of these 

arrangements, the introducing broker-dealer accepts orders from money managers (submitting 

orders for their advised accounts) and then executes the trade and provides research, while a 

second broker-dealer clears and settles the transaction.135 In other arrangements, an introducing 

broker-dealer facilitates access to research, but has little, if any, role in accepting orders or in 

executing, clearing, or settling any portion of the trade.136 The Commission expressed the view 

 

Commission Payments by Fiduciaries, Exch. Act Rel. No. 12251 (Mar. 24, 1976), 41 Fed. Reg. 13678 (Mar. 31, 

1976) (“1976 Release”).

130 See 2006 Release, 71 Fed. Reg. at 41979.

131 Id. at 41992 (stating that “several commenters expressly endorsed the Commission’s view that independent

research providers should be accorded equal treatment with proprietary research providers” and “[n]one of the 

commenters disputed this point,” but acknowledging commenters with differing views on other issues related to the 

Section 28(e) safe harbor). In the 1976 Release and 1986 Release, the Commission indicated that “under 

appropriate circumstances,” money managers may use client commissions to obtain third-party research (i.e., 

research produced by someone other than the executing broker-dealer). 1986 Release, 51 Fed. Reg. at 16007; 1976 

Release, 41 Fed. Reg. at 13679. Section 28(e) requires that research be “provided by” the broker-dealer that is 

“effecting” the transactions, which up until the Commission’s interpretation in the 2006 Release, limited the 

circumstances in which money managers could obtain third-party research. In the 2006 Release, the Commission 

modified its interpretation of “provided by” and “effecting” under Section 28(e) to clarify money managers’ ability 

to access third-party research. 2006 Release, 71 Fed. Reg. at 41993-95.

132 2006 Release, 71 Fed. Reg. at 41992.

133 Id. at 41983-41984.

134 Id. at 41993.

135 Id.

136 Id. In a typical CCA, a money manager places a client order through an executing broker-dealer and pays a 

single “bundled” commission for order execution and Section 28(e)-eligible brokerage and research services. The 

executing broker-dealer credits the portion of the commission for research to a CCA administered by the executing 

broker-dealer and retains the remainder of the commission payment. Alternatively, the executing broker-dealer 
32

that this separation of functions is beneficial to the money managers’ clients when an efficient 

execution venue provides good, low-cost execution while a research venue contributes research 

that is beneficial to managed accounts.137

B. “Hard Dollars” for Research

Bundled commission payments made under Section 28(e) (or “soft dollars”) are 

distinguishable from payments for research with “hard dollars,” which are payments in cash and 

may include direct payments from a money manager’s own resources rather than from client 

assets. U.S. money managers may typically pay for research with soft dollars under Section 

28(e) rather than hard dollars. Before MiFID II was implemented in January 2018, EU money 

managers were similarly permitted to use bundled commission payments rather than hard 

dollars to pay for research.

Broadly speaking, the EU adopted MiFID II to “strengthen investor protection and 

improve the functioning of financial markets making them more efficient, resilient and 

transparent.”138 As discussed below, MiFID II requires money managers to “unbundle” 

research payments from execution payments.

139 This requirement was intended to address the 

potential conflicts of interest associated with money managers tying research-buying decisions 

with execution decisions and to increase transparency of the costs of research and execution for 

investors.

140

 

may forward the research portion of the commission to a CCA administered by an external aggregator or 

administrator. The money manager then receives research from a third-party research provider or the executing 

broker-dealer, paid for by the CCA assets. Where an external aggregator or administrator is used, the money 

manager instructs the executing broker-dealer to deduct the portion of the commission payment for brokerage, 

including execution, from payments going to the CCA administered by that third party. See, e.g., Letter from 

Securities Industry and Financial Markets Association’s Asset Management Group (“SIFMA AMG”) to Heather 

Seidel, Acting Director, SEC Div. of Trading & Mkts. (Oct. 25, 2017), available at

https://www.sec.gov/divisions/marketreg/mr-noaction/2017/sifma-amg-102617-28e.pdf (describing a typical CCA 

in a request for a no-action letter).

137 2006 Release, 71 Fed. Reg. at 41993.

138 European Securities and Markets Authority (“ESMA”), MiFID II, https://www.esma.europa.eu/policyrules/mifid-ii-and-mifir. MiFID II sought to achieve a variety of regulatory goals. ESMA, the EU’s securities 

markets regulator, observed that, through MiFID II, “[t]he protection of investors is strengthened through the 

introduction of new requirements on product governance and independent investment advice, the extension of 

existing rules to structured deposits, and the improvement of requirements in several areas, including on the 

responsibility of management bodies, inducements, information and reporting to clients, cross-selling, 

remuneration of staff, and best execution.” Id.

139 MiFID II, supra note 114.

140 See Commission Delegated Directive (EU) 2017/593 of 7 April 2016, supplementing Directive 2014/65/EU of 

the European Parliament and of the Council with regard to safeguarding of financial instruments and funds 

belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, 

commissions or any monetary or non-monetary benefits, art. 13(9), O.J. (L 87) 500 (Mar. 31, 2017) (“EU 

Delegated Directive”), available at https://eur-lex.europa.eu/legalcontent/EN/TXT/PDF/?uri=CELEX:32017L0593&from=EN (stating that MiFID II restricted the possibility for 
33

In effect, MiFID II bans certain inducements (such as fees, bundled commissions, and 

non-monetary benefits) that investment firms pay or receive in connection with their provision 

of services to clients; these inducements are permitted only to the extent that they are designed 

to enhance the quality of service to clients.

141 It is not considered to be an inducement under 

MiFID II if the investment firm receives research in return for: (1) direct payments from the 

investment firm’s own resources; and/or (2) payments from a separate RPA that is controlled by 

the investment firm and funded with client assets, provided that certain conditions are met.142 

The consequence of this ban is that money managers subject to MiFID II must, in effect, 

“unbundle commissions” by making payments for execution separately from payments for 

research.143 Accordingly, while money managers subject to U.S. law may continue to make 

bundled commission payments to broker-dealers for brokerage and research services under 

Section 28(e) of the Exchange Act, money managers that are subject to MiFID II may no longer 

make those bundled payments.

The EU’s unbundling requirement led some U.S. money managers to ask certain U.S. 

broker-dealers if they would accept “hard dollars” for their research.144 Some U.S. brokerdealers have been reluctant to accept hard dollar payments, expressing concerns about their 

 

firms to receive or pay inducements to “increase clarity to clients as to the quality of services they receive” and that 

the supply of and charges for execution services “shall not be influenced or conditioned by levels of payment for 

execution services”); see also MiFID II, supra note 114 (“The expanding range of activities that many investment 

firms undertake simultaneously has increased potential for conflicts of interest between those different activities 

and the interests of their clients. It is therefore necessary to provide for rules to ensure that such conflicts do not 

adversely affect the interests of their clients.”). Section 28(e) addresses a money manager’s conflicts by allowing 

the money manager to pay higher commissions than are otherwise available to obtain brokerage and research 

services on behalf of a client if the money manager makes a good faith determination that the amount of 

commissions paid is reasonable. See 2006 Release, 71 Fed. Reg. at 41980.

141 MiFID II, supra note 114.

142 EU Delegated Directive, supra note 140. Payments may be made from a separate RPA under the control of the 

investment firm, provided that the following conditions relating to the operation of the account are met: “(i) the 

research payment account is funded by a specific research charge to the client; (ii) as part of establishing a research 

payment account and agreeing [to] the research charge with their clients, investment firms set and regularly assess 

a research budget as an internal administrative measure; (iii) the investment firm is held responsible for the 

research payment account; [and] (iv) the investment firm regularly assesses the quality of the research purchased 

based on robust quality criteria and its ability to contribute to better investment decisions.” Id.

143 Id.

144 This question has been raised on behalf of U.S. money managers with a global business as well as EU money 

managers that frequently purchase research from U.S. broker-dealers. See, e.g., Letter from American Securities 

Association to SEC Chairman Jay Clayton (May 2, 2019) (“American Securities Letter”); Letter from Sidley 

Austin LLP to SEC Chairman Walter Jay Clayton (Mar. 19, 2019) (“Sidley Austin Letter”); Letter from The 

Capital Group Companies, Inc. to SEC Chairman Walter Jay Clayton (Feb. 11, 2019) (“Capital Group Letter”); 

Letter from MFS Investment Management to SEC Chairman Walter Jay Clayton (Oct. 16, 2018), each available at 

https://www.sec.gov/comments/mifidii/mifidii.htm.
34

resulting status under the Advisers Act.145 In particular, a broker-dealer is excluded from the 

definition of “investment adviser” under the Advisers Act so long as its provision of investment 

advice is “solely incidental” to the conduct of its business as a broker-dealer and it receives no 

“special compensation” for the advice.146 As a general matter, U.S. broker-dealers expressed 

concern that if they received “hard dollars” for their research, those fees could subject the 

broker-dealer to regulation under the Advisers Act.147 In turn, U.S. money managers raised 

concerns that if a U.S. broker-dealer is unwilling or unable to accept separate payments for 

research (i.e., payments that are not bundled with commission payments for order execution), 

money managers may not be able to obtain necessary research that would benefit their advised 

accounts.148

In 2017, the Commission’s Division of Investment Management took a temporary noaction position stating that the staff would not recommend enforcement action if broker-dealers

receive research payments in “hard dollars” from money managers who are subject to MiFID II 

without the broker-dealers being considered investment advisers; the temporary position was 

intended to provide the staff and market participants with time to better understand the 

evolution of business practices after the implementation of MiFID II and, following the 

extension, to continue to monitor developments in Europe that could affect business 

practices.

149 At the same time, the Commission’s Division of Trading and Markets issued a no-

 145 See American Securities Letter, supra note 144; Sidley Austin Letter, supra note 144; Capital Group Letter, 

supra note 144.

146 See Section 202(a)(11) of the Advisers Act, 15 U.S.C. § 80b-2(a)(11). The Commission provided an updated 

interpretation on when the provision of advice falls within the “solely incidental” prong of the broker-dealer 

exclusion. See Commission Interpretation Regarding the Solely Incidental Prong of the Broker-Dealer Exclusion 

from the Definition of Investment Adviser, Advisers Act Rel. No. 5249 (Jun. 5, 2019), 84 Fed. Reg. 33681 (Jul. 12, 

2019).

147 See, e.g., Letter from SIFMA to Douglas J. Scheidt, Associate Director, SEC Div. of Investment Mgmt. (Oct. 

17, 2017), available at https://www.sec.gov/divisions/investment/noaction/2017/sifma-102617-202a-incoming.pdf

(requesting no-action letter).

148 See, e.g., Letter from SIFMA AMG to SEC Chairman Walter Jay Clayton (Dec. 14, 2018), available at

https://www.sec.gov/comments/mifidii/cll5-4881876-177433.pdf. Other commenters also addressed measures to 

facilitate cross-border implementation of MiFID II’s research provisions. See, e.g., Letter from Healthy Markets 

Association et al. to SEC Chairman Jay Clayton (Jun. 26, 2019) (recommending revising guidance under Section 

28(e) of the Exchange Act to impose additional requirements on money managers to enhance transparency on 

research costs and the use of client commissions to pay for it); Letter from Nucleus195 to SEC Chairman Jay 

Clayton (Mar. 11, 2019) (supporting unbundled model, with broker-dealers being paid directly for their research); 

and Letter from Council of Institutional Investors to SEC Chairman Jay Clayton (Jan. 31, 2019) (“While we 

understand concerns that the unbundling of broker-dealer commissions might adversely affect research availability 

for the smallest public companies, we have yet to see compelling evidence of that effect.”) (footnote omitted), each 

available at https://www.sec.gov/comments/mifidii/mifidii.htm.

149 SIFMA, SEC Staff No-Action Letter (Oct. 26, 2017), available at

https://www.sec.gov/divisions/investment/noaction/2017/sifma-102617-202a.htm. The temporary no-action 

position was originally for 30 months, until July 2020. In November 2019, the Division of Investment 

Management extended the position to July 3, 2023. See SIFMA, SEC Staff No-Action Letter (Nov. 4, 2019), 

available at https://www.sec.gov/investment/SIFMA-110419. The Division of Investment Management issued an 

additional no-action letter to provide a staff position related to MiFID II’s unbundling requirements. See
35

action letter stating that the staff would not recommend enforcement action if, under certain 

circumstances, money managers pay for research through the use of an RPA in reliance on the 

Section 28(e) safe harbor.

150

Subsequently, in February 2021, as part of the European Commission’s overall 

coronavirus recovery strategy aimed at making it easier for the capital markets to support the 

recovery of European businesses, the European Commission (“EC”) adopted amendments to 

MiFID II that would permit bundled commission payments for research on small- and mid-cap 

issuers, with the goal of incentivizing the provision of research with respect to those issuers.151 

The UK securities market regulator, the Financial Conduct Authority (“FCA”), issued, in April 

2021, a consultation paper on capital markets reform that involved looking at changes to the 

UK’s implementation of MiFID II,

152 and, in November 2021, a policy statement summarizing 

the feedback that it received on the consultation paper and outlining its final policy position and 

rules.153

 

Investment Company Institute, SEC Staff No-Action Letter (Oct. 26, 2017), available at 

https://www.sec.gov/divisions/investment/noaction/2017/ici-102617-17d1.htm (stating that the staff would not 

recommend enforcement action if investment advisers continue to aggregate client orders for purchases and sales of 

securities, where some clients may pay different amounts for research because of MiFID II requirements, but all 

clients will continue to receive the same average price for the security and execution costs).

150 SIFMA AMG, SEC Staff No-Action Letter (Oct. 26, 2017), available at

https://www.sec.gov/divisions/marketreg/mr-noaction/2017/sifma-amg-102617-28e.pdf. The letter specified four 

circumstances in which the no-action position would apply: (1) the money manager makes payments to the 

executing broker-dealer out of client assets for research alongside payments to that executing broker-dealer for 

execution; (2) the research payments are for research services that are eligible for the safe harbor under Section 

28(e); (3) the executing broker-dealer effects the securities transaction for purposes of Section 28(e); and (4) the 

executing broker-dealer is legally obligated by contract with the money manager to pay for research through the 

use of an RPA in connection with a CCA.

151 Directive (EU) 2021/338 of the European Parliament and of the Council of 16 February 2021 amending 

Directive 2014/65/EU as regards information requirements, product governance and position limits, and Directives 

2013/36/EU and (EU) 2019/878 as regards their application to investment firms, to help the recovery from the 

COVID-19 crisis, O.J. (L 68) (Feb. 26, 2021) (“EU Amendment”), available at https://eur-lex.europa.eu/legalcontent/EN/TXT/?uri=uriserv%3AOJ.L_.2021.068.01.0014.01.ENG&toc=OJ%3AL%3A2021%3A068%3ATOC

(“Research on small and middle-capitalisation issuers is essential to help issuers to connect with investors. That 

research increases the visibility of issuers and thus ensures a sufficient level of investment and liquidity.

Investment firms should be allowed to pay jointly for the provision of research and for the provision of execution 

services provided certain conditions are met. One of the conditions should be that the research is provided on 

issuers whose market capitalisation did not exceed EUR 1 billion, as expressed by the end-year quotes, for the 36 

months preceding the provision of the research.”).

152 FCA, CP21/9: Changes to UK MiFID’s Conduct and Organisational Requirements (Apr. 28, 2021) (“FCA 

Consultation Paper”), available at https://www.fca.org.uk/publication/consultation/cp21-9.pdf (proposing 

exemptions from MiFID II’s inducement rules for research on small and medium-sized enterprises (“SMEs”) that 

have market capitalization below £200m and for fixed income, currencies and commodities research).

153 FCA, PS21/20: Changes to UK MiFID’s Conduct and Organisational Requirements (Nov. 2021) (“FCA Policy 

Statement”), available at https://www.fca.org.uk/publication/policy/ps21-20.pdf (adopting new inducement rules 

relating to research, including the exemptions proposed in the FCA Consultation Paper and modified exemptions). 
36

Studies have found that MiFID II has had consequences beyond the EU, notably its 

impacts on payment mechanisms and research costs for money managers and research providers 

subject to U.S. law.

C. Impacts of MiFID II on Payment Mechanisms and Research Costs

Numerous studies have analyzed the impacts of MiFID II on research, some of which 

cover different payment mechanisms for research and costs of research, but not necessarily in 

the context of small issuers specifically.154 Although many of the studies were focused on 

European market participants, these studies are worth noting because, as discussed above, to the 

extent that market participants have global operations, they may change their practices in 

response to MiFID II on a global scale.155 One academic study noted the data limitations of 

these studies, indicating that as of October 2020, none of the industry reports or academic 

articles regarding the impact of MiFID II on market performance and analyst coverage utilized 

data from 2020 and that empirical analyses all stopped in 2019.156 While the results from these 

studies vary and may even be contradictory on the issues of availability and coverage of 

research,157 there appears to be a general consensus on several key points relating to payment 

mechanisms for research and research costs.

As discussed below, studies have found that, after MiFID II was implemented, both 

asset managers paying for research and research providers have tried to remain competitive in 

the EU and US markets. Studies have found, for instance, that as a result of MiFID II, there has 

been a trend towards asset managers paying for research from their own resources. 

Additionally, many asset managers decreased their research budgets and the number of their 

research providers, but it is unclear whether this was due to the legislation since this downward 

trend existed before MiFID II went into effect. Studies have also found that after MiFID II was 

 154 Section 106 requires the staff to consider “the impacts of different payment mechanisms for investment research 

into small issuers” on the provision of and reliance upon such research. Studies cited in this Report that cover this 

factor are discussed in the context of MiFID II’s impacts on research generally and research costs, and do not 

otherwise discuss payment mechanisms.

155 See Liquidnet University, Unbundling Research: Canary in the Coalmine (Dec. 10, 2018) (“Liquidnet 

Research”), available at https://www.liquidnet.com/expert-insights/unbundling-research-canary-in-the-coalmine

(finding, based on speaking to 62 market participants in a variety of roles across the globe, that “[r]esearch 

unbundling is already going global—53% of buy-side respondents have already implemented a global policy & a 

further 20% will do so within the next 5 years” and that “[i]n Europe the change may be regulatory driven, but 

across the rest of the world it is being led by end investor demand”); see also Andrew Holt, Mifid II Going Global, 

Says Research, IR MAG., Dec. 12, 2018, https://www.irmagazine.com/regulation-mifid-ii/mifid-ii-going-globalsays-research (citing Liquidnet Research revealing that “a majority of asset managers are implementing the 

European rules on research procurement across their worldwide operations, not just in Europe, in response to Mifid 

II and investor demand”); Siobhan Riding, US Bundled Equity Commissions Fall by Nearly Half in Decade, FIN.

TIMES, Jul. 14, 2019 (“Riding Article”), https://www.ft.com/content/40477f19-fffb-3d30-bfbd-4134bb31f416

(“Although Mifid II does not apply to US fund houses, [some] managers . . . have decided to implement it on a 

global basis, eager to capitalise on increased investor demand for transparent pricing.”).

156 See Jackson & Zhang, supra note 119, at 31.

157 See infra Section VI (discussing research coverage trends).
37

implemented, research providers competed over research prices that reduced research costs, but 

this has disadvantaged small research providers more so than large research providers.

1. Payment Mechanisms for Research

Studies have found that as a result of MiFID II, there has been a trend towards asset 

managers subject to the legislation paying for research from their own resources – rather than 

from their clients’ assets through an RPA – in order to remain competitive,158 for administrative 

convenience159 and/or to obtain tax benefits.160 Studies have also shown that this general trend 

was seen in the months leading up to the MiFID II implementation date161 and may have been 

 158 See, e.g., EC, The Impact of MiFID II on SME and Fixed Income Investment Research 10 (Apr. 2020) (“EC 

Report”), available at https://www.riskcontrollimited.com/wp-content/uploads/2020/10/The-Impact-of-MiFID-IIRules-on-SME-and-Fixed-Income-Investment-Research.pdf (“Faced with implementing MiFID II rules in 2017, 

almost all large asset managers [in the EU] chose to pay for research from their own [profit and loss (P&L)] rather 

than by using RPAs. Survey and interview evidence suggest that the choice was largely influenced by competitive 

pressures which made it hard for managers to impose new explicit research charges on their clients.”); Jacqueline 

Eli-Namer & Thierry Giami, AMF, Reviving Research in the Wake of MiFID II: Observations, Issues and 

Recommendations 12 (Jan. 2020) (“AMF Report”), available at https://www.amffrance.org/sites/default/files/2020-02/20200124-rapport-mission-recherche-projet-va-pm.pdf (“The fund 

management industry is faced with strong competition, notably from passive management. As a consequence, 

portfolio asset management companies have had to grant reductions in management fees. They therefore pass this 

downward pressure on to all their cost centres, and notably the research cost centre, especially if they have chosen 

to pay for research out of their revenues, which is the case for the broad majority of fund managers.”); Richard 

Johnson, Greenwich Associates, Seismic Shifts: The Future of Investment Research (2018) (“Greenwich Study”), 

available at https://www.digitaltrendanalytics.com/wp-content/uploads/2018/11/thomson-reuters-and-greenwichassociates.pdf (finding that 70% of investment professionals from North America, Europe and Asia who were 

interviewed were paying for research out of their resources); Mark Lang et al., MiFID II Unbundling and Sell Side 

Analyst Research 6 (Jun. 2019), available at 

https://www.stern.nyu.edu/sites/default/files/assets/documents/Lang%20Pinto%20SulMiFID%20II%20unbundling%20and%20sell%20side%20analyst%20research.pdf (noting, based on an 

examination of analyst activity in the EU and U.S., that the MiFID II’s unbundling approach put “pressure on 

research payments by fund managers, either because the costs must be justified to investors if passed on, or because 

they reduce the funds’ profits if absorbed”).

159 See, e.g., EC Report, supra note 158, at 15 (stating that “at a mundane level, some firms reportedly ran out of 

time to implement the administrative procedures required by RPAs in the run up to the MiFID II implementation 

date and hence were obliged to pay out of P&L”); Rhodri Preece, CFA Institute, MiFID II: One Year On, Assessing 

the Market for Investment Research (2019) (“CFA Report”), available at https://www.cfainstitute.org/-

/media/documents/survey/cfa-mifid-II-survey-report.ashx (“An additional factor behind the decision of firms to 

absorb these costs is the administrative convenience of doing so. Firms that opt to charge clients must establish 

research payment accounts, which carry additional regulatory requirements.”).

160 See, e.g., CFA Report, supra note 159 (stating that “booking the research cost against the firm’s profit and loss 

may confer certain tax advantages”); see also Amrish Ganatra, Research Payments: Funding Options Explained, 

Commcise Software Ltd., May 27, 2016 (“Commcise Article”), https://www.linkedin.com/pulse/researchpayments-funding-options-explained-amrish-ganatra (discussing pros and cons of using the profit and loss 

method).

161 See, e.g., CFA Report, supra note 159 (stating that “[i]n the months leading up to the introduction of MiFID II 

in January 2018, industry professionals observed a general trend toward firms opting to pay for research (charged 

against the firm’s profit and loss) as opposed to charging clients” and that “[o]ne year on, the survey results affirm 

that trend”); CFA Institute, MiFID II: A New Paradigm for Investment Research, Investor Perspectives on 
38

fueled, at least in part, by advisory clients negotiating for the advisers to pay for research and 

demands for transparency.162 While it appears that this trend was also seen with respect to asset 

managers that were not subject to MiFID II, it may not be as prevalent among them.163

Studies have further found that some asset managers, including small asset managers 

that cannot afford to pay for research out of their profit and loss (“P&L”), have created RPAs to 

pay for research using client funds.164 This payment mechanism has not been widely used 

partly because of its complexity165 and partly for the reasons discussed above; for example, 

some asset managers have chosen to pay for research out of their P&L to remain competitive, 

 

Research Costs and Procurement (2017), available at https://www.cfainstitute.org/-

/media/documents/support/advocacy/mifid_ii_new-paradigm-for-research-report.ashx (finding, based on a survey 

of its European members, that “[m]ost asset management firms intend to absorb research costs rather than charge 

clients”).

162 See Sophie Baker, Trade Associations Call for MiFID II Unbundling Exemptions, PENSIONS & INVS., May 26, 

2020, https://www.pionline.com/regulation/trade-associations-call-mifid-ii-unbundling-exemptions (noting that 

many French clients refuse to pay for research and that “either the asset manager bears the cost of the research or 

he loses (his) clients”). See also supra note 155.

163 See J.T. Farley, MiFID II Turns Two, Second Thoughts and Unintended Consequences, Spring 2020 (“NIRI 

Update”), available at

https://www.niri.org/NIRI/media/NIRI/IRUpdates/2020%20IR%20Update/Spring2020_NIRI_IRU_Feature4_MiFI

DII.pdf (quoting a principal at Integrity Research Associates, which tracks the investment management industry, as 

saying, “One year ago it seemed like there was a similar movement by U.S. asset managers to decide to pay for 

research out of their own P&Ls, but after a handful of managers made that move, very few really followed suit.”); 

Neil Scarth, Briefing: The Sum of All Fears, IPE MAG., Feb. 2021, https://www.ipe.com/home/briefing-the-sum-ofall-fears/10050264.article (“As a result of the widespread move to fund research budgets through P&L (profit and 

loss) by European asset managers, the contribution of European asset owners to European manager research costs 

has plummeted to near zero. In contrast, US asset owners [i.e., clients of managed accounts] continue to fund over 

90% of US manager research budgets . . . .”).

164 See, e.g., EC Report, supra note 158, at 10 (“Smaller asset managers that adopted RPAs typically have simpler 

fund structures which make the use of RPAs practically feasible. Moreover, these firms felt that absorbing research 

costs in P&L was not a viable option for them.”); see also Commcise Article, supra note 160 (discussing pros and 

cons of using RPAs).

165 See EC Report, supra note 158, at 15 (stating that “large firms chose to pay out of P&L because of the 

complexity they would face in attributing research costs to individual funds when block trades are performed 

simultaneously for multiple clients using a variety of trading mechanisms”); AMF Report, supra note 158 (noting 

that asset managers may choose to pay for research rather than pass the research costs on to their clients partly 

because of the regulatory complexity surrounding the establishment of RPAs); FCA, Implementing MiFID II –

Multi-firm Review of Research Unbundling Reforms (Sept. 19, 2019) (“FCA Report”), available at 

https://www.fca.org.uk/publications/multi-firm-reviews/implementing-mifid-ii-multi-firm-review-researchunbundling-reforms (“Most traditional asset managers have opted to pay for research using their own resources 

instead of setting up RPAs. There were only a few firms in our sample adopting RPAs, but we found no evidence 

that these firms were not complying with the rules. We generally saw comparable levels of scrutiny to research 

payments across both models.”). See also RSRCHXchange, Global Research Unbundling Survey – Summary 

Report (Jun. 2018) (“RSRCHXchange Report”), available at https://www.sec.gov/comments/mifidii/cll5-4919454-

178354.pdf (“Investment firms in Europe have tended toward paying for research from their own resources instead 

of charging clients due to the regulatory complexity.”).
39

for administrative convenience, or to obtain tax benefits. When the EC examined the state of 

research related to small and mid-sized enterprises across the EU countries, and the impact of 

MiFID II on research, the EC found that “[f]ollowing MiFID II, 96% of the firms responding to 

the survey reported paying for research out of P&L and 67% said they used RPAs,” which 

means that some firms took multiple approaches.

166 Generally speaking, the results from these 

studies appear to be consistent with public reports and comment letters to the Commission on 

measures to facilitate cross-border implementation of MiFID II’s research provisions, which 

note that most global asset managers pay for research out of P&L, but some asset managers in 

the EU may pay for research using RPAs, funded with client assets.167

a. Research Use

Studies have shown that after MiFID II, many asset managers decreased their research 

 166 EC Report, supra note 158, at 58 n.41 (“The fact that so many firms clearly use multiple approaches to paying 

for research may seem surprising. But in practice, a relatively small firm relying mainly on RPAs will typically use 

P&L to pay for some research related expenses such as data while major firms with global operations typically 

have a variety of fund management operations. So, while they may predominantly employ P&L, RPAs may be 

used in some of their activities.”).

167 See, e.g., Capital Group Letter, supra note 144, at 10 (“Several global investment managers, including Capital 

Group, have implemented policies to bear the cost of research from their own resources, thereby benefitting all 

clients in the same manner.”); Sidley Austin Letter, supra note 144, at 7 (“Driven in large part by MiFID II, global 

money managers, and in some cases U.S. money managers, have begun requesting U.S. broker-dealers to be able to 

pay for research with hard dollars.”); Owen Walker, Mifid II Influence Spreads Beyond EU Borders, FIN. TIMES, 

May 3, 2020, https://www.ft.com/content/6305c265-7549-44b1-801b-b11594134227 (discussing a Liquidnet 

study, which found that “52 per cent of international investment managers said they had taken the research costs on 

to their profit and loss globally, with 33 per cent doing so just for Europe”); Justina Lee, From $1,600 to $1 

Million: Research Costs Under MiFID II, BLOOMBERG, Apr. 23, 2019, 

https://www.bloomberg.com/news/articles/2019-04-23/from-1-600-to-1-million-what-research-costs-under-mifid-ii

(stating that according to a survey of research providers by U.S. consulting firm Integrity Research Associates LLC 

in 2019, “[m]edian responses show 60 percent of research revenue was paid in cash [“hard dollars” out of P&L], 30 

percent in commission sharing agreements [using bundled commissions] and 10 percent from directed 

commissions [an EU-type arrangement between an executing broker and research provider]”). Cf. AIMA, Payment 

for Research After MiFID 2: Hedge Fund Industry State of Play, Jul. 2018, available at 

https://www.sec.gov/comments/mifidii/cll5-4940120-178467.pdf (global trade association finding, based on a 

survey of 34 members, that more asset managers pay for fixed income research out of their P&L than RPAs 

whereas more asset managers pay for equity research out of their RPAs).
40

budgets168 and the number of their research providers.169 This decline, however, may have been 

 168 See EC Report, supra note 158, at 10 (“The average asset manager budget for external equity research fell 

between 2017 and 2019 by around 20-30%. The decline was concentrated in the budgets of larger firms (with the 

most sizeable firms reducing their research budgets by 30-40%) and was partially offset by higher spending on 

credit research and, possibly, by an increase in internal research costs. SME equity research expenditures also 

declined but not by as much as expenditures on Large Cap equity research.”); CFA Report, supra note 159, at iv

(finding, based on a survey of its European members, that “[r]esearch budgets have been scaled back, with the 

largest firms making the biggest budget reductions”); AMF Report, supra note 158 (finding that asset managers 

decreased their research budgets by 25% to 50% in 2018 and by a further 30% to 50% in 2019); FCA Report, supra

note 165 (finding that “[i]rrespective of payment approaches, firms have reduced their research expenditure” and 

that there was “a material reduction of around 20%-30% in the budgets firms set for externally produced equity 

research”); Rebecca Healey et al., Liquidnet University, MiFID II Unbundling Research: Canary in the Coalmine 

II (Apr. 2019), available at 

https://static1.squarespace.com/static/5bedbc974eddecbfbb0c217e/t/5cb8d43d8165f5922b1b7211/1555616829739/

LNU_Canary+in+a+Coalmine+II_DIGITAL180419.pdf (finding, based on interviewing market participants in the 

U.K., EU and U.S., that “[o]verall research spend has decreased for 39% of respondents; it has remained constant 

for 48% of asset managers who are instead choosing to re-align budgets, and 13% are now choosing to increase 

their research spend”). See also Annabel Smith, Banks Lose 7,500 Years of Analyst Experience Since MiFID II 

Unbundling, THE TRADE, Mar. 9, 2021, https://www.thetradenews.com/banks-lose-7500-years-of-analystexperience-since-mifid-ii-unbundling/ (citing a report that found that “virtual meetings during the pandemic had 

driven down the value of analyst research by almost half” and that “40% of asset managers [surveyed] said they 

had recalculated and reduced pre-agreed research budgets due to uncertainty and structural changes in research 

consumption”); Hugh Leask, How the MiFID II Review and Covid-19 are Reshaping the Hedge Fund Operational 

Landscape, HEDGEWEEK, Oct. 11, 2020, https://www.hedgeweek.com/2020/11/10/292019/how-mifid-ii-reviewand-covid-19-are-reshaping-hedge-fund-operational-landscape (“Almost three years on, industry consensus 

indicates MiFID II has led to a reduction in hedge fund research spend. But anecdotal evidence also suggests 

portfolio managers have sought to capitalise on the reduced amount of stock analysis with targeted research 

budgets to help them gain an edge.”); Helen Reid et al., Pressure on Small Brokers Grows a Year After New EU 

Rules, REUTERS, Jan. 2, 2019 (“Reid Article”), https://www.reuters.com/article/us-eu-markets-mifid-brokersanalysis/pressure-on-small-brokers-grows-a-year-after-new-eu-rules-idUSKCN1OW0FB (discussing Greenwich 

Associates research showing that “average budget cut by asset managers of about 20 percent in 2018, with a 

reduction of another 5 percent to 6 percent expected in 2019”); Andrew Holt, US Buy Side Sees Impact of Mifid II, 

Reveals Study, IR MAG., Aug. 7, 2019, https://www.irmagazine.com/regulation-mifid-ii/us-buy-side-sees-impactmifid-ii-reveals-study (citing study by consulting firm TABB Group finding that MiFID II has “caused the US 

commission pool to plummet”).

169 See, e.g., Ivy Schmerken, MiFID II Research Unbundling Spreads Uncertainty to the U.S., Jul. 11, 2019,

https://flextrade.com/mifid-ii-research-unbundling-spreads-uncertainty-to-the-u-s/ (“As a result of opting to pay for 

research themselves, many buy-side firms have slashed the number of research broker providers. A large firm that 

may have had 200 research providers has cut the number to 150, though that is still a large number.”); AMF 

Report, supra note 158 (discussing how “the majority of companies have carried out a stricter selection of research 

providers”); Quoted Companies Alliance / Peel Hunt, MiFID II: The Search for Research, Mid and Small-Cap 

Investor Survey (Feb. 2019) (“QCA Survey”), available at

https://www.theqca.com/article_assets/articledir_356/178156/QCA-Peel_Hunt_Investor_Survey_2019_Report.pdf

(finding that the majority of fund managers surveyed saw their list of research providers decrease as a result of 

MiFID II); Liquidnet Research, supra note 155 (finding that “61% of asset managers have reduced [the] number of 

research providers”); Scott Davis & Carter Copeland, A Year Into MiFID II, Melius Research, Nov. 23, 2018 

(“Melius Research”), available at https://www.sec.gov/comments/mifidii/cll5-5102588-183266.pdf

(“Unsurprisingly, in response to both declining assets under management in actively managed investment funds 

and the challenges that have been brought on by the adoption of MiFID II for global asset managers, the industry 

has responded by cutting down its number of suppliers. In many instances going from 80+ to ~30-35.”). See also 

David Whitehouse, Reviving Research in an Unbundled World, THE TRADE, Mar. 23, 2020 (“Whitehouse 

Article”), https://www.thetradenews.com/reviving-research-unbundled-world/ (stating that “the AMAFI association 
41

a continuation of a downward trend that existed before MiFID II.170 The reduction in research 

expenditures may be attributed to, among other factors, asset managers paying for research out 

of their own pockets, asset managers adopting a more targeted and efficient approach to 

obtaining and using research, a reduction in redundant analyst coverage and competition driving 

down the costs of research.171 Some studies have also found a trend towards asset managers 

insourcing research or supplementing external research with in-house research.172 Some of 

these trends may suggest that analysts, particularly sell-side analysts, are covering some issuers 

 of French market professionals reported in September a ‘large consensus among issuers, asset management 

companies and research providers’ that the total amount paid for research has dramatically diminished and is set to 

continue to fall, with the decline particularly severe for small- and mid-caps”).

170 See Riding Article, supra note 155 (“According to Greenwich Associates, average bundled equity commissions 

in the US are down by nearly half in the past decade. Greenwich estimated that the research component of these 

commissions had declined particularly sharply in the past three years, falling from about $6bn in 2016 to $3.6bn in 

2019.”); Michael Mayhew, 2019 Research Analyst Headcount Shrinks by 8%, Dec. 30 2019, 

https://www.magyates.com/blog/2019-research-analyst-headcount-shrinks-by-8/ (citing data by consulting firm 

Coalition Development showing that “research analyst headcount at the twelve largest investment banks dropped 

8% to 3,500 by the middle of 2019 across 12 of the largest investment banks,” but noting that “this decline has 

merely been the continuation of a longer-term trend in shrinking analyst headcount” well before MiFID II).

171 See, e.g., FCA Report, supra note 165 (stating that “[b]uy-side firms are paying less for research by having a 

more targeted approach to procurement and increased efficiency in the way they use research, such as fewer and 

more focused analyst meetings,” “[c]ompetition is driving down costs for written material” and “[m]ost firms are 

adopting formal processes to set their research budgets, and increasing their efforts to better understand how they 

use their research to improve cost discipline”); Brunswick Group, MIFID II: The Impact on FTSE 250 Companies

(Autumn 2018), available at https://www.brunswickgroup.com/media/4944/mifid-ii-impact-on-ftse-250-

companies-final.pdf (advisory firm noting that many asset managers in the U.K. who pay separate for research out 

of their own budget, as a result of MiFID II, have cut back their consumption of research); Guo & Mota, supra note 

111, at 98 (“In practice, since it is difficult to justify the exact value of each research service to clients, and since 

asset managers want to compete for investors, most asset managers have decided to charge research costs against 

their own profits. Internalizing research costs makes asset managers more selective, thus reducing the research 

services they choose to purchase.”); Greenwich Study, supra note 158, at 6 (finding that 43% of investment 

professionals interviewed “expect to further increase their reliance on proprietary in-house research, and 39% 

anticipate being more reliant on independent research providers”); Jackson & Zhang, supra note 119, at 5 (finding 

that “MiFID II has lowered the aggregate level of analyst coverage with respect to large companies—through 

reduced redundancy—but not with respect to small- and medium-sized companies”).

172 See, e.g., AMF Report, supra note 158, at 13 (noting that “a trend towards insourcing of research” has 

contributed to a further reduction in research demand); Bingxu Fang et al., The Effects of MiFID II on Sell-Side 

Analysts, Buy-Side Analysts, and Firms, 25 REV. ACCT. STUD. 855 (2020) (“Fang et al.”) (finding “strong evidence 

that the number of buy-side analysts increase[d] following MiFID II, suggesting that European investment firms 

turn[ed] to more in-house research after the implementation of the new regulation”).
42

in less depth or not at all,173 but whether this is primarily due to MiFID II is open to debate.174

b. Issuer-Sponsored Research

The staff understands that in recent years, there has been an increase globally in small 

issuers paying for, or sponsoring, research analysts to cover the issuers in order to be on 

investors’ radar and enhance the issuers’ credibility so that they can raise capital.175 This 

increase may have been an unintended consequence of MiFID II to the extent that the 

legislation made it harder for small issuers to attract research coverage.

176 Investment 

 173 See Julie Steinberg & Paul J. Davies, Less Research? No Problem, Hedge Fund Says, WALL ST. J., Jan. 13, 

2020, https://www.wsj.com/articles/less-research-is-no-problem-for-investors-11578918394 (“Many sell-side 

outfits have scaled back their research as investors have spent less money on it since the rules were implemented. 

Some investors have built their own in-house research teams. The knock-on effect is analysts are covering some 

stocks in less depth or not at all. Hedge funds are seizing on this information asymmetry, sniffing out companies 

that have become cheaper due to their lack of coverage.”).

174 See Whitehouse Article, supra note 169 (stating that “[t]he assumption that small- and mid-cap coverage has 

suffered as result of MiFID II is open to debate” and discussing different findings to support both sides of the 

argument). There is at least one limited study, with a one-year follow-up, that suggests that paying out of P&L 

may impact asset managers’ performance, as measured by fund performance. See Glenn Schorr et al., Evercore ISI 

Research and Frost Consulting, The Most Self-Serving Research Note Ever? (Apr. 26, 2019) (“Evercore Study”) 

(research providers finding that, in 2018, the first full year in which MiFID II’s unbundling requirements went into 

effect, asset managers who chose to pay for research from their own resources purchased less research and 

underperformed asset managers who adhered to the bundled brokerage commissions model while acknowledging 

that a review of only one year was too short to be dispositive of long-term performance trends); Glenn Schorr et al., 

Evercore ISI Research and Frost Consulting, Another Year of Unintended Consequences (May 2020) (“Evercore 

Updated Study”) (research providers finding, in a follow-up study, that U.S. asset managers outperformed their 

European counterparts who spent less on research). Another study, however, concluded that “empirical analysis, 

on balance, does not suggest that soft dollar practices improve fund performance,” while acknowledging that “it is 

difficult to empirically evaluate this hypothesis because researchers do not have a good line of sight into the 

amount of research funded with soft dollars at the fund level either at the individual fund level or in the aggregate.” 

Jackson & Zhang, supra note 119, at 18-19. See also Justina Lee, U.S. Managers Are Thumping European Peers. 

MiFID May Be Why, BLOOMBERG, May 14, 2020, https://www.bloomberg.com/news/articles/2020-05-14/u-sstock-pickers-are-thumping-european-peers-mifid-may-be-why (discussing Evercore Updated Study while noting 

that “[i]t’s difficult to directly attribute outperformance to a single factor”).

175 See AMF Report, supra note 158, at 18 (“Discussions between the Task Force [formed by AMF to explore ways 

to mobilize the research marketplace] and market participants have shown that [the] growth [of sponsored research] 

has accelerated in 2019.”); see also Ksenia Galouchko, As Stock Research World Shrinks, More Firms Pay to Be 

Covered, BLOOMBERG, Aug. 4, 2020, https://www.bloomberg.com/news/articles/2020-08-04/a-niche-grows-inresearch-more-firms-pay-for-their-own-analyst (discussing the increase of sponsored research and conflict 

concerns); Nikou Asgari, Reform Helps To Flip Cost of Research on to Small Companies, FIN. TIMES, May 7, 

2019, https://www.ft.com/content/f746ed3c-5f84-11e9-a27a-fdd51850994c (“The appeal for companies to pay [for 

research] is clear — research by smaller brokerages gives them greater exposure to investors at a time when large 

fund houses have slashed their research budgets.”).

176 See CFA Society United Kingdom, MiFID II: One Year On, An Assessment (2019), available at 

https://www.cfauk.org/-/media/files/pdf/pdf/9-media-centre/mifid-ii-one-year-on.pdf (identifying issuer-sponsored 

research as an unintended consequence of MiFID II); see also Ben Ashwell, Company-Sponsored Research Gains 

Credibility, Says Experts, IR MAG., Oct. 9, 2019, https://www.irmagazine.com/small-cap/company-sponsoredresearch-gains-credibility-say-experts (“While Mifid II is a European regulation and effects on issuers still seem 
43

professionals have expressed concerns regarding the credibility of issuer-sponsored research 

because it may be biased or may not clarify whether such research has been paid for by the 

issuer or whether the analyst is independent.177 In response, organizations whose members are 

investment professionals and corporate officers, as well as at least one foreign regulator, have 

encouraged the industry to develop best practices governing issuer-sponsored research.

178

2. Research Costs

Studies have shown that after MiFID II was implemented, the global market went 

through a period during which research providers sought to establish prices for research (“price 

discovery”) and engaged in a competition over research prices that reduced the costs of 

research, which benefited investors who paid for the research.

179 It appears, however, that this 

 largely muted in North America . . . there is a large universe of uncovered or undercovered public companies in the 

US. With many investment banks adopting Mifid II on a global scale for compliance reasons, there’s an 

acknowledgement that it’s harder for small and micro-cap companies to attract sell-side research coverage. This 

speaks to a need for some small and micro-cap companies to invest in company-sponsored research . . . .”).

177 See AMF News Release, supra note 42 (encouraging “all stakeholders to work on a charter that presents good 

practice based on existing regulatory obligations, in particular with respect to ethics and independence”); see also 

Human Article, supra note 42 (indicating that AMF spokesperson noted that some asset managers may have 

concerns that issuer-sponsored research may be biased or that it is not entirely clear whether such research is paid 

for by the issuer or whether the analyst is independent, which prompted AMF to encourage industry development 

of best practices to address potential conflicts of interest).

178 See supra note 42. In the United States, there are regulatory measures that relate to issuer-sponsored research. 

See, e.g., FINRA, Rule 2241(c)(4)(I) (2015) (requiring disclosure of material conflicts of interest of “the research 

analyst or member that the research analyst or an associated person of the member with the ability to influence the 

content of a research report knows or has reason to know at the time of the publication or distribution of a research 

report”) and Rule 2242(c)(4)(H) (2016) (requiring similar disclosure of material conflicts of interest with respect to 

debt research analyst). See also supra Section IV.A.2 (discussing FINRA Rule 2241). 

179 See, e.g., AMF Report, supra note 158, at 14-15 (noting that, in the Paris financial market, commercial 

negotiation of research was competitive in 2019, “[t]he great majority of research providers are therefore adjusting 

the price of these services downward,” and “MiFID II has led to the development of a supply of research services at 

extremely low prices”); CFA Report, supra note 159, at 9 (finding, based on a survey of its European members, 

that “[t]he advent of MiFID II led to a period of price discovery for research products and services”); FCA Report, 

supra note 165 (attributing, based on a study of buy-side firms, sell-side firms and activities in the U.K., the wide 

range of sell-side research levels to an ongoing process of price discovery of research). See also Andrew Bailey,

Chief Executive, FCA, Keynote Speech on MiFID II at the European Independent Research Providers Association 

(Feb. 25, 2019), available at https://www.fca.org.uk/news/speeches/andrew-bailey-keynote-speech-mifid-iieuropean-independent-research-providers-association (“The market is going through a period of price discovery, 

and is probably yet to find an equilibrium.”). Cf. Jackson & Zhang, supra note 119, at 47 (“Previously, asset 

managers in Europe and the United States had been paying for sell-side research services with what was effectively 

a different currency with a lower value than hard dollars. . . . Under MiFID II, the price of sell-side research 

services effectively increased as they were either moved to collect hard dollar payments from asset managers or 

transferred into RPA accounts where the cost of payment became immediately salient to asset owners [i.e., clients 

of managed accounts]. . . . the price charged for sell-side research, now levied in real currency, has come down and 

quite dramatically in some cases.”).
44

competition has disadvantaged small research providers more so than large research 

providers.180 At least one study found that research pricing models by investment firms 

providing execution and research services still varied greatly one year after the implementation 

of MiFID II,181 while another study found that even two years after the implementation, the 

pricing of research continued to be competitive, heavily negotiated, and in the “price discovery 

phase.”182 In at least two other studies, 75% of those surveyed believed that the low prices 

charged by research providers at the time were not sustainable, particularly for small 

independent research providers.183 One academic study indicated that as of September 2020, 

“there has not been a systematic study on how brokerage firms charge for research after MiFID 

II,” but anecdotal evidence suggested that “the pricing schedule after unbundling is mixed: basic 

access to research is at a single (subscription fee) and high touch services, such as direct access 

to analysts, are charged separately at a high premium.”184 Boutique or independent research 

providers in the EU, including the U.K. before its withdrawal from the EU, have complained 

that larger research providers have engaged in predatory pricing and unfair competition, with 

some rivals charging as little as $10,000 annually for access to all written research.185

 180 See, e.g., Siobhan Riding, Mifid II Creates ‘Existential Threat’ for Small Research Groups, FIN. TIMES, Dec. 8, 

2019, https://www.ft.com/content/1b7986ca-13e1-4d16-9d8e-37f1136e238e (“Independent boutiques, which rely 

almost entirely on the sale of research to survive, have been forced to reduce their pricing in response to the new 

environment. Nearly two-thirds of providers said they had cut prices in the past 12 months, with houses’ average 

annual fee falling from $45,000 to $30,000.”).

181 See FCA Report, supra note 165 (“Firms’ models varied with some using tiered service pricing levels, others 

offering ‘pay as you go’, while others price per type of interaction or product consumed.”).

182 See, e.g., NIRI Update, supra note 163, at 32 (noting “the aggressive pricing of equity research by some larger 

investment banks, with some bulge-bracket firms offering full access annually to published research for as little as 

$10,000”); see also Reid Article, supra note 168 (opining that “pressure on research prices may be here to stay, 

with asset managers in a strong bargaining position”); European Fund and Asset Management Association, 

Position Paper on EC Consultation Paper on Covid-19’s “Capital Markets Recovery Package” – Investment 

Research for SME and Fixed Income Instruments (Sept. 11, 2020), available at 

https://service.betterregulation.com/document/460379 (noting that the research market is still in the “price 

discovery” phase).

183 See RSRCHXchange Report, supra note 165 (research provider surveying over 400 asset management 

individuals representing 350 firms, including those in the U.S.); QCA Survey, supra note 169 (surveying 102 UKbased fund managers and 105 small and mid-sized quoted companies).

184 Guo & Mota, supra note 111, at 100.

185 Siobhan Riding & Chris Flood, FCA Attacked by Research Houses Over Mifid II Reforms, FIN. TIMES, Sept. 19, 

2019, https://www.ft.com/content/dc31af7d-63f3-3927-967e-e320a25d8814 (noting that the pricing environment 

would likely lead to a review of business models and consolidation opportunities). See also Melius Research, 

supra note 169, at 3 (independent research provider observing price dumping post-MiFID II and stating that “[the 

large broker-dealer level] of price sets an incredibly low benchmark for the overall market, at ~$25k for access to 

written research in Europe, with a la carte pricing for other services on top of this base rate”).
45

VI. Research Coverage Trends 

There are many theories about the factors that most significantly impact the amount of 

research coverage for small issuers. This Report discusses above186 the impacts of the Measures 

and implementation of MiFID II on research, including research on small issuers.

187 Other 

factors include, for example, the rise of CCAs; a decline in the overall number of IPOs until

2020;

188 falling equity commissions;189 fewer institutional investors that invest in small 

 186 See supra Section IV.B (discussing impacts of the Measures on research coverage) and Section V.C (discussing 

impacts of MiFID II on payment mechanisms and research costs).

187 See also AMF Report, supra note 158 (finding that MiFID II had a negative impact on research coverage in 

Paris for small and mid-cap issuers); FCA Consultation Paper, supra note 152, at 11 (finding that MiFID II has not 

significantly affected research analyst coverage for smaller UK public companies, but noting that the “average 

analyst coverage figures mask the fact that a significant proportion of companies at the lower end of the market cap 

spectrum are without coverage”); Giulio Anselmi & Giovanni Petrella, Regulation and Stock Market Quality: The 

Impact of MiFID II Provision on Research Unbundling, 76 INT’L REV. OF FIN. ANALYSIS 101788 (2021) (finding 

that “the payment of an explicit price for research is associated with a reduction in analyst coverage in the EU” and 

“[u]nexpectedly, the reduction is stronger for large-cap stocks”); Fang et al., supra note 172 (noting U.S. asset 

managers’ plans to build their own internal research capabilities and source more research in-house in light of 

MiFID II and finding “a decrease in the number of sell-side analysts covering European firms after MiFID II 

implementation”); Cowen Presentation, supra note 34, at 14 (discussing Global Settlement and its effect on small 

cap research). But see Adrien Amzallag et al., MiFID II Research Unbundling Assessing the Impact on SMEs 3 

(ESMA, Working Paper No. 3, 2021), available at https://www.esma.europa.eu/sites/default/files/library/esma_50-

165-1269_research_unbundling.pdf (finding, based on analyses of EU sell-side research, that small to mid-cap 

issuers “continue to be characterised by lower amount of analyst research, higher probability of losing coverage, 

worse quality of research and limited secondary market liquidity,” but this does not appear to be improved or 

worsened by MiFID II).

188 See Jay R. Ritter et al., Economies of Scope and IPO Activity in Europe, in Handbook of Research on IPOs 11 

(Mario Levis eds., 2013) (discussing three alternative explanations for the near-halt of IPO activity in Europe, and 

similarly in the United States, and finding that the decline in IPO activity has been mainly driven by small issuers); 

Gao et al., supra note 104 (discussing alternative reasons for the dearth of IPOs in the United States).

189 See Finding the Best U.S. Small Cap Research Providers, INTEGRITY RES. ASSOCS. (Sept. 9, 2007), 

https://www.integrity-research.com/finding-the-best-us-small-cap-research-providers/ (identifying reasons analyst 

firms have reduced coverage of small cap issuers, including the rise of CCAs, a decline in IPOs, falling equity 

commissions and “regulatory changes [that] have put pressures on sell-side and independent research firms”).
46

issuers;

190 a shift from active to passive investment strategies;191 an increase in reliance on inhouse research;192 and an increase in alternative data sources (e.g., artificial intelligence, 

machine learning, satellite data, shoppers’ data).193 The overlapping occurrence of these 

factors, among many other potential factors, makes measuring the individual effect of each on 

 190 Ehren Stanhope & Chris Meredith, O’SHAUGHNESSY ASSET MGMT., Inefficiency Breeds Opportunity in Small 

Cap Equities 1 (2015), 

https://www.osam.com/pdfs/whitepapers/_4_Commentary_InefficiencyBreedsOpportunitySmallCapEquities.pdf

(noting that “institutional ownership in small cap tends to be very low” and that “[i]ssues with liquidity and the 

ability to make investments in size tend to push institutions away from small cap names”); Punch & Associates, 

True Small Cap Investing: An Institutional Blind Spot? (2017) (SEC-registered investment adviser discussing some 

of the reasons that asset managers may not invest in small issuers, but noting the potential benefits in doing so); 

Garnet Roach, Institutional Investment Drops at Small-Cap Companies, IR MAG. (Mar. 1, 2017) (discussing the 

results of a survey of investor relations professionals, including a finding that there was “a continuing decline in 

levels of institutional investment into small-cap companies globally” while “the proportion of shares held by retail 

investors has remained the same, at 28 percent of the investor portfolio – by far the largest retail ownership across 

the different cap sizes measured”). But see OASB 2021 Annual Report, supra note 10, at 38 (finding that small 

public companies saw an increasing number of retail investors in 2020 and 2021).

191 See generally Kenechukwu Anadu et al., The Shift from Active to Passive Investing: Potential Risks to Financial 

Stability? (Bd. of Governors of the Fed. Res. Sys., Working Paper No. 2018-060, 2018), 

https://www.federalreserve.gov/econres/feds/files/2018060pap.pdf (discussing the shift from active to passive 

investment strategies, which use rules-based investing to track and index, and the impacts of the shift on financial 

stability).

192 See Madison Marriage, Banks Lose Business as Buyside Brings Research In-house, FIN. TIMES, Aug. 10, 2014, 

https://www.ft.com/content/88517bdc-1efb-11e4-9d7d-00144feabdc0 (“Fund managers are increasingly carrying 

out their equity research in-house as criticism grows about the quality and cost of research conducted by bank 

analysts.”).

193 See generally Zsolt Katona et al., On the Capital Market Consequences of Alternative Data: Evidence from 

Outer Space (2021), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3222741 (discussing 

alternative data in capital markets such as satellite data, which can increase information asymmetry among market 

participants); Financial Stability Board, Artificial Intelligence and Machine Learning in Financial Services, Market 

Developments and Financial Stability Implications (Nov. 2017), available at https://www.fsb.org/wpcontent/uploads/P011117.pdf (discussing the rapidly evolving use of artificial intelligence and machine learning in 

the financial services industry). See also Feng Chi et al., The Use and Usefulness of Big Data in Finance: 

Evidence From Financial Analysts (Apr. 2021), available at https://bhwang.com/pdf/14_big-data.pdf (identifying 

alternative data categories used by sell-side analysts, including “app usage, sentiment, employee, geospatial, point 

of sale, satellite image, [and] web traffic”); Leslie Picker et al., How Hedge Fund Investors Are Making Money Off 

the Data You’re Giving Them for Free, CNBC, Apr. 24, 2019, https://www.cnbc.com/2019/04/23/how-hedgefunds-use-alternative-data-to-make-investments.html (discussing the increased use of alternative data, such as 

shoppers’ data, by asset managers to get an edge); Robert C. Pozen & Jonathan Ruane, What Machine Learning 

Will Mean for Asset Managers, HARV. BUS. REV., Dec. 3, 2019, https://hbr.org/2019/12/what-machine-learningwill-mean-for-asset-managers (discussing the benefits and limitations of machine learning and noting that, as of 

2019, few portfolio managers used machine learning tools).
47

the research coverage of small issuers in the aggregate inherently difficult to quantify with 

precision.

194

Despite the difficulty of identifying causal linkages, as discussed and shown in the 

figures below, the staff’s analysis of data concerning research coverage in recent years (i.e., 

from 2016 to 2020) does indicate certain observable trends.195 For example, the number of 

analysts providing research coverage has declined in recent years. Despite this, the percentage 

of issuers receiving research coverage has been relatively consistent during most of this time. 

More noteworthy, the staff observed that small issuers are less likely than large issuers to be 

covered by research and that the availability of research coverage and the number of analysts 

covering an issuer correlate with market capitalization.

All results presented in this section and the Appendix are limited to the data contained in

the two relevant databases available to the staff – the Center for Research in Security Prices 

database (“CRSP”) (containing information on issuers with exchange-listed stocks) and the 

Institutional Brokers’ Estimate System database (“IBES”) (containing information on analysts 

and research coverage).

196

Recent General Trends

In recent years, the number of analyst firms has declined from 325 in 2016 to 305 in 

2019, but has since increased slightly to 314 in 2020 (See Figure 1a). Meanwhile, the number 

 194 See Mola et al., supra note 35, at 672 (noting that, in the context of regulatory reforms, “[t]he enactment of all 

these regulations over a short period makes it virtually impossible to analyze the incremental impact of the loss of 

coverage on firms from any one regulation”).

195 See supra note 11 (discussing the limitations of the staff’s data analysis).

196 Specifically, the results are based on the exchange-listed common stocks, real-estate investment trusts 

(“REITs”), foreign private issuers, foreign incorporated firms, and master limited partnerships tracked in CRSP 

combined with matching research coverage data in IBES. When data is unavailable in IBES for an issuer in CRSP, 

the issuer is assumed to have no analyst coverage. Exchange-traded funds (“ETFs”), closed-end funds, and 

commodity pools are excluded from the staff’s analysis because these issuers typically lack research coverage. 

IBES (Source: Thomson Reuters) is a widely-used commercial equity research database available from Refinitiv, 

one of the world’s largest providers of financial markets data, which includes sell-side analysts’ and select 

independent analysts’ forecasts of company earnings, cash flows, and other important financial items, as well as

buy-sell-hold recommendations. IBES gathers information on over 18,000 issuers in 60 countries from more than 

7,000 analysts at over 1,000 analyst firms. See A Guide to Understanding I/B/E/S Terms and Conventions, The 

I/B/E/S Glossary 2000, available at https://financelab.rotman.utoronto.ca/resources/researchdatabases/Docs/IBES_Glossary%202000.pdf. IBES does not include information on buy-side analysts and only a 

small fraction of independent analysts contribute to the database. CRSP, which is generally viewed as the gold 

standard for academic research and industry professionals, maintains the most comprehensive collection of security 

price, return, and volume data for approximately 26,500 exchange-listed stocks. The CRSP data referenced here is 

based on data from database name ©2021 Center for Research in Security Prices (CRSP®), The University of 

Chicago Booth School of Business.
48

of analysts providing coverage for any issuer (i.e., small issuers and large issuers) has 

consistently declined from 3817 in 2016 to 3420 in 2020 (See Figure 1b). As such, the average 

number of analysts per analyst firm has decreased in recent years (See Table 1 in the Appendix).

However, over the same period, the median number of issuers covered per analyst firm has 

remained mostly consistent around 16 (See Figure 1c).

Figure 1. Recent trends in analyst firms and analysts’ research coverage. This figure 

shows the following trends from 2016 to 2020: a) Number of analyst firms providing 

research coverage for any issuer; b) Number of analysts providing research coverage for 

any issuer; and c) Median number of issuers covered per analyst firm.

From 2016 to 2019, even though the number of analyst firms and analysts declined, the 

percentage of issuers receiving research coverage was relatively consistent; this is possible 

because an issuer can be covered by multiple analyst firms. Approximately 82.5% of all issuers

received coverage by at least one analyst firm during this period (See Figure 2a). In 2020, 

however, research coverage clearly declined – only 76.9% of issuers received coverage. 

Research coverage also declined in absolute numbers in 2020 – 4245 issuers received coverage 

in 2019 compared to 4113 issuers that received coverage in 2020 (See Figure 2b).
49

Figure 2. Recent trends in research coverage received by issuers. This figure shows 

the following trends from 2016 to 2020: a) Percentage of all issuers that received research 

coverage by any analyst firm; and b) Number of issuers that received coverage by any 

analyst firm.

It is unclear if deviations in 2020 data from prior years’ data are the result of a long-term 

trend or short-term factors. For example, these deviations may have resulted from disruptions 

to analyst coverage related to the COVID-19 pandemic as “stay-at-home orders” may have 

disrupted analyst firms’ ordinary courses of business.

197 It also may reflect that 2020 witnessed 

a significant increase in IPOs generally and IPOs of special purpose acquisition companies 

(“SPACs”) in particular over prior years, which resulted in a significant net increase in the 

number of exchange-listed stocks from 5145 in 2019 to 5348 in 2020 (see Table 2 in the 

Appendix).

198 SPACs that have not yet announced merger plans may receive little to no 

research coverage; the high proportion of 2020 IPO activity attributable to SPACs is a likely 

contributor to the observed overall decrease in research coverage of all issuers from prior years.

Coverage Trends by Issuer Size

The staff also examined research coverage trends by issuer size.199 Based on the staff’s 

analysis of data, it appears that research coverage generally correlates with market capitalization

 197 For example, analysts may have been reluctant to initiate coverage on certain issuers without the ability to make 

in-person visits to the issuer’s facilities or have face-to-face meetings with management.

198 In 2020, there were 494 IPOs, half of which were SPACs. See Sara B. Potter, U.S. IPO Market: SPACs Drive 

2020 IPOs to a New Record, FACTSET (Jan. 7, 2021), https://insight.factset.com/u.s.-ipo-market-spacs-drive-2020-

ipos-to-a-new-record; see also OASB 2020 Annual Report, supra note 9, at 33 (noting a 51% increase in IPOs and 

81% increase in IPO proceeds in the first three quarters of 2020 compared to 2019).

199 See supra Section I.B (defining “small issuers” and “large issuers”).
50

of issuers such that issuers with small market capitalization were less likely to have research 

coverage than issuers with large market capitalization.

200 This trend is apparent in the figures 

below.

For instance, the staff plotted the distribution of issuers by market capitalization for 

issuers with research coverage and those without research coverage for 2019201 (See Figure 3). 

While there is certainly some overlap in market capitalization among the two groups, issuers 

without coverage tend to have lower market capitalization than those with coverage, as reflected 

by the differences in the median in the figure. The median market capitalization for issuers 

without coverage (near $50M) is considerably lower than the median market capitalization for 

issuers with coverage ($1B).

The staff also plotted the average number of analyst firms covering issuers along the 

entire range of market capitalization for 2019 (See Figure 4). The figure shows a clear trend 

that issuers with larger market capitalization are covered by more analyst firms on average.

 200 In addition to market capitalization, the staff examined revenue as a metric of issuer size and observed a similar 

correlation between issuer size and the availability of research coverage. However, the staff ultimately decided to 

utilize the market cap metric in its data analysis, figures and tables to be consistent with the definition of “small 

issuers” in the SEC Small Business Advocate Act of 2016. See supra note 9 (defining “small issuers” and “large 

issuers”).

201 When examining a trend within a particular year, the staff used 2019 because it is the most recently available 

data where research coverage appears generally consistent with previous years. In 2020, research coverage 

declined compared to previous years and it is unclear if this is the result of a long-term trend or short-term factors. 

See supra Section VI.A (discussing recent coverage trends).
51

Figure 3. Distribution of issuers by market capitalization for issuers with and 

without research coverage. This figure shows the number of issuers by market 

capitalization (on the log10 scale202) separated by whether or not the issuers received 

research coverage in 2019. If an issuer received research coverage by at least one analyst 

firm in 2019, then that issuer is included in the top chart; issuers that did not receive 

coverage in 2019 are included in the bottom chart. The vertical axis in the top chart 

(“Number of Issuers”) has a significantly larger scale than the vertical axis in the bottom 

chart and should not be interpreted to mean that the two charts are drawn vertically to the 

same scale. Finally, the vertical dashed line represents the median market capitalization

among issuers included in each chart.

 202 The base 10 logarithmic scale (“log10 scale”) is a commonly used method of displaying data over a very wide 

range of numerical values in a compact way. Transforming values from the standard linear scale to the log10 scale 

does not change their relative order, but does change the interpretation of differences between values. In the log10 

scale, one unit difference is associated with a numerical increase by a factor of 10 rather than a factor of 1. The 

staff choose to display market capitalization on the logarithmic scale because it varies from a few million dollars up 

to over a trillion dollars.
52

Figure 4. Number of analyst firms providing research coverage of issuers by market 

capitalization. This figure shows the average number of analyst firms covering an issuer 

by market capitalization (on the log10 scale) in 2019. For example, an issuer with a 

market capitalization of $1 billion was covered by approximately 6 analyst firms on 

average in 2019 while an issuer with a market capitalization of $50 million was covered 

by approximately 2 analyst firms on average.

In recent years, small issuers constitute approximately one third of all issuers (See 

Figure 5). Over the same period, approximately 60% of small issuers received research 

coverage while approximately 90% of large issuers received coverage (See Figure 6a).

While both small issuers and large issuers experienced a decline in research coverage in 

2020 compared to previous years,

203 the decline was more pronounced for large issuers. For 

example, approximately 57.8% of small issuers had research coverage in 2020 compared to 

60.8% in 2019 while 87.3% of large issuers had research coverage in 2020 compared to 93.6% 

in 2019 (See Figure 6a).

Furthermore, from 2016 to 2020, the average number of analyst firms covering small 

issuers declined very slightly overall, but in an inconsistent pattern (See Figure 6b). In contrast, 

the average number of analyst firms covering large issuers over the same period exhibited a 

 203 See supra Section VI.A.
53 

much more consistent and pronounced decline (See Figure 6b).204 During this period, small 

issuers received coverage by approximately two analyst firms on average while large issuers 

received coverage by approximately nine analyst firms on average (See Figure 6b). 

 204 For additional information, see Table 3 in the Appendix.
54

 

Figure 6. Research coverage for issuers by size. This figure compares research 

coverage for small and large issuers from 2016 to 2020: a) Research coverage for small 

issuers and large issuers are measured separately in percentages; and b) Each issuer was 

covered by up to a maximum of 55 analyst firms in any given year. The number of analyst 

firms was averaged by year for small issuers and large issuers.
55

Sorting issuers into groups based on percentiles of market capitalization205 reveals 

granular insights into the research coverage trends by issuer size.

206 From 2016 to 2020, the 

trend in the percentage of issuers that had research coverage for small issuers in the smallest 

two groups (i.e., the 0th to 10th and 10th to 20th percentile groups, or roughly the smallest half of 

small issuers) exhibited no consistent pattern, but the percentage of issuers with coverage was

still slightly higher in 2020 than it was in 2016 in both groups. In contrast, over the same 

period, the percentage of issuers with research coverage in the 20th to 30th and 30th to 40th

percentile groups (i.e., roughly the largest half of small issuers) declined sharply (See Figure 7).

Across most market capitalization percentile groups for both small and large issuers, there was 

an overall decline in coverage from 2016 to 2020 both in the percentage of issuers receiving 

research coverage and the average number of analyst firms providing coverage for an issuer

with the steepest decline occuring in 2020 (See Tables 4a and 4b in the Appendix).

 205 The specific ranges (in dollar amount) for each market capitalization percentile, or decile, changed every year

from 2016 to 2020. The specific ranges for each decile shown in Figure 7 are detailed in Table 4c in the Appendix.

206 The market capitalization cutoff that separates small issuers from large issuers fell within the fourth decile of 

market capitalization percentile (i.e., 30th to 40th percentile) for every year shown in Figure 7. Because the fourth 

decile does not perfectly line up with this cutoff, the fourth decile includes large issuers.
56

Figure 7. Research coverage of issuers by market capitalization percentile groups. 

This figure shows the percent of issuers within each market capitalization percentile 

group that had research coverage from 2016 to 2020. For example, in 2020, 

approximately 40% of issuers with market capitalization in the 0th to 10th percentile had 

research coverage while over 90% of issuers with market capitalization in the 90th to 

100th percentile had research coverage.

VII. Recommendations

Notwithstanding potential conflicts of interests related to research,207 quality research 

serves an important and beneficial function in the U.S capital markets.

208 There is substantial 

evidence regarding the benefits of research coverage of issuers, in particular its role in 

increasing stock liquidity and providing an external governance mechanism on issuer 

management.209 Research coverage may be particularly important for a small issuer that seeks

to increase its stock liquidity or gain investors’ recognition.

Given the benefits of research coverage to small issuers in particular, the staff believes 

that it is important to identify, evaluate, and where appropriate, address some of the challenges 

 207 See supra Section III (discussing conflicts of interest related to research).

208 See supra Section II.B (discussing the importance and benefits of research, including the benefits of multiple 

analysts covering a single issuer).

209 See id.
57

that small issuers may face in obtaining research coverage. The staff’s data analysis suggests 

that small issuers appear to be less likely than large issuers to be covered by research.

Specifically, the availability of research coverage and the number of analysts covering an issuer 

correlate with market capitalization. The staff’s evaluation of these issues has also identified a 

number of factors that may impact the availability of research coverage of small issuers, 

including the Measures addressing potential conflicts of interest associated with research, the 

implementation of MiFID II, and other variables, such as the rise of CCAs, a decline in the 

overall number of IPOs until 2020, falling equity commissions, fewer institutional investors that 

invest in small issuers, a shift from active to passive investment strategies, an increase in 

reliance on in-house research and an increase in alternative data sources.

At this time, however, the data limitations and ongoing industry adaptations to MiFID II

and other legislative and regulatory changes create obstacles to determining the extent to which

research coverage of small issuers has declined in recent years and the causes of such decline. 

For example, money managers and broker-dealers continue to adapt their business models to 

accommodate MiFID II requirements, which are in flux.

210 In that context, the staff periodically 

discusses research coverage and availability with global regulators as well as industry 

participants, which provide the staff with an opportunity to continue to monitor research trends. 

Therefore, the staff recommends that the staff continue to monitor research trends, including 

research into small issuers, and consider what, if any, potential actions may be appropriate to 

recommend to increase the demand for, volume of, and quality of investment research into 

small issuers. As part of this evaluation, the staff recommends that the staff continue to engage 

with global regulators and industry participants to better understand any developments in the 

research marketplace.

 210 See EU Amendment, supra note 151; FCA Policy Statement, supra note 153.
58

VIII. Appendix 

Table 1. Number of issuers covered per analyst firm

Year Total 

Number of 

Issuers with 

Coverage

Average 

Issuers 

Covered 

per 

Analyst 

Firm

25th / 50th / 75th 

Percentile of 

Issuers Covered 

per Analyst Firm

Number of 

Analyst 

Firms

Number of 

Analysts211

Average 

Number of 

Analysts 

per Analyst 

Firm

2016 4,264 120 4 / 16 / 107 325 3,817 11.7

2017 4,202 115 4 / 15 / 100 327 3,640 11.1

2018 4,227 117 5 / 17 / 93 312 3,547 11.4

2019 4,245 119 5/ 16 / 89 305 3,472 11.4

2020 4,113 110 4 / 16 / 78 314 3,420 10.9

 211 The total number of analysts in IBES who cover exchange-listed stocks may be an undercount of the actual 

number of analysts employed by analyst firms because some smaller analyst firms may not submit estimates to 

IBES, and it is also likely in some cases that more than one analyst contributes to the work behind a set of 

estimates for a single stock even though IBES identifies only a single analyst, presumably the lead analyst, per 

estimate.
59

Table 2. Number, percentage, and market capitalization of issuers with exchange-listed stocks212

Year Count (%)

Mean Market 

Capitalization 

($millions)

Median Market 

Capitalization 

($millions)

2016

All Exchange-Listed Stocks 5171 $5,263 $595

Stocks w/ Coverage 4264 (82.5%) $6,264 $911

Stocks w/o Coverage 907 (17.5%) $532 $62

2017

All Exchange-Listed Stocks 5095 $6,214 $728

Stocks w/ Coverage 4202 (82.5%) $7,412 $1,106

Stocks w/o Coverage 893 (17.5%) $547 $73

2018

All Exchange-Listed Stocks 5120 $6,739 $777

Stocks w/ Coverage 4227 (82.6%) $8,026 $1,193

Stocks w/o Coverage 893 (17.4%) $590 $80

2019

All Exchange-Listed Stocks 5145 $6,939 $669

Stocks w/ Coverage 4245 (82.5%) $8,304 $1,064

Stocks w/o Coverage 900 (17.5%) $438 $78

2020

All Exchange-Listed Stocks 5348 $7,266 $601

Stocks w/ Coverage 4113 (76.9%) $9,215 $1,017

Stocks w/o Coverage 1235 (23.1%) $721 $139

 212 The number of stocks represents the number of exchange-listed common stocks, REITs, foreign private issuers, 

foreign incorporated firms, and master limited partnerships available in CRSP. ETFs, closed-end funds, and 

commodity pools are excluded from this count. Data on analyst coverage is available in IBES. Issuers with 

multiple exchange-listed voting classes or issuers with multiple exchange-listed tracking stocks are considered in 

Table 2 calculations as a single stock with research coverage if one or more of such classes or tracking stocks has 

research coverage. 
60

Table 3. Number and percentage of exchange-listed stocks by market capitalization of issuers213 with 

average number of analyst firms providing coverage

Number of Stocks (%) Average Number of Analyst Firms Providing 

Coverage per Stock

Year

Market 

Capitalization: 

$0M - $250M

Market 

Capitalization: 

$250M+

Market 

Capitalization: 

$0M - $250M

Market 

Capitalization:

$250M+

2016 1830 (35.4%) 3336 (64.6%) 2.1 10.5

2017 1621 (31.9%) 3469 (68.2%) 1.9 9.9

2018 1598 (31.3%) 3514 (68.7%) 1.8 9.6

2019 1710 (33.3%) 3426 (66.7%) 2.0 9.6

2020 1851 (34.7%) 3487 (65.3%) 1.9 8.9

 213 Certain stocks do not have market capitalization data in CRSP. These stocks were not classified into either 

group.
61

Table 4a. Percent of exchange-listed stocks with analyst firm coverage by market capitalization of 

issuers

Percentile Group by Market Capitalization

0th to 

10th

10th to 

20th

20th to 

30th

30th to 

40th

40th to 

50th

50th to 

60th

60th to 

70th

70th to 

80th

80th to 

90th

90th to 

100th

Year

Number 

of 

Stocks

Percent of Stocks with Analyst Firm Coverage

201

6 5171 40% 56% 74% 83% 89% 96% 95% 97% 98% 98%

201

7 5095 42% 55% 75% 80% 90% 94% 95% 96% 99% 98%

201

8 5120 41% 61% 73% 79% 88% 94% 96% 98% 98% 98%

201

9 5145 45% 61% 71% 76% 89% 94% 96% 98% 98% 99%

202

0 5348 43% 59% 68% 67% 76% 84% 88% 94% 93% 98%

Table 4b. Average number of analyst firms covering exchange-listed stocks by market capitalization of 

issuers

Percentile Group by Market Capitalization

0th to 

10th

10th to 

20th

20th to 

30th

30th to 

40th

40th to 

50th

50th to 

60th

60th to 

70th

70th to 

80th

80th to 

90th

90th to 

100th

Year Number 

of Stocks Average Number of Analyst Firms

2016 5171 0.9 1.7 2.8 4.0 4.8 6.6 8.3 11.2 13.5 21.3

2017 5095 1.0 1.7 2.8 3.8 4.8 6.2 8.3 10.2 13.7 21.2

2018 5120 0.9 1.7 2.7 3.4 4.6 6.0 8.1 10.1 13.1 21.0

2019 5145 1.0 1.8 2.7 3.3 4.7 5.9 8.1 9.7 12.9 20.5

2020 5348 1.0 1.8 2.5 3.1 4.0 5.0 6.7 8.9 12.1 19.8
62

Table 4c. Upper cutoffs for each market capitalization percentile group214 for Tables 3a and 3b

Percentile Group by Market Capitalization

0 to 10th 10th to 

20th

20th to 

30th

30th to 

40th

40th to 

50th

50th to 

60th

60th to 

70th

70th to 

80th

80th to 

90th

90th to 

100th

Year Market Capitalization Upper Cutoffs for each Percentile Group ($millions)

2016 $36 $86 $178 $330 $595 $1,089 $1,901 $3,591 $9,531 $566,254 

2017 $40 $104 $220 $416 $728 $1,282 $2,277 $4,238 $11,065 $784,145 

2018 $41 $107 $236 $424 $777 $1,353 $2,365 $4,619 $11,940 $911,163 

2019 $34 $93 $207 $372 $669 $1,243 $2,271 $4,554 $12,203 $1,011,709 

2020 $35 $101 $191 $336 $601 $1,113 $2,114 $4,249 $12,025 $1,663,468 

 214 Each percentile group contains issuers with market capitalization above the previous cutoff and at or below the 

current cutoff. For example, issuers within the 20th to 30th percentile group in 2020 have market capitalization 

above $101M and at or below $191M.