NIRI lobbies for small-cap coverage

Nov 15, 2017
Letter to SEC chair highlights need to hold roundtable on equity research

In the wake of Mifid II’s ripple effect on global markets, US-based NIRI has spoken out to look after the interests of its smaller-cap members.

Writing to the SEC, NIRI’s CEO Gary LaBranche exhorts the commission to hold a roundtable on equity research in order to ‘hear the views of market participants’ on new rules that are bound to further shrink coverage of small and mid-cap companies.

The recent decline in sell-side research budgets due to ‘the rise of passive investing and cuts in trading commissions’ has led to several well-known sell-side names having to close their research division altogether, LaBranche stresses. ‘According to a Reuters analysis, the number of companies in the small-cap Russell 2000 index that lack any formal Wall Street analyst coverage has risen 30 percent over the past three years.’

The letter also cites a recent McKinsey & Co report, which estimates that ‘Mifid II would prompt the 10 largest sell-side firms to lay off hundreds of analysts and reduce their spending on equity research by $1.2 bn.’

Highlighting the challenges facing companies with no coverage in attracting new investors, LaBranche points out that the research shortage has also impacted individual investors, which were left with ‘fewer independent sources of information about a company’s prospects. Without this information, these investors likely will miss out on the greater investment returns many small companies generate as they grow.’

The SEC recently granted broker-dealers a 30-month transition period before they will have to comply with the new European unbundling rules, a move NIRI has welcomed. Indeed, according to domestic regulations, only financial services firms set up as SEC-registered investment advisers are allowed to sell research for hard money.

‘Given the decline in sell-side research coverage in recent years, NIRI is grateful the commission has stepped in to protect investors from the disruption that would have resulted if broker-dealers had abruptly discontinued coverage of small-cap and mid-cap issuers to comply with Mifid II,’ LaBranche writes.

‘During the 30-month period of no-action relief, NIRI encourages the commission staff to work with broker-dealers, independent research providers, investment managers, IR professionals and European regulators to develop recommendations to promote more research coverage of small and mid-cap companies in both the US and Europe.’

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