In a victory for New York Attorney General Eric T. Schneiderman, 17 brokerage firms including heavy hitters like Goldman Sachs Group Inc (NYSE:GS), Citigroup Inc (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM) and Merrill Lynch agreed to a moratorium on money management surveys designed to benefit from the changing views of research analysts.
The aforementioned brokerages were joined by Barclays Capital; Deutsche Bank AG (NYSE:DB) (ETR:DBK); Morgan Stanley (NYSE:MS); UBS AG (NYSE:UBS); Credit Suisse Group AG (ADR) (NYSE:CS); Sanford C. Bernstein; Stifel Financial Corp. (NYSE:SF), Nicolaus & Company; Keefe, Bruyette & Woods; Thomas Weisel Partners; the Macquarie Group Ltd (ASX:MQG) (OTCMKTS:MQBKY); FBR Capital Markets; Wolfe Research; and Vertical Research Partners in the signed deal.
While Schneiderman is still investigating the firms for their participation in the surveys, each were subpoenaed in January, it’s clearly a victory for the attorney general.
In a statement yesterday afternoon, Schneiderman applauded the goodwill of the firms: “All of these firms have shown leadership in agreeing to stop a practice that can offer an advantage to powerful clients at the expense of others,” he said. “Our markets will only be fair and healthy if everyone plays by the same rules, which is why we will continue to take action against those who provide unfair advantages to elite traders at the expense of the rest of us.”
The BlackRock investigation
The agreement comes on the heels of an investigation launched by Schneiderman following a piece written about BlackRock, Inc. (NYSE:BLK)’s use of surveys in July of 2012. After the report was published, Schneiderman determined that BlackRock used the surveys to trade ahead of public announcements made by analysts as they changed their recommendations. He went so far as to call the practice “Insider Trading 2.0.”
Specifically, BlackRock, Inc. (NYSE:BLK)’s surveys asked analysts whether a company’s near-term profits were more likely to surprise “on the upside or downside,” and whether they believed that the company they followed would be “taken over in the next six months.” Perhaps even more brazen, the surveys asked analysts to base their opinions on unannounced transactions.
BlackRock, Inc. (NYSE:BLK)’s sheer size with $4.3 trillion under management, and the commissions to be had from its trades certainly encouraged analysts to participate. Additionally, the investigation revealed that BlackRock assigned higher ratings to analysts that participated, something that BlackRock may yet regret.