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Regulatory Scheme Protects Investors by Curtailing Stock Research

June 9, 2005

A new company is being formed by the Nasdaq and Reuters to provide stock research for nearly 700 companies that currently lack research coverage by any major brokerage firm on Wall Street. Why do brokerage firms not cover these companies? Since the Wall Street research settlement engineered by Eliot Spitzer, brokerage firms were forced to scale back their operations and can no longer afford to cover smaller market cap companies.

This was an unintended consequence of the $1.4 billion in fines imposed by Spitzer. Terms of the research settlement require Wall Street firms to spend $432.5 million to subsidize independent research by their competitors. However, the settlement does not allow any of this subsidy to be used to cover the 700 companies that lack coverage. Instead, it must be used to write duplicative research on the stocks that the big firms' already follow. See story in WSJ ($).

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