I just finished reading a research report on some financial services company or other—the sell-side’s daily output sometimes becomes a bit of a blur—and the most notable thing about it, I now realize, is that, of the report’s twelve pages, five consist entirely of six-point, single-spaced disclaimers. They go on forever. In those disclaimers I am told, for example, which companies mentioned in the report have been investment banking clients of Citi over the past twelve months, and am told, too, which companies in the report Citi is pitching banking business to. I am informed which companies Citigroup Capital Markets “owns a position of 1 million USD or more in the debt securities” in. I am admonished that the information I just read may not be accurate or complete and that it would be prudent of me to do some additional work on my own. I’m told how Citi determines its ratings and what those ratings mean. I’m also told the names and addresses of the entities, by country, that distribute Citi’s research outside the U.S. and the local entities that regulate them. (If you happen to be in Chile, for example, you’re dealing with “Banchile Corredores de Bolsa, S.A., an indirect subsidiary of Citigroup Inc., which is regulated by the Superintendencia de Valores y Seguros. Agustinas 975, piso 2, Santiago.” Good to know!) I’m told about trademarks, and which Citi unit is a unit of which other Citi unit, and am warned that everything I just read is under copyright, and that I’d better not copy any of it. I’m told . . . . Wait, let me take a break for a moment to rest my fingers.
I have a question: how did we come to this? You’ll get no argument from me that sell-side research should sometimes be taken with a grain of salt, and that the disclosures provided at the end can be extremely helpful in informing the reader how skeptical he should be. When I was on the sell side, for instance, you wanted to be sure to know whether the subject of the report had an investment-banking relationship with the report’s issuer, and how strong that relationship was. Disclaimers gave you that information. But do I really care whether Citi owns $1 million or more of Bank of America’s debt? Or where Citi’s Singapore unit operates?
This is disclaimer kabuki, and it doesn’t help anyone but the lawyers. Regulators and compliance executives now require sell-side firms to disclose so much in their research reports that, in aggregate, the disclosures are much less helpful to the research user than they once were. Now a disclosure that might actually be relevant and helpful now finds itself buried in a sea of blather. And yet the tide never recedes. There will likely never be a day, for instance, when someone in a bank’s compliance department somewhere (or at the S.E.C.) will suddenly slap himself on the forehead and say, “You know what, maybe we can ease up on talking about potential derivative counterparty positions!” Rather, the volume will only grow. So next year at this time, I wonder how many pages of a typical twelve-page sell-side report will be taken up by disclaimers. It almost certainly won’t be fewer than the numbers of pages you’ll find this year.
Slowly but surely, the bureaucracy is taking over and running things for its own sake, to little real benefit of the consumer. That’s too bad. Once upon a time, the disclosures on a research report truly were helpful. Not anymore.
What do you think? Let me know!