39. Security Research Analysts and Investment Advisers Must Remain Separate

There must be an enforced separation between the research and investment banking departments of an organization because of the inherent conflict of interests between them. Human nature is just not capable of maintaining an honest separation over the long term when the financial stakes are so directly related. Public confidence can best be maintained only by this enforced separation.

Many of the elements imposed by the Sarbanes-Oxley act of 2002 are valuable regulations to maintain and expand throughout the industry to minimize the potential of another market shaking runaway financial evolution. For example, banning research personnel from advertising any products to potential clients and prohibiting the investment banking division from having any input regarding questions as to whether or not research should be initiated or terminated for any security are both good regulations.

In addition, full disclosure of any relationships security research analysts and investment advisers/bankers may have with each other must be made publicly available. Transparency is usually the best fail-safe measure of all to defuse potentially catastrophic future threats.

Ultimately, these artificial markets entail the creation and trading of investment securities which are simply financial instruments which create little, if anything, of intrinsic value. Yes, they do allow greater liquidity in various markets, which is beneficial, but such high levels of liquidity is of questionable necessity, except, of course to enable short-term investors, day traders, and high-frequency trading to occur with little slippage.

Greater stability can be brought to these markets by reducing the efficiency of trading. The imposition of a sales tax on every transaction would increase the cost of each trade, removing, to some degree, the incentive for people to participate in these markets for the mere extraction of money, without any significant connection or ‘investment’ with the underlying product. Such a tax would reduce¬†the most volatile segment of the trading community to a level that is far less likely to dramatically alter market dynamics which could potentially lead to unusual market fluctuations or even partial or total collapse. The size of this proposed sales tax could be adjusted so as to provide the desired effect.


Leave a Reply