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From Securities Regulation Daily, January 9, 2014

New York AG extracts agreement from BlackRock to stop analyst surveys

By Matthew Garza, J.D.

New York Attorney General Eric Schneiderman has obtained assurances from the world’s largest asset manager, BlackRock, Inc., that the company will permanently end its practice of surveying stock analysts to capture their views regarding companies they cover ahead of the public release of their reports. The Attorney General’s investigation determined that the design, timing, and structure of the surveys allowed BlackRock to obtain information from analysts that could be used to “front-run” analyst recommendations. The January 8, 2014, Assurance of Discontinuance said that the conduct violated provisions of New York’s Martin Act, Article 23-A of the General Business Law, and provisions of §63(12) of the Executive Law. BlackRock neither admitted nor denied the findings.

The company, which has assets under management of approximately $4 trillion, will end the practice worldwide. BlackRock has also agreed to continue cooperating with the Attorney General’s broader investigation into what the Schneiderman has dubbed “Insider Trading 2.0.”

The Assurance of Discontinuance stated that because brokerage firm customers and other investors may be influenced by analyst research reports, the information contained in the reports “is generally considered to be market moving.” The Attorney General found that certain analyst reports specifically noted that they are disseminated and available to all clients simultaneously.

The Attorney General warned in the press release, “The concept that there should be one set of rules for everyone is critical to protecting the integrity of our markets, which is why my office will continue to take action against those who provide unfair advantages to elite traders at the expense of the rest of us.”

Survey. The company asserted that the survey was an effort to quantify analysts’ publicly available qualitative insights and employ them in trading models developed by the company’s quantitative investment group, Scientific Active Equities. The survey solicited, in numeric form, information regarding managements, competitive positions, and earnings, among other aspects of the covered companies’ performances.

The survey asked analysts to answer questions on a scale of one through nine. One indicated a strong negative response, nine indicated a strong positive response, and five was a neutral response. The survey gathered hundreds of thousands of responses since it began in the U.S. in 2004. The program was expanded to Europe and Japan in 2007 and to Canada, Latin America, and the rest of Asia in 2008.

Insider Trading 2.0. Attorney General Schneiderman said the BlackRock action was intended to combat a growing area of concern that he called “Insider Trading 2.0.” Schneiderman reached a deal with Thomson Reuters in July 2013 where the publisher agreed to halt its practice of delivering consumer sentiment data to high-frequency traders two seconds before releasing it to the rest of its subscribers.

This “growing area of concern” is a focus because of the increasingly common practice of preferred- and technologically sophisticated- market participants getting an unfair advantage by obtaining early access to market-moving information, he said. Speaking about the deal with Thomson Reuters in July, Schneiderman said that agreement would immediately remove a “prior distortion in the markets” and send a message that unfair timing advantages for high-frequency traders will not be tolerated.

Companies: BlackRock, Inc.; Thomson Reuters

MainStory: TopStory Enforcement ExchangesMarketRegulation NewYorkNews

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