Speeches

Can Reform, New Umbrella Standards
Rescue Research?"

* Originally scheduled to be presented By Gayle Essary, CEO, Investrend Research / Executive Director, FIRST Research Consortium --- Presented at National Investment Banking Association meeting in Denver, Colorado, May 18, 2006. Mr. Essary was unable to travel to Denver at the last minute.

**Presented by James A. �Drew� Connolly III, Director of Corporate Development, Investrend Research.

March 27, 2006 seemed like a nice enough day.

We had been following allegations for quite some time that a research firm, Gradient Analytics, had �colluded� with one or more hedge funds to produce possible �tainted research,� which of course, it still denies, but �60 Minutes� had just brought the issue mainstream, and I awoke to a three-day nightmarish uproar on CNBC, with reporter Charles Gasparino seemingly weighing in every half hour with an update, repeatedly raising the question about �independence� among �independent research providers.�

Never mind that this was a �subscription-based� research provider; not, like us, a �sponsored� research provider. All the public and financial community knew or perhaps still thinks if knows, is that it is a so-called �independent� research provider, and that something is askew in our business.

The bottom line is that what Gradient did was to �cross-over� from a subscription model to a hybrid subscription/sponsored model that included �sponsored research� on behalf of its clients, without disclosure and transparency to either its other clients, or to the public. And also, without following the �Standards for Independent Research Providers,� promulgated three years ago by the FIRST Research Consortium, of which our firm is a founding member.

It became immediately evident that our entire industry was being called into question, and that something had to be done in response before we faced regulation, investigations or worse.

It also could not have come at a worse moment.

Our organization of just over a dozen ethical research providers had just achieved a momentous accomplishment. The SEC Advisory Committee on Smaller Public Companies in its final report to the Commission had just fully endorsed sponsored research as essential to the market liquidity of public companies with no coverage, or little coverage, and we had a chance as the ethical providers, to move outside the perspective of some as part of a �promotion� budget to the real Moody�s and S&P�s of our industry, respected, credible, and absolutely on the up-and-up.

I need to pay homage here to Drew Connolly, our own firm�s director of corporate development, for his service on the SEC committee, and for shepherding through the language that parallels the �transparency� and �disclosure� language in the �Standards.�

The SEC staff, during my own testimony and dialogue, was overwhelmingly supportive of our research, our integrity, the credibility we seek to bring to this industry in parallel with the interests of equally ethical NIBA members, as well as for the massive visibility programs and distributions we have created, which staff and committee members said dovetails perfectly with the SEC�s Congressional mandate to achieve the highest level of market liquidity for listed companies. In fact, I believe an SEC official said as much from this podium as part of his comments at NIBA�s recent Washington conference.

I am also encouraged by the growing sophistication of you and your colleagues, and we chose this venue because we consider YOU to be the ethical side of the investment banking community, just as we believe we are on the analytics side!

We are quite proud of the fact, for instance, that our newest reenrollment, from Eden Energy, has come just after the company�s equities were �downgraded� by our analyst. This is the business we�re in, and if we�re going to have credible research at our level, we have to see it co-exist with the interests of those in this room so that it is believable and acted upon. Management at Eden read the report, and the analyst gave them milestones to achieve, and when that happens, the analyst will no doubt act accordingly. So rather than take it personally, a sophisticated management team is back on board working to gain the analyst�s accolades when it achieves its stated objectives and the analysts� milestones.

I�ve seen what happens in the past � in fact Charles & Colvard achieved a steady 5X market cap growth after convincing our analyst that it could meet his milestones. We analyze, positively or negatively. Companies perform, positively or negatively.

This is what we should be doing together, and we are pleased that NIBA is in the forefront of the responsible investment community.

Over the years, I have observed anecdotally that most companies trade at a substantial discount to management�s expectations, but that covered companies in general trade 30% to 40% higher because of the higher level of public confidence in analytics than management�s statements. Recently I looked at a portfolio that Todd Essary, our vice president, put together, and found that over the past year our covered companies he had entered into the portfolio back then were up 89%, inclusive of both upgrades and downgrades that may have occurred.

That amazed me, because that is not what we believe we are about. But it does demonstrate that if we all work together to achieve and maintain public confidence and trust, everyone�s interests will eventually be served, even those of the shareholders, whom we hold to be our sole clients.

One of the axioms we all watch is that in a time of uncertain markets investors do not trade markets. Investors trade stocks. Thus, what anyone that is invested in a company is looking for is an edge, and one that is based on solid fundamentals and not spikes and pumps and promotions. Something that investors can rely on long-term, and receive professional updates on to pull that company out of the pack of thousands of public companies and keep it front and center in a responsible manner.

Recently we joined our research with the Shareholders Research Alliance, Inc., a not-for-profit group of monitors of public company research, and we expect great things out of this monitoring process to further assure the public that the procedures, standards and policies we state we are following are in fact being observed and implemented. You will hear more about this in a moment from the Chair of this organization.

Meanwhile, it became evident in the noise in the media that we needed to fix our wagons and move on. The not for profit FIRST Research Consortium, now in its third year of promulgating standards, in response, is today promulgating a new umbrella research provider standard that you have in front of you.

It is the �Standards Of Practice For Research Providers.�

It incorporates and endorses standards set by the Association of Standards-Based Independent Research Providers, which is our Sponsored Research segment of the industry, the publicly-available Code of Ethics promulgated by Investorside, representing the Subscription-Based side of the aisle, and the broker-dealer research departments, so that all segments of our industry are now represented in an omnibus packet of ethics.

The new �Standards� represent genuine reform. Those who adopt these �Standards,� and especially all analysts, for instance, will no longer be able to own or trade in the equities of companies they have under coverage. With the one exception, of course, being compliant broker-dealers with research departments.

This practice has been a monumental conflict, and as of today, it is no longer an acceptable �Standard of Practice� for an independent research provider or analyst to own or trade stocks of covered companies.

In every way, we intend to work to minimize Conflict, maximize Transparency, make certain that �analysts� are qualified or credentialed and their qualifications described, to exercise full disclosure, shield analysts from outside influences that could taint the research, monitor the process, and subject our own industry to peer review.

It is also no longer acceptable for a Research Provider to also provide promotional, IR, funding, consultation or other services to covered companies that might compromise the integrity of the research or bring disrepute to our industry.

It is also no longer an acceptable standard for a research provider to accept stock in any form or fashion to provide research, for the same reason that an analyst can no longer acceptably own or trade in stocks of companies he or she covers. And we will be mounting an aggressive educational and public awareness campaign to help remove this practice from our industry, or at least let the public know �buyer beware.�

In short, together we can make research an essential element of every company�s best-interest, as well as the primary component of every shareholder�s required data; but let�s begin right now to agree to do it right.

On behalf of the FIRST Research Consortium, I now respectfully submit to you the new �Standards of Practice for Research Providers.�

* Gayle Essary is CEO of Investrend Communications, Inc., and heads its Investrend Research division, the largest, pioneering independent sponsored-research firm which he founded just over ten years ago.  He is also Executive Director of the FIRST Research Consortium, which three years ago promulgated the first "Standards for Independent Research Providers," now adopted by more than a dozen ethical research providers.  Essary was also Chairman of the Board of a NASDAQ-listed company in the streaming media business, and provided consulting for Thomson Corp. prior to founding Investrend.   He has been a leader in advocating standards and ethics for the industry, and successfully lobbied for language recently adopted by the SEC Advisory Commttee on Smaller Public Companies endorsing sponsored research that incorporates full transparency and disclosure.

**James A. �Drew� Connolly III has spent his career in various capacities in the securities industry over the past 25 years. Currently he serves as Director of Corporate Development for Investrend Communications and principal of IBA Capital Funding, a NJ based financial services consulting firm focused on the micro and smallcap marketplace. He is the Executive Director of the CEO Council, a Washington DC based association of officers and directors of small public companies engaged in the public policy arena and supporting the efforts of company management in regulatory and legislative initiatives. He recently completed a term on the SEC Advisory Committee for Smaller Public Companies established under former SEC Chair William Donaldson . Their recommendations have been published at www.sec.gov. His participation on the Capital Formation Subcommittee encompassed a series of proposals including a streamlined securities offering process, an enhanced role for finders and the ground breaking research recommendations for a more transparent and investor friendly offering process.