For more than a decade, Tom Berquist enjoyed life as a software analyst at Goldman Sachs and then Citigroup, delving into the latest technology and rubbing elbows with the executives of new, fast-growing firms.
But next month Berquist joins the exodus of Wall Street's sell-side analysts when he moves to a small software company himself, becoming chief financial officer of closely held Ingres Corp.
The reason? Mountains of red tape imposed by the government in the wake of the Internet bubble, which he says limited his ability to gather information from small companies that were thinking of going public with an initial stock offering.
"If you wanted to have a discussion about a transaction, you had to have lawyers present," Berquist, 41, told Reuters. "I miss that contact with all the innovation leaders."
Those remaining on Wall Street, however, must endure the new rules, which were imposed to stop analysts touting companies and transactions they didn't believe in to curry favor with investment banking clients in return for generous fees.
New York Attorney General Eliot Spitzer and the Securities and Exchange Commission struck a $1.4 billion settlement with the ten largest Wall Street firms in 2002. Among other things, the reforms restrict talk between analysts and bankers and ended the practice of tying an analyst's pay to his contributions to banking activity.
Yet while Wall Street cleaned up its stock research ways -- as evidenced by the increased number of "sell ratings" and reduction in "buys" -- the global research settlement and other regulatory efforts have had unintended and unappealing consequences.
Frustrated by the restrictions, there's been an exodus of veteran analysts fleeing to hedge funds and other "buy side" investment firms, which offer richer pay and greater freedom. Investors and investment banking clients, meanwhile, say the quality of coverage has suffered, with many small companies no longer getting any attention.
"In the last three years, after the Spitzer settlement with Wall Street, there's been a decline in the quality of Wall Street research," said Mike Monahan, head of investor relations at Ecolab. "There's a sense the sell-side's coverage has gotten thinner."
Research analysts play a key role in securities markets, providing insights to investors and helping draw attention to companies.
But because research departments at big brokerages can no longer earn investment banking fees, brokerages are spending less on research, no longer able to attract talented analysts and putting bigger loads on increasingly younger teams.
"There are a few analysts who do their homework and who get it, but for the most part there are many who cover too many companies and want to make a name for themselves," said Adobe Systems Chief Executive Bruce Chizen, one of several company executives who expressed such concerns in interviews with Reuters.
"Folks are telling me a lot of the best analysts are with the hedge funds now, so now what you've got in the firms are a lot of younger analysts who are really stretched with the number of companies they cover," said Lou Thompson, CEO and president of the National Investor Relations Institute.
Fred Dickson, head of retail research at D.A. Davidson & Co., a regional U.S. broker-dealer, said reform pressure and staff turnover have been highest among the biggest firms.
"Where it used to take four or five years of grueling work to get to the point of knowing the relationship and knowing the catalysts, now less seasoned people are thrown in more quickly," Dickson said
Representatives of Spitzer's office and the Securities Industry Association, which represents brokerages, declined comment. The SIA said it endorsed a joint NASD- New York Stock Exchange report last month that concluded that equity research has been greatly improved.
Cutbacks in research can hurt companies in several ways. Ecolab, which makes specialty chemicals, is now often covered by commodity chemicals analysts. The new analysts just don't know the company as well, Ecolab officials said.
Smaller companies, in particular, argue they've been "orphaned" because they don't generate enough revenue to merit Wall Street's coverage.
"Increasingly, the small cap universe is growing dark," said David Weild, a former investment banker and Nasdaq vice chairman now running National Research Exchange, a firm set up help small companies get more analyst coverage.
Weild said roughly 70 percent of small-cap companies have inadequate coverage, with only a handful of analysts following their stocks and producing fewer pages of research . Investors avoid companies with just one or two analysts since any additional loss of coverage can sink a stock.
To be sure, hundreds of independent research firms have sprouted since the settlement and the revived stock market has boosted overall coverage. StarMine, a San Francisco firm that tracks analysts, said the number of stocks covered by at least one analyst rose to nearly 4,300 last year from 3,600 in 2003.
But investors say that the quality of coverage has slipped, with mistakes highlighted in the Enron scandal being repeated.
"There's probably more reporting now, yet the situation that arose around Enron -- where analysts just passed along company guidance -- that's gotten worse. So based on that alone, I'd say quality has deteriorated," says Samuel Jones, who helps manage $1 billion in assets at Trillium Asset Management. "It's an unintended consequence of the global settlement."