Index unit’s planned IPO sparks concerns about conflicts

PHILADELPHIA — Morgan Stanley’s plans to take its MSCI Inc. index unit public is raising concerns about conflicts of interest that may arise when an index company must answer to shareholders.
AUG 13, 2007
By  Bloomberg
PHILADELPHIA — Morgan Stanley’s plans to take its MSCI Inc. index unit public is raising concerns about conflicts of interest that may arise when an index company must answer to shareholders. As a stand-alone public company, MSCI would face new and greater pressures to make money for shareholders, said Herb Blank, founder and president of QED International Associates Inc., an industry consulting firm in New York. “It opens many possibilities on the indexing frontier,” he said. “It can be very dicey and treacherous.” Pressure to meet shareholder demands for earnings could lead an indexer to look for new, creative ways to make money such as creating a system in which a “platinum” subscriber would get index information ahead of other market participants, Mr. Blank said. There could be regulatory issues with such a move, he admitted, but regulators have taken a very “laissez-faire” view of indexing, he said. Morgan Stanley of New York filed papers with the Securities and Exchange Commission last month signaling its plans for an IPO of MSCI — formerly Morgan Stanley Capital International — a subsidiary that specializes in publishing a wide variety of market indexes. Morgan Stanley will sell a minority interest in MSCI, which does business as MSCI Barra, via Class A common stock, according to the July 31 filling. The Wall Street wirehouse left open the possibility, however, of selling all of its interest in MSCI if market conditions warrant. The filing means MSCI could soon become the first publicly traded company whose core business is indexing, industry experts said. More indexes? MSCI’s public offering is likely to lead to the creation of new indexes that are even more specialized than the indexes now underlying exchange traded funds, said Jeff Tjornehoj, a Denver-based senior analyst with Lipper Inc. of New York. While that isn’t necessarily a bad thing, it could lead to more ETF failures, because ETFs based on niche indexes may find it tough to attract assets, he said. Another industry veteran, however, said he didn’t think Morgan Stanley’s move to spin off MSCI is all that earth shattering.
“My initial reaction is really ‘ho-hum,’” said Gary Gastineau, managing director of ETF Consultants LLC in Summit, N.J. “I don’t see any enormous advantage or disadvantage.” As part of a public company, MSCI already has had to deal with the pressures associated with public ownership, he said. That may be true, but the reality is that as a subsidiary, MSCI is removed from many of the pressures that directly face its parent, Mr. Tjornehoj said. Regardless, if MSCI’s offering is successful, other companies are likely to also shed their indexing operations, he said. Sale speculation For years, there has been industry speculation about whether The McGraw-Hill Cos. Inc. of New York might try and put Standard & Poor’s on the block, Mr. Blank said. And now that New York-based News Corp. has agreed to buy Dow Jones & Co. Inc., also of New York, it remains to be seen what will happen to Dow Jones’ indexes, he said. With all the demand for new indexes — much of it being generated by ETFs — now seems as good a time as any to contemplate the sale of an index provider, Mr. Tjornehoj said. “There’s licensing revenue to be made,” he said.

Latest News

SEC bars ex-broker who sold clients phony private equity fund
SEC bars ex-broker who sold clients phony private equity fund

Rajesh Markan earlier this year pleaded guilty to one count of criminal fraud related to his sale of fake investments to 10 clients totaling $2.9 million.

The key to attracting and retaining the next generation of advisors? Client-focused training
The key to attracting and retaining the next generation of advisors? Client-focused training

From building trust to steering through emotions and responding to client challenges, new advisors need human skills to shape the future of the advice industry.

Chuck Roberts, ex-star at Stifel, barred from the securities industry
Chuck Roberts, ex-star at Stifel, barred from the securities industry

"The outcome is correct, but it's disappointing that FINRA had ample opportunity to investigate the merits of clients' allegations in these claims, including the testimony in the three investor arbitrations with hearings," Jeff Erez, a plaintiff's attorney representing a large portion of the Stifel clients, said.

SEC to weigh ‘innovation exception’ tied to crypto, Atkins says
SEC to weigh ‘innovation exception’ tied to crypto, Atkins says

Chair also praised the passage of stablecoin legislation this week.

Brooklyn-based Maridea snaps up former LPL affiliate to expand in the Midwest
Brooklyn-based Maridea snaps up former LPL affiliate to expand in the Midwest

Maridea Wealth Management's deal in Chicago, Illinois is its first after securing a strategic investment in April.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.