Vested Interest: How the 2026 IPO Market Is Re-Exposing a Dot-Com Era Regulatory Tension

An analysis of the conflict of interest between investment bankers and research analysts, and the effectiveness of the current regulatory regime.

Carter Hanson and Mason Hoekenga
Sept. 1, 2026

Introduction

In 2002, then New York Attorney General Eliot Spitzer published emails from former Merrill Lynch Research Analyst Henry Blodget in which he privately described a dot-com company as “a POS,” despite publicly praising it. Blodget's story illustrates the conflict inherent within integrated investment banks—financial institutions that operate both corporate investment banking and sell-side research divisions. In these firms, analysts may face intense pressure to report bullishly on companies to help bankers secure fee-generating underwriting roles. Blodget eventually agreed to pay $4 million and accepted a lifetime ban from the securities industry to settle the charges that arose from the case. His situation, while the most individually famous, was not unique, and by 2004, twelve of Wall Street’s most prominent financial firms, including Goldman Sachs, J.P. Morgan Chase, and Morgan Stanley, were punished for similar conduct in what became known as the Global Research Analyst Settlement (GRAS). GRAS not only punished these firms for their prior violations, but also required them to implement third-party-approved policies to insulate the relationship between their investment banking and research analysis divisions. The SEC retired the GRAS settlement and the undertakings imposed on those firms in late 2025, as part of a wider deregulatory push. Whether that decision will harm the investing public will be tested in short order as the 2026 Initial Public Offering (IPO) market triggers one of the largest waves of capital raises since the dot-com era that led to GRAS in the first place.

The SEC and other proponents of the GRAS rollback put forward a few key arguments for retiring the settlement. The formal basis was a sunset provision built into the original settlement, which provided that new, superseding regulation would trigger termination of the undertakings, a threshold the settling firms argued Financial Industry Regulatory Authority (FINRA) Rule 2241 had met. Proponents also argued the change would expand research coverage, pointing to a chilling effect the settlement's compliance burdens had allegedly had on analyst coverage of smaller and mid-sized companies for two decades. Secondly, they argue that other regulations, primarily FINRA Rule 2241, serve the same investor-protection purpose at a lower cost; thirdly, those other regulations govern all firms, not just the twelve to whom GRAS applied as part of a legal settlement. Their arguments have merit; however, this article argues that the SEC drew the wrong conclusion in retiring GRAS.

This piece argues that rolling back GRAS has substantially increased the risk of overstated sell-side research, to the detriment of both retail and institutional investors.

The Structural Differences Between GRAS and FINRA Rule 2241 Create Vulnerability

GRAS and FINRA Rule 2241 both seek to ensure that, within integrated investment banks, analysts' recommendations are not influenced by the investment bank's motive to sell fee-generating work to the same clients the analysts cover. Both regulatory frameworks require firms to implement and enforce compensation, reporting, logging, and disclosure policies designed to prevent investment bankers' pursuit of lucrative underwriting fees from influencing research analysts and leading to the publication of overly bullish investment analyses.

GRAS required an independent third-party monitor to conduct a single, formal review validating the effectiveness of each firm's compliance policies within roughly two years of the settlement's entry, but once that review concluded, firms were required to maintain those validated standards indefinitely, without ever being re-checked, subject only to superseding SEC rulemaking. This is precisely where GRAS's design broke down: a one-time compliance check from two decades ago should not have been treated as sufficient oversight in perpetuity, and the indefinite, unreviewed nature of that obligation is a legitimate reason the settlement had outlived its usefulness. But that flaw is a reason to fix how often firms are independently verified, not a reason to eliminate independent verification altogether. The key mechanism that made GRAS a proactive defense, however imperfectly implemented, was that an independent third-party certified that the policies were actually built to work, not merely that a firm claimed as much internally. FINRA Rule 2241 does not require that certification even once.

FINRA Rule 2241 contains no third-party advance verification of internal policies, meaning that traditional routine audits can only check whether the company complies with its policies, not whether the policies are effective in the first place. That problem is worsened by the ambiguity of FINRA Rule 2241, which merely requires policies to be "reasonably designed," a standard that leaves what counts as adequate to be argued case by case rather than fixed in advance. This limits 2241's deterrent effect relative to other reactive penal rules or laws, since a company can claim its policy was reasonably designed and that the malfeasance that occurred was impossible to predict. That will undoubtedly be true in some cases, but it can easily become a crutch that enables firms to sidestep FINRA Rule 2241. As such, the retirement of GRAS does not represent a step forward to more streamlined regulation that serves the same practical purpose, but rather a deregulatory step that increases the chances of the very conflict both frameworks are designed to prevent. Formerly GRAS, and now FINRA Rule 2241, are not the only regulations that govern the interaction between research analysts and investment bankers. Effective April 14, 2003, the SEC's Regulation Analyst Certification (AC) also seeks to protect the objectivity of a research analyst's reports and ensure analysts properly disclose potential conflicts of interest. The SEC initially proposed Regulation AC in July 2002, before the passage of the Sarbanes-Oxley Act (SOX), which directed the SEC to adopt more stringent regulations addressing conflicts of interest for research analysts. After President Bush signed SOX into law, the Commission ensured that Regulation AC aligned with its provisions.

Regulation AC applies to analysts' certification of their research reports and public appearances. For research reports, Regulation AC requires research analysts to provide a clear, prominent certification that all views expressed in the report reflect their personal views on the securities. Most importantly, Regulation AC does not require third-party approval of communication barriers between research analysts and investment bankers. Thus, while Regulation AC helps ensure adequate analyst disclosure, it leaves the same critical gap that FINRA 2241 does in ensuring proactive enforcement.

Simply put, GRAS required firms to continue following a policy that had been independently verified, whereas FINRA Rule 2241 never requires that independent design verification to happen at all — leaving regulators able to confirm firms are following their own policies, but with no mechanism to confirm those policies were soundly designed in the first place.

The Current Regulatory Regime Does Not Adequately Ensure that Research Analysts will Maintain Analytical Independence

Once GRAS was repealed, its parties were no longer required to implement third-party-validated compliance procedures, and the burden fell on these firms to design policies and procedures reasonably designed to mitigate conflicts of interest. The shift from outside verification of compliance to reactive self-regulation creates a key risk: an analyst's published research can be unduly influenced by investment banking fees. The 2007 paper published in the Journal of Financial Economics, Conflicts of interest in sell-side research and the moderating role of institutional investors, explains that a research analyst's primary role is to act as a neutral intermediary between a firm and investors. Companies, however, are also key stakeholders in analysts’ research. If a research analyst works for an integrated investment bank, the analyst's opinions could influence whether a company chooses to work with the investment bank that employs the analyst. For example, if a research analyst publishes a report changing a rating from “hold” to “sell,” a company could see a market sell-off, and management would be less likely to work with the bank that published the negative research. The 2007 paper explains how research analysts come under implicit pressure to publish positively on a company to maintain a positive relationship with management. With the rollback of GRAS and the removal of third-party compliance certification, the systems in place to prevent this conflict of interest are weaker than before, and sell-side equity research is increasingly vulnerable to conflicts of interest.

The 2026 IPO Market Creates Unique Risks to Both Retail and Institutional Investors

The retirement of GRAS and lack of proactive compliance under FINRA Rule 2241 presents a unique risk to retail and institutional investors at the onset of new IPOs in 2026 and beyond. IPOs in the first half of 2026 raised $128B in capital, compared with just $17.1B in the first half of 2025. The surge in capital in H1 2026 is driven by optimism around AI and the IPOs of high-profile companies like SpaceX (NASDAQ: SPCX), Jersey Mike’s (NYSE: JMKE), and Bending Spoons (NASDAQ: BSP). Additionally, Anthropic, OpenAI, Discord, Inspire Brands, and Anduril are all rumored to be exploring public offerings in late 2026 or early 2027. The bottom line is that the GRAS rollback occurred just as the IPO market was set to expand to volumes not seen since 2021, creating risk for both retail and institutional investors.

Unique to the 2026 wave of IPOs is the influence of retail investors and their interaction with sell-side research. The rollback of GRAS becomes especially important because overstated sell-side research can directly influence retail investors' decisions, creating the risk of retail capital being funneled into firms with illustrative price targets and biased analyst recommendations. With increased access via digital trading platforms, longer investment time horizons, and greater willingness to participate, retail investors are an increasingly important part of the IPO and post-IPO capital pool for issuing firms. Upon its IPO, SpaceX, for example, allocated an outsized 20% of its initial public offering to retail investors. This represents an approximately 3-4x increase over the typical IPO allocation of 5% to 7% to retail investors. While the allocation of shares to retail investors in the IPOs of Anthropic and OpenAI is not yet confirmed, each firm’s IPO is rumored to allocate above the typical 5% to 7% of shares. Trading volume on Kalshi’s question, When Will Anthropic Officially Launch an IPO?  has exceeded $1.5M, reflecting significant retail engagement with the timing of the offering itself. As retail investors grow more important in today’s market dynamics, the question becomes how the GRAS rollback poses a unique risk to them.

Retail investors uniquely rely on research published by sell-side analysts; as a result, the quality and accuracy of analysts’ reports are vital to helping retail investors make well-informed decisions. The 2025 working paper Do Retail Investors Pay Attention to Sell-Side Analysts?,  concludes that net retail buying increases following an analyst’s positive revision, recommendation, price target increase, or EPS forecast update. Additionally, retail investor activity increases when an ‘all-star’ or highly regarded analyst changes an investment recommendation. This correlation shows retail investors' reliance on sell-side investment reports and their willingness to follow analyst recommendations. If an analyst is incentivized, directly or indirectly, to publish a more favorable view on an asset, the evidence shows the effect on retail investors is real — and the price they’re buying in at likely exceeds what honest analysis would support, leaving them exposed when the market corrects.

For institutional investors, the rollback of GRAS and reliance on FINRA Rule 2241 have a different, though no less important, effect. The difference lies in how institutional investors use sell-side research reports. Buy-side investment analysts, who work for institutional investors like mutual funds or hedge funds, largely perform their own fundamental analysis rather than relying on sell-side analysts’ conclusions as retail investors do. Fewer than 3% of buy-side analysts say sell-side research recommendations are a very useful input to their investment recommendations. Buy-side analysts, however, report their main use for sell-side research analysts is industry knowledge and access to company management. Under the current regulatory regime, where sell-side analysts are not proactively monitored for misaligned incentives, it seems increasingly likely that an analyst would speak more favorably about a company or industry, or be more willing to provide access to management, when that company is also a client of the analyst's investment bank. This interaction between buy-side analysts at institutional investment firms and sell-side analysts at investment banks suggests that retiring GRAS's proactive regulations can harm even institutional investors, who are the least reliant on sell-side research reports themselves, but depend on the access and relationships those reports are meant to reflect honestly.

The Effect of the GRAS Rollback on Follow-On Capital Raises

The conflict of interest within integrated investment banks does not end at the IPO; in fact, it is arguably more acute, and far less regulated, for follow-on capital raises. This is because IPOs contain a hardline rule that follow-on raises do not. Section 5 of the Securities Act of 1933 creates what are known as the "gun-jumping" rules, which prohibit analysts from publishing promotional research prior to a securities offering. Rule 139 offers underwriters a safe harbor from the gun-jumping rules so long as their research coverage of the issuer is published in the ordinary course of business rather than newly initiated because of the offering, but only once the issuer has at least twelve months of Exchange Act reporting history. That reporting-history requirement is quite limited, and would currently only bar pre-offering research on companies that have recently gone public such as SpaceX, and even that restriction is set to expire by mid-2027. Furthermore, Rule 139 says nothing about the months or years of coverage that precede any offering being filed at all; a bank angling for a future underwriting mandate can publish as bullishly as it likes on a stock long before a deal exists, since gun-jumping rules by definition only apply once an offering is in registration or clearly imminent. This means that under a follow-on offering, the dynamic between research analysts and investment bankers becomes exponentially more important both before and after a deal is announced, and virtually unregulated in either window with the small exception of companies without twelve months of reporting history. GRAS's third-party-validated policies proactively prevented that dynamic regardless of whether the raise was an IPO or follow-on offering. FINRA Rule 2241's reactive regulation has no such mechanism, creating an incentive for these firms to publish bullish analysis to curry favor with companies and position themselves to win high-fee follow-on underwriting roles.

The AI investment race taking place in our capital markets in 2026 makes this dynamic far from theoretical. In June 2026, Alphabet, Google’s parent company, returned to equity markets for the first time since 2005, raising nearly $90 billion across a public offering, a private placement, and an at-the-market program, reflecting the unprecedented scale of its AI infrastructure buildout, even as a portion of that raise is earmarked for unrelated stock-compensation tax obligations. That equity raise comes on top of nearly $90 billion in bond issuance since April 2025, pushing Alphabet's debt pile past $100 billion, a tenfold increase in roughly 14 months. SpaceX presents an even more extreme example. Despite pulling off a record-breaking IPO just months ago, the company has disclosed more than $350 billion in commitments through 2030, compared to just $85 billion raised in its initial listing. To fund those commitments, SpaceX will likely have to return to public capital markets.

The future capital raises likely needed to fund that gap may very well be led by the same investment banks actively publishing sell-side research reports on SpaceX. This dynamic helps explain why questions arise when analysts at firms like Morgan Stanley and Raymond James have published share price targets for SpaceX of $300 and $800 per share, respectively, as the stock trades marginally above its IPO price of $135 per share as of the writing of this article.

To be clear, hyper-bullish price targets do not constitute foul play or illegal conduct. Still, serious questions arise when the same firms competing for lucrative follow-on fees publish price targets substantially exceeding current market values, particularly when existing regulations offer few means to distinguish genuine analysis from research shaped by the prospect of future underwriting business.

Conclusion

GRAS was fundamentally flawed; complying with standards certified almost twenty years ago was unreasonably costly, and it treated a small group of firms differently from the rest based on transgressions committed more than two decades ago. As such, the decision to move on from GRAS was logical; however, the execution was flawed. Rather than streamlining the regulation to cut compliance costs and apply it universally while retaining its proactive third-party policy verification, the SEC shifted to relying entirely on FINRA Rule 2241, a weaker, reactive rule. That decision creates substantial risk of misleading, overstated sell-side research. The shift from proactive prevention to reactive, principles-based enforcement occurred as the IPO market surges for the first time since the post-pandemic investment boom, exposing retail and institutional investors alike to greater risk. Alphabet has already gone back to the capital markets for a follow-on raise, and SpaceX will likely need to as well, precisely where the gap between GRAS and Rule 2241 matters most. Two decades after Henry Blodget privately trashed the same stocks he publicly praised, the rules meant to prevent such a scenario are, once again, resting on trust rather than verification.