SunTrust Robinson Humphrey
March 10, 2003
Mr. Jonathan G. Katz
Re: Release No. 34-47110 (December 31, 2002)
Dear Mr. Katz:
Thank you for the opportunity to comment on the above-referenced proposed regulations related to research analysts employed by broker-dealers such as SunTrust Capital Markets, Inc. SunTrust Capital Markets, Inc. is a full service broker-dealer headquartered in Atlanta, Georgia with offices located in the Eastern United States. We maintain a large and well-respected research department covering approximately 300 companies, an active investment banking department, institutional and retail sales and trading departments. We appreciate the efforts of the National Association of Securities Dealers ("NASD") and the New York Stock Exchange ("NYSE") to ensure the integrity of our markets and maintain the confidence of investors.
Although SunTrust Capital Markets, Inc. supports the goals of the proposals, we do have concerns related to the following issue:
Proposed New Paragraphs NYSE Rule 472(b)(4) and NASD Rule 2711(c)(4)
This proposed addition to the NYSE and NASD rules concerns us for the following reasons:
1) "communication in furtherance of obtaining investment banking business" is subject to broad and subjective interpretations;
2) the permanent prohibition against an analyst covering a company if deemed to have engaged in such communications is excessive and relatively unprecedented;
3) the proposal restricts the ability of the analyst to glean important information from private companies regarding the industry in order to provide more insightful research, ultimately benefiting the investor; and
4) the rule would restrict the ability of firms to present an overall view of their capabilities so that private companies can make informed choices with respect to the firm(s) best suited to assist them in entering the capital markets and may broadly restrict private companies from access to the capital markets.
"Communication in furtherance of obtaining investment banking business"
"Communication in furtherance of obtaining investment banking business" can be interpreted to include almost any contact between a research analyst and a private company. Our research analysts regularly visit and communicate with private companies. These contacts provide valuable information and insight regarding the analyst's industry sector and competitors in the sector.
The language in the proposed rules leads to uncertainties as to what activities would be viewed as a violation. Analysts would require specific guidance regarding questions such as:
As written, it is unclear where the authority to determine an infraction lies. If a firm ultimately participates in a company's initial public offering, is the firm's legal department charged with reviewing all historic communications and conducting interviews with the analyst and principals of the company to determine if the analyst was performing "legitimate research functions" versus "acting in furtherance of obtaining investment banking business"? Are firms to act at their peril only have securities regulators disagree with their best judgment if they subsequently determine an improper communication has occurred?
Proposed NYSE Rule 472(b)(4) and proposed NASD Rule 2711(c)(4) would permanently bar a research analyst from covering a company if the analyst is determined to have acted "in furtherance of obtaining investment banking business." In addition to the difficulty in determining that the analyst has breached the rule, the permanent ban on coverage, in our opinion, is excessive and unprecedented. Current and proposed NYSE and NASD Rules now restrict all analysts in a firm that is a manager or co-manager of an initial public offering from publishing a research report or making a public appearance for 40 calendar days after the offering, and would prohibit all analysts in that firm from publishing a research report or making a public appearance in the 15 days before and after the expiration of a lock-up agreement or other agreement restricting or prohibiting the sale of shares by the company or its shareholders.1
In addition, it is required firms have Chinese Wall policies and procedures that restrict an analyst's coverage when knowledgeable of material, non-public information (such as anticipated or active investment banking transactions). In all cases, there is a time frame associated with research restrictions. We know of no other regulation that imposes a permanent ban on an individual from performing a core broker-dealer function.
Restricting Analyst's Access to Information
We serve as advisors and underwriters in initial public offerings for small and mid-capitalization companies. The interest of these companies and of potential investors in these companies is best served when our research analysts' can utilize on-going relationships and communications with private companies to further understand their industry sector, without regard to the specific potential (or timing) of bringing a company public. Additionally, as a result of the on-going communications, when the companies go public (whether our firm participates in the IPO or not), the analyst is better positioned to provide thorough and expert coverage, benefiting the investors.
Restricting Company's Ability to Access Capabilities
We are also concerned about the negative consequences, especially for smaller companies, to raise capital and have access to choices for financial advisory and underwriting services. If analysts are reluctant to continue contacts with private companies because of a fear that they might, ultimately, be banned from covering the company, both the firm and the companies will lose an important source of information. In our experience, companies often request a meeting with the firm's analyst and bankers to assess the firm's overall capabilities prior to considering a financing scenario. Currently companies base the choice of bankers, in part, upon the firm's research analyst's prominence and reputation. Certainly company representatives expect to meet the analyst prior to making a commitment to the firm. Under the proposed rules, firms would be reluctant to participate in these types of introductory meetings for fear of tainting the analyst and, as a result, the company's ability to assess the firm's overall capabilities would be limited.
We strongly urge the NYSE and NASD to consider requiring firms to implement policies and procedures to ensure that research analysts are not involved in marketing the firm's investment banking services, rather than imposing a permanent bar to coverage based on a difficult to interpret standard specifically targeting communications with private companies. If, however, a further bar is deemed necessary, we urge the NYSE and NASD to consider a finite time frame for the restriction. The investing public will be ill served if analysts are generally restricted from gaining valuable information from the private sector as a result of the proposed Rules. Potential issuers will lose valuable access to the capital markets as well.
If the Commission staff would like to discuss these issues, please feel free to contact me at (404) 926-5570.