Commission Approval of SRO Rule Amendments Addressing Research Analyst Conflicts of Interest
Today, the Commission approved NYSE and NASD (collectively "the SROs") rule changes addressing research analyst conflicts of interest. Among other things, these rule changes fulfill the mandates of section 501 of the Sarbanes-Oxley Act of 2002.
The approval of the SRO rule amendments represents another step by the Commission to address potential conflicts of interest relating to research analysts, including: approval of major SRO rule changes in May 2002; the adoption of Regulation AC (Analyst Certification), which requires analysts to certify that their research reports accurately reflect their personal views and disclose whether they received compensation for their specific recommendations; the joint inquiry between the SEC and other regulators culminating in an agreement to settle an enforcement action involving ten major investment banking firms; and continuing investor education initiatives.
The approved rule amendments were proposed as two different sets of SRO rule proposals; one set conceived as improvements to the May 2002 SRO rule changes and another set to comply with the mandate in section 501 of Sarbanes-Oxley. The amendments include the following provisions, among others:
- Separation of Research Analyst Compensation from Investment Banking Influence. The rule changes require firms to establish a compensation committee to review and approve the compensation of its research analysts that are primarily responsible for the preparation of the substance of research reports. The committee would report to the Board of Directors and may not have representation from the firm's investment banking department.
- Booster Shot Research Reports. The rule changes prohibit analysts from issuing positive research reports or reiterating a "buy" recommendation around the expiration of a lock-up agreement (sometimes called "booster shot" research reports).
- Quiet Periods. The amendments extend the current quiet periods for the issuance of written research reports to public appearances by managers and co-managers of initial and secondary offerings. The proposals also establish quiet periods for all dealers who have participated in an offering.
- Pitch Meetings. The rules further insulate research analysts from investment banking interests by prohibiting analysts from participating in "pitches" or other communications for the purpose of soliciting investment banking business.
- Termination of Coverage. The rules require that firms disclose to customers in a final report that it is terminating research coverage of an issuer that is the subject of a research report.
- Prepublication Review of Research Reports. The SRO rule changes restrict the prepublication review and approval of research reports by persons not directly responsible for research. The rules also require that prepublication communications about a research report between all non-research personnel and the research department be intermediated by legal or compliance staff.
- Anti-Retaliation. The amendments prohibit firms engaged in investment banking activities from directly or indirectly retaliating, or threatening to retaliate, against a research analyst who publishes a research report or makes a public appearance that may adversely affect the member's present or prospective investment banking relationship.
- Disclosure of Any Compensation from the Issuer. The amendments expand on the current SRO compensation disclosure obligations by requiring disclosure of whether the member, any of its affiliates, or the research analyst, received any compensation from the issuer that is the subject of the research report or public appearance.
- Disclosure of Client Relationships. The rule changes require disclosure of whether the subject company is or recently was a client of the member, and if so, the types of services provided to the issuer. The types of services provided to the subject company must be described as: (1) investment banking services, (2) non-investment banking securities-related services, or (3) non-securities services.
- Gatekeeper Exceptions. The SRO rule changes also create an exception from the existing "gatekeeper" provisions of the SRO rules for certain members that engage in limited underwriting activity.
- Research Analyst Registration and Qualification. The rules impose additional registration, qualification, and continuing education requirements on research analysts. The amendments establish a new registration category and require a qualification examination for research analysts. The rules also impose requirements regarding the continuing education of certain registered persons consisting of a Regulatory Element and a Firm Element to address applicable rules and regulations, ethics, and professional responsibility.