Cleary Gottlieb Steen & Hamilton
one liberty plaza
new york, ny 10006-1470
(212) 225-2000
(212) 225-3999
WASHINGTON, D.C. 20006-1801

75008 PARIS

RUE DE LA L01 23


                            MAIN TOWER

00187 ROME



April 4, 2002

Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Re: NASD and NYSE Rule Proposals Regarding Research Analyst
Conflicts of Interest (File Nos. SR-NASD-2002-21; SR-NYSE-2002-09)

Dear Mr. Katz:

We are submitting this letter in response to the request of the Securities and Exchange Commission (the "Commission" or "SEC") for comments regarding rule proposals submitted to the Commission by the National Association of Securities Dealers, Inc. (the "NASD") and the New York Stock Exchange, Inc. (the "NYSE") relating to conflicts of interest of NASD and NYSE member firms ("member firms") and their research analyst employees (the "Proposed Rules").1

While the explicit prohibitions and mandated disclosures contained in the Proposed Rules may help address perceived conflicts of interest of member firms and their research analysts, we believe that some of the provisions raise a number of questions and require further clarification. Moreover, compliance with the Proposed Rules would likely impose significant additional costs and administrative burdens on member firms, which we hope the Commission will consider in determining whether to approve the Proposed Rules. Finally, although we recognize that the NASD and NYSE worked together in developing the Proposed Rules, we believe that further harmonization and coordination between the two sets of proposals is required in order for the Proposed Rules to be uniformly implemented by the respective member firms of those two organizations.

We set forth below the issues raised by the Proposed Rules we believe will be of greatest importance to member firms. We would be happy to discuss these issues further should you, or representatives of the NASD and NYSE, so desire.

Comments on the Proposed Rules

1. Research Publication Date. The Proposed Rules measure certain time periods by reference to the date on which a research report is published. However, particularly in the context of electronic communications, the publication date may not be clear. Indeed, some have argued, for example, that information available online may be viewed as being continually republished each time the information is accessed. We suggest that the Proposed Rules clarify that the reference date for this purpose is the date that the report is first disseminated by the firm to its customers or the public and not the date that an investor accesses the report online or through other means.

2. Limitation on Contacts Between Research Analysts and Investment Banking Personnel. The Proposed Rules and accompanying statements by the NASD and NYSE appear to imply that any communication between a research analyst and a member of the investment banking department should be viewed as suspect. Although the Proposed Rules would permit certain interaction to take place between analysts and investment banking personnel regarding the factual accuracy of a research report (so long as such interaction is intermediated by the legal or compliance department), the Proposed Rules do not acknowledge or explicitly sanction the other important roles that research analysts often play in connection with securities offerings, sales and other activities conducted by the firm.2

We believe that the Proposed Rules should explicitly acknowledge and confirm that research analyst activities and interactions with non-research personnel, other than those activities and interactions expressly prohibited by the Proposed Rules, should be allowed to continue pursuant to appropriate written supervisory procedures and compliance with general conflict of interest requirements.

3. Compensation Disclosure. The Proposed Rules' requirement that a member firm disclose that it (or an affiliate) expects to receive compensation from a subject company within the three months following publication of a research report may serve to alert the public, the analyst or other market participants that the subject company may have engaged the firm or its affiliates to assist it in connection with a transaction that has not yet been made public. Although the NASD and NYSE contend that the nature of the required disclosure is too general for any conclusion to be drawn as to the type of transaction that has generated or is expected to generate the compensation, there remains the risk that this type of disclosure may lead to speculation about the existence of an imminent non-public transaction. We believe this risk, even if mitigated by the generality of the required reference, far outweighs any possible benefit that this disclosure may provide.

Accordingly, we propose that this requirement be replaced by more generic disclosure that effectively alerts the investing public that the member firm may have a conflict of interest due to the receipt or anticipated receipt of compensation to the member firm or its affiliates, but that does not inadvertently and inappropriately tip the market about an impending non-public transaction. This disclosure, for example, could be to the effect that "the firm and its affiliates have done business with the issuer mentioned in this report in the past and expect to compete actively for its business in the future."3

4. Research Quiet Periods. The Proposed Rules would prohibit the distribution of research by managers and co-managers for 40 days after an issuer's initial public offering and 10 days after a secondary offering. In light of the research quiet periods already effectively imposed by Section 4(3) of the Securities Act and Rule 174 thereunder with respect to securities that are the subject of a distribution, however, we do not believe that any additional research quiet periods are warranted, nor do we believe it is appropriate for the NASD and NYSE to effectively amend these provisions of the Securities Act through modifications to their rules.

We are not aware of any evidence that the current research quiet periods effectively imposed by the Commission are not adequate for the protection of investors or the market.4 The imposition of additional research quiet periods by the NASD and NYSE will only harm investors by limiting the amount of information available to them. Moreover, the imposition of the proposed additional research quiet periods would create competitive disadvantages between managers and co-managers who would be subject to the new rules, and other broker-dealer participants in the offering (as well as non-participants) who would not be.

5. Impact on Research Issued by Foreign Affiliates of Member Firms. We note that the Proposed Rules do not address the issue of research reports prepared by foreign broker-dealer affiliates of member firms. Although we recognize the Proposed Rules do not, and in the interests of comity should not, generally apply to research reports prepared by foreign broker-dealers, we believe it is important for the NASD and NYSE to make clear how the Proposed Rules are intended to apply to those research reports when a U.S. registered broker-dealer "accepts responsibility" for them and distributes them to U.S. investors in accordance with existing SEC no-action positions that were preserved in connection with the adoption of Rule 15a-6 under the Exchange Act (the "Research No-Action Position").5

If the Proposed Rules were to be applied to foreign-prepared research distributed to U.S. investors by a member firm required to accept responsibility for that research in accordance with the Research No-Action Position, it would require as a practical matter that foreign affiliates of the member firm adopt research procedures sufficient to comply with the U.S. rules. This would likely result in significant competitive disadvantages for these foreign affiliates vis-à-vis other broker-dealers operating in their local markets and may well cause the affiliates to decide not to furnish research to U.S. investors. Accordingly, we believe that the Proposed Rules should not be applicable to, or in connection with, foreign-prepared research that is distributed by member firms in accordance with the Research No-Action Position, where such research relates to foreign issuers or is contained in an industry-wide report covering both U.S. and foreign issuers. We believe, however, these reports should contain generic disclosure to the effect that the requirements applicable to member firms under the Proposed Rules do not apply to such foreign-prepared research reports and that the foreign broker-dealer or foreign research analyst preparing the report may have a conflict of interest due to the receipt or anticipated receipt of compensation from the issuer, securities ownership or other interaction with the issuer.6

6. Beneficial Ownership Disclosure. The Proposed Rules would require disclosure in research reports and public appearances if the member firm or its affiliates beneficially own more than one percent of a company's common equity securities. Though the Proposed Rules refer to Sections 13(d) and 13(g) of the Exchange Act for purposes of determining what constitutes "beneficial ownership", the disclosure requirement set forth in the Proposed Rules is triggered by a significantly lower threshold than the five percent threshold required by Schedules 13D and 13G under the Exchange Act. Moreover, the Proposed Rules would require member firms to calculate their aggregate holdings by reference to the date of the report or public appearance - not the time periods for filing Schedule 13D or 13G. As a result, the Proposed Rules' disclosure requirement will likely add significant cost and compliance burdens to member firms and their affiliates as they may be forced to modify or create new systems to track such information. The disclosure of information beyond that required in publicly available SEC filings may also result in unfair treatment among market participants, since only those receiving the research reports or attending (or hearing a broadcast of) the public appearance would receive such additional information.

Accordingly, we believe that the beneficial ownership disclosure requirement should be limited to the information (and reference the time periods) required by Schedules 13D and 13G. Finally, if this proposed requirement is adopted, we believe that such disclosure should be required only in research reports or in public appearances where the research analyst knows in advance that a particular security will be discussed.

* * *

We would be pleased to respond to any inquiries regarding this letter or our views generally on the Proposed Rules. Please contact Allan G. Sperling or Leslie N. Silverman in New York at 212-225-2000 or Edward F. Greene in London at 44-20-7614-2200.

Very truly yours,


cc: The Honorable Harvey Pitt, Chairman
Annette L. Nazareth, Director, Division of Market Regulation
Alan L. Beller, Director, Division of Corporation Finance
Paul M. Dudek, Chief, Office of International Corporate Finance, Division of Corporation Finance
Mary L. Shapiro, President, NASD Regulation, Inc.
Patrice M. Gliniecki, Acting General Counsel, NASD Regulation, Inc.
Philip Shaikun, Assistant General Counsel, NASD Regulation, Inc.
Edward A. Kwalwasser, Group Executive Vice President-Regulation, New York Stock Exchange, Inc.
Donald van Weezel, Vice President-Regulatory Affairs, New York Stock Exchange, Inc.
Mary Anne Furlong, Director-Rule and Interpretive Standards, New York Stock Exchange, Inc.

1 SEC Release No. 34-45526 (March 8, 2002) (the "Release").
2 For example, research analysts may, particularly in expedited offerings, assist investment bankers in the conduct of due diligence investigations regarding a company and may be called upon to help ensure that the prospectus contains all material information required to be disclosed under applicable law. Research analysts also may participate in roadshows and in one-on-one meetings with potential investors as part of the distribution process. Such participation by research analysts in securities offerings is typically undertaken in the context of strict "Chinese Wall"-crossing procedures that are monitored closely by the member firm's legal or compliance department.
3 The Proposed Rules similarly contain a provision that would require a research analyst to disclose in public appearances that an issuer of a discussed security is a "client" (or, pursuant to the NYSE proposal, an "investment banking services client") of the member firm or its affiliates. The term "client", according to the NASD and NYSE in their respective proposals, is defined by reference to the past receipt or anticipated future receipt of compensation by the member firm and its affiliates. For the same reasons noted above with respect to written disclosure in research reports issued by the firm, we believe this requirement should be replaced with more generic disclosure along the lines set forth above.
4 Because a research report with respect to a company's shares may be viewed as an offer of those shares, these provisions of the Securities Act and related rules are generally viewed as effectively prohibiting firms that participate in an offering of a company's securities from distributing research (unless such research meets the requirements of Rule 138 or 139 under the Securities Act) regarding the distributed securities for (A) if the issuer was not subject to the periodic reporting requirements of the Securities Exchange Act of 1934 (the "Exchange Act") immediately prior to a registered offering, (i) 25 days after the later of the effective date of the registration statement for the offering or the first date on which the securities were bona fide offered to the public (the "offering date"), if the securities will be listed (upon consummation of the offering) on a U.S. securities exchange or quoted on Nasdaq; (ii) 90 days after the offering date, if the securities will not be listed (upon consummation of the offering) on a U.S. securities exchange or quoted on Nasdaq and the offering is the first registered offering of the issuer's securities, or (iii) 40 days after the offering date, if the securities will not be listed (upon consummation of the offering) on a U.S. securities exchange or quoted on Nasdaq and the offering is not the first registered offering of the issuer's securities; (B) zero days after the offering date, if the issuer was subject to the periodic reporting requirements of the Exchange Act immediately prior to a registered offering; and (C) 40 days after the offering date, in the case of offerings exempt from the registration requirements of the Securities Act.
5 See SEC Release No. 34-27017 (July 11, 1989) (the "Rule 15a-6 Release"). In the Rule 15a-6 Release, the Commission states that "a registered broker-dealer would meet its responsibility under the Rule if it took reasonable steps to satisfy itself regarding the key statements in the research," and that "this responsibility can be fulfilled by reviewing the research in question and comparing it with other public information readily available regarding the issuer, to make certain that neither the facts nor the analysis appear inconsistent with outstanding information regarding the issuer." Rule 15a-6 Release, note 116. The Commission also notes in the Rule 15a-6 Release that existing NASD and NYSE rules would require disclosure in research reports distributed by a member firm of the identity of the preparer of the report if other than the member firm. Rule 15a-6 Release, note 99.
6 We assume the Proposed Rules, which by their terms apply only to member firms, would not apply at all to research reports prepared and distributed by foreign broker-dealers directly to major U.S. institutional investors in accordance with Rule 15a-6(a)(2) under the Exchange Act.