Association for Investment Management and Research

15 July 2003

Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W., Stop 6-9
Washington, D.C. 20459

Re: NASD and NYSE Rulemakings: Amendment No. 2 to Proposed Rule Changes Relating to NYSE Exchange Rules 344 (Supervisory Analysts), 345A (Continuing Education for Registered Persons), 351 (Reporting Requirements) and 472 (Communications with the Public) and NASD Rule 472 (Research Analysts and Research Reports) -File Nos. SR-NYSE-2002-49; SR-NASD-2002-154

Dear Mr. Katz:

The U.S. Advocacy Committee (USAC) of the Association for Investment Management and Research (AIMR)1 appreciates the opportunity to comment on Amendment No. 2 rule changes that have been proposed by the New York Stock Exchange, Inc. (NYSE) and the National Association of Securities Dealers, Inc. (NASD) (collectively referred to as SROs) to revise their respective analyst conflict of interest rules to fully implement the requirements of the Sarbanes-Oxley Act.

The USAC is a standing committee of AIMR charged with responding to new regulatory, legislative, and other developments in the United States affecting the investment profession, the practice of investment analysis and management, and the efficiency of financial markets.

Summary Position

We strongly support several of the proposed amendments, as changes that go to the heart of the issues involved in pressures that threaten to undermine the independence and objectivity of analyst research. In particular, we heartily endorse the extension of the prepublication review restriction to more than just investment banking personnel, the new definition of "research report," and the added prohibitions against retaliating against research analysts. We discuss these in more detail below.


As stated in our last letter to the SEC on the SROs' proposed Amendment No. 1 to these rules,2 we strongly support initiatives to strengthen the ability of research analysts to provide unbiased and sound research reports and recommendations without undue influence from their employers or the companies that they cover. We appreciate the renewed efforts by the NYSE and NASD, through their proposals, to further this effort.

AIMR has long been a strong proponent of shoring up safeguards to ensure the integrity of analyst research. In 2002, it issued proposed Research Objectivity Standards (ROS) for managing some of the major conflicts confronting analysts today. The ROS track both in spirit and principle many of the amendments offered through these proposals. We therefore support many of the provisions of both the NYSE and NASD proposals, as discussed in detail below.

I. Prepublication Review

We agree with the proposed amendments to NYSE Rule 472 and NASD Rule 2711 that would prohibit review or approval of research reports prior to publication not only by investment banking personnel, but also by non-research personnel, other than legal or compliance department personnel. We believe that this is an appropriate extension of the prepublication prohibition.

AIMR's ROS require firms that engage in, or collaborate on investment banking activities to implement procedures that prevent investment banking or corporate finance departments from reviewing, modifying, approving or rejecting research reports. Like the proposed amendments to these rules, AIMR's ROS also urge the use of compliance or legal personnel as intermediaries for all communications between the research analyst and investment banking or corporate finance departments. We welcome amendments that go even beyond the investment banking and corporate finance departments to reduce the risk of pressure, influence, or actual change in substance by anyone not involved in the research effort as appropriate measures to further safeguard analyst independence.

II. Definition of Research Report

Both SROs have proposed to amend their definition of "research report" to no longer require that the report include a recommendation. We support this approach. We believe that expressing an opinion about the potential of an issuer's securities, even without the making of a recommendation, qualifies as a research report.

III. Retaliation Against Analysts

We strongly support the new language in the SRO rules that recognize and prohibit company retaliation against analysts for the views they may express in research reports and public appearances. We believe that this area has been long overlooked as a very real pressure on research analysts, and one that impedes the analyst's ability to conduct independent research and make objective recommendations.

While pressure from the investment banking arm of a firm may be a more obvious source of pressure, covered companies have numerous ways to discourage or encourage certain coverage, including limiting conference call access, restricting other sources of information to the analyst, and even instituting legal actions. In fact, a recent survey has indicated that close to 90% of analysts fear negative fallout from companies they cover should they issue negative opinions.

AIMR's ROS recognize the role that retaliation has played in exerting pressures on analysts. Provisions of the ROS provide that firms must implement policies and procedures that manage the working relationships with research analysts. In particular, companies must be prohibited from

  • Retaliating against a research analyst for a recommendation or rating or change in a recommendation or rating; and

  • Decreasing or eliminating brokerage, or threatening to do so, unless a research analyst maintains or changes a recommendation.

IV. Communications with Subject Company

We strongly support provisions of the SRO proposals that separate the analyst research function from the investment banking arm of a firm, in the belief that research must stand on its own, uninfluenced by explicit or implicit promises of compensation. The implicit promise (or even the possibility) of receiving underwriting business from a company taints the integrity of the research report.

AIMR's ROS dealing with relationships with subject companies specifically prohibit analysts from directly or indirectly promising a subject company or other corporate issuer a favorable report or a specific target, or from threatening to change reports, recommendations or price targets. Issuing a report or making a public appearance in which the company's prospects are assessed raises these very issues of compromise.

We therefore strongly support provisions proposed by both SROs that prohibit the publication of a research report or the making of public appearances concerning a subject company, if the analyst has communicated with the company prior to the issuance of the report/public appearance for the purpose of obtaining investment banking business before the SRO member entered into an agreement designating the member as an underwriter of an initial public offering of the company. We believe that this prohibition is central to addressing conflicts of interest that threaten the objectivity and integrity of a research report. Communications with the company prior to issuance of a research report or public appearance, when done so for the purposes of trying to secure investment banking business, raise strong questions about the analyst's ability to remain impartial when addressing the prospects of the offering.

V. Registration and Qualification of Research Analysts (NYSE Rule 344; NASD Rule 1050)

As noted in our earlier comment letter on proposed Amendment No. 1 to these rules, we believe that the SROs should apply the same qualification standard to research/securities analysts as they currently do to supervisory analysts. Thus, as discussed in our letter, we renew our request that the SROs recognize that those who have passed Level I of the CFA exam be deemed to satisfy whatever testing requirements that are ultimately adopted for research/securities analysts under NYSE Rule 344 and NASD Rule 1050. We also suggest that the SROs consider whether research directors, who may have active roles in reviewing reports, should also be required to demonstrate a certain level of knowledge for purposes of these rules.


We applaud the SROs for their efforts to strengthen the prohibitions against companies that directly and indirectly exert pressures on research analysts, and thereby threaten the analyst's ability to provide unbiased and objective research without the fear of retaliation, both from their firm's investment banking departments, as well as from the companies that they cover. We believe that the SROs' recognition of these pressures, and the attempt to counteract them through these regulations together sends a powerful message to the industry and to investors that the status quo will no longer be tolerated.

If we can provide additional information, please do not hesitate to contact Deborah Lamb at 770.971.7010, or Linda Rittenhouse at 434.951.5333,


/s/ Deborah A. Lamb

Deborah A. Lamb
Chair, U.S. Advocacy Committee

  /s/ Linda L. Rittenhouse

Linda L. Rittenhouse
Staff, AIMR Advocacy

Cc: Members of the U.S. Advocacy Committee
Rebecca T. McEnally, Ph.D., CFA
Vice President-AIMR Professional Standards and Advocacy

1 With headquarters in Charlottesville, VA and regional offices in Hong Kong and London, the Association for Investment Management and Research® is a non-profit professional association of over 66,000 financial analysts, portfolio managers, and other investment professionals in 117 countries of which 56,900 are holders of the Chartered Financial Analyst® (CFA®) designation. AIMR's membership also includes 127 affiliated societies and chapters in 46 countries.
2 See March 6, 2003 letter to Jonathan G. Katz from Deborah A. Lamb and Linda L. Rittenhouse (File Nos. SR-NYSE-2002-49; SR-NASD-2002-154).