Search results

On May 10, 2002, the Securities and Exchange Commission (the “SEC”) approved certain rule changes filed by the National Association of Securities Dealers, Inc. (the “NASD”) and the New York Stock Exchange, Inc. (the “NYSE”) relating to research analysts’ perceived conflicts of interest. In proposing such rule changes, the SROs noted that these new rules were intended “to improve the objectivity of research and provide investors with more useful and reliable information when making investment decisions” and “to reinforce the integrity of the process and help rebuild investors’ faith in research and in the equities market as a whole”. To that end, NASD Rule 2711 and NYSE Rule 472 (the “rules”) restrict and prohibit certain activities of firms and their research analysts. This article sets forth a summary of the rules and the guidance relating thereto. It also provides a brief description of the recently proposed Regulation AC, which effectively will impose additional requirements on firms and their analysts. By integrating these sources into one, this article intends to survey the existing landscape as it relates to the rules governing research analysts, and, more important, to serve as a guidepost around which this landscape continues to evolve.

In March 2004, the NASD and the New York Stock Exchange (the “NYSE,” together with the NASD, the “SROs”) issued a joint memorandum (the “2004 Joint Memorandum”) that provides interpretative guidance on NASD Rule 2711 and the research analyst provisions of NYSE Rules 351 and 472, as amended in July 2003 (the “SRO rules”), and addresses issues raised by members regarding these rules. The SROs state in the 2004 Joint Memorandum that the guidance provided in their first joint memorandum issued in July 2002 (the “2002 Joint Memorandum”) continues to apply unless stated otherwise in the 2004 Joint Memorandum. This article will identify and discuss the major issues addressed in the 2004 Joint Memorandum and attempt to provide general guidance to practitioners seeking to understand the implications of these issues for their clients” research analysts’ activities. In analyzing the application of the SRO rules and derivative material, including the 2004 Joint Memorandum, the starting point always must be an understanding of what activities and materials the SRO rules address. The SRO rules apply to registered broker‐dealers that are members of either the NYSE or NASD (“member firm” or “member firms”) with research analysts who produce “research reports” and “public appearances” with regard to any “equity security” as defined in section 3(a)11 of the Exchange Act of 1934 (the “Act”).

On December 20, 2002, the Securities and Exchange Commission (“SEC”), the National Association of Securities Dealers (“NASD”), the New York Stock Exchange (“NYSE”), the New York Attorney General, and the North American Securities Administrators Association (“NASAA”) announced their Global Settlement resolving investigations at 10 large integrated securities firms into business practices involving equity research analysts. The 10 firms agreed to pay over $1.4 billion in fines and to overhaul the way in which they prepare, review, and issue equity research. These firms also agreed to change significantly the way that equity research analysts interact with other business groups, in particular investment banking. These efforts are intended to eliminate practices that were alleged to have undermined the integrity and independence of equity research produced at those firms. Most securities firms that were not parties to the settlement, and that both issue equity research and provide investment banking services, are likely to establish supervisory procedures designed to honor the spirit of the Global Settlement. Regulators, however, have not yet provided clarity as to what they will require of firms not party to the Global Settlement. Furthermore, the NYSE and NASD have proposed amendments to their existing rules addressing research‐analyst independence that will, if adopted, expand the universe of firms that need to address potential conflicts of interest of the research function to include all firms that issue research, not only those that both issue research and provide investment banking services. The proposed amendments also will expand the definition of research, which could further extend the reach of the NYSE and NASD rules. This article will attempt to provide general guidance in two of the areas addressed in the Global Settlement and in the NYSE and NASD rules and proposed amendments to those rules: (1) the separation of the equity research department from other firm functions, and (2) the compensation of equity research analysts. Please note, however, that in this time of regulatory change, even this summary guidance quickly could become obsolete once the regulators finalize their rulemaking efforts in this area.

Following a spate of corporate scandals, the bursting of the “Internet bubble,” and media revelations of research analyst bias at the nation’s largest investment banks, regulators launched a series of investigations and rulemaking initiatives that culminated in the adoption of extensive new rules regarding the conduct of research analysts and in the April 2003 global settlement (“Global Settlement”) of enforcement actions against 10 firms relating to research and investment banking conflicts. Although the Global Settlement by its terms only applies to the settling firms, as a practical matter, its reach will be much broader because state regulators and other third parties are looking to it to define a set of “best practices” to supplement the new rules. Although the new rules and the Global Settlement are intended to address the same concern ‐ i.e., conflicts of interest between research analysts and investment banking personnel at multi‐service brokerage firms ‐ their approaches to handling these conflicts reflect different assumptions and result in regulatory regimes that differ in such basic respects as the universe of persons who are deemed to be “research analysts.” These differences are not surprising. The new rules are the product of a lengthy, iterative rulemaking process that was open to the public and in which a diverse range of interested parties participated. In contrast, the undertakings detailed in the Global Settlement were the result of an enforcement action, concluded through bi‐lateral negotiations between the regulators and the 10 firms and without the opportunity for other interested parties to provide input or contribute to the process. However, for firms that seek to comply with both sets of requirements, the overlapping, and at times inconsistent, terms create a confusing and costly environment.

To explain recent guidance released by the Financial Industry Regulatory Authority (FINRA) regarding research analyst conflicts of interest that arise during the underwriter selection process.

The article discusses the risks associated with different communications between research analysts and issuers during the three phases of the underwriter selection process: the pre-IPO period; the solicitation period; and the post-mandate period.

While many questions remain, the FINRA guidance provides valuable insight to firms regarding the types of communications between research analysts and issuers that are permitted during different periods in the solicitation process. The risk levels associated with different types of communications during those time periods range from low to high to “unmanageable”. The article provides practical guidance on what research analysts can say and do during the different periods.

Broker-dealers should evaluate their policies and procedures to ensure compliance with the new FINRA guidelines.

Practical guidance from experienced securities lawyers who are on the front lines in dealing with these issues.

The purpose of this paper is to describe regulatory activities since the initial regulatory actions between 2001 and 2003 in response to securities firm research analyst conflicts of interest that were identified after the “internet bubble.”

The paper describes a number of important regulatory activities, including: interpretive activities, such as the 2004 Second Joint Research Memorandum; establishment of a new licensing requirement for research analysts; additional rulemaking, in the form of 2005 changes to the SRO Rules that are meant to tighten those rules; the December 2005 report of the NASD and NYSE studying the operation and effectiveness of prior regulatory actions, including the SRO Rules; enforcement actions against both firms' and research analysts' behavior; industry sweeps gathering information regarding industry practices in respect of debt research; and rulemaking for purposes of implementing interpretive guidance and Joint Report.

Following extraordinary and sweeping regulatory actions between 2001 and 2003, securities regulators have continued a high level of activity with respect to securities research. Research regulation stands as a hallmark for the current era of securities regulation for at least three reasons: it has displayed a wide range of regulatory tools including rulemaking, publication of interpretive guidance, “sweep” examinations, licensing, and enforcement, and has been largely “principles‐based” rather than prescriptive in nature; it is marked by complexity: a web of SEC, SRO, and informal or “best practices” regulation now exists covering every aspect of securities research; and it is a cornerstone of an emerging regulatory theme of heightened and more detailed compliance for investment banking operations.

This is a valuable summary and analysis of seven years of regulatory activity on a complex issue by experienced securities lawyers

To analyze the changes to the FINRA equity research rules and evaluate concerns that may be important to and have an impact on equity research activities following the effective date.

This article provides an overview of the changes reflected in FINRA Rule 2241 pertaining to equity research analysts and research reports, as well as changes to licensing requirements for equity research analysts. It highlights potential issues for firms and provides some commentary on how these issues should be considered in light of FINRA’s articulated position and assurances FINRA has given to the SEC.

This article concludes that firms should anticipate these changes and begin a comprehensive review of research policies and procedures, the personnel who prepare research reports and the scope of their research products so as to be compliant with Rule 2241 from its effective date. Firms should also begin an investigation of technologies used to gather, produce and disseminate research and required disclosures to ensure they meet the new requirements when they are effective.

This article provides insight into the new FINRA Rule 2241 and practical guidance from experienced securities lawyers.

This article discusses the perils of electronic communication, the regulators' response to its proliferation, the findings of a recent survey by Orchestria, and the traditional solutions most companies are adopting.

Discusses results of a survey that illustrates the uncontrollable nature of electronic communication; recent financial services regulations concerning document retention, activity supervision, and communication approval; archiving and other costs of electronic communication; the inadequacy of many companies' risk mitigation strategies; and a recommended active policy management approach.

The challenge that management and compliance staff face with unstructured communication is twofold: 1. the speed and informality with which messaging systems are used by employees to make assertions and promises and to transfer data, and 2. the almost total absence of management visibility and control over the content of such communications. In the current regulatory climate, not knowing what employees are communicating to each other, clients, suppliers, and other contacts is a significant risk.

Alerts financial services companies to the risks inherent in employees' unrestricted use of all the different electronic communications media and recommends a proactive approach to manage those risks.

The purpose of this study is to investigate the value of analyst coverage on the covered firms.

To isolate the value impact of analyst coverage, the study focuses on a unique set of firms that receive analyst coverage for the first time after having been traded in an exchange for at least one year. Event study and ordinary least square regressions are used to test the hypotheses.

There is a significant and positive price reaction at the time of the announcement of analyst coverage initiations. However, unlike the coverage initiations around the initial public offers (IPOs), the price impact is not related to the reputation of the analyst firm, the exchange listing or whether the analyst firm is also the IPO underwriter. The sample firms do not experience significant reduction in the level of information asymmetry but experience a significant increase in liquidity. The increase in liquidity only occurs after the coverage initiations. The increase in liquidity is not explained by the increase in institutional investors' interest. Finally, the price impact around a coverage initiation is positively related to the change in liquidity.

The findings suggest that firms benefit from analyst coverage through an improvement in liquidity.

This is the first study to focus on the analysts' first‐time coverage initiations. It argues that focusing on the first‐time coverage initiations provides a better analysis of the effects of analyst activities on the firm value.

To address practical issues broker-dealers may face in reviewing and revising their policies and procedures in response to FINRA’s new fixed-income research rule, modifications to its equity research rule, and its FAQs regarding conflicts of interest in the offering process.

Reviews FINRA’s new fixed-income research rule, modifications to its equity research rule, and its FAQs regarding the its equity research rule, and provides detailed comparisons between current rules and new rules to help firms consider how to review and revise their policies and procedures.

Although significant exemptions may apply depending on firm structure, under FINRA’s new fixed-income research rule, firms producing fixed-income research reports will now be subject to regulation similar to that FINRA has imposed on firms producing equity research reports, including with respect to information barriers, other policies and procedures, and certain disclosures. The modified FINRA equity research rule retains the core provisions of the existing NASD and NYSE equity research rules and adds a “principles-based procedures” approach to potential conflicts of interest, shortens or eliminates quiet periods, and imposes some of the Global Settlement prohibitions on all firms. Firms will need to review and revise their policies and procedures for research in response to these rule changes. Firms should also take note of FINRA’s guidance in its FAQs regarding conflicts of interest in the offering process.

Overview of recent FINRA enforcement activity, rule modifications, and practical guidance from experienced securities and financial services lawyers.