NASD Notice to Members 06-36 - July 2006
NASD and NYSE Joint Interpretive Guidance on Fixed Income Research
In December 2005, the New York Stock Exchange (NYSE) and NASD (the SROs) issued a joint report that assessed the effectiveness of the SRO research analyst conflict of interest rules.1 Those rules apply only to equity research reports.2 However, the joint report noted that the SROs would monitor the extent to which firms have adopted the Bond Market Association’s (BMA) “Guiding Principles to Promote the Integrity of Fixed-Income Research” (Guiding Principles)3, which are voluntary, principle-based guidelines designed to help firms manage potential conflicts of interest that may arise in the context of fixed income research activities. According to the BMA, the Guiding Principles were designed "to address the issue of research integrity in the fixed income markets in a manner that takes into account their unique characteristics."
The SROs note that voluntary trade association conduct standards are not the equivalent of sanctionable rules. As such, the SROs maintain the right to promulgate rules in the fixed income research area that may be different from, or analogous or additive to, the Guiding Principles. Nonetheless, the SROs regard as a worthy objective trade association efforts to promote aspirational standards and agree with the BMA that the Guiding Principles “serve as a helpful reference point as firms review and modify their own fixed income research practices.” The SROs therefore believe a review of compliance with the Guiding Principles helps to inform consideration of whether more definitive rules are needed to regulate fixed income research.4
To that end, the SROs conducted examinations of certain member organizations to assess how those firms have addressed conflicts of interest with respect to fixed income research. The examinations found many instances in which firms had failed to adhere to the Guiding Principles. Even more significantly, the examinations discovered several instances where firms failed to establish, maintain and enforce written supervisory procedures in the fixed income research area—a fundamental obligation under SRO rules5—or comply with existing SEC Regulation Analyst Certification (Regulation AC).6 A general synopsis of the examination results follows.
1 See “Joint Report by NASD and the NYSE on the Operation and Effectiveness of the Research Analyst Conflict of Interest Rules” at www.nasd.com/web/groups/rules_regs/documents/rules_regs/p015803.pdf and www.nyse.com/pdfs/rajointreport.pdf.
2 NASD Rule 2711 (Research Analysts and Reports) and NYSE Rule 472 (Communications with the Public).
3 See “Guiding Principles To Promote Integrity of Fixed Income Research,” May 2004.
4 As the joint report noted, anti-fraud statutes, as well as existing SRO rules such as NYSE Rules 401 (Business Conduct), 476(a)(6) (allowing for disciplinary proceedings against a member organization for “conduct or proceeding inconsistent with just and equitable principles of trade”), and NASD Rule 2110 (which requires that members “observe high standards of commercial honor and just and equitable principles of trade”) can reach and address any egregious conduct involving fixed income research.
5 See NYSE Rule 342 (Offices Approval, Supervision and Control) and NASD Rule 3010 (Supervision).
6 17 CFR 242.500 et seq.
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