finra

FINRA

For Release:
Contacts:
Thursday, February 7, 2002
Howard Schloss
202-728-8440
Nancy A. Condon
202-728-8379
Michael Shokouhi
202-728-8304


NASD Announces New Rules Governing Recommendations Made by Research Analysts

Washington, DC— Robert R. Glauber, Chairman and CEO of the National Association of Securities Dealers, Inc. (NASD®) announced today it has proposed new rules governing securities recommendations made by research analysts. The proposed new rules will impose a comprehensive set of measures to address the serious potential conflicts of interest faced by research analysts and are backed by the ability of the NASD to enforce compliance through appropriate disciplinary action. The NASD has developed these rule changes under the leadership and support of the House Financial Services Committee and its Capital Markets Subcommittee and the Securities and Exchange Commission (SEC).

 

Conflicts can arise when analysts work for firms that have other business relationships with the company being analyzed, like investment banking services. For example, conflicts can arise when an analyst’s compensation is tied to specific IPO deals; when a research report is subject to the approval of the firm’s investment banking department and the subject company; when an analyst makes personal trades in the stock of the companies covered; and when an analyst or the firm has a financial interest in the issuing company.

 

“This is a tough and comprehensive set of rules,” said Robert R. Glauber, Chairman and CEO of the NASD. “It is a combination of disclosure and outright prohibitions that I believe will protect investors and go a long way to dealing with conflicts of interest. These rules will be vigorously enforced with the full range of disciplinary options available to the NASD.”

 

“I want to thank Chairman Mike Oxley of the House Financial Services Committee, and Rep. John LaFalce, the ranking member, for their strong interest and support in this issue. Subcommittee Chairman Richard Baker and Paul Kanjorksi, the ranking member, have really done a superb job of educating the public on these issues and committing their staffs to work with us on a solution.”

 

Specifically, the proposed changes would require increased disclosures of conflicts in research reports and public appearances, prohibit analysts from purchasing or receiving pre-IPO (or cheap stock), prohibit tying analyst compensation more generally to specific investment banking transactions, and tightly restrict an analyst’s personal trading of securities. The proposal also would prohibit control by an investment banking department over the content of a research report. Under the rule proposal, the member firm must disclose ownership in or compensation received from the recommended company. Firms also would have to clarify the meanings of their research ratings and provide historical price and ratings distribution data in research reports to better enable investors to evaluate and compare the quality of research.

 

The proposed rule is the result of an ongoing effort by the NASD that incorporates a number of significant changes, among them:

 

  • Analyst/Firm Compensation. An analyst’s compensation may not be tied to specific investment banking transactions. If an analyst received compensation that is based upon (among other factors) the firm’s investment banking revenues, this fact must be disclosed in research reports. A firm must disclose in a company’s research report if it or its affiliates received compensation from that company within the previous 12 months or if they expect to receive compensation from the company within the next three months following publication of the report. When an analyst recommends a security in a public appearance, the analyst must disclose if the issuer is a client of the firm.
  • Investment Banking Department Relationship with Research Department. No research analyst may be supervised or controlled by a firm’s investment banking department. The research department may only have reports checked for factual accuracy by either the investment banking department or the subject company.
  • Measures to Prevent Promises of Favorable Research. The proposal will require quiet periods during which a firm acting as manager or co-manager of a securities offering may not issue a report on a company within 40 days after an IPO or within 10 days after a secondary offering. A firm is prohibited from offering or threatening to withhold favorable research to induce business.
  • Analyst’s Personal Trading. No analyst or member of the analyst’s household may purchase or receive an issuer’s securities prior to its IPO, if the company does the same type of business that the analyst issues reports about. In addition, no analyst or household member may trade securities issued by companies the analyst follows for 30 days prior to the issuance of the research report and ending five days after the date of the research report. Neither the analyst nor any household member will be allowed to make trades contrary to the analyst’s most current recommendations.
  • Disclosures of Firm/Analyst Ownership of Securities. An analyst must disclose in public appearances and a firm must disclose in research reports if the analyst or a member of his or her household has a financial interest in the securities of a recommended company. Any conflict of interest that is known to exist at that time must also be disclosed in the research report or during the public appearance. Additionally, if a firm, as of five business days before the public appearance or publication of a research report, owns one percent or more of any equity class of the company, this must be disclosed in the research report or during the appearance.

 

In conjunction with the rule proposal announced today, the NASD is launching an initiative to educate investors about research reports, their value and their limitations. Under this initiative the NASD will reach out to investors across the country with educational materials.

 

The new rules were developed in conjunction with the New York Stock Exchange (NYSE) and the SEC. It is anticipated that the NYSE will propose similar rule language.

 

The NASD is the largest securities-industry, self-regulatory organization in the United States. It is the parent organization of NASD Regulation, Inc.; the American Stock Exchange, LLC; and NASD Dispute Resolution, Inc. For more information about the NASD and its subsidiaries, please visit the following Web sites: www.nasd.com; www.nasdr.com; www.amex.com; www.nasdadr.com.