|Thursday, February 7, 2002
Nancy A. Condon
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:
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.