Notice to Members 06-36

NASD and NYSE Joint Interpretive Guidance on Fixed Income Research

Executive Summary

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. Those rules apply only to equity research reports. 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), 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.

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 rules—or comply with existing SEC Regulation Analyst Certification (Regulation AC). A general synopsis of the examination results follows.