WASHINGTON — The Financial Industry Regulatory Authority (FINRA) announced today that it has fined 10 firms a total of $43.5 million for allowing their equity research analysts to solicit investment banking business and for offering favorable research coverage in connection with the 2010 planned initial public offering of Toys"R"Us.
FINRA fined the following firms.
- Barclays Capital Inc. – $5 million
- Citigroup Global Markets Inc. – $5 million
- Credit Suisse Securities (USA), LLC – $5 million
- Goldman, Sachs & Co. – $5 million
- JP Morgan Securities LLC – $5 million
- Deutsche Bank Securities Inc. – $4 million
- Merrill Lynch, Pierce, Fenner & Smith Inc. – $4 million
- Morgan Stanley & Co., LLC – $4 million
- Wells Fargo Securities, LLC – $4 million
- Needham & Company LLC – $2.5 million
Susan Axelrod, FINRA Executive Vice President, Regulatory Operations, said, "FINRA's research analyst conflict of interest rules make clear that firms may not use research analysts or the promise of offering favorable research to win investment banking business. Each of these firms used their analyst to solicit investment banking business from Toys"R"Us and offered favorable research. This settlement affirms our commitment to policing the boundaries between research and investment banking to ensure that research is not improperly influenced."
Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, "The firms' rush to assure the issuer and its sponsors that research was in synch with the pitch being made by their investment bankers caused them to overstep the prohibitions against analyst solicitation and the promise of favorable research. Today's actions reaffirm the importance of these prohibitions to maintaining the integrity of the research function against whatever pressures may exist to monetize the reputation and work product of the analysts."
In April 2010, Toys"R"Us and its private equity owners (sponsors) invited these 10 firms to compete for a role in Toys"R"Us' planned IPO. FINRA found that each of the 10 firms used its equity research analyst as part of its solicitation for a role in the IPO. Specifically, Toys"R"Us asked equity research analysts from each of the 10 firms to make separate presentations to Toys"R"Us' management and sponsors for the purpose of ensuring that the analysts' views on key issues, including valuation factors, were aligned with the views expressed by the firms' investment bankers. Each firm understood that the performance of their analysts at the presentations would be a key factor in determining whether the firm received an underwriting role in the IPO. These presentations took place during the solicitation period on May 5, 2010. As detailed in the settlement documents, each of the firms implicitly or explicitly at these meetings or in follow-up communications offered favorable research coverage in return for a role in the IPO. For example, certain analysts voiced a positive outlook on the company and its potential IPO during their May 5 presentations. All of the firms except for Needham provided the valuation to Toys"R"Us and its sponsors, which sought the combined view of research and investment banking on key valuation factors. Throughout the course of the solicitation period, Toys"R"Us made clear to the firms that the purpose of these requests was to vet the analyst's views to determine their consistency with the valuation provided by its investment bankers.
In addition, FINRA found that six of the 10 firms — Barclays, Citigroup, Credit Suisse, Goldman Sachs, JP Morgan and Needham — had inadequate supervisory procedures related to research analyst participation in investment banking pitches.
Toys"R"Us and its sponsors offered each of the 10 firms various roles in the IPO but it eventually decided not to proceed with the offering.
In settling this matter, the 10 firms neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
FINRA's investigation was conducted by Mark Bernstein, Gary Carleton, Catherine Cottam, Erin Griffith, Jack Hanlon, Margery Shanoff, Michael Smith, and William Thompson under the supervision of Eric Brooks, Director, and James Day, Vice President and Chief Counsel in the Department of Enforcement. FINRA appreciates the assistance of the Securities and Exchange Commission in referring the matters.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2013, members of the public used this service to conduct 16.5 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999. Investors may find copies of this disciplinary action as well as other disciplinary documents in FINRA's Disciplinary Actions Online database.
FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, informing and educating the investing public, providing trade reporting and other industry utilities, and administering the largest dispute resolution forum for investors and firms. For more information, please visit www.finra.org.