CHAPTER 8 Research
research coverage changed quickly and fundamentally. These changes were brought about as a result of the entry by a number of investment banking firms into the Global Research Analyst Settlement (the Global Settlement), the adoption of SRO rules relating to research, and the promulgation by the SEC of Regulation AC. The Global Settlement addressed the most serious perceived conflicts between investment banking and research departments during the dot-com boom, and required implementation of various prophylactic measures by investment banking firms that provided research coverage, including separating banking and research structurally and physically, requiring a chaperone to monitor communications between the two, and requiring analyst compensation be determined independently and not be based on banking revenues. Regulation AC was designed to ensure research analyst independence and integrity by requiring that research analysts certify the truthfulness of the views expressed in research reports and public appearances. The rules adopted by the NASD (Finra’s predecessor) and NYSE followed along the same lines and also addressed the timing of research reports in connection with offerings. In addition to imposing significant compliance burdens, together, the Global Settlement and the rules and regulations relating to research also brought about a significant cultural shift, and changed fundamentally the role of research analysts and the business of research coverage.1
A In part, as a result of these
changes, research coverage for smaller companies declined. As noted in the IPO Task Force Report, the lack of research coverage adversely impacts trading volumes, company market capitalisations and the total mix of information available to market participants. In order to promote capital formation by emerging growth companies, the IPO Task Force Report recommended that policymakers consider the existing restrictions on research, and adopt measures to encourage additional research coverage of emerging growth companies in order to improve the flow of information. Title I of the JOBS Act addresses certain of the concerns
s discussed in the Introduction, the capital markets have undergone significant changes in the last decade. In 2003, as a result of legal and regulatory developments, the business of
raised by the IPO Task Force Report by implementing a number of changes to the restrictions on the timing of, and on the publication of, research reports relating to emerging growth companies. As discussed below, however, the JOBS Act does not address the research safe harbours contained in the Securities Act, nor does it address the regulations that mandate the separation of research and investment banking functions. In order to put the JOBS Act research-related changes in context, below we provide a summary of the rules and regulations governing the research function and the release of research reports.
The regulatory framework applicable to research The rules and regulations that apply to the relationship between the research and investment banking departments of an investment banking firm include: Finra Conduct Rule 2711; NYSE Rule 472; SEC Regulation AC (Analyst Certification); and Rules 137, 138, and 139 under the Securities Act. In addition, certain firms are bound by the terms of the Global Settlement. During the dot-com boom, research analysts published
reports recommending investments in the securities of many companies with which their firms had an advisory or investment banking relationship. In 1999, the SEC began a review of industry practices regarding the disclosure of research analysts’ conflicts of interest. Committees of the US House of Representatives and the Senate also held hearings on research analysts’ conflicts of interests. In April 2002, the SEC announced a formal inquiry into industry practices concerning research analysts, their conflicts of interest and their relationships with the investment banking departments within their firms. Civil complaints were filed by the SEC and other federal and state regulatory and law enforcement authorities against these firms. The Global Settlement is an enforcement agreement first announced in December 2002 and finalised on April 28 2003, among the SEC, NASD (now Finra), the NYSE, the New York State Attorney General and 10 of the then- largest investment banking firms in the United States (referred to here as the settling firms). As part of the Global Settlement, the settling firms agreed to several measures
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