designed to prevent abuse stemming from pressure by investment bankers on research analysts to provide favourable coverage of specific issuers or securities. The settling firms were required to separate their investment banking and research departments from each other both physically and with information firewalls. Additionally, the budget allocation for research was to be independent of investment banking. Research analysts were also prohibited from attending IPO pitches and road shows with investment bankers. Finally, research analysts’ previously issued ratings about issuers had to be disclosed and made available. In addition to these regulatory actions, each settling firm was enjoined from violating the statutes and rules that it was alleged to have violated, and were also required to pay fines to their investors, fund investor education and pay for independent third-party market research. The Global Settlement remains in effect, although its terms have been modified from time to time. The Sarbanes-Oxley Act required the SEC to address
conflicts of interest involving research analysts and investment bankers. In response to Sarbanes-Oxley, the NASD and the NYSE established rules and safeguards to separate research analysts from the review, pressure and oversight of investment banking personnel. These rules are intended to ensure the integrity of research and to protect investors from being misled as a result of a failure to disclose potential conflicts of interest. On July 29 2003, the SEC announced the approval of a series of changes to the rules affecting research analysts, generally embodied in Finra Rule 2711 and NYSE Rule 472 and referred to as the SRO rules. The SRO rules have since been amended many times (most recently on October 11 2012 to conform the SRO Rules to provisions of the JOBS Act). The Global Settlement and SRO rules address reporting
lines, requiring that research and investment banking be separate units, and research not report to banking. Research must be physically separated from investment banking. This physical separation must be reasonably designed to ensure that there will not be any intentional or unintentional flow of information between research and investment banking. Research must have its own resources for compliance and legal services. In addition, the research budget may not be controlled by investment banking, and compensation for research personnel cannot be tied to investment banking business or revenues.2 Both the SRO rules and Regulation AC mandate that
research reports include certain disclosures. Research reports must include disclosures relating to any actual or potential conflicts of interest. For example, a research report must disclose whether a firm does or seeks to do business with the company covered by the report; whether
66 JOBS Act Quick Start
it has received, or expects to receive, compensation from the subject company within a specified time period; and whether analysts or other persons own securities of the subject company. Regulation AC requires that reports contain prominent certifications regarding the views expressed in the research report, and attesting that the analyst’s compensation was not tied to or related to specific recommendations or views expressed by the research analyst in the research report. The Global Settlement also limits the participation of
research personnel in offering related activities. Research personnel may not participate in efforts to solicit business for investment banking, including, among other things, participating in any pitches, or otherwise communicating with a company or prospective client for the purpose of soliciting investment banking business.3
Further, SEC
interpretive guidance states that it would be inconsistent with section I.9 of Addendum A to the Global Settlement to allow investment banking personnel to include any information regarding any research analyst employed by the firm in a pitch book or any other presentation materials used to solicit investment banking business. Research personnel are not allowed to participate in any road shows sponsored by the company or investment banking related to a public offering or other investment banking transaction. However, SEC interpretive guidance provides that research personnel may listen (in listen-only mode) or view a live webcast of these road shows. Research personnel may also access other widely attended presentations to investors from a remote location, but if the presentation is in the firm’s building, they must be in a separate room. The Global Settlement permits certain communications
between a research analyst and an issuer in connection with an offering. At an issuer’s request, investment banking personnel may arrange for a department of the firm other than research to provide the issuer access to previously published reports regarding that issuer that would be available from other sources. Should an issuer request investment banking personnel to arrange a meeting between the issuer and a research analyst, the investment bankers must instruct the issuer to contact research directly and may not notify research in advance. A research analyst is permitted to attend a meeting with an issuer and answer questions regarding the analyst’s views on the company, but may not use it as an opportunity to solicit investment banking business, and investment banking personnel may not be present or participate in any of these meetings. The SRO rules subject member firms to quiet periods
during which they may not publish research and during which analysts may not make public appearances following
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