SEC Approves SRO Rule Changes Related to Analyst Communications

By: Cydney Posner

The SEC has approved the proposed NYSE and NASD rule changes related to analyst communications.

See: Release

The rules are intended to insulate analysts from investment banking pressure, thereby promoting the integrity of research reports, public appearances and all other communications by research analysts to customers and internal personnel. The rule changes become effective 45 days following approval (April 21, 2005).

First, the rules prohibits a research analyst from directly or indirectly participating in a road show related to an investment banking services transaction or otherwise communicating with customers in the presence of investment banking personnel or company management about an investment banking services transaction. As a result, "three-way" communications among research, customers and banking,

as well as those involving research, customers and issuers, are prohibited. This rule is designed to reduce the pressure on analysts to give overly optimistic assessments of particular transactions. The SEC also believes that the prohibition on research analyst communications with customers in the presence of investment banking or company management will guard against research analysts being, or being perceived as, part of the sales and marketing team for a transaction, rather than as independent sources of information.

Second, the rules prohibit investment banking personnel from directly or indirectly directing a research analyst to engage in sales and marketing efforts or other communications with a current or prospective customer related to an investment banking services transaction.

The SEC believes that this provision will further insulate research analysts from investment baking pressure and promote analyst objectivity and independence.

Finally, the rules require that research analyst written and oral communications relating to an investment banking services transaction with a current or prospective customer or with internal personnel, must be fair, balanced and not misleading, taking into consideration the overall context in which the communication is made. The rule was designed to preserve the ability of research analysts to educate investors and internal personnel about investment banking services transactions, provided that, given the context, those communications are fair, balanced and not misleading.

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