SRO propsal to amend analyst conflict-of-interest rules

By: Cydney Posner

The NYSE and NASD are proposing to amend their rules that separate research from investment banking and provide disclosure of conflicts of interest in research reports and public appearances. The NYSE proposal would amend certain provisions of NYSE Rules 472 and 344 to eliminate the exception for pre-publication factual verification review of research reports by non-research personnel, change the quiet periods surrounding securities offerings and the release of lock-up agreements, allow member organizations to develop policies and procedures if they choose to prohibit research analysts from holding securities for companies they cover, alter the format for certain disclosures in research reports and extend the anti-retaliation prohibitions to all employees of a member organization, not just investment banking. The NASD proposal would amend NASD Rules 1050 and 2711 regarding, among other things: disclosure of conflicts, quiet periods, restrictions on review of research reports by non-research personnel, and restrictions on personal trading by research analysts. The NASD and NYSE rules and interpretations are quite similar and are intended to operate uniformly.

In April 2005, the SEC requested a joint comprehensive report on the operation and effectiveness of the analyst conflict-of-interest rules, together with any recommendations for changes or additions to the rules. The SROs submitted that report to the SEC in December 2005. The SRO staffs concluded that the rules were effective in helping to restore integrity to research, but thought that changes might help to strike a better balance "between ensuring objective and reliable research on the one hand and permitting the flow of information to investors and minimizing costs and burdens to members on the other." These rule proposals implement those recommendations.

For example, some of the proposed changes relate to the quiet periods surrounding public offerings and the releases of lock-up agreements: The proposed rule changes create a uniform 25-day IPO quiet period for all underwriters and dealers participating in the public offering and eliminate quiet periods following a secondary offering. Similarly, the proposed NYSE rule changes reduce the quiet period surrounding the expiration, termination or waiver of a lock-up agreement from the current 15-day period to a five-day period. The NASD proposal would eliminate the quiet period around the expiration, waiver or termination of a lock-up agreement, provided that members certify that they have a bona fide reason for issuing research during the 15-day periods before and after a lock-up expiration and that they have not otherwise issued the report for any reason pertaining to conditioning the market price of the subject security.. In addition, the exception to the quiet period prohibition that permits reports and public appearances during the quiet periods if they concern the effects of significant news or a significant event is proposed to be expanded to expressly include earnings announcements.

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