SEC Approves FINRA Amendments Regarding Research Analysts and Reports

By Cydney Posner

The SEC has granted accelerated approval of a FINRA proposal amending NASD Rule 2711 (Research Analysts and Research Reports), with corresponding changes to NYSE Rule 472 (Communications With The Public), to conform to the JOBS Act and to make certain additional changes to quiet period restrictions consistent with the policies underlying the JOBS Act. 

The rule changes are generally consistent with the August FAQs.

Arranging and Participating in Communications

Section 105(b) of the JOBS Act prohibits the SEC and the national securities associations (SROs) from adopting or maintaining any rule in connection with an IPO of an EGC that:

• restricts, based on functional role, which associated persons of a broker, dealer, or member of a national securities association, may arrange for communications between an analyst and a potential investor; or
• restricts a securities analyst from participating in any communication with the management of an EGC that is also attended by any other associated person of a broker, dealer or member of an SRO whose functional role is other than as a securities analyst.

NASD Rule 2711(c)(4) prohibits a research analyst from participating "in efforts to solicit investment banking business," including "pitches." Under the FAQs, in connection with an IPO of an EGC, research analysts can now attend meetings with issuer management that are also attended by investment banking personnel, including pitch meetings. However, Section 105(b) does not "permit analysts to engage in otherwise prohibited conduct in such meetings. Section 105(b) does not, for example, affect SRO rules that otherwise prohibit an analyst from engaging in efforts to solicit investment banking business." The FAQs further explain that a research analyst that attends a pitch meeting "could, for example, introduce themselves, outline their research program and the types of factors that the analyst would consider in his or her analysis of a company, and ask follow-up questions to better understand a factual statement made by the [EGC]'s management." The rule change would create an exception to NASD Rule 2711(c)(4) consistent with this guidance.

Under the FAQs, pursuant to Section 105(b) of the JOBS Act, an associated person of a broker-dealer, including investment banking personnel, may arrange communications between research analysts and investors in connection with an IPO of an EGC. For example, an investment banker could forward "a list of clients to the analyst that the analyst could, at his or her own discretion and with appropriate controls, contact. In turn, an analyst could forward a list of potential clients it intends to communicate with to investment banking as a means to facilitate scheduling. Investment bankers can also arrange, but not participate in, calls between analysts and clients." This type of activity is not directly prohibited by FINRA rules, and the FAQs state that this activity, without more, would not constitute conduct by investment banking personnel to directly or indirectly direct a research analyst to engage in sales or marketing efforts related to an investment banking services transaction, in violation of NASD Rule 2711(c)(6).  Accordingly, this JOBS Act provision required no conforming rule change. The release notes, however, that the Global Settlement among the SEC, SROs and other regulators, and 12 broker-dealers regarding  conflicts of interest between the firms' research and investment banking functions  remains in place for those firms subject to the settlement.

Quiet Periods/Booster Shots
 
Under Section 105(d) of the JOBS Act, the SEC and the SROs are prohibited from adopting or maintaining any rule that prohibits a broker or dealer from publishing or distributing any research report or making a public appearance, with respect to the securities of an EGC either:

• within any prescribed period of time following the IPO date of the EGC; or
• within any prescribed period of time prior to the expiration date of any agreement between the broker, dealer, or member of a national securities association and the EGC or its shareholders that restricts or prohibits the sale of securities held by the EGC or its shareholders after the IPO date.

Although the JOBS Act refers only to the "expiration" of a lock-up, in the FAQs, the SEC Staff extended the effect of that provision to also apply to the period before a "waiver" or "termination" of a lock-up. As a result, the rule change eliminates the following quiet periods with respect to an IPO of an EGC:

• NASD Rule 2711(f)(1)(A), which imposes a 40-day quiet period after an IPO on a member that acts as a manager or co-manager of an IPO;
• NASD Rule 2711(f)(2), which imposes a 25-day quiet period after an IPO on a member that participates as an underwriter or dealer (other than manager or co-manager) of an IPO; and
• NASD Rule 2711(f)(4) with respect to the 15-day quiet period applicable to IPO managers and co-managers prior to the expiration, waiver or termination of a lock-up or any other agreement that the member has entered into with a subject company or its shareholders that restricts or prohibits the sale of securities held by the subject company or its shareholders after the completion of an IPO.

Although the JOBS Act did not affect quiet periods after a secondary offering or during a period of time after expiration, termination or waiver of a lock-up agreement, FINRA (and the SEC staff in the FAQs) believe that elimination of those quiet periods would advance the policy objectives of the JOBS Act.  As a result, FINRA would amend the following rules accordingly:

• NASD Rule 2711(f)(1)(B), which imposes a 10-day quiet period on managers and co-managers following a secondary offering; and
• the remaining portion of NASD Rule 2711(f)(4) relating to quiet periods after the expiration, termination or waiver of a lock up agreement.

Effectiveness

Effectiveness of the amendments required to comply with the JOBS Act  -- Rules 2711(c)(4), (f)(1)(A), (f)(2), and (f)(4) (with respect to the 15-day quiet period before the expiration, termination or waiver of a lock-up agreement) -- is retroactive to April 5, 2012. The other changes -- Rules 2711(f)(1)(B) and (f)(4) (with respect to the 15-day quiet period after the expiration, termination or waiver of a lock-up agreement) -- are effective as of the date of accelerated approval.

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