Introduction
On September 27, 2006, the NYSE filed with the
Securities Exchange Commission (“SEC” or “Commission”) for immediate
effectiveness amendments to NYSE Rule 472 (“Communications With The
Public” or the “Rule”).1 This rule filing (the “Filing”)
was done in coordination with the National Association of Securities
Dealers (“NASD”), which made substantially similar changes to NASD
Rule 2711. The amendments to Rule 472 codify existing NYSE
interpretive guidance contained in previously circulated joint
NYSE/NASD memoranda and make certain non-substantive, technical
changes, where necessary, to clarify the rule's intended meaning.
The Filing also codifies Exchange interpretations regarding the
definition of “research report,” the distribution of third-party
research reports through soft dollar arrangements and the
requirements regarding the supervisory review and approval of
third-party research reports, which were not contained in the joint
memoranda. This Information Memo contains additional NYSE
interpretations with respect to research analyst participation in
pitch meetings and restrictions on sales and marketing activity.
As noted above, the amendments to
the Rule were filed with the Commission for immediate effectiveness
and, as such, the effective
date was the date of filing,
September 27, 2006.
Background
Since the 2002 amendments to Rule 472,2 the
NYSE has jointly published with NASD two memoranda that provide
interpretive guidance to member organizations on a number of issues
relating to the Rule and NASD’s corresponding Rule 2711.3
Further, on December 21, 2005, the NYSE and the NASD submitted to
the Commission a joint report on the operation and effectiveness of
their respective Rules relating to research analyst conflicts of
interest (the "SRO Report").4 Among the recommendations
included in the SRO Report is that certain interpretations set forth
in the two joint memoranda be codified as rule text. Accordingly,
the NYSE filed amendments to NYSE Rule 472 consistent with these
recommendations and made certain other changes based on other NYSE
interpretations, which are discussed below.
Summary
Definition of “Public
Appearance”
Prior to the
Filing, NYSE Rule 472.50 defined "public appearance" as any
participation in a seminar, forum (including an interactive
electronic forum), radio, television or print media interview, or
other public speaking activity, or the writing of a print media
article, in which a research analyst makes a recommendation or
offers an opinion concerning an equity security. First, the Filing
amends the definition of “public appearance” to codify existing
interpretive guidance that “conference calls” are included in the
definition.
Second, the amendments
codify that a conference call, seminar, forum (including an
interactive electronic forum) or other public speaking activity in
which a research analyst makes a recommendation or offers an opinion
concerning an equity security constitutes a “public appearance” only
if presented before 15 or more persons. If a member
organization can reasonably ascertain at a public speaking activity
before 15 or more persons that those persons represent fewer than 15
separate investors, then it will not constitute a public appearance.
Third, the amendments clarify that
any conference call, seminar, forum (including an interactive
electronic forum) or other public speaking activity in which a
research analyst makes a recommendation or offers an opinion
concerning an equity security before one or more representatives of
the media constitutes a public appearance. This interpretation is
consistent with the current definition of “public appearance,” which
expressly includes radio, television and print media interviews
because the media are a conduit to the public.
Lastly, the amendments codify that password-protected
Webcasts, conference calls and similar events with 15 or more
existing customers (either individuals or entities) will not
constitute a public appearance, provided that:
1. the event participants have
previously received the most current research report or other
documentation pertaining to the equity security in question that
includes the disclosures required by Rule 472; and
2. the research analyst appearing
at the event corrects or updates during the public appearance any
disclosures that are inaccurate, misleading or no longer
applicable.
Definition of
“Research Report”
The
amendments codify exclusions from the definition of “research
report” in Rule 472.10(2) for certain communications.
The amendments exclude the
following communications from the definition of "research report":
(1) reports discussing broad-based
indices, such as the Russell 2000 or S&P 500 index;
(2) reports commenting on
economic, political or market conditions;
(3) technical analysis concerning the
demand and supply for a sector, index or industry based on
trading volume and price;
(4) statistical summaries of multiple
companies' financial data, including listings of current
ratings;
(5) reports that recommend increasing or
decreasing holdings in particular industries or sectors;
(6) notices of ratings or price target
changes, provided that the member organization simultaneously
directs the readers of the notice to the most recent research
report on the subject company that includes all current
applicable disclosures required by NYSE Rule 472 and that such
research report does not contain materially misleading
disclosures, including disclosures that are outdated or no
longer applicable.
Additionally, the amendments codify that the following
communications are not included in the definition of "research
report,” even if they include an analysis of an individual security
and information reasonably sufficient upon which to base an
investment decision:
(1) any
communication distributed to fewer than 15 persons;
(2) periodic reports or other
communications prepared for investment company shareholders or
discretionary investment account clients that discuss individual
securities in the context of a fund's or an account's past
performance or the basis for previously made discretionary
investment decisions;5 and
(3) internal communications that are not
given to customers.
Lastly,
the amendments to the definition of “research report” codify an
interpretation, not contained in the joint interpretive memoranda,
that communications that constitute statutory prospectuses filed as
part of a registration statement are not considered "research
reports," even if they otherwise satisfy the definitional elements.
This exemption recognizes that prospectuses serve different purposes
than research reports and, thus, are subject to a separate
comprehensive regulatory scheme.
Definition of “Investment Banking
Services”
The amendments
add “acting as a member of a selling group in a securities
underwriting” to the definition of “investment banking services” in
Rule 472.20.
Definition
of “Household Member”
The
amendments clarify that the definition of “household member” in NYSE
Rule 472.40 does not include an unrelated person who shares the same
residence as a research analyst provided that the research analyst
and unrelated person are financially independent of one another.
Thus, for example, an analyst’s roommate or apartment mate, who is
financially independent of the analyst, would not be considered a
“household member” for purposes of the restrictions on personal
trading and disclosure requirements in NYSE Rule
472.
Definition of “Equity
Security”
Prior to the
Filing, “equity security” was not defined in NYSE Rule 472. The
amendments add “equity security” as a defined term in paragraph Rule
472.140 and codify that, for purposes of this rule, the term has the
meaning ascribed to it in Section 3(a)(11)6 of the
Securities Exchange Act of 1934.
Disclosure Requirements
NYSE Rule 472(k) sets forth a number of disclosure
requirements for research reports and for public appearances by
research analysts. Rule 472(k)(1)(i)g requires member organizations
to disclose in research reports the percentage of all securities
recommended by the member organization in each ratings category and
the percentage in each ratings category of all subject companies
that are investment banking clients of the member organization. Rule
472.70 supplements this provision providing that the ratings
disclosures required under (k)(1)(i)g be current as of the end of
the most recent calendar quarter (or the second most recent calendar
quarter if the publication date is less than 15 calendar days after
the most recent calendar quarter).
The Filing amends NYSE
Rule 472.70 to clarify that the ratings distribution in a research
report should reflect the current distribution of the most recent
ratings that the member organization has issued for all subject
companies, within the previous 12 months. Thus, in a ratings
distribution, a member organization only has to include ratings for
subject companies for which it has issued a rating within the
previous 12-month period.
In
addition, the amendments clarify, in NYSE Rule 472(k)(1)(i)h, that a
price chart is required only if a research report contains
either a
rating or
a price target, and the member organization has assigned a rating or
price target to the subject company for at least one
year.
The amendments to NYSE Rule
472(k)(1) also explain that a research report must disclose: (1) the
meanings of ratings used in the member organization's ratings system
only if the report contains a rating of the subject company's stock;
(2) the member organization's ratings distribution information only
if the report contains a rating; and (3) valuation methods used in
determining price targets only if the report contains a price
target.
Compendium
Reports
NYSE Rule
472(k)(1)(iii)d provides that when a member organization distributes
a research report covering six or more companies, for purposes of
the Rule’s disclosure requirements, such report may direct the
reader in a clear manner to the applicable current disclosures in
written or electronic format. Further, the amendments codify the
existing NYSE interpretation that an electronic compendium report –
a research report covering six or more subject companies – may
include a hyperlink to the required disclosures. A paper-based
compendium report must provide either a toll-free number to call or
a postal address to write for the required disclosures and may also
include a web address of the member organization where the
disclosures can be found.
Third-Party Research
The Filing adds new provision (k)(4) (“Third-Party
Research Reports”) which codifies Exchange interpretative guidance
regarding the distribution of third-party research reports by member
organizations. The amendments also codify the level of supervisory
review and approval required of member organizations that distribute
such reports.
· Third-Party Research Report
Disclosures
The amendments
codify interpretive guidance from the joint memoranda which provides
that when a member organization distributes or makes available
research produced by another member organization, a non-member
organization affiliate (e.g., a foreign
broker-dealer or an investment adviser) or an independent third
party, the distributing member organization must disclose the
following:
1) the distributing member organization's
and its affiliate's ownership of the subject company's
securities;
2) the distributing member organization's
and its affiliate's investment banking relationships with the
subject company;
3) the distributing member organization's
market making activities in the subject company's securities;
and
4) any other actual, material conflict of
interest of the analyst or distributing member organization (the
“third-party disclosures”).
Where a member organization distributes another member
organization's research report, the distributing member organization
must include the third-party disclosures only as they pertain to the
distributing member organization's relationship to the subject
company, whereas the preparing member organization is subject to all
disclosure requirements under NYSE Rule 472.
· Supervisory Review and
Approval of Third-Party Research
New section (k)(4) of Rule 472 also
codifies the Exchange standard for supervisory review and approval
of third-party research distributed by a member organization. This
interpretation was not included in the joint memoranda but is based
on the pre-Filing requirements of NYSE Rule 472 and its
interpretation. Section (k)(4) supersedes the previous NYSE
interpretation for “material externally prepared” in
472/07.7
The
supervisory requirements of NYSE Rule 472(a)(1) and 472.10 apply to
all communications generally distributed or made available to
customers or the public, which includes third-party research
reports, pursuant to the broad definition of “communications” in
Rule 472.10. The third-party disclosures and the supervisory review
and approval requirements for third-party research only apply if
third-party research is “distributed” by a member organization. A
member organization is not considered to have “distributed”
third-party research if it makes available non-affiliate
(independent third-party) research on its website or upon customer
request.
Rule 472(k)(4) requires
that either a supervisory analyst or a person designated under Rule
342(b)(1)8 review third-party research distributed by a
member organization to verify that the third-party disclosures, as
they pertain to the distributing member organization, are complete
and accurate. The distributing member organization is not required
to verify the completeness or accuracy of the preparing entity’s
disclosures when the preparing firm is an NASD or NYSE member
organization.
Additionally, the
distributing member organization must review the third-party
research to ensure that the content of the research report is
consistent with all applicable standards regarding communications
with the public. This provision requires member organizations to
meet the standard in Rule 472(i), which generally prohibits a member
organization from distributing any third-party research that
contains any untrue statement or omission of a material fact or is
otherwise false or misleading.9
Rule 472(k)(4) also requires that all other content of
the third-party research report distributed by a member organization
be approved by a supervisory analyst qualified under NYSE Rule 344.
A member organization is not required to validate the preparing
firm’s methodologies, analysis or judgment.
· Soft
Dollars
The joint NYSE and NASD
interpretive memoranda indicate that distribution of independent
third-party research through a soft-dollar arrangement is not
encompassed by the disclosure requirements. The amendments to NYSE
Rule 472 supersede this interpretation and provide that the
third-party disclosure requirements do apply when a member
organization distributes independent third-party research through a
soft-dollar arrangement, unless another exception is available
(e.g.,
where such research is provided upon customer request). The
applicable disclosure and supervisory requirements apply equally to
all third-party research distributed by a member organization,
including soft dollar arrangements. But, as noted above, a member
organization is not considered to have “distributed” such research,
and thus the third-party research requirements will not apply, where
non-affiliate (independent third party) research is made available
to customers either upon request or through a member-maintained
website, whether it is through a soft-dollar arrangement or
otherwise.
Other
Changes
The Exchange is
also taking this opportunity to issue certain other interpretive
guidance with respect to restrictions on sales and marketing
activity and prohibitions on research analyst participation in pitch
meetings.10
Prohibitions on Participation in Pitch
Meetings
NYSE Rule 472(b)(5) prohibits research
analysts from participating in pitch meetings.
This provision is intended to prevent the use or
promise of favorable research as a sales and marketing tool to
influence prospective investment banking clients and to separate
research analysts from sales and marketing activities.
NYSE interprets this provision to
prohibit member organizations from including in pitch or
presentation materials information regarding a research analyst
employed by the firm or their views that suggests, directly or
indirectly, that the member organization may provide favorable
research. For example, the Exchange considers this prohibition to
encompass pitch materials that include the industry ranking of an
analyst. A member organization would be permitted to include in
pitch materials the name of the research analyst and the fact of
coverage, as long as it does not imply the potential for favorable
research.11
Restrictions on Sales and Marketing
Activity
NYSE Rule 472(b)(6) prohibits research
analysts from participating in road shows related to investment
banking services transactions and from engaging in any
communications regarding investment banking services transactions
with current or prospective customers in the presence of investment
banking personnel or company management. Investment banking
personnel are also prohibited from directing research analysts to
engage in sales or marketing efforts or to engage in any
communication with a current or prospective customer related to
investment banking transactions.
NYSE interprets this provision to permit research
analysts to listen to (“listen-only” mode, not identified as being
present), or view a live Webcast of a road show or other widely
attended presentation to investors or the sales force, so long as
access is from a remote location (i.e., not at the same
address as investment banking, investors or the sales force).
Further, if the road show or other widely attended presentation to
investors or the sales force is conducted at the member
organization’s offices, research personnel may listen-in from the
same address as investment banking, investors or the sales force,
but not in the same room.
Any
questions regarding this Information Memo may be directed to William
Jannace at 212-656-2274 or Erika Lazar at
212-656-4591.
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