Chapter 11.4 Flashcards
Member firms must have written policies and procedures reasonably designed to identify and effectively manage conflicts of interests related to:
- The preparation, content, and distribution of research reports
- Public appearances by research analysts and
- The interaction between research analysts and those outside the research department, including investment banking, and sales and trading personnel, with regards to subject companies.
Restrictions on investment banking department relationships with the research department
- No research analyst may be subject to the supervision or control of any employee of the member’s investment banking department
- No employee of an investment banking department may review or approve a research report of the member before the report’s publication.
- Investment banking personnel are prohibited from directing a research analyst to engage in any sales or marketing efforts related to investment banking transactions. Research analysts are prohibited from participating in road shows related to specific investment banking transactions and may not communicate with current or prospective customers regarding an investment banking transaction.
- The member firm must retain copies of drafts and final copies of each report for 3 years.
- FINRA rules prohibit investment banking personnel, senior or otherwise, from determining or influencing the research department’s budget.
- Prohibition of retaliation against research analysts: No member and no employee of a member who is involved with the member’s investment banking activities may retaliate against or threaten to retaliate against any research analyst employed by the member or its affiliates as a result of an adverse, negative, or otherwise unfavorable research report or public appearance written or made by the research analyst that may adversely affect the member’s present or prospective investment banking relationship with the subject company of a research report.
Restriction on review of a research report by the subject company
- A member may not submit a research report to the subject company before the report’s publication except to verify the factual accuracy of information in sections of the report and that those sections do not contain a research summary, rating or price target.
- A complete draft of the research report must be provided to the legal or compliance department before sections of the report are submitted to the subject company for review.
- If the research analyst wants to change the rating or price target on a report the analyst must provide written justification and must receive written approval from legal or compliance personnel. The member firm must retain copies of original drafts and final versions of all research reports for 3 years following publication.
- No member may pay any bonus, salary, or other form of compensation to a research analyst that is based upon a specific investment banking services transaction. The research analyst’s compensation must be reviewed by a member firm committee that reports directly to the board of directors. If a research analyst’s compensation is based upon the investment banking department’s revenues, disclosure must be made.
Prohibition of promise of favorable research
No member may directly or indirectly offer favorable research, a specific rating or a specific price target, or threaten to change research, a rating, or price target, to a company as consideration or inducement for the receipt of business or compensation.
Restrictions on personal trading by research analysts
- A research analyst and member of their households may not purchase or receive any securities before an issuer’s initial public offering if the issuer is principally engaged in the same types of business as companies that are followed by the research analyst.
- A research analyst may not purchase or sell any security or derivative of such security in any manner that is inconsistent with the research analyst’s recommendation.
- A member firm’s legal or compliance department may authorize a transaction otherwise prohibited based upon an unanticipated significant change in the personal financial circumstances of the research analyst, provided that the compliance department authorizes the transaction before it is done
- The member firm must maintain written records concerning each transaction and justify permitting such transaction for 3 years following the transaction.
Restrictions on publishing research reports and public appearances.
- No member may publish a research report and no research analyst may make a public appearance regarding a subject company for which the member acted as manager or co-manager of:
- An IPO, for 10 calendar days following the date of the offering.
- *Exception: B/D’s and banks are allowed to publish research reports on emerging growth companies immediately after the issue goes public and are not subject to the quiet period.
- A secondary offering, for 3 calendar days following the date of the offering.
- *Exceptions:
- If there is significant news or a significant event concerning the subject company within such 10 and 3 days periods, the member can publish a research report and a research analyst can make a public appearance regarding the effects of the news or event. Prior approval of the research report and the public appearance must be obtained by legal or compliance.
- The member can publish a research report and make a public appearance if the subject company meets the requirements of SEC Rule 139.
- *Exceptions:
- An IPO, for 10 calendar days following the date of the offering.
-No Member that has agreed to participate or is participating as an underwriter or dealer of an issuer’s IPO may publish or otherwise distribute a research report or make a public appearance regarding that issuer for 10 calendar days after the date of the offering
Termination of coverage
If a member intends to terminate its research coverage of a subject company, notice of its termination must be made. The member must make available a final research report on the subject company. The report must be comparable in scope and detail to prior research reports and must include a final recommendation or rating, unless it is impracticable for the member to produce a comparable report. If it is impracticable to produce a final recommendation or rating, the final research report must disclose the member’s rationale for the decision to terminate coverage.
Selective Distribution
Every member must establish, maintain, and enforce written policies and procedures to ensure that a research report is not distributed “selectively” to internal trading personnel, or a particular customer or class of customers that the firm previously determined are entitled to received the research report.
