Chapter 4 Study Notes

Question 1

Rule 138 – Non-equivalent Securities

Research reports

Answer 1

If a registration statement has been filed for a nonconvertible debt security or a non-convertible preferred stock, a broker-dealer may , publish or distribute in the normal course of business a research
report regarding the common stock and convertible securities of the issuer.

Question 2

Rule 137 – Persons Not Participating in an Offering

research reports

Answer 2

This allows a firm that is not a member of the syndicate to issue a research report during the cooling-off period.
in the previous three years, may not have been a blank-check company, a shell company, or an issuer for a penny stock offering.

Question 3

Rule 139 – Research Reports

Answer 3

an issuer is subject to the 1934 Act reporting requirements or is a well-known seasoned issuer, a broker-dealer may publish or distribute a research report regarding the issuer’s securities, even if it is a participant in the distribution, if certain conditions are met

Question 4

Research Reports

Submitting to subject company

Answer 4

Members may not submit research reports to the subject company, except for the sole purpose of
fact verification, and then only the relevant sections may be transmitted. The full draft of the report
must be sent to the member’s legal or compliance department prior to the excerpt being sent to the
subject company.

Question 5

Actively traded securities are defined pursuant to Rule 139 of the Securities Act of 1933

Answer 5

Actively traded securities are those that have an (ADTV) of at least $1 million, issuer whose common equity securities have a public float of at least $150 million.

Question 6

Research Report

Restricted period for actively traded securities.

Answer 6

The quiet period for secondary offerings does not apply to issuers whose securities are actively traded as defined under Regulation M of the Securities Exchange Act of 1934. This applies to both research reports and public appearances.

Question 7

Research Reports

Unregistered Offerings

Answer 7

The quiet period following secondary offerings does not apply to unregistered offerings. Therefore, there is no quiet period regarding private placements of 144A
securities and offerings outside of the U.S. conducted under Regulation S.

Question 8

Emerging Growth Companies

IPO

Answer 8

1. In connection with the initial public offering (IPO) of an EGC, the prohibition against a research
   analyst participating in a pitch meeting with investment bankers is not applicable. Also the
   prohibition from joint due diligence meetings is not applicable if it relates to an IPO. However, all
   other restrictions concerning non-IPO solicitations of investment banking business by research
   analysts remain in place.
2. The three-day and 10-day quiet periods that restrict a research analyst’s ability to publish a research
   report or make a public appearance concerning a securities offering have been eliminated.
   Therefore, immediately following an IPO or secondary offering, a research analyst is permitted to
   write a research report or make a public appearance.

Question 9

Research Analyst

Compensation Committee

Answer 9

Member firms are required to form a compensation committee that
will be responsible for reviewing and approving the compensation of the firm’s research analysts.
 Must review and approve at least annually the analyst compensation
 Must report to the board of directors (BOD) or, if the member firm has no BOD, a senior executive
officer of the firm
 Is not permitted to have any representative from the member firm’s investment banking department
 Must document the basis on which the research analyst compensation was established

Question 10

Factors that the compensation committee will take into consideration when reviewing an analyst’s
compensation include the following:

Answer 10

 Individual performance of the analyst including productivity and the quality of the work
 Correlation between the analyst’s recommendations and the performance of the securities
recommended
 Review of a spectrum of ratings from clients, the sales force, and other internal or external
professionals, excluding the investment banking department and independent rating services
Exempt from the compensation committee’s review are any analysts who are not primarily
responsible for the substance of a research report (e.g., a junior analyst who simply reports to the
lead analyst).

Question 11

Research report disclosures

Answer 11

 Whether the analyst (or a member of the analyst’s household) has a financial interest in the securities
of the subject company (i.e., holds shares, warrants, or options contracts of the subject company)
 Whether the firm has ownership of the subject security and whether such ownership is 1% or greater
of the outstanding stock of the subject company. Ownership must be ascertained as of the end of the
month directly preceding publication of the research report, allowing for a 10-day calculation period.
If the report is published less than 10 days from the end of the month, a member may ascertain
ownership based on the second-most-recent month.
 Disclosure of whether the firm makes a market in the subject security
 Any material conflict of interest about which the analyst or member knows or has reason to know
 Whether the member has received compensation for investment banking activity from the subject
company during the 12 months preceding publication, or expects to receive or seek compensation in
the three months following publication
 Whether the analyst or any member of the analyst’s household is an officer, director, or advisory
board member of the subject company

Question 12

Globally Branded/ Mixed Team Research Reports

Answer 12

Any research report distributed in the U.S. is
required to be approved by a supervisory analyst or registered principal. Registration is not required
of a research analyst employed by the foreign affiliate of a member firm who contributes to a globally
branded research report.

Question 13

mixed-team research report

Answer 13

to any research report by a member firm that is not globally
branded and includes a contribution by a research analyst that is not considered an associated person
by the member firm. Registration in the U.S. is required of a research analyst employed by the foreign
affiliate of a member firm who contributes to a mixed-team research report.

Question 14

third-party research report

Answer 14

s one that has been prepared by an affiliate of the broker-dealer. This
form of research report must be approved by a supervisory analyst or an approved supervisory
person of the broker-dealer

Question 15

third-party research disclosures

Answer 15

 Whether the broker-dealer has received compensation from the subject company within the
preceding 12 months, or expects to receive compensation in the upcoming three months for
investment banking services related to the subject company
 Whether the broker-dealer makes a market in the subject company
 Whether the broker-dealer owns 1% or more of the subject company’s equity securities
 Any other material conflicts of interest

Question 16

An independent third-party research report

Answer 16

one that has been prepared by a person or firm that 1)
has no affiliation or contractual relationship with the disturbing member, and 2) makes content
determinations without any input from the distributing member or that member’s affiliates. Since
the distributing broker-dealer has no editorial control over the content of the report, approval by a
principal of the broker-dealer is not required.

Question 17

Public Appearance Disclosures

Answer 17

 Whether the subject company is an investment banking client of the member
 Whether the analyst (or a member of the analyst’s household) has a financial interest in the security
that is the subject of the report (subject security)
 Whether the member firm has ownership of the subject security if such ownership is 1% or greater of
the outstanding stock of the subject company
 Any material conflict of interest about which the analyst or member firm knows or has reason to
know
 Whether the analyst or any member of the analyst’s household is an officer, director, or advisory
board member of the subject company

Question 18

Termination of Research Coverage

Answer 18

When a broker-dealer decides to terminate coverage on an
issuer, the firm must publish a final research report and provide the report to its customers, in the
same manner ordinarily used when distributing material. The final report must be similar in scale
and scope to its past reports, and must include a recommendation, unless it is impractical to do so.
In the event that a final recommendation is not available, the broker-dealer must disclose its reason(s) for
terminating research on the issuer and or security. A broker-dealer terminating coverage is not
required to discontinue market making in the issue.

Question 19

Regulation AC - Written research attestation

Answer 19

 None of his compensation is, was, or will be related to his recommendations or views expressed in
the research report, or
 Part or all of his compensation, is, was, or will be related to his recommendations or views expressed
in the research report

Question 20

Regulation AC - Public appearance attestation

Answer 20

 A statement by the research analyst doing the certifying that the views he expressed during his public
appearance(s) during the calendar quarter reflected his personal views about the subject securities or
issuers
 A written statement by the research analyst certifying that no part of his compensation, is, or will be
related to the views expressed or recommendations made during his public appearances during the
last calendar quarter

Question 21

Regulation FD—Fair Disclosure

Answer 21

Regulation FD applies to disclosures by senior company officials and those who regularly communicate with
research analysts and investors
If the disclosure was unintentional, the company has
24 hours to publicly disseminate the information, or until the opening of the next trading day on the
NYSE if the disclosure takes place during a weekend or holiday, whichever is later.