Preparation of Research Reports (64% of Exam) Flashcards
FINRA Rule 2241
2241 - Research Analysts and Research Reports
The main rule regarding research personnel and research reports is FINRA Rule 2241, which was created when FINRA incorporated two previous rules —NYSE Rule 472 and NASD Rule 2711.
FINRA Rule 2262
2262 - Disclosure of Control Relationship with Issuer
A member controlled by, controlling, or under common control with, the issuer of any security, shall, before entering into any contract with or for a customer for the purchase or sale of such security, disclose to such customer the existence of such control, and if such disclosure is not made in writing, it shall be supplemented by the giving or sending of written disclosure at or before the completion of the transaction.
FINRA Rule 2269
2269 - Disclosure of Participation or Interest in Primary or Secondary Distribution
A member who is acting as a broker for a customer or for both such customer and some other person, or a member who is acting as a dealer and who receives or has promise of receiving a fee from a customer for advising such customer with respect to securities, shall, at or before the completion of any transaction for or with such customer in any security in the primary or secondary distribution of which such member is participating or is otherwise financially interested, give such customer written notification of the existence of such participation or interest.
FINRA Rule 5121
5121 - Public Offerings of Securities with Conflicts of Interest
A conflict exists if a member firm is participating in a public offering and any of the following conditions apply:
- The securities are being issued by the member firm or an affiliated company.
- The issuer controls or is under the control of the member firm.
- At least 5% of the net proceeds of the offering, not including the underwriting compensation, are intended to reduce or retire the balance of a loan extended by the member firm.
FINRA Rule 5141
5141 - Sale of Securities in a Fixed Price Offering
A fixed price offering is defined as the offering of securities in the U.S. at a stated public offering price. An example is a typical initial public offering in which all of the securities are sold to the public at the same price. Selling concessions and discounts for a public offering may only be granted to broker-dealers that are engaged in the distribution and provide investment banking or securities services. A broker-dealer is considered to have rendered services if it underwrites part of the offering or is a member of the selling group.
Any member firm that receives a selling concession or discount must sign a written agreement which states that it will abide by the requirements of industry rules regarding selling concessions. A member firm may not sell securities at a discount to persons to whom it provides research services, but may sell the securities to them at the public offering price. This type of situation typically arises in the context of soft-dollar arrangements. For example, a firm could provide research to an institution (e.g., a mutual fund) through a soft dollar arrangement, participate as a selling syndicate or selling group member in an IPO, and sell these securities to the mutual fund as long as it pays the public offering price.
FINRA Rule 5230
5230 - Payments Involving Publications that Influence Market Price of a Security
Member firms are not permitted to directly or indirectly give, or permit to be given, anything of value to any person for the purpose of influencing or rewarding the action of that person in connection with the publication or circulation in any electronic or other public media. The different circulation methods include a website, newspaper, radio, or television program that’s intended to have an effect on the market price of any security.
This prohibition doesn’t apply if the compensation is being paid to a person in connection with any of the following:
-A communication that’s clearly distinguishable as paid advertising
-A communication that discloses the receipt and amount of compensation in accordance with the Securities Act of 1933
-A research report
SEC Rule 15c1-5
15c1-5 – Disclosure of Control
SEC Rule 15c1-6
15c1-6 – Disclosure of Interest in Distributions
SEC Regulation A
Regulation A – Conditional Small Issues Exemption
Regulation A contains rules which provide exemptions from the registration requirements and allows some companies to use equity crowdfunding in order to offer and sell their securities without needing to register the securities with the SEC.
SEC Regulation AC
Regulation AC – Analyst Certification
Under Regulation AC, research analysts are required to make certifications regarding any conflicts of interest that are involved with preparation of a research report. Also, a broker-dealer that employs research analysts must maintain records regarding public appearances that are made by its personnel who prepare research reports.
SEC Regulation FD
Regulation FD – Selective Disclosure and Insider Trading (Fair Disclosure)
Regulation FD was created to protect retail investors by barring issuers from selectively disclosing material, non-public information to securities professionals (including employees of broker-dealers and investment advisers) or to shareholders if it’s “reasonably foreseeable” that they will trade on the information.
The SEC lists four categories of persons to whom selective disclosure may not be made without a specified exclusion. The first three are securities market professionals:
1. Broker-dealers and their associated persons
2. Investment advisers, certain institutional investment managers and their associated persons
3. Investment companies, hedge funds, and affiliated persons
4. The fourth category includes holders of the issuer’s securities; under circumstances in which it’s reasonably foreseeable that such persons may purchase or sell securities on the basis of the information.
SEC Regulation G
Regulation G – Non-GAAP Disclosures
Under Regulation G, if a registrant (or any person who acts on its behalf) publicly discloses material information that includes a non-GAAP financial measure, the registrant must accompany that measure with:
- A presentation of the most directly comparable financial measure that’s calculated and presented in accordance with generally accepted accounting principles.
- A reconciliation that’s quantitative for historical non-GAAP measures provided. The reconciliation must be quantitative for forward-looking information of the differences between the non-GAAP financial measure disclosed with the most comparable financial measure(s) calculated and presented in accordance with GAAP that has also been identified in the first bullet (above).
SEC Regulation S
Regulation S – Rules Governing Offers and Sales Made Outside the U.S. Without Registration Under the Act of 1933
Today, if a U.S. company issues securities under the provisions of Regulation S, the securities are not required to be registered under the Securities Act of 1933. According to Regulation S, a U.S. company may quickly issue an unlimited amount of securities outside of the country without filing any documentation with the SEC. There are no restrictions regarding the type of non-U.S. investors who may purchase the security.
To qualify for a Regulation S exemption, the transaction must be executed offshore. An offshore transaction is one in which no offer is made to a person in the U.S. and either:
1. The buyer is outside of the U.S. at the time the buy order is originated, or
2. The transaction is executed through the facilities of a designated offshore securities market
FINRA Rule 1220(a)(14)
1220(a)(14) – Supervisory Analyst
(A) Principals Engaged in Limited Activities
Each principal as defined in paragraph (a)(1) of this Rule may register with FINRA as a Supervisory Analyst if his or her activities are limited to approving the following: (i) the content of a member’s research reports on equity securities; (ii) the content of a member’s research reports on debt securities; (iii) the content of third-party research reports; (iv) retail communications as described in Rule 2241(a)(11)(A); or (v) other research communications that do not meet the definition of “research report” under Rule 2241, provided that the Supervisory Analyst has technical expertise in the particular product area.
The activities of a Supervisory Analyst engaged in equity research shall be supervised by a Research Principal registered pursuant to paragraph (a)(6) of this Rule.
(B) Qualifications
Each person seeking to register as a Supervisory Analyst shall, prior to or concurrent with such registration pass the Supervisory Analyst qualification examination.
Upon written request pursuant to the Rule 9600 Series, FINRA shall grant a waiver from the securities analysis portion (Part II) of the Supervisory Analyst qualification examination upon verification that the applicant has passed Level I of the Chartered Financial Analyst (“CFA”) Examination.
FINRA Rule 2210
2210 – Communications with the Public
A public appearance includes any situation in which an employee who’s associated with a broker-dealer participates in a television or radio interview, seminar or forum, makes a public appearance, or engages in a speaking activity that’s unscripted. Although a public appearance itself is not considered a form of communication, an associated person who makes a public appearance must abide by the same general content standards that apply to all other communications. Due to the spontaneous nature of public appearances, they’re not subject to preapproval by a principal of the firm or filing with FINRA. When a person who’s associated with a member firm participates in a public appearance, the following conditions apply:
- If a security is recommended, the associated person must have a reasonable basis for the recommendation and disclose if she has a financial interest in the security itself or any derivative of the security
- At the time of the public appearance, disclosure is required of any material conflict of interest that a firm or associated person knows or has reason to know
- Each firm must establish policies and procedures that are appropriate to supervise public appearances
Disclosures:
- Whether the research analyst or a member of the analyst’s household has a financial interest in the debt or equity securities of the subject company
- Whether the firm or its affiliates has an ownership interest in the subject security of 1% or greater of the outstanding common equity of the subject company
- Any material conflict of interest about which the analyst or member firm knows, or has reason to know, at the time of the public appearance
- To the extent the research analyst knows, or has reason to know, whether the member or any affiliate has received compensation from the subject company in the past 12 months
- Whether the research analyst received compensation from the subject company in the past 12 months
- To the extent the research analyst knows, or has reason to know, whether the subject company currently is, or was during the 12-month period preceding the date of distribution of the research report, a client of the member firm. In such cases, the research analyst also must disclose the types of services provided to the subject company, if this is known by the research analyst
