No Promises of Favorable Research
NYSE and FINRA rules prohibit analysts from offering
a favorable research rating or specific price target to induce
investment banking business from companies. The rule changes
also impose quiet periods that bar a firm that is acting as
manager of a securities offering from issuing a report within
40 days after an initial public offering or within 10 days
after a secondary offering for an inactively traded company.
Significance of the
Change
Promising research coverage to a company will not
be as attractive if the research may not be issued within
the initial days following the offering.
Limitations on Relationships and
Communications
Research analysts are prohibited from being
supervised by the investment banking department. Investment
banking personnel are prohibited from discussing research with
analysts prior to distribution, unless staff from the firm's
legal/compliance department monitor those communications.
Analysts are prohibited from sharing draft research reports
with the target companies, other than to check facts.
Significance of the
Change
These provisions help protect research analysts from
influences that could impair their objectivity and
independence.
Analyst Compensation
Securities firms are barred from tying an analyst's
compensation to specific investment banking transactions.
Furthermore, if an analyst's compensation is based on the
firm's general investment banking revenues, that fact must be
disclosed in the firm's research reports.
Significance of the
Change
Prohibiting compensation from specific investment
banking transactions significantly curtails a potentially
major influence on research analysts' objectivity.
Firm Compensation
A securities firm are required to disclose in a
research report if it managed or co-managed a public offering
of equity securities for the company or if it received any
compensation for investment banking services from the company
in the past 12 months. A firm also must disclose if it expects
to receive or intends to seek compensation for investment
banking services from the company during the next 3 months.
Significance of the
Change
Requiring securities firms to disclose compensation
from investment banking clients can alert investors to
potential biases in their recommendations.
Restrictions on Personal Trading
by Analysts
Analysts and members of their households are barred
from investing in a company's securities prior to its initial
public offering if the company is in the business sector that
the analyst covers. This rule require blackout periods that
prohibit analysts from trading securities of the companies
they follow for 30 days before and 5 days after they issue a
research report, and prohibits analysts from trading against
their most recent recommendations.
Significance of the
Change
Prohibiting analysts from trading around the time
they issue research reports should reduce conflicts arising
from personal financial interests.
Disclosures of Financial Interests
in Covered Companies
Analysts are required to disclose if they own shares of
recommended companies. Firms are also required to disclose if
they own 1% or more of a company's equity securities as of the
previous month end.
Significance of the
Change
Requiring analysts and securities firms to disclose
financial interests can alert investors to potential biases
in their recommendations.
Disclosures in Research Reports
Regarding the Firm's Ratings
Firms must explain in research reports the meaning of
all ratings terms they use, and this terminology must be
consistent with its plain meaning. Firms must provide the
percentage of all the ratings that they have assigned to buy /
hold / sell categories and the percentage of investment
banking clients in each category. Firms are required to
provide a graph or chart that plots the historical price
movements of the security and indicates those points at which
the firm initiated and changed ratings and price targets.
Significance of the
Change
These disclosures will assist investors in deciding
what value to place on a securities firm's ratings and
provide them with better information to assess its research.
Disclosures During Public
Appearances by Analysts
This rule requires disclosures from analysts during
public appearances, such as television or radio interviews.
Guest analysts will have disclose if they or their firm have a
position in the stock; if the company is an investment banking
client of the firm; if the analyst or a member of the
analyst's household is an officer, director or advisory board
member of the recommended issuer; and other material
conflicts.
Significance of the
Change
This disclosure will inform investors who learn of
analyst opinions and ratings through the media — rather
than in written research reports — of analyst and firm
conflicts.
