[Federal Register Volume 67, Number 153 (Thursday, August 8, 2002)]
[Proposed Rules]
[Pages 51510-51516]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-20031]



[[Page 51510]]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 242

[Release Nos. 33-8119; 34-46301; File No. S7-30-02]
RIN 3235-AI60


Regulation Analyst Certification

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Commission is seeking public comment on proposed 
Regulation Analyst Certification. The proposed regulation would require 
that any research report disseminated by broker or dealer include 
certifications by the research analyst that the views expressed in the 
research report accurately reflect the analyst's personal views, and 
whether the analyst received compensation or other payments in 
connection with his or her specific recommendations or views. A 
research analyst would also be required to provide certifications and 
disclosures in connection with public appearances. Although research 
analysts are often viewed by investors as experts and as important 
sources of information about the securities and companies they cover, 
many factors can create pressure on their independence and objectivity. 
By requiring these certifications and disclosures, the proposed 
regulation should promote the integrity of research reports and 
investor confidence in the recommendations contained in those reports.

DATES: Comments must be received on or before September 23, 2002.

ADDRESSES: To help us process and review your comments more 
efficiently, comments should be sent by one method only.
    Persons wishing to submit written comments should send three copies 
to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 
Fifth Street, NW., Washington, DC 20549-0609. Comments also may be 
submitted electronically at the following E-mail address: [email protected]. All comment letters should refer to File No. S7-30-
02. Comments submitted by E-mail should include this file number in the 
subject line. Comment letters received will be available for public 
inspection and copying in the Commission's Public Reference Room, 450 
Fifth Street, NW., Washington, DC 20549. Electronically submitted 
comment letters will be posted on the Commission's Internet Web site 
(http://www.sec.gov). The Commission does not edit personal, 
identifying information, such as names or e-mail addresses, from 
electronic submissions. Submit only the information you wish to make 
publicly available.

FOR FURTHER INFORMATION CONTACT: James Brigagliano, Thomas Eidt, or 
Racquel Russell in the Office of Risk Management and Control, Division 
of Market Regulation, at (202) 942-0772.

SUPPLEMENTARY INFORMATION: We are proposing new Regulation Analyst 
Certification (``Regulation AC'') \1\ under the Securities Act of 1933 
(``Securities Act'') and the Securities Exchange Act of 1934 
(``Exchange Act'').
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    \1\ 17 CFR 242.500 through 502.
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I. Introduction

    Research analysts study publicly-traded companies and make 
recommendations about the securities of those companies, often through 
the issuance of research reports. Analysts typically work for full-
service broker-dealers \2\ and, as such, are ``persons associated with 
a broker or dealer.'' \3\ The Commission has stated that analysts, who 
``ferret out and analyze information,'' play an important role in the 
securities markets.\4\
    Research analysts at full-service brokerage firms, so called sell-
side analysts, are often viewed by investors as experts and as 
important sources of information about the securities and the companies 
they cover.\5\ At the same time, however, many factors can create 
pressure on an analyst's independence and objectivity. Among other 
things, investment banking relationships and certain compensation 
arrangements may adversely affect analyst objectivity and, as a result, 
the integrity of the views expressed in research reports and public 
appearances.
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    \2\ Full-service broker-dealers provide a wide range of services 
to clients, including investment banking, financial planning, and 
other financial services.
    \3\ See Exchange Act Section 3(a)(18).
    \4\ Dirks v. SEC, 463 U.S. 646, 658 (1983). See also Securities 
Act Release No. 7606A (November 13, 1998), 63 FR 67174 (December 4, 
1998).
    \5\ Sell-side analysts typically work for full-service broker-
dealers that sell securities to the public and make recommendations 
on the securities they cover. Many of the more popular sell-side 
analysts work for prominent brokerage firms that also provide 
investment banking services for corporate clients--including 
companies whose securities the analysts cover.
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    Proposed Regulation AC seeks to address these concerns by requiring 
broker-dealers issuing research reports to include clear and prominent 
certifications by the research analysts that the research report 
accurately reflects the analyst's personal views about the subject 
securities and issuers and whether the analyst received compensation 
for views or specific recommendations in the research report. The 
proposed regulation would also require the analyst to make quarterly 
certifications that the views expressed by the analyst in public 
appearances accurately reflected the analyst's personal views and 
whether or not he or she received any related compensation for his or 
her views or recommendations. In so doing, the proposed regulation 
should promote the integrity of research reports and investor 
confidence in the research analyst's recommendations contained in those 
reports.

II. Proposed Rule

A. Reasons for Proposal

    During 1999, the Commission and Congress began to examine research 
analysts' conflicts of interest in greater depth. The Commission was 
particularly concerned that many investors who rely on analysts' 
recommendations may not know, among other things, that favorable 
research could be used as a component of the marketing of investment 
banking services provided by the analyst's firm, and that analyst 
compensation may be based significantly on generating investment 
banking business.
    Beginning in the summer of 1999, Commission staff began a review of 
industry practices regarding disclosure of research analyst conflicts 
of interest. Commission staff conducted on-site examinations of full-
service broker-dealers that focused on analysts' financial interests in 
companies they cover, reporting structures (in particular whether 
analysts report to investment banking personnel) and analyst 
compensation arrangements. In June and July 2001, the Subcommittee on 
Capital Markets, Insurance and Government Sponsored Enterprises of the 
House of Representatives' Committee on Financial Services held hearings 
on research analyst conflict of interest issues.\6\ In addition, also 
in July 2001, the staff of the Commission's Office of Investor 
Education and Assistance issued an Investor Alert highlighting the 
numerous biases that may affect analyst recommendations.\7\ The Senate 
Committee on Governmental Affairs held a hearing on analysts on 
February 27, 2002.\8\
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    \6\ Analyzing the Analysts: Hearings Before the Subcomm. on 
Capital Markets Insurance and Government Sponsored Enterprises of 
the House Comm. on Financial Services (June 14 and July 31, 2001).
    \7\ See www.sec.gov/investor/pubs/analysts.htm.
    \8\ The Watchdogs Didn't Bark: Enron and the Wall Street 
Analysts: Hearing Before the Senate Comm. on Governmental Affairs 
(February 27, 2002).

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[[Page 51511]]

    On April 25, 2002, the Commission announced the commencement of a 
formal inquiry into market practices concerning research analysts and 
the personal conflicts that can arise from the relationship between 
research and investment banking.\9\ Further, on May 10, 2002, the 
Commission approved rule changes proposed by the National Association 
of Securities Dealers (``NASD'') and the New York Stock Exchange 
(``NYSE'') relating to research analyst conflicts of interest.\10\ The 
NASD and NYSE filed these rule changes with the Commission in February 
2002. New NASD Rule 2711 and amended NYSE Rule 472 established 
standards governing member broker-dealer communications with the public 
to address research analyst conflicts of interest. Specifically, the 
rules contain, among other things:
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    \9\ See www.sec.gov/news/press/2002-56.htm.
    \10\ See Securities Exchange Act Release No. 45908 (May 10, 
2002), 67 FR 34968 (May 16, 2002).
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     A prohibition on tying analyst compensation to specific 
investment banking transactions;
     A prohibition on offering favorable research to induce 
firm business;
     Restrictions on personal trading by analysts in securities 
of companies followed by the analyst; and
     Requirements mandating increased disclosures of conflicts 
of interest in research reports and public appearances, such as 
business relationships with, compensation from, or ownership interests 
in the company that is the subject of the research report.
    New NASD Rule 2711 and amended NYSE Rule 472 also require that 
members attest annually that the member has adopted and implemented 
written supervisory procedures reasonably designed to ensure that 
employees comply with the provisions of the rule. These SRO rules close 
regulatory gaps and take a significant step toward restoring investor 
confidence in the role of sell-side research in the capital markets. 
However, it is possible that the Commission's formal inquiry may 
indicate the need for further SRO rule changes or additional Commission 
action. Moreover, the Commission has requested that the NASD and NYSE 
report within a year of implementing these rules on their operation and 
effectiveness, and whether they recommend any changes or additions to 
the rules.
    Proposed Regulation AC is part of an ongoing process by the 
Commission to address conflicts of interest affecting the production 
and dissemination of research by securities firms, and to provide 
increased disclosure to investors. The Commission encourages brokers, 
dealers, and persons associated with brokers and dealers, to consider 
voluntarily implementing the types of disclosures that proposed 
Regulation AC, if adopted, would require. The Commission will continue 
its efforts to determine whether any additional action may be necessary 
to improve the integrity of research and to restore investor 
confidence.\11\
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    \11\ We note that the recently-enacted Sarbanes-Oxley Act of 
2002 directs the Commission to conduct rulemaking, itself or through 
the SROs, to address a broad range of issues stemming from analysts 
conflicts. See Sarbanes-Oxley Act of 2002, Public Law 107-204. The 
Commission voted to propose Regulation AC on July 24, 2002, before 
the passage of the Act. The Commission will, of course, abide by the 
directives of the Act as it continues to address analyst conflicts 
of interest issues, including with respect to the possible adoption 
of Regulation AC.
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B. Description of Proposal

    We propose new Regulation AC to further address conflicts of 
interest faced by research analysts and their firms. The proposed 
regulation would require certification by ``research analysts'' that 
the views they express in ``research reports'' and ``public 
appearances'' accurately reflect their personal views about the subject 
securities and issuers. Analysts would also have to disclose whether 
they received compensation for their specific recommendations or views. 
The proposed regulation defines ``research report'' as ``a written 
communication that includes an analysis of securities of an issuer or 
issuers, provides information reasonably sufficient upon which to base 
an investment decision and includes a recommendation.'' Proposed 
Regulation AC requires certain certifications and disclosures regarding 
a ``public appearance,'' which is defined as ``any participation in a 
seminar, forum (including an interactive electronic forum), radio or 
television interview, or other public speaking activity in which a 
research analyst makes a specific recommendation or offers an opinion 
concerning a security or an issuer.'' ``Research analyst'' is defined 
as ``any natural person who is principally responsible for the analysis 
of any security or issuer included in a research report.''
    Proposed Regulation AC would require that broker-dealers and 
persons associated with broker-dealers include in their research 
reports:
     A statement by the research analyst certifying that the 
views expressed in the research report accurately reflect such research 
analyst's personal views about the subject securities and issuers;
     A statement by the research analyst certifying that no 
part of his or her compensation \12\ was, is, or will be directly or 
indirectly related to the specific recommendation or views contained in 
the research report; or
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    \12\ The Commission notes that the term ``compensation,'' for 
the purposes of Regulation AC, would also include payments received 
from sources other than the research analyst's employer, including 
issuers, underwriters, dealers, and other related persons.
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     A statement by the research analyst certifying that part 
or all of his or her compensation was, is, or will be directly or 
indirectly related to the specific recommendation or views contained in 
the research report. If the analyst did receive such related 
compensation, the statement must include the source and amount of such 
compensation, and the purpose of the compensation, and further disclose 
that such compensation may influence the recommendation in the research 
report;
     All certifications must be clear and prominent.\13\
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    \13\ The Commission would expect that the required 
certifications be included on the front page of the research report, 
or that the front page would specify the page or pages on which each 
certification is found.
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    Additionally, under proposed Regulation AC, broker-dealers must 
make a record related to public appearances by research analysts.\14\ 
Specifically, a broker-dealer who publishes, circulates, or provides, 
directly or indirectly, a research report by a research analyst, would 
be required to make a record within thirty days after each calendar 
quarter in which the research analyst made the public appearance, that 
includes:
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    \14\ If an associated person of a broker-dealer publishes a 
research report, the broker-dealer would be required to make and 
keep the mandated records.
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     A written statement by the research analyst certifying 
that the views expressed in each public appearance accurately reflected 
such research analyst's personal views about the subject securities and 
issuers; and
     A written statement by the research analyst certifying 
that no part of such research analyst's compensation was, is, or will 
be directly or indirectly related to any specific recommendations or 
views expressed in any public appearance.
    In cases where the analyst is unable to make the certifications in 
connection with public appearances as described above, the broker-
dealer must make, keep, and maintain a record of a statement from the 
research analyst that he or she is unable to provide the written 
certifications specified in Rule 502 (a)(1) of proposed Regulation AC

[[Page 51512]]

and the reasons therefor. The broker-dealer must also disclose in all 
research reports for the next 120 days that the research analyst did 
not comply with the certification requirements specified in Rule 502 
(a)(1) of proposed Regulation AC and the reasons therefor. It should be 
noted that the 120 day disclosure period prescribed in paragraph (a)(2) 
of proposed Rule 502, which is longer than a calendar quarter, runs 
from the time the analyst notifies the broker-dealer employer that he 
or she is unable to provide the written certifications specified in 
paragraph (a)(1). The broker-dealer must also promptly provide copies 
of statements that the analyst is unable to provide the certifications 
in connection with public appearances to its examining authority, 
designated pursuant to section 17(d) of the Exchange Act and Rule 17d-2 
thereunder. Further, broker-dealers must keep and maintain these 
records pursuant to Rule 17a-4(b)(4).
    Proposed Regulation AC is intended to complement other rules 
governing conflicts of interest disclosure by research analysts, 
including NYSE Rule 472 and NASD Rule 2711. We note that SRO rules 
currently address an analyst who writes a research report that does not 
reflect his or her personal views, even if the analyst states that the 
report does not reflect his or her views. Thus, we do not see a need to 
allow for a negative certification concerning an analyst's personal 
views. Should Regulation AC also provide an analyst a negative 
certification option that the views expressed in the research report do 
not accurately reflect his or her personal views? Similarly, given that 
SRO rules currently prohibit an analyst from receiving compensation for 
a specific investment banking transaction, is it necessary or desirable 
for Regulation AC to permit an analyst to disclose the receipt of 
compensation for a specific recommendation?
    The scope of proposed Regulation AC is broader than the scope of 
the current SRO rules in that the proposed regulation covers debt as 
well as equity securities. We believe that some of the same concerns 
regarding analyst conflicts also pertain to debt securities. Thus, we 
propose to coverer debt securities in the regulation. In addition, we 
understand that the SROs are considering expanding the coverage of 
their rules regarding analyst research reports to cover debt 
securities.
    Proposed Regulation AC focuses on core issues of analysts' 
integrity: their beliefs in their recommendations and the influence of 
compensation on their recommendations. It is important for an investor 
to know whether an analyst potentially is biased with respect to 
securities or issuers that are the subject of a research report. 
Further, in evaluating a research report, it is reasonable for an 
investor to want to know about an analyst's compensation. We believe 
that proposed Regulation AC is reasonably designed to prevent acts and 
practices that are fraudulent, deceptive, or manipulative. The proposed 
regulation does not preclude an analyst from providing services to his 
or her firm's investment banking department within the requirements of 
governing SRO rules, and it does not prohibit analysts generally from 
receiving compensation for covering issuers or for preparing research 
reports. Rather, proposed Regulation AC focuses on disclosure where the 
analyst is compensated for making a specific recommendation or rating. 
The Commission also notes that the proposed regulation is intended to 
address analysts' beliefs about their expressed views and 
recommendations, not the accuracy of the recommendations or opinions 
regarding securities discussed. Proposed Regulation AC also does not 
impose new liability. Even without proposed Regulation AC, analysts may 
be found to have violated the anti-fraud provisions of the federal 
securities laws if they make baseless recommendations or 
recommendations that they disbelieve.\15\ Regulation AC is not intended 
to create duties under section 10(b) of the Exchange Act. As a result, 
no private liability will arise from a broker, dealer, or associated 
person's failure to make the required disclosure, or make, keep, and 
maintain required records.
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    \15\ Regulation AC does not alter or effect any other existing 
obligation under the federal securities laws for research analysts 
or broker-dealers.
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III. General Request for Comment

    We encourage any interested person to submit written comments on 
all aspects of the proposed regulation. In particular, we request 
comment on:
     Would the proposed certification and disclosure 
requirements, if adopted, promote investor confidence in the views 
expressed by research analysts and provide investors with useful 
information with which to evaluate potential biases?
     Would the required disclosures and certifications reduce 
public appearances by analysts and the amount of useful information 
available to investors?
     Should the proposed definitions of ``research report,'' 
``research analyst,'' or ``public appearance'' be broader or narrower 
than proposed?\16\
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    \16\ For example, we note the term research analyst would not 
include an investment adviser, such as a mutual fund portfolio 
manager, who is not principally responsible for preparing research 
reports, even if the investment adviser is a registered person of a 
member. See Joint Memorandum of the NASD and the New York Stock 
Exchange. Discussion and Interpretation of Rules Governing Research 
Analysts and Research Reports (NASD Rule 2711 and NYSE Rules 351 and 
472) at 3.
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     Should the proposed definition of ``research report'' be 
limited to cover only equity securities?
     What disclosures, if any, should be required during public 
appearances? We also request comment on whether the proposed 
requirements relating to public appearances should also apply to 
research analyst's recommendations in the print media.
     Broker-dealers often choose to publish research reports 
that cover multiple issuers, securities, or an industry segment, in a 
compendium report. Certain portions of the NASD and NYSE rules permit 
different treatment of these compendium reports. Should the regulation 
make allowances for compendium research reports covering six or more 
securities? For example, should a broker-dealer be permitted to publish 
the required disclosures for such a compendium in a place other than 
the research report?
     If a research analyst is unable to provide the 
certifications relating to public appearances in Rule 502(a)(1) and 
instead provides the certifications in Rule 502(a)(2), the broker-
dealer is required to disclose that fact in all research reports for 
120 days after the analyst has provided his or her certification under 
Rule 502(a)(2). Is 120 days the appropriate amount of time the broker-
dealer should be required to make such disclosure? Should the 
disclosure period be longer or shorter?
     Are the recordkeeping requirements of Regulation AC 
appropriate?
     What additional procedures would firms need to put in 
place in order to ensure compliance with the proposed regulation, 
beyond those already established or that will be established to comply 
with the recently-approved SRO rules?
     The application of proposed Regulation AC broadly covers 
brokers or dealers and any person associated with a broker or dealer 
because we believe that these entities are subject to the greatest 
conflicts. We request comment on whether the proposed regulation should 
cover banks that are not associated persons and other independent 
entities. Are there certain classes of persons associated with a 
broker-dealer that should not be subject to the rule? Should the rule 
explicitly exclude investment advisers?

[[Page 51513]]

     Would the required disclosures be utilized by investors if 
they are not on the cover page, given the numerous other disclosures 
that firms must make?
     Should Rule 501 of proposed Regulation AC allow for a 
statement that the research analyst is ``unable to provide the written 
certifications required,'' similar to Rule 502?
     Should Rule 502 require research analysts to provide their 
employers with a list identifying each public appearance made during 
the calendar quarter?
    We solicit comment on our approach and the specific proposed 
certifications and disclosures. The Commission encourages commenters to 
provide information regarding the advantages and disadvantages of the 
proposed regulation.

IV. Paperwork Reduction Act

    The proposed regulation contains ``collection of information'' 
requirements within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\17\ We will submit the proposal to the Office of Management 
and Budget (``OMB'') for review in accordance with the PRA.\18\ The 
Commission is proposing to create a new information collection entitled 
``Regulation AC--Analyst Certification.'' An agency may not conduct or 
sponsor, and a person is not required to respond to, an information 
collection unless it displays a currently valid OMB control number.
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    \17\ 44 U.S.C. 3501 et seq.
    \18\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
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A. Summary of Collection of Information

    Proposed Regulation AC, if adopted, would require that any research 
report published, circulated, or provided by a broker or dealer or 
person associated with a broker or dealer contain a statement attesting 
to the fact that the views expressed in each research report accurately 
reflect the analyst's personal views and whether or not the research 
analyst received or will receive any compensation in connection with 
the views or recommendations in the research report. The proposed 
regulation would also require broker-dealers to, on a quarterly basis, 
make, keep, and maintain records of research analyst statements 
regarding whether the views expressed in public appearances accurately 
reflected the analyst's views, and whether any part of the analyst's 
compensation is related to the specific recommendation or views 
expressed in the public appearance.

B. Reporting and Cost Burden Estimates

    The proposed regulation would provide that broker-dealers, and 
persons associated with broker-dealers, must include in research 
reports they publish certain certifications and disclosures about the 
analyst's views expressed in the research reports and any relationship 
between the analyst's compensation and the specific recommendations or 
views expressed. The proposed regulation would also require broker-
dealers to make, keep, and maintain records of research analyst 
certifications and disclosures in connection with public appearances.
    The staff of the Commission believes that the average amount of 
time it would take a broker-dealer to include the required 
certifications and disclosures in each research report is one minute 
per report. The Commission staff estimates that broker-dealers publish 
approximately 657,000 research reports per year.\19\ Therefore, the 
Commission estimates that the total annual burden in hours for all 
broker-dealers to comply with the research report certification and 
disclosure requirements of the proposed regulation is approximately 
10,950 hours per year [(1 minute  x  657,000 reports) / 60 minutes]. 
The Commission staff expects that research analysts will likely be the 
employees primarily charged with executing certifications and including 
them in research reports. According to industry sources, research 
analysts, on average, earn $189,250 per year, for an hourly pay rate of 
approximately $90. Including 35% overhead, Commission staff estimates 
that the hourly pay rate for a research analyst would be approximately 
$121.50. Therefore, the Commission estimates that the total annual 
burden in dollars of complying with the research report certification 
and disclosure requirements is approximately $1,330,425 per year 
[10,950 hours  x  $121.50 per hour].
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    \19\ Based on data provided by First Call, the staff of the 
Commission estimates that approximately 657,000 research reports 
were published in 2001.
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    The staff of the Commission believes that the average amount of 
time it would take a research analyst to prepare the quarterly 
statements regarding public appearances as required by the proposed 
regulation is ten minutes per analyst. The staff of the Commission 
believes that, on average, approximately 519 public appearances by 
research analysts occur per quarter,\20\ or about 2,076 per year. 
Therefore, the Commission believes that the total annual burden in 
hours of complying with the public appearance certification and 
disclosure requirements would be approximately 346 hours per year [(10 
minutes  x  2076 appearances) / 60 minutes].
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    \20\ 519 is approximately 10% of the estimated 5,186 research 
analysts employed in the U.S., which is based on information 
provided by Nelson Information.
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    In cases where the analyst is unable to make the certifications in 
connection with public appearances as specified in Rule 502 (a)(1) of 
proposed Regulation AC, the firm is required to make, keep, and 
maintain a record of a statement from the research analyst that he or 
she is unable to make the specified certifications, and the reasons 
therefor, and to provide copies of that statement to its examining 
authority. The staff of the Commission believes that there will be few, 
if any, instances where a broker-dealer will provide copies of 
statements to their examining authority, as analysts and their firms 
will have strong incentives to avoid having to make the type of 
disclosures required to be provided to their examining authority. 
Therefore, the total annual burden, in dollars, of complying with the 
public appearance certification requirements would be approximately 
$42,039 [2,076 appearances  x  $20.25 pay per 10 minutes].
    The proposed regulation requires that the records of statements 
regarding public appearances submitted by research analysts to their 
broker-dealers be preserved in accordance with Exchange Act Rule 17a-
4(b)(4). Exchange Act Rule 17a-4(b)(4) requires that any communication 
relating to a broker-dealer's business, including inter-office 
communications, must be kept for at least three years. In light of the 
existing record preservation requirement for brokers and dealers under 
Exchange Act Rule 17a-4(b)(4),\21\ the staff of the Commission believes 
that any additional costs to preserve the records of the certifications 
required by the proposed regulation would be minimal.
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    \21\ OMB Control No. 3235-0279.
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    Proposed Regulation AC, if adopted, would require that brokers and 
dealers establish and follow sufficient procedures to comply with the 
provisions of the proposed regulation and would require that the broker 
or dealer is able to: collect, process, and disclose the information 
required to be included in research reports; ensure the submission of 
information required to be submitted to the firm's compliance 
department; and periodically review and evaluate these procedures. 
Brokers or dealers should already have these procedures in place to 
meet existing obligations under the SRO rules relating

[[Page 51514]]

to research analysts that recently were approved by the Commission.\22\ 
Therefore, the Commission estimates that the proposed regulation would 
result in a total annual time burden of approximately 11,296 hours 
[10,950 hours to comply with research report requirements + 346 hours 
to comply with public appearance requirements], and a total annual cost 
in dollars of approximately $1,372,464 [$1,330,425 to comply with the 
research report requirements + $42,039 to comply with the public 
appearance requirements].
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    \22\ Supra note 10.
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C. Request for Comment

    The Commission solicits comments in order to: (i) Evaluate whether 
the proposed collection of information is necessary for the proper 
performance of the functions of the agency, including whether the 
information shall have practical utility; (ii) evaluate the accuracy of 
the Commission's estimate of the burden of the proposed collection of 
information; (iii) determine whether there are ways to enhance the 
quality, utility, and clarity of the information to be collected; and 
(iv) evaluate whether there are ways to minimize the burden of the 
collection of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology. We also request comment on how many public 
appearance certifications would likely be submitted to brokerage firms 
per quarter, and how many of those statements would be required to be 
provided to the firm's examining authority.
    Persons submitting comments on the collection of information 
requirements should direct them to the Office of Management and Budget, 
Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs, Washington, DC 20503, and 
should also send a copy of their comments to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609, with reference to File No. S7-30-02. 
Requests for materials submitted to OMB by the Commission with regard 
to this collection of information should be in writing, refer to File 
No. S7-30-02, and be submitted to the Securities and Exchange 
Commission, Records Management, Office of Filings and Information 
Services. OMB is required to make a decision concerning the collections 
of information between 30 and 60 days after publication. Consequently, 
a comment to OMB is best assured of having its full effect if OMB 
receives it within 30 days of publication.

V. Costs and Benefits of the Proposed Rule

    The Commission is considering the costs and the benefits of 
proposed Regulation AC. The Commission encourages commenters to discuss 
any costs or benefits in addition to those discussed below. In 
particular, the Commission requests comment on any potential costs, as 
well as any potential benefits, resulting from the proposals for 
investors, issuers, broker-dealers, other securities industry 
professionals, SROs, or others. Commenters should provide analysis and 
data to support their views on the costs and benefits associated with 
the proposed amendments.

A. Benefits

    We believe that investor confidence in the integrity of research 
has suffered because some investors may believe that research analyst 
objectivity has been compromised due to, among other things, analysts' 
personal compensation and firms' investment banking relationships with 
issuers that are the subjects of research reports. Requiring that 
research analysts certify that the views expressed in research reports 
reflect their personal views, and requiring disclosure of information 
regarding whether analyst compensation is related to the specific 
recommendations made, would help bolster investor confidence in the 
quality of research. This, in turn, should help bolster investor 
confidence in the securities markets.
    Proposed Regulation AC would require that broker-dealers include 
certifications in research reports regarding the accuracy of the views 
expressed in the research report. Firms would be required to include in 
their research reports certifications that the views expressed in the 
research report accurately reflect the analyst's personal views 
regarding the subject securities or issuers and whether or not the 
analyst received compensation in connection with the reports. Many 
investors rely on the research reports and recommendations provided by 
their brokers. To the extent that the proposed regulations require 
disclosures that provide more transparency than provided by current 
regulation, these disclosures should provide investors with important 
information with which to determine the value of the research available 
to them.
    Proposed Regulation AC may result in an increase in the overall 
quality of the research available to the public because a broker-dealer 
would be in violation of the securities laws when issuing research 
reports unless the reports include the required certifications and 
disclosures. The proposed requirement that the research analyst 
principally responsible for preparing the research report personally 
certify that the views expressed in the report accurately reflect his 
or her personal views creates an incentive for analysts to examine, 
even more carefully, the basis and foundations for his or her 
recommendations in preparing research reports.
    Proposed Regulation AC may also result in an increase in the 
quality of research because of competitive reasons. Firms that publish 
research reports that do not contain certain analyst certifications 
will be in violation of the proposed regulation, and firms whose 
research analysts' compensation is related to the specific 
recommendations or views provided in research reports may lose some 
business to firms that are less conflicted. The proposed regulation is 
intended to enhance investor confidence in the integrity of the 
research available to them. We believe that by requiring research 
analysts to certify as to the accuracy of the views expressed in 
research reports, investor confidence in the securities markets should 
be enhanced, thereby leading to the benefit of more liquid and 
efficient markets. These benefits are difficult to quantify.

B. Costs

    While the proposed regulation may lead to some additional costs for 
brokers or dealers, we believe that any costs should not be 
significant. The proposed certification and disclosure requirements 
would require research analysts to even more carefully consider the 
accuracy of the views expressed in research reports and public 
appearances, to consider their compensation arrangements, and then to 
make the required certifications and disclosures. In light of current 
requirements under SRO rules, the Commission estimates that, beyond the 
paperwork costs described above, any additional costs that would result 
from the required certifications and disclosures would be minimal.
    Moreover, with respect to the compensation certifications and 
disclosures that would be required by proposed Regulation AC, brokers 
and dealers are already required to make certain disclosures regarding 
research analyst compensation under SRO rules.\23\ Additionally, 
Exchange Act Rule 17a-3(a)(19) currently requires

[[Page 51515]]

brokers or dealers to maintain a record of all agreements pertaining to 
the relationship between each associated person and the broker-dealer, 
including a summary of each associated person's compensation 
arrangement or plan.\24\ Brokers or dealers should also already have in 
place procedures necessary to comply with many components of the 
proposed regulation due to existing obligations under SRO rules, 
although these procedures might require some minor modifications to 
conform with proposed Regulation AC. As noted previously, the 
Commission estimates that the annual paperwork costs in dollars of 
complying with the proposed regulation would be approximately 
$1,372,464.
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    \23\ See NASD Rule 2711 and NYSE Rule 472.
    \24\ These subparagraphs of the rule may be redesignated as Rule 
17a-3(a)(12)(ii) and Rule 17a-3(a)(12)(iii), should the Commission 
adopt amendments proposed in October 2001. See Securities Exchange 
Act Release No. 44992 (October 26, 2001).
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C. Request for Comments

    As an aid in evaluating costs associated with proposed Regulation 
AC, the Commission requests the public's views and any supporting 
information. We request comment on all aspects of this cost-benefit 
analysis, including identification of any additional costs or benefits 
of, or suggested alternatives to, the proposed regulation. Commenters 
are requested to provide empirical data and other factual support for 
their views to the extent possible.

VI. Regulatory Flexibility Act Certification

    The Commission certifies, pursuant to 5 U.S.C. 605(b), that the 
proposed regulation would not, if adopted, have a significant economic 
impact on a substantial number of small entities. The purpose of the 
proposed regulation is to increase analyst independence; further manage 
conflicts of interest; require increased disclosures to investors; and 
promote investor confidence in the integrity of research. By improving 
the quality of disclosure, the proposed regulation should enhance 
investor confidence in the fairness and integrity of the securities 
markets. The requirements of the proposed regulation are closely 
related to information, procedures, and disclosures required by 
existing SRO rules, which apply to both large and small broker-dealers 
that publish or circulate research reports.
    The Division of Market Regulation estimates that the total burden 
in hours required to comply with proposed Regulation AC would, at most, 
be approximately two hours and two minutes per small firm. Accordingly, 
the Commission certifies that proposed regulation should not have a 
significant impact on a substantial number of small entities.

VII. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, or ``SBREFA,''\25\ we must advise OMB as to whether the 
proposed regulation constitutes a ``major'' rule. Under SBREFA, a rule 
is considered ``major'' where, if adopted, it results or is likely to 
result in:
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    \25\ Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C., and as a note 
to 5 U.S.C. Section 601).
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more 
(either in the form of an increase or a decrease);
     A major increase in costs or prices for consumers or 
individual industries; or
     Significant adverse effects on competition, investment or 
innovation.
    Where a rule is ``major,'' its effectiveness will generally be 
delayed for 60 days pending Congressional review. We request comment on 
the potential impact of the proposed regulation on the economy on an 
annual basis. Commenters are requested to provide empirical data and 
other factual support for their views to the extent possible.

VIII. Effects on Competition, Efficiency and Capital Formation

    Section 3(f) of the Exchange Act \26\ requires us, when engaging in 
rulemaking where we are required to consider or determine whether an 
action is necessary or appropriate in the public interest, to consider 
whether the action will promote efficiency, competition, and capital 
formation. In addition, section 23(a)(2) \27\ of the Exchange Act 
requires the Commission to consider the impact any rule would have on 
competition. Further, the law requires that the Commission not adopt 
any rule that would impose a burden on competition not necessary or 
appropriate in furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------

    \26\ 15 U.S.C. Section 78c(f).
    \27\ 15 U.S.C. Section 78w(a)(2).
---------------------------------------------------------------------------

    The proposed regulation is intended to enhance investor confidence 
in the integrity of the research available to them. We believe that 
requiring broker-dealers to include analyst certifications in research 
reports, as well as the other disclosures required by proposed 
Regulation AC, should enhance investor confidence in the securities 
markets, thereby leading to a more efficient market. The Commission has 
considered the proposed regulation in light of the standards cited in 
section 23(a)(2) and believes preliminarily that it, if adopted, would 
not impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act.
    We request comment on whether the proposed amendments, if adopted, 
would impose a burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act. We also request 
comment on whether the proposed amendments, if adopted, would promote 
efficiency, competition, and capital formation. Specifically, research 
analysts are employed by different kinds of entities. Therefore, we 
seek comment on whether the regulation should be more expansive. For 
example, should the proposed regulation cover banks that are not 
associated persons? Commenters are requested to provide empirical data 
and other factual support for their views if possible.

IX. Statutory Authority

    Regulation AC is being proposed pursuant to sections 3, 15, 17, and 
23 of the Exchange Act and pursuant to sections 17 and 19 of the 
Securities Act.

Text of the Proposed Regulation

List of Subjects in 17 CFR Part 242

    Securities.

    In accordance with the foregoing, Title 17, Chapter II, of the Code 
of Federal Regulations is proposed to be amended as follows:

PART 242--REGULATIONS M, ATS and AC

    1. The authority citation for part 242 is revised to read as 
follows:

    Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2), 
78i(a), 78j, 78k-1(c), 78l, 78m, 78mm, 78n, 78o(b), 78o(c), 78o(g), 
78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 80a-23, 80a-29, and 80a-37.

    2. The part heading for part 242 is revised as set forth above.
    3. Part 242 is amended by adding Regulation AC, Secs. 242.500 
through 242.502 to read as follows:

Regulation AC--Analyst Certification

Sec.
242.500   Definitions.
242.501   Research reports.
242.502   Public appearances.

Regulation AC--Analyst Certification


Sec. 242.500  Definitions.

    For purposes of Regulation AC (Secs. 242.500 through 242.502):

[[Page 51516]]

    Public appearance means any participation in a seminar, forum 
(including an interactive electronic forum), radio or television 
interview, or other public speaking activity in which a research 
analyst makes a specific recommendation or offers an opinion concerning 
a security or an issuer.
    Research analyst means any natural person who is principally 
responsible for the analysis of any security or issuer included in a 
research report.
    Research report means a written communication that includes an 
analysis of the securities of an issuer or issuers, provides 
information reasonably sufficient upon which to base an investment 
decision and includes a recommendation.


Sec. 242.501  Research reports.

    A broker or dealer, or any person associated with a broker or 
dealer, that publishes, circulates, or provides, directly or 
indirectly, a research report prepared by a research analyst shall 
include in that research report a clear and prominent certification by 
the research analyst containing the following statements:
    (a) A statement attesting that the views expressed in the research 
report accurately reflect the research analyst's personal views about 
any and all of the subject securities or issuers; and
    (b)(1) A statement attesting that no part of the research analyst's 
compensation was, is, or will be, directly or indirectly, related to 
the specific recommendations or views expressed by the research analyst 
in the research report; or
    (2) A statement:
    (i) Attesting that part or all of the research analyst's 
compensation was, is, or will be, directly or indirectly, related to 
the specific recommendations or views expressed by the research analyst 
in the research report;
    (ii) Identifying the source and amount of such compensation and the 
purpose therefor; and
    (iii) Further disclosing that the compensation could influence the 
recommendations or views expressed in the research report.


Sec. 242.502  Public appearances.

    (a) If a broker or dealer, or any person associated with a broker 
or dealer, publishes, circulates, or provides, directly or indirectly, 
a research report prepared by a research analyst, the broker or dealer 
must make a record within thirty days after each calendar quarter in 
which the research analyst has made a public appearance that includes a 
certification by the research analyst containing the following 
statements:
    (1) A statement:
    (i) Attesting that the views expressed by the research analyst in 
each public appearance accurately reflected the research analyst's 
personal views at that time about any and all of the subject securities 
or issuers; and
    (ii) Attesting that no part of the research analyst's compensation 
was, is, or will be, directly or indirectly, related to the specific 
recommendations or views expressed by the research analyst in any 
public appearance; or
    (2) A statement attesting that the research analyst is unable to 
provide the written certifications specified in paragraph (a)(1) of 
this section and the reasons therefor. The broker or dealer must also 
disclose in all research reports prepared by the research analyst for 
the next 120 days that the research analyst did not provide the 
certifications specified in paragraph (a)(1) of this section and the 
reasons therefor.
    (b) A broker or dealer shall promptly provide copies of all 
statements prepared pursuant to paragraph (a)(2) of this section to its 
examining authority, designated pursuant to Section 17(d) of the 
Securities Exchange Act of 1934 (15 USC 78q(d)) and Sec. 240.17d-2 of 
this chapter.
    (c) A broker or dealer shall preserve the records specified in 
paragraph (a) of this section in accordance with Sec. 240.17a-4(b)(4) 
of this chapter.

    By the Commission.

    Dated: August 2, 2002.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-20031 Filed 8-7-02; 8:45 am]
BILLING CODE 8010-01-P