[Federal Register Volume 68, Number 39 (Thursday, February 27, 2003)]
[Rules and Regulations]
[Pages 9482-9493]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-4576]



[[Page 9481]]

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Part III





Securities and Exchange Commission





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17 CFR Part 242



Regulation Analyst Certification; Final Rule

  Federal Register / Vol. 68, No. 39 / Thursday, February 27, 2003 / 
Rules and Regulations  

[[Page 9482]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR PART 242

[Release Nos. 33-8193; 34-47384; File No. S7-30-02]
RIN 3235-AI60


Regulation Analyst Certification

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'' ``SEC'' 
or ``we'') is adopting new Regulation Analyst Certification 
(``Regulation AC''). Regulation AC requires that brokers, dealers, and 
certain persons associated with a broker or dealer include in research 
reports certifications by the research analyst that the views expressed 
in the report accurately reflect his or her personal views, and 
disclose whether or not the analyst received compensation or other 
payments in connection with his or her specific recommendations or 
views. Broker-dealers would also be required to obtain periodic 
certifications by research analysts in connection with the analyst's 
public appearances. By requiring these certifications and disclosures, 
Regulation AC should promote the integrity of research reports and 
investor confidence in those reports.

EFFECTIVE DATE: April 14, 2003.

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 adopting new Regulation Analyst 
Certification \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 505.
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I. Introduction and Summary of Regulation Analyst Certification

    During 1999, the Commission and Congress began to closely examine 
research analysts' conflicts of interest. We were particularly 
concerned that many investors who rely on analysts' recommendations may 
not know, among other things, that favorable research coverage could be 
used to market the investment banking services provided by an analyst's 
firm, and that an analyst's compensation may be based significantly on 
generating investment banking business. Moreover, news reports stated 
that some analysts had issued reports that did not reflect their true 
beliefs and communicated to institutional investors views that differed 
materially from those expressed in their research reports.\2\ 
Regulation AC, together with other efforts, is intended to address 
these issues.\3\
    On May 10, 2002, we approved rule changes filed by the NYSE and 
NASD governing analyst conflicts of interest.\4\ On December 31, 2002, 
we noticed for comment a second set of proposed rules filed by the NYSE 
and NASD to further address research analyst conflicts of interest.\5\ 
These self-regulatory organization rules are part of an ongoing process 
on our part and that of the NYSE and NASD to address conflicts of 
interest affecting the integrity and objectivity of research by 
securities firms. Regulation AC is intended to complement other rules 
governing conflicts of interest disclosure by research analysts, 
including NYSE Rule 472, NASD Rule 2711, and the anti-fraud provisions 
of the federal securities law.
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    \2\ See, e.g., Gretchen Morgenson, ``NASD Sues Star Analyst Over 
Research,'' The New York Times at A1 (September 24, 2002).
    \3\ On December 20, 2002, the Commission, New York Attorney 
General, North American Securities Administrators Association, New 
York Stock Exchange (``NYSE''), National Association of Securities 
Dealers (``NASD''), and state securities regulators announced an 
agreement in principle that, if approved by the Commission, would 
result in a settlement with major investment firms to resolve issues 
of conflicts of interest relating to the production of research 
reports. Securities and Exchange Commission Press Release No. 2002-
179 (December 20, 2002).
    \4\ Securities Exchange Act Release No. 45908 (May 10, 2002), 67 
FR 34968 (May 16, 2002).
    \5\ Securities Exchange Act Release No. 47110 (December 31, 
2002), 68 FR 826 (January 7, 2003). The Commission will consider 
action on these proposed rules after the close of the comment 
period, which is March 10, 2003.
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    On July 30, 2002, President Bush signed into law the Sarbanes-Oxley 
Act of 2002 (``SOA'').\6\ Section 501 of the SOA requires that rules 
governing analyst conflicts be adopted within a year of enactment, 
including rules: limiting the supervision and compensatory evaluation 
of securities analysts; defining periods in which brokers or dealers 
engaged in a public offering of a security as underwriter or dealer may 
not publish research on such security; and requiring securities 
analysts and brokers or dealers to disclose specified conflicts of 
interest. The Commission voted to propose Regulation AC on July 24, 
2002, before the passage of the SOA.\7\ In the Proposing Release, the 
Commission noted that it would abide by the directives of the SOA as it 
continues to address analyst conflicts of interest issues, including 
with respect to the possible adoption of Regulation AC.
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    \6\ Pub. L. 107-204 (2002).
    \7\ Securities Exchange Act Release No. 46301 (August 2, 2002), 
67 FR 51510 (August 8, 2002) (``Proposing Release'').
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    The Commission received twenty-one comment letters in response to 
the Proposing Release,\8\ which generally supported the proposed 
regulation. After considering the comments, we are adopting Regulation 
AC with modifications to the rule to reflect commenters' concerns and 
to clarify and limit certain provisions. We are also providing 
interpretive guidance requested by commenters.
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    \8\ See Letters to Jonathan G. Katz, Secretary, Commission, 
from: The Alliance in Support of Independent Research, dated 
September 20, 2002 (``Alliance''); Association for Investment 
Management and Research, dated September 30, 2002 (``AIMR''); The 
Bond Market Association, dated September 23, 2002 (``TBMA''); 
Charles Schwab &Co., Inc., dated September 23, 2002 (``Schwab''); 
Cleary, Gottlieb, Steen & Hamilton, dated September 12, 2002 
(``Cleary''); Credit Suisse First Boston, dated September 23, 2002 
(``CSFB''); David Norr Inc., dated August 16, 2002 (``David Norr''); 
Goldman Sachs, dated September 23, 2002 (``Goldman''); Investment 
Company Institute, dated September 23, 2002 (``ICI''); Investment 
Counsel Association of America, letters dated September 23, 2002 and 
January 13, 2003 (``ICAA''); Investorside Research Association, 
dated September 20, 2002 (``Investorside''); Karr Tuttle Campbell, 
dated September 27, 2002 (``Karr Tuttle''); Rupert Kenna, dated 
October 10, 2002; Merrill Lynch, dated September 18, 2002 
(``Merrill''); North American Securities Administrators Association, 
Inc., dated September 23, 2002 (``NASAA''); Salomon Smith Barney, 
dated September 27, 2002 (``SSB''); Securities Industry Association, 
dated September 23, 2002 (``SIA''); Sullivan & Cromwell, dated 
September 23, 2002 (``Sullivan''); Thomson Financial, dated 
September 23, 2002; and Weiss Ratings, Inc., dated September 10, 
2002 (``Weiss'').
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A. Certifications in Connection With Research Reports

    As adopted, Regulation Analyst Certification requires that brokers, 
dealers, and their associated persons that are ``covered persons'' \9\ 
that publish,\10\ circulate, or provide research reports include in 
those research reports:
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    \9\ ``Covered person'' is defined in Rule 500 of Regulation AC, 
and is discussed in detail below at II.A.2.
    \10\ Publish means to disseminate by any means, including 
through any third party.
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    (A) A statement by the research analyst (or analysts) certifying 
that the views expressed in the research report accurately reflect such 
research analyst's personal views about the subject securities and 
issuers; and
    (B) A statement by the research analyst (or analysts) certifying 
either:
    (1) That no part of his or her compensation was, is, or will be 
directly or indirectly related to the specific recommendations or views 
contained in the research report; or

[[Page 9483]]

    (2) That part or all of his or her compensation was, is, or will be 
directly or indirectly related to the specific recommendations or views 
contained in the research report. If the analyst's compensation was, 
is, or will be directly or indirectly related to the specific 
recommendations or views contained in the research report, the 
statement must include the source, amount, and purpose of such 
compensation, and further disclose that it may influence the 
recommendation in the research report.
    All certifications must be clear and prominent.\11\ If the analyst 
is unable to certify that the report accurately reflects his or her 
personal views, distribution of the report by the broker-dealer or 
covered person would be in violation of Regulation AC. Similarly, if 
the report does not contain one of the two alternative compensation 
certifications, distribution of the report by the broker-dealer or 
covered person would be in violation of Regulation AC.\12\
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    \11\ Regulation AC, 17 CFR 242.501(a). The Commission expects 
that the certifications will be included on the front page of the 
research report, or that the front page will specify the page or 
pages on which each certification is found. Disclosures and 
references to disclosures must be clear and prominent. Electronic 
research reports may utilize hyperlinks to this disclosure, provided 
that the first screen that the investor sees clearly and prominently 
labels the hyperlinks to the required disclosures. When hyperlinks 
are not possible (such as a report in PDF format), firms should 
follow the requirements for paper reports. See NYSE Information Memo 
No. 02-26 (June 26, 2002), and NASD Notice to Members 02-39 (July 
2002).
    \12\ Communications relating to the certifications should be 
treated as being within the purview of Exchange Act Rule 17a-
4(b)(4). See Exchange Act Rule 17a-4(b)(4), 17 CFR 240.17a-4(b)(4).
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    Research reports generally contain an analyst's summary rating of 
the security based on his or her particular firm's rating system, as 
well as an analysis. The summary rating or recommendation is often one 
word (e.g., buy, sell, overweight), while the analysis may be very 
detailed and lengthy. Generally, the analysis explains the basis for 
the rating and provides extensive supplementary information, which, in 
some instances, significantly qualifies or conditions the stated 
rating. The Regulation AC certification that the views in the report 
accurately reflect the analyst's personal views applies to the analysis 
as reflected in the rating as well as the substance of a research 
report.
    A rating is designed to be a severable summary statement of the 
analysis in the report. In situations where the analysis significantly 
qualifies or conditions the stated rating, a communication by the firm 
or the analyst of only the rating to an investor as representing the 
analyst's views about the security could be misleading.\13\ Further, 
where the analysis contradicts the stated rating, an analyst and the 
firm could be in violation of the anti-fraud provisions of the federal 
securities laws. A rating that contradicts the analysis could also 
render false the analyst's certification, because the analyst's 
certification reflects both the analysis as well as the rating.
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    \13\ Cf. Hanly v. SEC, 415 F.2d 589, 597 (2d Cir. 1969).
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B. Certifications in Connection With Public Appearances

    Under Regulation AC, broker-dealers must make and keep records 
related to public appearances by research analysts. Specifically, if a 
broker-dealer publishes, circulates, or provides a research report 
prepared by a research analyst employed by the broker-dealer or a 
covered person, the broker-dealer is required to make a record within 
thirty days after each calendar quarter in which the research analyst 
made any public appearance, that includes:
    [sbull] A statement by the research analyst attesting that the 
views expressed by the research analyst in all public appearances 
during the calendar quarter accurately reflected the research analyst's 
personal views at that time about any and all of the subject securities 
or issuers; and
    [sbull] 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 such public appearance.
    In cases where the broker-dealer does not obtain a statement by the 
research analyst in connection with public appearances as described 
above, the broker-dealer must promptly notify its examining authority, 
designated pursuant to section 17(d) of the Exchange Act and Rule 17d-2 
thereunder, that the analyst did not provide certification in 
connection with public appearances. In addition, for 120 days following 
such notification, the broker-dealer must disclose in any research 
report it distributes authored by that analyst that the analyst did not 
provide certification specified in Rule 502(a) of Regulation AC. 
Further, broker-dealers must keep and maintain these records pursuant 
to Rule 17a-4.

II. Response to Comments on Regulation Analyst Certification

    In the Proposing Release, the Commission sought comment on specific 
aspects of the proposed regulation, as well as general comments. We 
received twenty-one comment letters in response to the release. Many 
commenters expressed support for Regulation AC, although a number also 
expressed concerns regarding one or more aspects of the proposal, and 
some suggested alternatives for addressing particular issues. We are 
adopting Regulation AC with modifications from the proposal that 
clarify or limit provisions or reflect commenters' views.

A. Defined Terms

    We requested comment on whether the proposed definitions of 
``research report,'' ``research analyst,'' or ``public appearance'' 
should be broader or narrower than proposed. Eleven commenters 
discussed the scope of the definitions proposed in Regulation AC and 
noted differences in certain respects compared to definitions contained 
in the self-regulatory organization (``SRO'') rules and the SOA.\14\ 
Generally, commenters believed that compliance efforts would be 
significantly enhanced by the use of consistent terminology throughout 
the rules wherever possible.\15\ The Commission has conformed the 
terminology and definitions of Regulation AC to the SRO rules and the 
SOA wherever appropriate.
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    \14\ See Alliance, AIMR, Cleary, Goldman, ICI, ICAA, SIA, SSB, 
Schwab, Sullivan, and Thomson Financial.
    \15\ See, e.g., Cleary and SIA.
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1. Definition of ``Research Analyst''
    Commenters noted that Regulation AC defines ``research analyst'' 
more broadly than do the current SRO analyst rules and the SOA. 
Specifically, the Regulation AC definition as proposed covers ``any 
natural person,'' rather than only ``associated persons of a member'' 
(in the case of the SRO rules) or ``associated persons of a registered 
broker or dealer'' (in the case of the SOA). Commenters argued that 
Regulation AC applies to any person, including employees of investment 
advisers, foreign entities, or any other third party that prepares a 
research report that is circulated by a broker-dealer or associated 
persons.\16\
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    \16\ See, e.g., Cleary, ICAA, SSB, Sullivan, and Thomson 
Financial.
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    In this regard, Regulation AC is designed to be broader than the 
SRO rules and the SOA in that it applies to brokers, dealers, and 
certain associated persons,\17\ which may also include investment 
advisers and others that prepare research reports. We believe that the 
broad scope of Regulation AC

[[Page 9484]]

is warranted because Regulation AC imposes core standards of integrity 
that should pertain to all research distributed by broker-dealers and 
covered persons. On the other hand, we note that Regulation AC is 
narrower than the SRO rules and the SOA in that its certification 
requirements apply only to the research analyst or analysts primarily 
responsible for the content of a research report; junior analysts are 
not required to certify.\18\ This distinction is reasonable because the 
core integrity standards promoted by Regulation AC are achieved where 
the analysts primarily responsible for the views expressed in the 
research report are required to certify. In comparison, the coverage of 
junior analysts by the SRO rules is appropriate because the concerns 
those provisions seek to address (for example, trading ahead of 
research reports) exist with respect to all analysts associated with a 
member firm and those persons who report to analysts.
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    \17\ See Rule 500 of Regulation AC (definition of ``covered 
person'').
    \18\ The proposed definition of ``research analyst'' referred to 
any natural person ``principally'' responsible for research reports; 
the adopted definition refers to any natural person ``primarily'' 
responsible. This modification clarifies that, whether or not a 
natural person is considered to be principally responsible for 
research reports as a job description, any natural person who is 
primarily responsible for the preparation of the content of any 
research report is a research analyst for the purposes of Regulation 
AC unless otherwise exempted.
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2. Definition of ``Covered Person''
    In response to comments, we have added the definition of ``covered 
person'' to narrow the scope of persons to which Regulation AC applies. 
Covered person means persons associated with a broker or dealer,\19\ 
but not including an associated person that has no officers or 
employees in common with the broker or dealer and where the broker or 
dealer maintains and enforces written policies and procedures 
reasonably designed to prevent the broker or dealer or any of its 
controlling persons, officers, or employees from influencing the 
activities of research analysts and the content of research reports 
prepared by the associated person. In adopting Regulation AC, we have 
sought to focus the rule on research that appears to be most 
susceptible to pressures that might compromise its integrity, for 
example pressures to generate investment banking business.
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    \19\ The term ``person associated with a broker or dealer'' is 
defined in Exchange Act section 3(a)(18), 15 U.S.C. 78c(a)(18).
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    We believe that it is unnecessary to apply Regulation AC to 
research published, circulated, or provided by associated persons who 
have a sufficient level of independence from the broker or dealer with 
which they are associated. Associated persons who meet the independence 
criteria in this definition should have a sufficient level of 
independence so that pressures from the broker-dealer with which they 
are associated should not compromise their research. In order to avoid 
the possibility that an associated person might incorrectly believe 
that the broker-dealer had policies and procedures to prevent 
influencing the research of the associated person and, therefore, fail 
to certify when certification was required, we have added a provision 
to Regulation AC (Rule 504) that requires a broker or dealer to notify 
its associated persons that issue research reports as to whether the 
broker or dealer maintains and enforces such written policies and 
procedures and whether the associated person has any officers (or 
persons performing similar functions) or employees in common with the 
broker or dealer who can influence the activities of research analysts 
or the content of research reports and, if so, the identity of those 
persons.\20\ We also would not expect that such policies and procedures 
would interfere with other communications between the associated person 
and the broker-dealer made in the ordinary course of business and not 
in violation of any other provision of the securities laws.
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    \20\ Associated persons of a member are required under SRO rules 
to provide prompt notice to his or her employer of employment with 
any other persons as a result of a business activity. See NASD Rule 
3030.
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    We have also excluded from the rule investment advisers that are 
prohibited under section 203A of the Investment Advisers Act of 1940 
\21\ (``Advisers Act'') from registering with the Commission as 
investment advisers and not otherwise registered or required to be 
registered as a broker-dealer. Section 203A was added to the Advisers 
Act by the National Securities Markets Improvement Act of 1996 
(``NSMIA''), which amended the Advisers Act to divide responsibility 
for regulating investment advisers between the Commission and state 
securities authorities.\22\ Section 203A of the Advisers Act effects 
this division by generally prohibiting investment advisers from 
registering with us unless they have at least $25 million of assets 
under management or advise a registered investment company.\23\ 
Advisers prohibited from registering with us are subject to the 
regulation of state securities authorities, but also continue to be 
subject to the federal securities laws, including the anti-fraud 
provisions of the federal securities laws.
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    \21\ 15 U.S.C. 80b-3a.
    \22\ Pub. L. No. 104-290, 110 Stat. 3416 (1996) (codified in 
scattered sections of the United States Code). Section 203A was 
designed to allow the Commission to better use its limited resources 
by concentrating its regulatory responsibilities on advisers with 
national businesses, and to reduce the burden to investment advisers 
of the overlapping and duplicative regulation existing prior to the 
enactment of NSMIA. See S. Rep. No. 293, 104th Cong., 2d Sess. 2-4 
(1996). In conjunction with implementing NSMIA, the Commission 
amended several ``prophylactic'' anti-fraud rules under the Advisers 
Act to make them inapplicable to state-registered advisers because 
``application of these provisions to state-registered advisers is 
more appropriately a matter for state law.'' Investment Advisers Act 
Release No. 1633 (May 15, 1997), 62 FR 28112 (May 22, 1997).
    \23\ Pursuant to authority under Advisers Act section 
203(a)(1)(A) the Commission adopted Advisers Act Rule 203A-1, which 
made SEC registration optional for certain investment advisers that 
have between $25 and $30 million of assets under management. See 
Advisers Act Rule 203A-1(a)(1), 17 CFR 275.203A-1(a)(1).
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    We also make clear that no provision of the regulation shall apply 
to the publisher of any newspaper, news magazine, or business or 
financial publication of general and regular circulation that is not 
registered or required to be registered with the Commission as a broker 
or dealer or investment adviser. Regulation AC was never intended to 
govern media coverage of issuers.\24\
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    \24\ It is possible that a broker or dealer or covered person 
could provide a research report to a media entity intending that it 
be published. In that case, the report must be certified by the 
research analyst.
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3. Definition of ``Research Report''
    The Commission requested comment on whether the definition of 
``research report'' should be broader or narrower than proposed. 
Commenters discussed several aspects of the proposed definition, 
including whether it should cover debt securities, whether it should 
include electronic communications, and guidance concerning what will 
and will not be considered a research report.
a. Application to Debt Securities
    We specifically requested comment on whether the proposed 
definition of ``research report'' should be limited to cover only 
equity securities. Five commenters discussed the application of 
Regulation AC to fixed income and all supported the application to debt 
to some extent.\25\
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    \25\ See CSFB, Goldman, NASAA, SSB, and TBMA. We note that the 
SOA and the SRO rules apply only to equity securities.
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    The Commission has determined that applying the requirements of 
Regulation AC to debt securities as well as equity securities would 
benefit investors because it would provide to debt investors the same 
benefits as equity

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investors by promoting the integrity of research reports and confidence 
in research analyst recommendations.
b. Electronic Communications
    Commenters noted that, unlike the SRO rules, the proposed 
definition of ``research report'' in Regulation AC did not explicitly 
include ``electronic communications,'' and requested that the 
Commission clarify that the regulation would apply to research reports 
transmitted electronically.
    The Commission believes that electronic communications were 
included under proposed Regulation AC's definition of ``research 
report.'' However, in response to commenters' concerns, the Commission 
has modified the proposed definition of ``research report'' to 
explicitly include written communications in electronic form.
c. What Constitutes a Research Report?
    The Commission has deleted the ``recommendation'' element from 
Regulation AC's proposed definition of ``research report'' to conform 
to the definition in the SOA. Therefore, ``research report'' is defined 
as ``a written communication (including an electronic communication) 
that includes an analysis of a security or an issuer and provides 
information reasonably sufficient upon which to base an investment 
decision.''
    Commenters requested that the Commission provide guidance 
concerning what types of communications the rule is not intended to 
cover.\26\ Commenters also requested clarification that Regulation AC 
would not apply to internal communications.
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    \26\ See SIA and Schwab.
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    It is not possible to provide a complete list of all types of 
communications that would or would not fall within the definition of 
``research report.'' Whether a particular communication constitutes a 
research report for the purposes of Regulation AC will turn on the 
individual facts and circumstances surrounding that communication. In 
general, however, the following communications would not be research 
reports if they do not include an analysis of, or recommend or rate, 
individual securities or companies:
    [sbull] Reports discussing broad-based indices, such as the Russell 
2000 or S&P 500 index.
    [sbull] Reports commenting on economic, political, or market 
conditions.
    [sbull] Reports commenting on or analyzing particular types of debt 
securities or characteristics of debt securities.
    [sbull] Technical analysis concerning the demand and supply for a 
sector, index, or industry based on trading volume and price.
    [sbull] Reports that recommend increasing or decreasing holdings in 
particular industries or sectors or types of securities.
    The following communications would generally not be research 
reports even if they recommend or rate individual securities or 
companies:
    [sbull] Statistical summaries of multiple companies' financial data 
(including listings of current ratings) that do not include any 
analysis of individual companies' data.
    [sbull] An analysis prepared for a specific person or a limited 
group of fewer than fifteen persons.\27\
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    \27\ We have focused on a group of fewer than fifteen persons in 
part because Congress made a determination that an investment 
adviser who, during the course of the preceding twelve months, has 
had fewer than fifteen clients and who, among other things, does not 
hold themselves out generally to the public as an investment 
adviser, does not have to register with the Commission as an 
investment adviser. See Advisers Act Rule 203(b)(3), 15 U.S.C. 80b-
3(b)(3).
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    [sbull] Periodic reports or other communications prepared for 
investment company shareholders or discretionary investment account 
clients discussing past performance or the basis for previously made 
discretionary investment decisions.
    [sbull] Internal communications that are not given to customers.
4. Definition of ``Third Party Research Analyst''
    In response to commenters'' concerns, we have added a definition of 
``third party research analyst'' in order to refine the scope of 
Regulation AC. A ``third party research analyst'' is, with respect to a 
particular broker or dealer, any research analyst not employed by that 
broker or dealer or any associated person of that broker or dealer. 
With respect to a covered person, a ``third party research analyst'' is 
any research analyst not employed by that covered person, by the broker 
or dealer with whom that covered person is associated, or by any other 
associated person of the broker or dealer with whom that covered person 
is associated. We believe that research prepared by third party 
research analysts will not be susceptible to pressures from broker-
dealers who distribute their research provided that the analyst's 
employer meets certain independence criteria.

B. Discussion of Certification Requirements

1. Certification by the Primarily Responsible Analyst
    Commenters requested clarification on identifying the research 
analyst that would be required to make the certifications. Commenters 
argued that multiple certifications would likely be confusing or have 
other undesirable effects.\28\
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    \28\ See, e.g., SIA and SSB.
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    Regulation AC requires that the analyst or analysts primarily 
responsible for the preparation of the content of a research report 
comply with the certification requirements. Thus, certification by 
junior analysts involved in the preparation of a research report is not 
necessary.\29\ In some cases, however, there may be more than one 
research analyst primarily responsible for the content of a research 
report. In such instances, all analysts who are primarily responsible 
for the views expressed in the report must provide the certifications. 
Removing the names of all analysts from a report would not allow the 
firm to avoid including the required certifications and disclosures; 
the analyst or analysts primarily responsible for the report must 
certify.
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    \29\ The Commission notes that any person not required to comply 
with the certification requirements of Regulation AC (e.g., junior 
analysts) would nonetheless be subject to the antifraud provisions 
of the federal securities laws.
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2. Quantitative and Technical Research
    Commenters argued that research based on quantitative and technical 
models may not be attributed to a particular analyst, may not reflect 
an analyst's views, and therefore, requested that the Commission 
provide guidance that these types of research would not be covered.\30\ 
One commenter suggested, as an alternative, that Regulation AC should 
require a certification by the firm that the views expressed in the 
report are derived from the firm's systematic quantitative research 
model.\31\
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    \30\ See Schwab and SIA.
    \31\ See Schwab.
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    The Commission has determined that, in cases where there is no 
identified analyst because the report is based on the firm's 
quantitative or technical model, the firm itself may provide the 
certifications that the views expressed in the research report 
accurately reflect the firm's quantitative research model, and that no 
part of the firm's compensation was, is, or will be, directly or 
indirectly, related to the specific recommendations or views disclosed 
in the research report.

[[Page 9486]]

    However, tying an analyst's compensation to the performance of a 
quantitative or technical model would indicate that the report is the 
product of the analyst's subjective views (reflected by the design of 
the model employed). In that case, that analyst must certify the report 
containing the model's results in accordance with Rule 501 of 
Regulation AC.
C. Certifications or Disclosures During Public Appearances
    We requested comment on what, if any, disclosures should be 
required during public appearances by analysts. The four commenters 
that addressed this issue generally were opposed to requiring 
certifications during analyst public appearances.\32\ We have 
determined not to require certifications during public appearances by 
analysts.
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    \32\ See AIMR, Goldman, SIA, and SSB.
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    The Commission believes that the proposed quarterly certification 
requirements in connection with analyst public appearances are 
sufficient. If the analyst does not provide a certification in 
connection with public appearances, Rule 502 of Regulation AC requires 
the broker-dealer to provide readers of research reports that it 
distributes, as well as the broker-dealer's designated examining 
authority, with notice that the analyst did not provide the 
certifications.\33\ A Rule 502(b) notice in a research report must be 
in plain English.
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    \33\ The Commission believes that merely citing to the rule 
provision would not constitute an adequate notice.
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D. Compendium Reports

    The Commission requested comment on whether Regulation AC should 
make allowances for compendium research reports covering six or more 
securities. Commenters that discussed the treatment of certifications 
in compendium research reports believed that Regulation AC should 
permit the required disclosures to appear in a place other than the 
report itself.\34\ Most of these commenters specifically supported 
treatment of compendium reports for the purpose of Regulation AC 
similar to the treatment allowed under SRO rules. Under SRO rules, 
members are not obligated to include disclosures in compendiums if the 
report directs readers to a toll-free number or postal address to write 
for required disclosures.\35\ Electronic compendiums may instead 
include a hyperlink and paper compendiums may also include a web 
address where disclosures are located. Two commenters suggested the use 
of a combined certification that each analyst referenced in the report 
certifies that the analysis attributed to him or her accurately 
reflects his or her views.\36\
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    \34\ See CSFB, Cleary, Goldman, SIA, SSB, and Schwab.
    \35\ See CSFB, Cleary, SIA, SSB, and Schwab.
    \36\ See SIA and SSB.
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    The Commission has determined not to permit treatment of compendium 
research reports in a manner similar to that permitted by the SROs 
because, unlike the SRO rules, the certifications required by 
Regulation AC are very concise. Nonetheless, when a research report 
covers more than one company and each research analyst required to 
certify with respect to the views expressed in a portion of the report 
is able to certify that: (a) the views expressed in the research report 
accurately reflect such research analyst's personal views about the 
subject securities and companies; and (b) that no part 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, the 
firm may comply with Regulation AC by including one clear and prominent 
combined certification that, as to each company covered, the respective 
research analyst (or analysts) certifies as to (a) and (b) above.\37\
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    \37\ This certification must be in plain English. The Commission 
would expect that broker-dealers would be able to demonstrate that 
the combined certification in the report is accurate.
---------------------------------------------------------------------------

E. Application of Regulation AC to Investment Advisers and Banks

    Regulation AC is directed at brokers, dealers, and covered persons, 
because we believe that these entities are subject to the greatest 
conflicts. Therefore, investment advisers and banks, among others, may 
be required to comply with the regulation if they are covered persons 
of a broker-dealer. The Commission noted in the Proposing Release that 
the term ``research analyst'' would not include personnel of an 
investment adviser, such as a mutual fund portfolio manager, who are 
not principally responsible for preparing research reports, even if the 
individuals are registered persons of a broker-dealer (similar to the 
guidance provided by the SROs in the joint interpretive 
memorandum).\38\ The Commission requested comment on whether the 
regulation should cover banks that are not associated persons and other 
independent entities, and whether the rule should explicitly exclude 
investment advisers.
---------------------------------------------------------------------------

    \38\ See NYSE Information Memo No. 02-26 (June 26, 2002), and 
NASD Notice to Members 02-39 (July 2002).
---------------------------------------------------------------------------

    Commenters who addressed the application of Regulation AC to 
investment advisers generally opposed the rule's coverage of investment 
advisers and investment advisory personnel.\39\ Some commenters called 
for the specific exclusion of investment advisers.\40\ Commenters who 
addressed the application of Regulation AC to banks generally opposed 
the rule's coverage of banks.\41\ One commenter favored the application 
of Regulation AC to investment advisers and banks.\42\
---------------------------------------------------------------------------

    \39\ See Alliance, ICAA, ICI, Investorside, SIA, SSB, Sullivan, 
and Thomson Financial.
    \40\ See, e.g., ICAA and ICI.
    \41\ See Investorside, SSB, Sullivan, and Thomson Financial.
    \42\ See NASAA.
---------------------------------------------------------------------------

    The Commission has determined that Regulation AC should not exclude 
all investment advisers or banks that are associated with broker-
dealers. However, as discussed above, the definition of ``covered 
person'' substantially narrows the scope of persons associated with a 
broker-dealer, such as investment advisers and banks, that are subject 
to Regulation AC. Where the broker-dealer has informational and 
structural separations from its associated person, the rule does not 
apply to that associated person. Where the protections are lacking, 
however, with respect to a person associated with a broker-dealer, that 
person is a covered person.\43\ Accordingly, if an investment adviser 
or bank is a covered person and publishes, circulates, or provides 
research reports, the research report certification provisions of 
Regulation AC will apply. We believe those investment advisers and 
banks that do not meet the independence criteria that would exclude 
them from the definition of ``covered person'' may be subject to 
greater conflicts than are other investment advisers and banks. 
Specifically, a broker-dealer's investment banking department could 
pressure these investment adviser or bank affiliates to comment 
favorably in a research report or public appearance about a client or 
prospective client. Moreover, if associated persons that are covered 
persons were not subject to the certification requirements of 
Regulation AC, broker-dealers could attempt to funnel research through 
them to avoid complying with Regulation AC.\44\
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    \43\ As discussed above, Regulation AC requires a broker-dealer 
to inform its associated persons as to whether or not it maintains 
and enforces the informational barriers described in Regulation AC.
    \44\ Regulation AC is directed at those regulated persons that 
prepare research reports, as well as persons associated with 
regulated persons who might be used if attempts were made to 
improperly circumvent the rule. See also Exchange Act section 20(b), 
15 U.S.C. 78t(b).

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[[Page 9487]]

F. Application of Regulation AC to Third Party Research

    In Proposing Regulation AC, we did not propose to treat research 
prepared by third parties but distributed by a broker-dealer 
differently from research produced by the broker-dealer itself. 
Commenters argued that broker-dealers should not be responsible for 
certifying research by independent third parties. Moreover, they 
pointed out practical problems, including the difficulty of tracking 
analysts employed by third parties.\45\ They also cited increased 
costs. They argued that firms would discontinue providing the valuable 
service of making third party research available to customers.\46\
---------------------------------------------------------------------------

    \45\ See Alliance and Thomson Financial.
    \46\ See, e.g., Schwab.
---------------------------------------------------------------------------

    We have determined not to apply Regulation AC where a broker-dealer 
distributes research prepared by a third party research analyst whose 
employer satisfies certain independence criteria. The independence 
criteria require that the third party research analyst's employer does 
not have officers or employees in common with the broker-dealer or 
covered person distributing its research, and that the broker-dealer 
has written policies and procedures designed to prevent the broker-
dealer, its controlling persons, officers, and employees from 
influencing the activities of the third party research analyst and the 
content of his or her research reports. We believe that research 
analysts employed by these independent third parties will not be 
sufficiently susceptible to pressures from distributing broker-dealers 
to warrant certification. Where a broker-dealer distributes the 
research of a third party that does not meet the independence criteria, 
however, the broker-dealer must confirm that the research report 
includes the same research analyst certification as required by 
Regulation AC.
    Commenters argued that it would be difficult to track analysts 
employed by third parties, some of whom are overseas, in order to 
monitor their public appearances and obtain written statements from 
them. In response to commenters' concerns, we have determined that 
broker-dealers who distribute third party research are not required to 
obtain the public appearance certifications required by Rule 502 of 
Regulation AC with respect to public appearances by third party 
research analysts.

G. Application of Regulation AC to Foreign Research

    In proposing Regulation Analyst Certification, the Commission did 
not distinguish between research that was issued by a U.S. entity and 
research that was issued by a non-U.S. entity. Several commenters 
raised the issue of the Regulation's effect on research originating 
from a foreign entity. These commenters generally opposed the proposed 
scope of Regulation AC, which captured foreign entities (and their 
associated persons) that issue research reports, including those who 
are not required to be registered with the Commission under section 15 
of the Exchange Act.\47\
---------------------------------------------------------------------------

    \47\ See, e.g., Cleary and Thomson Financial.
---------------------------------------------------------------------------

    In light of these comments, we have created a narrow exception for 
foreign persons that are located outside of the United States and are 
not associated with a registered broker-dealer that prepares and 
provides research on foreign securities \48\ to major United States 
institutions in the U.S. in accordance with the provisions of Rule 15a-
6(a)(2). In these instances, the foreign person is excepted from the 
requirements of Regulation AC.
---------------------------------------------------------------------------

    \48\ As defined in the rule, for purposes of Regulation AC, 
``foreign security'' means a security issued by a foreign company 
for which a U.S. market is not the principal trading market.
---------------------------------------------------------------------------

    In addition, in the case of a research analyst employed outside the 
United States by a foreign person located outside the United States, 
Rule 502 of Regulation AC only applies to public appearances while the 
research analyst is physically present in the United States.

H. Supervision and Oversight

    Commenters requested that the Commission clarify that the 
certification pertaining to the analyst's personal views is not 
intended to prevent research supervisors or review committees from 
seeking changes to the research product.\49\ One commenter argued that 
Regulation AC should not impede the ability of a supervisor or a review 
committee to require that a report follow a written firm policy on when 
a research report can upgrade or downgrade a rating, or when it must 
withhold a rating to prevent conflicts or for other reasons.\50\ 
Commenters argued that certification also should not preclude the 
ability of an analyst or a firm to modify the report due to a change in 
the analyst's opinion or to remove statements that create legal or 
regulatory concerns.\51\
---------------------------------------------------------------------------

    \49\ See, e.g., SIA and SSB.
    \50\ See SIA.
    \51\ See SIA and SSB.
---------------------------------------------------------------------------

    The certification required by Rule 501 of Regulation AC does not 
impede the oversight or review of research reports. If, at the end of 
the revision process, the analyst still believes that the report 
accurately reflects his or her personal views about the subject 
securities or issuers, then that analyst may certify and the firm may 
use the research report. If, however, after the review process the 
research report no longer reflects the analyst's personal views, then 
that analyst would be unable to certify and the firm would not be in 
compliance with Regulation AC if it uses the research report without a 
certification.

I. Regulation AC and Fraud Liability Under Federal Securities Laws

    Several commenters requested that the Commission reiterate the 
position stated in the Proposing Release that Regulation AC does not 
impose new liability on analysts or their firms.\52\ Regulation AC 
formalizes and potentially adds rigor to analysts' responsibilities to 
express their views truthfully and without guile.\53\ Regulation AC 
makes explicit the representations that are already implicit when an 
analyst publishes his or her views--that the analysis of a security 
published by the analyst reflects the analyst's honestly held 
views.\54\
---------------------------------------------------------------------------

    \52\ See, e.g., Karr Tuttle, NASAA, SIA, and SSB.
    \53\ As the Commission stated in the Proposing Release, 
Regulation AC is not intended to create new 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. However, Regulation AC is subject to the full range of the 
Commission's enforcement authority. With regard to the enforcement 
of Regulation AC by the SROs, nothing in Regulation AC is 
inconsistent with Exchange Act Rule 19g2-1. See 17 CFR 240.19g2-1.
    \54\ The use of a certification process echoes and is consistent 
with one approach employed in the Sarbanes-Oxley Act of 2002, which 
requires certifications by officers of corporations relating to 
issuers' financial statements. See Sarbanes-Oxley Act sections 302 
and 906, Pub. L. 107-204 (2002).
---------------------------------------------------------------------------

    Regulation AC does not alter any other existing obligation under 
the federal securities laws for research analysts or broker-
dealers.\55\ A research report contains an inherent representation that 
the views expressed in the report are not knowingly false and do not 
omit material facts necessary in order to make statements made not 
misleading.\56\ Thus, even without

[[Page 9488]]

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.\57\
---------------------------------------------------------------------------

    \55\ See, e.g., Securities Act sections 17(a) and 17(b), 15 
U.S.C. 77q; Exchange Act section 10(b), 15 U.S.C. 78j(b), and Rule 
10b-5, 17 CFR 240.10b-5.
    \56\ See, e.g., Securities Act section 17(a), 15 U.S.C. 77q(a); 
Exchange Act Rule 10b-5, 17 CFR 240.10b-5; Exchange Act section 
15(c)(1)(A), 15 U.S.C. 78o(c)(1)(A); and Exchange Act Rule 15c1-
2(b), 17 CFR 240.15c1-2.
    \57\ See Securities Exchange Act Release No. 45908 (May 10, 
2002), 67 FR 34968, 34977 (May 16, 2002); Proposing Release at 
51512; Cf. Hanly, supra, note 13, at 597. See also In the Matter of 
Robertson Stephens, Inc., Administrative Proceeding File No. 3-11003 
(January 9, 2003) (settled fraud action against broker-dealer where 
Commission found that a research analyst employed by the broker-
dealer issued recommendations about a public company that were 
inconsistent with his privately communicated beliefs about the 
company.)
---------------------------------------------------------------------------

J. Performance-Based Compensation

    Commenters expressed concern that Regulation AC could be read to 
require disclosure of analyst compensation arrangements based on the 
accuracy or performance of the views expressed as to the subject 
company's prospects.\58\ Commenters thought that the compensation 
disclosure provision should be clarified to only require disclosure of 
compensation that was intended to influence or induce the particular 
view expressed in the research report.\59\
---------------------------------------------------------------------------

    \58\ See, e.g., Goldman and Merrill.
    \59\ See, e.g., Cleary, SIA, SSB, and Sullivan.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission noted that Regulation AC 
does not preclude an analyst from providing otherwise permissible 
services to his or her firm's investment banking department, and it 
does not prohibit analysts generally from receiving compensation for 
covering issuers or for preparing research reports. Instead, Regulation 
AC focuses on disclosure where the analyst compensation that is related 
to the specific recommendations or views expressed by the research 
analyst in the research report. Regulation AC is not intended to 
address compensation based on the performance of the views expressed 
regarding the securities discussed.

III. Paperwork Reduction Act

    Regulation AC contains ``collection of information'' requirements 
within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\60\ We have submitted the proposal to the Office of 
Management and Budget (``OMB'') for review in accordance with the 
PRA.\61\ 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.
---------------------------------------------------------------------------

    \60\ 44 U.S.C. section 3501 et seq.
    \61\ 44 U.S.C. section 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission solicited comments on the 
collection of information requirements. In response to comments, the 
Commission has revised the estimates published in the Proposing Release 
regarding the collection of information burdens associated with the new 
rule.

A. Summary of Collection of Information

    Regulation AC generally requires that research reports published, 
circulated, or provided by a broker or dealer or covered person contain 
a statement attesting 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 expressed in the research 
report. Regulation AC also requires 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 personal views, and whether any part of the 
analyst's compensation is related to the specific recommendations or 
views expressed in the public appearance.

B. Reporting and Cost Burden Estimates

    Regulation AC provides that brokers, dealers, and covered persons 
must include in research reports they publish, circulate, or provide 
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 regulation also requires broker-dealers to periodically 
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 to include the required certifications and 
disclosures in each research report is one minute per report. In the 
Proposing Release, the Commission staff estimated that broker-dealers 
publish approximately 657,000 research reports per year. One commenter 
provided the Commission with data in response to the Proposing 
Release.\62\ After considering this additional information, the staff 
of the Commission believes that broker-dealers publish approximately 
1,375,865 research reports per year.\63\ Therefore, the Commission 
estimates that the total annual burden in hours for broker-dealers to 
comply with the research report certification and disclosure 
requirements is approximately 22,930 hours per year ((1 minute x 
1,375,865 reports)/60 minutes).
---------------------------------------------------------------------------

    \62\ Thomson Financial asserted in its comment letter that the 
Commission's cost estimate in the Proposing Release was too low. 
Thomson Financial noted that the Commission cited data from Thomson 
Financial First Call and estimated that broker-dealers publish 
657,000 research reports per year. Thomson Financial asserted that, 
while this estimate may accurately reflect equity research on U.S. 
securities transmitted via First Call Notes, it did not capture 
fixed-income research, research on non-U.S. equities or full-text 
reports transmitted through First Call Research Direct. Thomson 
Financial asserted that, when these additional sell-side reports are 
accounted for, the total exceeds 2 million reports a year. Thomson 
Financial suggested that the compliance costs for sell-side firms 
could run as high as $4,116,784.50.
    \63\ After further consultation with Thomson Financial, they 
have revised their total estimated number of research reports per 
year for 2001 to range between 1,375,865 and 1,540,150. The staff 
believes that the overall calculations are over-inclusive and 
possibly duplicative. As a result, we are basing our estimates on 
the lower-end of the range of the number of research reports per 
year. The staff believes that this estimate continues to be 
conservative.
---------------------------------------------------------------------------

    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 for broker-dealers to comply with the 
research report certification and disclosure requirements is 
approximately $2,785,995.00 \64\ per year (22,930 hours x $121.50 per 
hour).
---------------------------------------------------------------------------

    \64\ The estimated total annual burden in dollars for broker-
dealers to comply with the research report certification and 
disclosure requirements would be approximately $3,118,642.00 if 
calculated using the high-end of the estimated range for the number 
of research reports.
---------------------------------------------------------------------------

    Rule 501 of Regulation AC, which applies to research reports, may 
also impose requirements on certain entities if they are associated 
with a broker-dealer and meet the definition of ``covered person.'' 
However, ``covered persons'' are not subject to Rule 502 of Regulation 
AC, which addresses pubic appearances. The Commission estimates that 
approximately 2,650 SEC registered investment advisers are associated 
with a broker-dealer. We believe that not all of these entities write 
research reports, and that those who do write research reports write 
relatively few. Of those investment advisers that are associated with a 
broker-dealer and that write research reports, we do not believe that 
all of them will meet the definition of a ``covered person,'' as 
defined by

[[Page 9489]]

Regulation AC. As a conservative estimate, however, if all SEC 
registered investment advisers are covered persons and on average 
publish as many research reports per year as the average broker-dealer 
(250 research reports), the estimated total number of research reports 
published by SEC registered investment advisers who are associated with 
a broker-dealer would be approximately 662,500 (250 x 2,650).\65\ 
Therefore, the Commission estimates that the total annual analyst 
certification burden in hours for these investment advisers would be 
11,040 hours ((1 minute x 662,500 research reports)/60 minutes). The 
Commission estimates that the annual burden in dollars of complying 
with the research report certification and disclosure requirements for 
SEC registered investment advisers is approximately $1,341,360 per year 
\66\ (11,040 x $121.50). Unlike Rule 501, Rule 502 of Regulation AC 
(public appearances) does not apply to covered persons. We note, 
however, that we believe that a significant number of associated 
persons would not be ``covered person(s),'' as defined in Rule 500 of 
Regulation AC and, as a result, the aggregate burden for persons 
associated with broker-dealers to comply with the research report 
certification and disclosure requirements will be significantly lower.
---------------------------------------------------------------------------

    \65\ We believe that including all SEC registered investment 
advisers in calculating the paperwork burden as to covered persons 
is over-inclusive as to investment advisers, and that this estimate 
is therefore sufficient to account for other types of entities who 
would meet the definition of ``covered person.''
    \66\ The estimated total annual burden in dollars for SEC 
registered investment advisers to comply with the research report 
certification and disclosure requirements would be approximately 
$1,501,518.00 if calculated using the high-end of the estimated 
range for the number of research reports.
---------------------------------------------------------------------------

    The staff of the Commission believes that the research analyst will 
prepare the quarterly statement required for public appearances. The 
staff estimates that the average amount of time it would take a 
research analyst to prepare the quarterly statements regarding public 
appearances as required by the 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,\67\ or 
about 2,076 per year. Therefore, the Commission believes that the total 
annual burden for broker-dealers 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).
---------------------------------------------------------------------------

    \67\ 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. One commenter believes that this 
estimate is low, but did not provide specific data in support of its 
views. See Thomson Financial.
---------------------------------------------------------------------------

    In cases where the broker or dealer does not obtain a statement by 
the research analyst in connection with public appearances as described 
above, the broker-dealer must promptly notify its examining authority, 
designated pursuant to section 17(d) of the Exchange Act and Rule 17d-2 
thereunder, that the analyst did not provide certification in 
connection with public appearances. In addition, for 120 days following 
such notification, the broker-dealer must disclose in any research 
report it distributes authored by that analyst that the analyst did not 
provide certification specified in Rule 502(a) of Regulation AC. 
Further, broker-dealers must keep and maintain these records pursuant 
to Rule 17a-4(b)(4). Broker-dealers are also expected to have records 
that document the process they followed in producing each research 
analyst certification. The staff of the Commission believes that there 
will be few, if any, instances where a broker-dealer will provide 
notification 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 (346 hours x $121.50).
    The regulation requires that the records of statements regarding 
public appearances 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),\68\ the staff of the Commission 
believes that any additional costs to preserve the records of the 
certifications required by the regulation would be minimal.
---------------------------------------------------------------------------

    \68\ OMB Control No. 3235-0279.
---------------------------------------------------------------------------

    Rule 500 of Regulation AC includes a definition of ``covered 
person,'' which limits the scope of the regulation's application. Rule 
504 of Regulation AC requires a broker-dealer to notify its associated 
persons that issue research reports as to whether associated persons 
would meet the definition of ``covered persons'' under Regulation AC, 
and, therefore, be subject to the rule. Specifically, the broker-dealer 
must inform its associated persons whether the broker or dealer 
maintains and enforces written policies and procedures reasonably 
designed to prevent the broker or dealer or any of its controlling 
persons, officers, or employees from influencing the activities of 
research analysts and the content of research reports prepared by 
associated persons. Broker-dealers must also inform its associated 
persons whether associated persons have any officers or employees in 
common with the broker or dealer who can influence the activities of 
research analysts or the content of research reports and, if so, the 
identity of those persons.
    The staff has not obtained data on the amount of time it would take 
for broker-dealers to make the necessary determinations and to draft 
and provide the notification required under Rule 504 of Regulation AC. 
For PRA purposes, the below calculations represent the staff's 
estimates of the amount of time that would be required for broker-
dealers to comply with Rule 504. The staff estimates that there are 
approximately 2,650 investment advisers that are associated with at 
least one broker-dealer. The staff estimates that it would take 
approximately one hour per year for each of the approximately 2,650 
broker-dealers to determine whether it maintains and enforces written 
policies and procedures reasonably designed to prevent the broker or 
dealer or any of its controlling persons, officers, or employees from 
influencing the activities of research analysts and the content of 
research reports prepared by associated persons. The staff estimates 
that it would take approximately thirty minutes per year for each 
broker-dealer to determine whether its associated persons have any 
officers or employees in common with the broker or dealer who can 
influence the activities of research analysts or the content of 
research reports and, if so, the identity of those persons.\69\
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    \69\ Broker-dealers should already have mechanisms in place to 
determine whether such persons exist and, if so, the identity of 
those persons because of NASD Rule 3030. See NASD Rule 3030.
---------------------------------------------------------------------------

    The staff estimates that it would take fifteen minutes per year for 
each broker-dealer to draft and provide the required notification to 
its associated persons. The Commission staff expects that a compliance 
officer will likely be the employee primarily charged with making the 
necessary determinations, and drafting and providing the required 
notification. According to industry sources, in 2002, compliance 
officers,

[[Page 9490]]

on average, earned approximately $82.00/per hour. Including 35% 
overhead, Commission staff estimates that the hourly pay rate for a 
compliance officer would be $110.70 per hour. Therefore, the Commission 
estimates that the annual burden for broker-dealers in hours of 
complying with the notification requirements would be approximately 
4,638 hours ([2,650 x 105 minutes)/60]. The staff estimates that the 
annual burden for broker-dealers of complying with the notification 
requirements in dollars would be approximately $513,427.00 (4,638 hours 
x $110.70).
    Therefore, the Commission estimates that the regulation would 
result in a total annual burden in hours of approximately 38,954 hours 
(22,930 hours for broker-dealers to comply with the research report 
requirements + 11,040 hours for investment advisers to comply with the 
research report requirements + 346 hours for broker-dealers to comply 
with the public appearance requirements + 4,638 hours for broker-
dealers to comply with the notification requirements), for a total 
annual cost in dollars of approximately $4,682,821 ($2,785,995 for 
broker-dealers to comply with the research report requirements + 
$1,341,360 for investment advisers to comply with research the report 
requirements + $42,039 for broker-dealers to comply with the public 
appearance requirements + $513,427 for broker-dealers to comply with 
the notification requirements).

IV. Costs and Benefits of Adopted Regulation Analyst Certification

    To assist the Commission in evaluating the costs and benefits that 
may result from adopting Regulation AC, the Commission sought comment 
on any potential costs, as well as any potential benefits, resulting 
from the proposal for investors, issuers, broker-dealers, other 
securities industry professionals, SROs, or others. The Commission also 
requested that commenters provide analysis and data to support their 
views. 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. Regulation AC includes a requirement that 
broker-dealers and covered persons 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. Regulation AC would also require broker-dealers to make, 
keep, and maintain records of research analyst certifications and 
disclosures in connection with public appearances. We are sensitive to 
the costs and benefits that result from our rules. The Commission 
initially identified certain costs and benefits relating to the 
proposals and encouraged commenters to discuss any additional costs or 
benefits. We discuss these costs and benefits below.

A. Costs

    The Commission received letters from twenty-one commenters 
concerning Regulation AC. Only one commenter provided actual data to 
quantify the costs identified. This commenter believed that the 
estimates set forth in the proposing release were low primarily because 
the estimated number of research reports per year did not capture, 
among other things, reports by investment advisers and certain full-
text reports.\70\ The Commission modified its estimates in response to 
these comments.
---------------------------------------------------------------------------

    \70\ See Thomson Financial.
---------------------------------------------------------------------------

    The Commission also requested 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. One commenter believed that 
the estimate of the number of public appearances was too low, but did 
not provide specific data in support of its views.\71\
---------------------------------------------------------------------------

    \71\ Id.
---------------------------------------------------------------------------

    While Regulation AC may lead to some additional costs for brokers, 
dealers, and covered persons, we continue to believe that any costs 
should not be significant. In light of current requirements for broker-
dealers under SRO rules, the Commission estimates that, beyond the 
paperwork costs described above, any additional costs to broker-dealers 
that would result from the required certifications and disclosures 
would be minimal. In the Proposing Release, the staff estimated that 
broker-dealers publish approximately 657,000 research reports per year. 
One commenter provided information that suggests that broker-dealers 
publish as many as 1,375,865 research reports per year.\72\ Given the 
refined scope of Regulation AC, the staff believes that these two 
estimates represent a reasonable range with which to estimate research 
reports affected by the rule. Accordingly, the Commission estimates the 
total direct costs to be approximately $2.5 million to $4.7 
million.\73\ In addition, because the rule is minimally burdensome, the 
Commission believes that, beyond the paperwork costs described above, 
any additional costs to associated persons that would result from 
certifications and disclosures would be minimal.
---------------------------------------------------------------------------

    \72\ See Thomson Financial and footnote 63 for a discussion of 
revisions to the original estimate.
    \73\ The total burden range of approximately $2.5 million to 
$4.7 million is obtained by applying both the low and the high 
research report estimates. Costs are proportionate to the number of 
research reports assumed to be issued each year. For purposes of the 
Paperwork Reduction Act analysis, we used the estimate of 1,375,865 
research reports to obtain the high end of the burden range. If we 
instead substitute the low estimate of 657,000 research reports in 
place of the high estimate, the low end of the burden range is 
approximately $2.5 million. The low research report estimate is 
approximately 48% of the high estimate and the resulting total 
annual cost burden is approximately $2.5 million ($1,337,278 for 
broker-dealers to comply with the research report requirements + 
$643,853 for investment advisers to comply with the research report 
requirements + $42,039 for broker-dealers to comply with the public 
appearance requirements + $513,427 for broker-dealers to comply with 
the notification requirements = $2,536,596).
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    Moreover, with respect to the compensation certifications and 
disclosures that are required by Regulation AC, broker-dealers are 
already required to make certain disclosures regarding research analyst 
compensation under SRO rules. For example, SRO rules currently require 
that firms disclose in research reports if the associated person 
preparing the report received compensation that is based upon (among 
other factors) the member's overall investment banking revenues.\74\ 
Further, SRO rules prohibit members from offering favorable research to 
a company as consideration or inducement for the receipt of business or 
for compensation.\75\ Additionally, Exchange Act Rule 17a-3(a)(19) 
currently requires broker-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.
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    \74\ NASD 2711(h)(2)(A)(i); NYSE 472(k)(2).
    \75\ NASD Rule 2711(e); NYSE Rule 472(g).
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    In response to commenters' concerns, we modified the proposed rule 
text to include a definition of ``covered person,'' which limits the 
scope of the regulation's application. Rule 504 of Regulation AC 
requires broker-dealers to notify its associated persons that issue 
research reports as to whether the broker-dealer maintains and enforces 
written policies and procedures reasonably designed to prevent the 
broker or dealer or any of its controlling

[[Page 9491]]

persons, officers, or employees from influencing the activities of 
research analysts and the content of research reports prepared by the 
associated person, and to inform associated persons as to whether the 
associated person has any officers (or persons performing similar 
functions) or employees in common with the broker or dealer who can 
influence the activities of research analysts or the content of 
research reports and, if so, the identity of those persons. Broker-
dealers may incur costs in providing this notification to each of its 
associated persons. As noted previously, the staff estimates that the 
paperwork costs for broker-dealers of complying with the notification 
requirements in dollars would be approximately $513,427.00. Any 
additional costs should not be significant in part because associated 
persons of an SRO member are required under SRO rules to provide prompt 
notice to his or her employer of employment with any other persons as a 
result of a business activity.\76\
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    \76\ See NASD Rule 3030.
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    With respect to public appearances, current SRO rules require 
analysts to make certain disclosures during public appearances, such as 
the member's or the analyst's ownership interests in the subject 
company. SRO rules also require analysts to disclose any other actual, 
material conflict of interest of which the research analyst knows, or 
has reason to know, at the time of the public appearance.\77\
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    \77\ NASD Rule 2711(h); NYSE 472(k)(1).
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    Broker-dealers should already have in place procedures necessary to 
comply with many components of Regulation AC due to existing 
obligations under SRO rules, although these procedures might require 
some minor modifications to conform with Regulation AC. As noted 
previously, the Commission estimates that the annual paperwork costs in 
dollars of complying with the regulation would be approximately 
$4,682,821.

B. Benefits

    We believe that investor confidence in the integrity of research 
has suffered because there is evidence that, in some cases, 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 research analysts to 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, should help bolster investor confidence 
in the quality of research. This, in turn, should help increase 
investor confidence in the securities markets.
    The Commission requested comment on whether the certification and 
disclosure requirements, if adopted, would promote investor confidence 
in the views expressed by research analysts and provide investors with 
useful information with which to evaluate potential biases. Ten 
commenters expressed support for Regulation AC. Generally, these 
commenters were of the view that Regulation AC would promote the 
integrity of research and investor confidence.\78\ Three commenters did 
not agree that Regulation AC would advance investor protection and/or 
investor confidence to any significant degree.\79\
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    \78\ See AIMR, CSFB, Goldman, ICAA, ICI, Merrill, SIA, SSB, 
Schwab, and TBMA.
    \79\ See David Norr, NASAA, and Thomson Financial.
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    Regulation AC requires that broker-dealers and covered persons 
include certifications in research reports regarding the truthfulness 
of the views expressed in research reports and whether or not the 
analyst received compensation in connection with his or her specific 
recommendations or views. Many investors rely on the research reports 
and recommendations provided by their brokers and covered persons. To 
the extent that the Regulation AC requires 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.\80\
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    \80\ See Securities Exchange Act Release No. 45908 (May 10, 
2002), 67 FR 34968 (May 16, 2002).
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    Regulation AC may result in an increase in the overall quality of 
the research available to the public because broker-dealers and covered 
persons would be in violation of Regulation AC when issuing research 
reports unless the reports include the required certifications and 
disclosures. The requirement that the research analyst (or analysts) 
primarily 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.
    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 regulation, and firms whose research analysts' 
compensation is related to the specific recommendations or views 
provided in research reports (to the extent allowed by SRO rules) may 
lose some business to firms that are less conflicted. Regulation AC 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 truthfulness 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. The Commission does not have data to quantify the 
value of the benefits described above. The Commission requested, but 
did not receive, comment on how it may quantify these benefits. The 
Commission also requested, but did not receive, comment concerning any 
benefits, not already identified, that may result from the adoption of 
Regulation AC.

V. Regulatory Flexibility Act Certification

    Pursuant to section 605(b) of the Regulatory Flexibility Act,\81\ 
the Commission certified that Regulation AC will not have a significant 
economic impact on a substantial number of small entities. This 
certification, including the reasons supporting the certification, were 
set forth in the Proposing Release.
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    \81\ 5 U.S.C. 605(b).
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    The Commission solicited comments on the potential impact of 
Regulation AC on small entities in the Proposal. No comments were 
received that discussed the Regulatory Flexibility Act Certification. 
However, in response to other comments, the Commission has revised its 
estimates and believes that the total burden in hours required to 
comply with proposed Regulation AC would be approximately 5.78 hours 
per year, per small firm, as compared to the original estimate of two 
hours and two minutes per year, per small firm.

VI. Consideration of Burden on Competition, and Promotion of 
Efficiency, Competition and Capital Formation

    Section 3(f) of the Exchange Act \82\ 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,

[[Page 9492]]

and capital formation. In addition, section 23(a)(2) \83\ 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.
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    \82\ 15 U.S.C. section 78c(f).
    \83\ 15 U.S.C. section 78w(a)(2).
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    In the Proposing Release, the Commission solicited comment on the 
proposal's effect on competition, efficiency, and capital formation. 
Three commenters believed that Regulation AC would impose an 
inappropriate burden on competition.\84\ One commenter asserted that 
the scope of Regulation AC was overly broad and would apply 
unnecessarily to, and be an onerous burden on, broker-dealer firms that 
are not subject to the conflicts the regulation is designed to 
address.\85\ Another commenter asserted that Regulation AC may serve as 
a barrier to entry and an impediment to competition for firms seeking 
to provide an alternative to sell-side research.\86\
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    \84\ See Alliance, Investorside, and Thomson Financial.
    \85\ See Alliance.
    \86\ See Investorside.
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    Regulation AC is intended to enhance investor confidence in the 
integrity of the research available to them. Further, we have modified 
the rule from the proposal and have limited the scope of its 
application. We believe that requiring broker-dealers and covered 
persons to include analyst certifications in research reports, as well 
as the other disclosures required by Regulation AC, should enhance 
investor confidence in the securities markets, thereby leading to a 
more efficient market.
    The Commission has considered Regulation AC in light of the 
standards in section 23(a)(2) and believes that it would not impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Exchange Act. As discussed above in the Cost-
Benefit section, the Commission recognizes that Regulation AC may lead 
to some additional costs for broker-dealers and covered persons. On 
balance, we think that the application of Regulation AC is tailored to 
those situations where the conflicts are most likely to affect 
research. As such, we do not believe that the rule would create an 
unreasonable burden on competition. Further, we believe that providing 
the benefits that will result from the rule in those conflict-laden 
situations will further the purposes of the rule, including enhancing 
investor confidence in the market, thereby leading to a more efficient 
market.

VII. Statutory Authority

    Regulation AC is being adopted 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 Rule

List of Subjects in 17 CFR Part 242

    Brokers, Securities.


    For the reasons set out in the preamble, Title 17, Chapter II, of 
the Code of Federal Regulations is amended as follows.

PART 242--REGULATIONS M, ATS, AND AC AND CUSTOMER MARGIN 
REQUIREMENTS FOR SECURITY FUTURES

    1. The authority citation for part 242 continues to be 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, Sec. Sec.  242.500 
through 242.505 to read as follows:

Sec.
242.500 Definitions.
242.501 Certifications in connection with research reports.
242.502 Certifications in connection with public appearances.
242.503 Certain foreign research reports.
242.504 Notification to associated persons.
242.505 Exclusion for news media.

Regulation AC--Analyst Certification


Sec.  242.500  Definitions.

    For purposes of Regulation AC (Sec. Sec.  242.500 through 242.505 
of this chapter) the term:
    Covered person of a broker or dealer means an associated person of 
that broker or dealer but does not include:
    (1) An associated person:
    (i) If the associated person has no officers (or persons performing 
similar functions) or employees in common with the broker or dealer who 
can influence the activities of research analysts or the content of 
research reports; and
    (ii) If the broker or dealer maintains and enforces written 
policies and procedures reasonably designed to prevent the broker or 
dealer, any controlling persons, officers (or persons performing 
similar functions), and employees of the broker or dealer from 
influencing the activities of research analysts and the content of 
research reports prepared by the associated person.
    (2) An associated person who is an investment adviser:
    (i) Not registered with the Commission as an investment adviser 
because of the prohibition of section 203A of the Investment Advisers 
Act of 1940 (15 U.S.C. 80b-3a); and
    (ii) Not registered or required to be registered with the 
Commission as a broker or dealer.


    Note to definition of covered person: An associated person of a 
broker or dealer who is not a covered person continues to be subject 
to the federal securities laws, including the anti-fraud provisions 
of the federal securities laws.


    Foreign person means any person who is not a U.S. person.
    Foreign security means a security issued by a foreign issuer for 
which a U.S. market is not the principal trading market.
    Public appearance means any participation by a research analyst in 
a seminar, forum (including an interactive electronic forum), or radio 
or television or other interview, in which the research analyst makes a 
specific recommendation or provides information reasonably sufficient 
upon which to base an investment decision about a security or an 
issuer.
    Registered broker or dealer means a broker or dealer registered or 
required to register pursuant to section 15 or section 15B of the 
Securities Exchange Act of 1934 (15 U.S.C. 78o or 78o-4) or a 
government securities broker or government securities dealer registered 
or required to register pursuant to section 15C(a)(1)(A) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78o-5(a)(1)(A)).
    Research analyst means any natural person who is primarily 
responsible for the preparation of the content of a research report.
    Research report means a written communication (including an 
electronic communication) that includes an analysis of a security or an 
issuer and provides information reasonably sufficient upon which to 
base an investment decision.
    Third party research analyst means:
    (1) With respect to a broker or dealer, any research analyst not 
employed by that broker or dealer or any associated person of that 
broker or dealer; and
    (2) With respect to a covered person of a broker or dealer, any 
research analyst not employed by that covered person, by the broker or 
dealer with whom that covered person is associated,

[[Page 9493]]

or by any other associated person of the broker or dealer with whom 
that covered person is associated.
    United States has the meaning contained in Sec.  230.902(l) of this 
chapter.
    U.S. person has the meaning contained in Sec.  230.902(k) of this 
chapter.


Sec.  242.501  Certifications in connection with research reports.

    (a) A broker or dealer or covered person that publishes, 
circulates, or provides a research report prepared by a research 
analyst to a U.S. person in the United States shall include in that 
research report a clear and prominent certification by the research 
analyst containing the following:
    (1) A statement attesting that all of 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
    (2)(i) 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
    (ii) A statement:
    (A) 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;
    (B) Identifying the source, amount, and purpose of such 
compensation; and
    (C) Further disclosing that the compensation could influence the 
recommendations or views expressed in the research report.
    (b) A broker or dealer or covered person that publishes, 
circulates, or provides a research report prepared by a third party 
research analyst to a U.S. person in the United States shall be exempt 
from the requirements of this section with respect to such research 
report if the following conditions are satisfied:
    (1) The employer of the third party research analyst has no 
officers (or persons performing similar functions) or employees in 
common with the broker or dealer or covered person; and
    (2) The broker or dealer (or, with respect to a covered person, the 
broker or dealer with whom the covered person is associated) maintains 
and enforces written policies and procedures reasonably designed to 
prevent the broker or dealer, any controlling persons, officers (or 
persons performing similar functions), and employees of the broker or 
dealer from influencing the activities of the third party research 
analyst and the content of research reports prepared by the third party 
research analyst.


Sec.  242.502  Certifications in connection with public appearances.

    (a) If a broker or dealer publishes, circulates, or provides a 
research report prepared by a research analyst employed by the broker 
or dealer or covered person to a U.S. person in the United States, the 
broker or dealer must make a record within 30 days after any calendar 
quarter in which the research analyst made a public appearance that 
contains the following:
    (1) A statement by the research analyst attesting that the views 
expressed by the research analyst in all public appearances during the 
calendar quarter accurately reflected the research analyst's personal 
views at that time about any and all of the subject securities or 
issuers; and
    (2) A statement by the research analyst 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 such public appearances.
    (b) If the broker or dealer does not obtain a statement by the 
research analyst in accordance with paragraph (a) of this section:
    (1) The broker or dealer shall promptly notify in writing its 
examining authority, designated pursuant to section 17(d) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78q(d)) and Sec.  240.17d-2 
of this chapter, that the research analyst did not provide the 
certifications specified in paragraph (a) of this section; and
    (2) For 120 days following notification pursuant to paragraph 
(b)(1) of this section, the broker or dealer shall disclose in any 
research report prepared by the research analyst and published, 
circulated, or provided to a U.S. person in the United States that the 
research analyst did not provide the certifications specified in 
paragraph (a) of this section.
    (c) In the case of a research analyst who is employed outside the 
United States by a foreign person located outside the United States, 
this section shall only apply to a public appearance while the research 
analyst is physically present in the United States.
    (d) A broker or dealer shall preserve the records specified in 
paragraphs (a) and (b) of this section in accordance with Sec.  
240.17a-4 of this chapter and for a period of not less than 3 years, 
the first 2 years in an accessible place.


Sec.  242.503  Certain foreign research reports.

    A foreign person, located outside the United States and not 
associated with a registered broker or dealer, who prepares a research 
report concerning a foreign security and provides it to a U.S. person 
in the United States in accordance with the provisions of Sec.  
240.15a-6(a)(2) of this chapter shall be exempt from the requirements 
of this regulation.


Sec.  242.504  Notification to associated persons.

    A broker or dealer shall notify any person with whom that broker or 
dealer is associated who publishes, circulates, or provides research 
reports:
    (a) Whether the broker or dealer maintains and enforces written 
policies and procedures reasonably designed to prevent the broker or 
dealer, any controlling persons, officers (or persons performing 
similar functions), or employees of the broker or dealer from 
influencing the activities of research analysts and the content of 
research reports prepared by the associated person; and
    (b) Whether the associated person has any officers (or persons 
performing similar functions) or employees in common with the broker or 
dealer who can influence the activities of research analysts or the 
content of research reports and, if so, the identity of those persons.


Sec.  242.505  Exclusion for news media.

    No provision of this Regulation AC shall apply to any person who:
    (a) Is the publisher of any bona fide newspaper, news magazine or 
business or financial publication of general and regular circulation; 
and
    (b) Is not registered or required to be registered with the 
Commission as a broker or dealer or investment adviser.

    Dated: February 20, 2003.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-4576 Filed 2-26-03; 8:45 am]
BILLING CODE 8010-01-P