[Federal Register Volume 68, Number 99 (Thursday, May 22, 2003)]
[Notices]
[Pages 28039-28041]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-12873]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47876; File Nos. SR-NASD-2003-79; SR-NYSE-2003-17]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Changes by the National Association of 
Securities Dealers, Inc. and the New York Stock Exchange, Inc. Relating 
to Establishing Effective Dates for Certain Provisions of NASD Rule 
2711, Research Analysts and Research Reports, and NYSE Rule 472, 
Communications with the Public

May 15, 2003.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 6, 2003, the National Association of Securities Dealers, Inc. 
(``NASD''), and on May 9, 2003, the New York Stock Exchange, Inc. 
(``NYSE'' or ``Exchange''), filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule changes as 
described in Items I, II, and III below, which Items have been prepared 
by the respective self-regulatory organizations (``SROs''). The SROs 
have designated the proposed rule changes as constituting stated 
policies, practices, or interpretations with respect to the meaning, 
administration, or enforcement of an existing rule series under 
paragraph (f)(1) of Rule 19b-4 under the Act,\3\ which render the 
proposals effective upon filing with the Commission. The Commission is 
publishing this notice to solicit comments on the proposed rule changes 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(1).
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I. Self-Regulatory Organizations' Statements of the Terms of Substance 
of the Proposed Rule Changes

A. NASD

    NASD is filing with the SEC a proposed rule change to establish 
July 30, 2003, or until a superseding permanent exemption is approved 
by the SEC and becomes effective, as the effective date for NASD Rules 
2711(b) and (c) for members that over the previous three years, on 
average, have participated in 10 or fewer investment banking 
transactions as manager or co-manager and generated $5 million or less 
in gross investment banking revenues from those transactions. NASD 
Rules 2711(b) and (c), when effective, prohibit a research analyst from 
being subject to the supervision or control of any employee of a 
member's investment banking department, and will further require legal 
or compliance personnel to intermediate certain communications between 
the research department and either the investment banking department or 
the company that is the subject of a research report or recommendation 
(``subject company'').

B. NYSE

    The NYSE is filing with the SEC a proposed rule change that would 
establish July 30, 2003, or until such date as a permanent exemption is 
approved by the SEC and becomes effective, as the effective date for 
certain provisions of Rule 472 (``Communications with the Public'') for 
certain members and member organizations.

II. Self-Regulatory Organizations' Statements of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

    In their original rule filings with the Commission, the SROs 
included statements concerning the purpose of, and basis for, the 
proposed rule changes and discussed any comments they received on the 
proposed rule changes. The text of these statements may be examined at 
the places specified in Item IV below. The SROs have prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant aspects of such statements.

A. Self-Regulatory Organizations' Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

1. NASD's Purpose
    NASD is filing the proposed rule change to establish July 30, 2003, 
or until the date a superseding permanent exemption is approved by the 
SEC and becomes effective, as the effective date for NASD Rules 2711(b) 
and (c) for members that over the previous three years, on average per 
year, have participated in 10 or fewer investment banking transactions 
as manager or co-manager and generated $5 million or less in gross 
investment banking revenues from those transactions. Pursuant to the 
SEC's approval of SR-NASD-2002-87 \4\ and SR-NASD-2002-161 \5\, NASD 
Rules 2711(b) and (c), as applied to this class of members, otherwise 
would have gone into effect on May 5, 2003. NASD seeks to delay 
implementation of these provisions for these members while it finalizes 
a proposal to create a permanent exemption for firms that engage in 
limited underwriting activity. The purpose of the delayed 
implementation--and ultimately a permanent exemption--is to preserve 
the role of certain smaller firms that often are the sole or primary 
source of underwriting and research coverage for some smaller or 
regional companies.
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    \4\ See Securities Exchange Act Release No. 46165 (July 3, 
2002), 67 FR 46555 (July 15, 2002).
    \5\ See Securities Exchange Act Release No. 46949 (December 4, 
2002), 67 FR 76202 (December 11, 2002).
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    On May 10, 2002, the Commission approved new NASD Rule 2711, which 
governs conflicts of interest when research analysts recommend equity 
securities in research reports and during public appearances.\6\ The 
Commission approved a staggered implementation period for the rule. 
Most provisions of the rule became effective on July 9, 2002, including 
those that restrict supervision and control of research analysts by the 
investment banking department. The ``gatekeeper'' provisions, described 
below, became effective September 9, 2002. The remaining provisions of 
the Rule became effective on November 6, 2002.
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    \6\ See Securities Exchange Act Release No. 45908 (May 10, 
2002), 67 FR 34968 (May 16, 2002) (``May 10th order'').
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    NASD Rule 2711(b) contains provisions that generally restrict the 
relationship between the research and investment banking departments, 
including ``gatekeeper'' provisions that require a legal or compliance 
person to intermediate certain communications between the research and 
investment banking departments. NASD Rule 2711(b)(1) prohibits a 
research analyst from being under the control or supervision of any 
employee of the investment banking department. NASD Rule 2711(b)(2) 
prohibits employees in the investment banking department from reviewing 
or approving any research report prior to publication. NASD Rule 
2711(b)(3) creates an exception to (b)(2) to allow investment banking 
personnel to review a research report prior to publication to verify 
the factual information contained therein and to screen for potential 
conflicts of interest. Any permissible written communications must be 
made through an authorized legal or compliance official or copied to 
such official. Oral communications must be made through, or in the 
presence of, an authorized legal or compliance official and must be 
documented.
    Similarly, NASD Rule 2711(c) restricts communications between a 
member and the subject company of a research report, except that a 
member

[[Page 28040]]

may submit sections of the research report to the company to verify 
factual accuracy and may notify the subject company of a ratings change 
after the ``close of trading'' on the business day preceding the 
announcement of the ratings change. Submissions to the subject company 
may not include the research summary, the rating or the price target, 
and a complete draft of the report must be provided beforehand to legal 
or compliance personnel. Finally, any change to a rating or price 
target after review by the subject company must first receive written 
authorization from legal or compliance.
    As the Commission noted in the May 10th order, several commenters 
argued that the gatekeeper provisions would impose significant costs, 
especially for smaller firms that would have to hire additional 
personnel. Commenters also noted that personnel often wear multiple 
hats in smaller firms, thereby causing a greater burden to comply with 
the restriction on supervision and control by investment banking 
personnel over research analysts. NASD received similar comments in 
response to Notice to Members 02-44, which sought comment on whether 
certain members should be exempted from certain provisions of the Rule 
and what criteria should be employed to fashion such an exemption.
    NASD received 10 comments in response to the Notice to Members.\7\ 
Generally, the comments emphasized the financial and administrative 
burdens imposed by NASD Rule 2711 to implement the gatekeeper 
provisions and to structure firms so that research personnel are not 
subject to supervision by investment banking personnel. Commenters 
argued that the conflicts addressed by NASD Rule 2711 are less 
pronounced with respect to smaller firms and that the burdens of 
compliance could force firms to discontinue their research business.
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    \7\ Letter from David Amster, CRT Capital Group, dated August 
19, 2002; Letter from Peter V.B. Unger, Fulbright & Jaworski, LLP, 
dated August 30, 2002; Letter from First Analysis Securities Corp., 
dated August 30, 2002; Letter from Scott Cleland and John Eade, 
Investorside Research Association, dated August 29, 2002; Letter 
from W. Gray Medlin, The Carson Medlin Co., dated August 29, 2002; 
Letter from Cathryn Streeter, BioScience Securities, Inc., dated 
August 28, 2002; E-mail from James Nelson, Minnesota Valley 
Investments, dated July 31, 2002; E-mail from Joe B. Kercheville, 
Kercheville & Company, dated August 28, 2002; E-mail from Ray Chin, 
DBS Vickers Securities (USA) Inc., dated July 29, 2002; Letter from 
Stuart J. Kaswell, Securities Industry Association, dated August 30, 
2002.
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    In response to the comments, NASD has been developing a proposed 
permanent exemption to preserve the role of smaller firms in the 
capital raising process and to ensure research coverage for smaller or 
regional companies.
    NASD believes that compliance with both NASD Rules 2711(b) and (c) 
continues to pose financial and administrative challenges for certain 
smaller firms. As such, NASD believes it appropriate to extend the 
effective date of those provisions for members that over the previous 
three years, on average per year, have participated in 10 or fewer 
investment banking transactions as manager or co-manager and generated 
$5 million or less in gross investment banking revenues from those 
transactions. NASD proposes to delay the effective date of NASD Rules 
2711(b) and (c) until July 30, 2003, or until the date a superseding 
permanent exemption is approved by the SEC and becomes effective.
    As a further condition for the delayed implementation date, those 
firms that meet the eligibility requirements outlined above would be 
required to maintain records of communications that would otherwise be 
subject to the gatekeeper provisions of NASD Rules 2711(b) and (c).
2. NASD's Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Act,\8\ which requires, among 
other things, that NASD's rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. NASD believes that this proposed rule change would 
reduce or expose conflicts of interest and thereby significantly 
curtail the potential for fraudulent and manipulative acts. NASD 
further believes that the proposed rule change will provide investors 
with better and more reliable information with which to make investment 
decisions.
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    \8\ 15 U.S.C. 78o-3(b)(6).
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3. NYSE's Purpose
    The Exchange is filing the proposed rule change to establish July 
30, 2003, or until such date as a permanent exemption is approved by 
the SEC and becomes effective, as the effective date for NYSE Rule 
472(b)(1), (2) and (3), subject to certain conditions, for members and 
member organizations that over the previous three years, on average per 
year, have participated in ten or fewer investment banking services 
transactions as manager or co-manager and generated $5 million or less 
in gross investment banking revenues from those transactions 
(hereinafter referred to as ``small firms'').
    In the May 10th order, the Commission approved amendments to NYSE 
Rules 351 (``Reporting Requirements'') and 472, which place 
prohibitions and/or restrictions on Investment Banking Department, 
Research Department, and Subject Company relationships and 
communications and impose new disclosure requirements on members and 
member organizations and their associated persons. At the same time, 
the Commission also approved a staggered implementation period for the 
rules. Most provisions of the rules became effective on July 9, 2002, 
including those that restrict supervision and control of associated 
persons by the investment banking department and those that require 
disclosure of investment banking compensation received from a subject 
company. The ``gatekeeper'' provisions, described below, became 
effective on September 9, 2002.
    On July 9, 2002, the Exchange filed, for immediate effectiveness, 
SR-NYSE-2002-23\9\ that extended the effective date to November 6, 2002 
for NYSE Rule 472(b)(1), (2) and (3) (``gatekeeper'' provisions) for 
small firms.
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    \9\ See Securities Exchange Act Release No. 46182 (July 11, 
2002), 67 FR 47013 (July 17, 2002).
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    On November 7, 2002, the Exchange filed, for immediate 
effectiveness, SR-NYSE-2002-60,\10\ which extended the delayed 
effective date of the gatekeeper provisions for small firms until May 
5, 2003.
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    \10\ See note 5 supra.
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Small Firm Relief
    NYSE Rule 472 contains provisions that generally restrict the 
relationship between the research and investment banking departments, 
including ``gatekeeper'' provisions that require a legal or compliance 
person to intermediate certain communications between the research and 
investment banking departments. NYSE Rule 472(b)(1) prohibits an 
associated person (also referred to throughout this filing as a 
``research analyst'') from being under the control or supervision of 
any employee of the investment banking department.
    NYSE Rule 472(b)(1) also prohibits the investment banking 
department from reviewing or approving any research reports prior to 
distribution. NYSE Rule 472(b)(2) creates an exception to the 
prohibition of (b)(1) to allow investment banking personnel to review a 
research report prior to

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publication to verify the accuracy of information contained therein and 
to review for any potential conflicts of interest. Any permissible 
written communications must be made through legal or compliance or 
copied to legal or compliance. Oral communications must be made 
through, or in the presence of, legal or compliance personnel and must 
be documented.
    Similarly, NYSE Rule 472(b)(3) restricts communications between a 
member or member organization and the subject company of a research 
report, except that a member or member organization may submit sections 
of the research report to the subject company to verify factual 
accuracy and may notify the subject company of a ratings change after 
the ``close of trading'' on the business day preceding the announcement 
of the ratings change. Submissions to the subject company may not 
include the research summary, the rating or the price target, and a 
complete draft of the research report must be provided beforehand to 
legal or compliance personnel. Finally, any change to a rating or price 
target after review by the subject company must first receive written 
authorization from legal or compliance.
    As the Commission noted in the May 10th order, several commenters 
argued that the ``gatekeeper'' provisions would impose significant 
costs, especially for smaller firms that may have to hire additional 
personnel to comply with the requirements. Commenters also noted that 
personnel often wear multiple hats in smaller firms, thereby causing a 
greater burden to comply with the restriction on supervision and 
control by investment banking personnel over research analysts. These 
comments raised the prospect that the Rules might force some firms out 
of the investment banking or research business and/or reduce important 
sources of capital and research coverage for smaller companies.
    Accordingly, the Exchange is proposing to delay implementation of 
NYSE Rules 472(b)(1), (2), and (3) until July 30, 2003, or until a 
permanent exemption is approved by the SEC and becomes effective, for 
small firms. Those members or member organizations that meet the 
eligibility requirements outlined above for the delayed implementation 
date would also be required to maintain records of communications that 
would otherwise be subject to the gatekeeper provisions of NYSE Rule 
472(b).
4. NYSE's Statutory Basis
    The statutory basis for the proposed rule change is section 6(b)(5) 
of the Exchange Act \11\ which requires, among other things, that the 
rules of the Exchange be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade and in general to protect investors and the public 
interest.
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    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organizations' Statements on Burden on Competition

    The SROs do not believe that the proposed rule changes will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organizations' Statements on Comments on the 
Proposed Rule Changes Received From Members, Participants, or Others

    The NASD and NYSE have not solicited or received written comments 
on the proposed rule changes.

III. Date of Effectiveness of the Proposed Rule Changes and Timing for 
Commission Action

    The proposed rule changes have been filed by the SROs as stated 
policies, practices, or interpretations with respect to the meaning, 
administration, or enforcement of an existing rule series under Rule 
19b-4(f)(1) under the Act.\12\ Consequently, they have become effective 
pursuant to section 19(b)(3)(A) of the Act \13\ and Rule 19b-4(f)(1) 
thereunder.\14\
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    \12\ 17 CFR 240.19b-4(f)(1).
    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(1).
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    At any time within 60 days of the filing of such proposed rule 
changes, the Commission may summarily abrogate such rule changes if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing including whether the proposed rule 
changes are consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. 
Copies of the submissions, all subsequent amendments, all written 
statements with respect to the proposed rule changes that are filed 
with the Commission, and all written communications relating to the 
proposed rule changes between the Commission and any person, other than 
those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filings will also be available for inspection and copying at the 
principal offices of the SROs. All submissions should refer to the file 
numbers SR-NASD-2003-79 and SR-NYSE-2003-17 and should be submitted by 
June 12, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-12873 Filed 5-21-03; 8:45 am]
BILLING CODE 8010-01-P