[Federal Register Volume 68, Number 103 (Thursday, May 29, 2003)]
[Notices]
[Pages 32148-32164]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-13446]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47912; File Nos. SR-NYSE-2002-49; SR-NASD-2002-154]


Self-Regulatory Organizations: Notice of Filing of Amendment No. 
2 to Proposed Rule Changes by the New York Stock Exchange, Inc. 
Relating to Exchange Rules 344 (``Supervisory Analysts''), 345A 
(``Continuing Education for Registered Persons''), 351 (``Reporting 
Requirements'') and 472 (``Communications With the Public'') and by the 
National Association of Securities Dealers, Inc. Relating to NASD Rule 
2711 (``Research Analysts and Research Reports'')

May 22, 2003.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on May 16, 2003, the New York Stock Exchange, Inc. (``NYSE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') Amendment No. 2 to its proposed rule change 
(``NYSE Amendment No. 2''), which it originally filed on October 9, 
2002 and subsequently amended on December 4, 2002.\3\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Darla Stuckey, Corporate Secretary, NYSE, to 
James A. Brigagliano, Assistant Director, Division of Market 
Regulation (``Division''), Commission (``NYSE Amendment No. 1''). 
NYSE Amendment No. 1 conformed aspects of the proposed NYSE rules to 
those of NASD (See SR-NASD-2002-154), and proposed effective dates 
for the various rule provisions.
---------------------------------------------------------------------------

    On May 20, 2003, the National Association of Securities Dealers, 
Inc. (``NASD'') filed Amendment No. 2 to its proposed rule change 
(``NASD Amendment No. 2''), which it originally filed on October 25, 
2002 and subsequently amended on December 18, 2002.\4\ The proposed 
rule changes, incorporating NYSE Amendment No. 1 and NASD Amendment No. 
1, were published for comment in the Federal Register on January 7, 
2003.\5\
---------------------------------------------------------------------------

    \4\ See Letter from Philip Shaikun, Assistant General Counsel, 
NASD, to Katherine A. England, Assistant Director, Division, 
Commission (``NASD Amendment No. 1''). NASD Amendment No. 1 
clarified that only research analysts who are directly responsible 
for the preparation of research reports would be required to 
register with NASD and pass a qualification examination (See 
proposed NASD Rule 1050). NASD Amendment No. 1 also conformed NASD's 
proposed research analyst compensation provisions to comparable NYSE 
provisions. NASD Amendment No. 1 also amended the definition of 
``research report'' to conform it to the definition in the Sarbanes-
Oxley Act of 2002. NASD Amendment No. 1 also revised certain 
language that was contained in the discussion of the proposed 
amendment concerning print media interviews and articles.
    \5\ See Securities Exchange Act Release No. 47110 (December 31, 
2002), 68 FR 826 (``Original Notice'').
---------------------------------------------------------------------------

    NYSE Amendment No. 2 and NASD Amendment No. 2 are described in 
Items I, II, and III below, which Items have been prepared by the 
respective self-regulatory organizations (``SROs''). The Commission is 
publishing this notice to solicit comments on NYSE Amendment No. 2 and 
NASD Amendment No. 2 from interested persons.

I. Self-Regulatory Organizations' Statements of the Terms of Substance 
of the Proposed Rule Changes

    The NYSE is filing with the SEC proposed amendments to NYSE Rule 
472 (``Communications with the Public'') to conform to the requirements 
of the Sarbanes-Oxley Act of 2002 (``SOA''),\6\ and providing for an 
interpretation to the public appearance and print media disclosure 
requirements of NYSE Rule 472.
---------------------------------------------------------------------------

    \6\ Pub. L. 107-204, 116 Stat. 745 (2002).
---------------------------------------------------------------------------

    NASD is submitting an amendment to SR-NASD-2002-154, a proposed 
rule change to strengthen rules that govern analyst conflicts of 
interest by amending NASD Rules 1120 and 2711 and creating a new NASD 
Rule 1050. NASD Amendment No. 2 would implement provisions of the SOA 
related to analyst conflicts of interest, create an exemption from some 
provisions of NASD Rule 2711 for certain smaller firms, and make 
certain other changes to the current rule.
    Below is the text of the proposed rule changes. Proposed new 
language is in

[[Page 32149]]

italics; proposed deletions are in [brackets].
A. NYSE's Proposed Rule Text

Rule 472 Communications With the Public

Approval of Communications and Research Reports
    (a)(1) Each advertisement, market letter, sales literature or other 
similar type of communication which is generally distributed or made 
available by a member or member organization to customers or the public 
must be approved in advance by a member, allied member, supervisory 
analyst, or qualified person designated under the provisions of Rule 
342(b)(1).
    (2) Research reports must be [prepared or] approved, in advance, by 
a supervisory analyst acceptable to the Exchange under the provisions 
of Rule 344. Where a supervisory analyst does not have technical 
expertise in a particular product area, the basic analysis contained in 
such report may be co-approved by a product specialist designated by 
the organization. In the event that the member organization has no 
principal or employee qualified with the Exchange to approve such 
material, it must be approved by a qualified supervisory analyst in 
another member organization by arrangement between the two member 
organizations.
Investment Banking, Research Department and Subject Company 
Relationships and Communications
    (b)(1) Research Department personnel or any associated person(s) 
engaged in the preparation of research reports may not be subject to 
the supervision or control of the Investment Banking Department of the 
member or member organization.
    (2) Research reports may not be subject to review or approval prior 
to publication [distribution] by [the] Investment Banking [Department] 
personnel or any other employee of the member or member organization 
who is not directly responsible for investment research (``non-research 
personnel'') other than Legal or Compliance Department personnel.
    (3) [(2)] [Investment Banking personnel] Non-research personnel may 
review [check] research reports prior to publication [distribution] 
only to verify the factual accuracy of information in the research 
report [and] or to identify [or to review for] any potential conflicts 
of interest that may exist, provided that:
    (i) any [such] written communication concerning the content 
[accuracy] of a research report[s] between [the Investment Banking] 
non-research personnel and Research [Departments] personnel must be 
made either through [the] Legal or Compliance [Department] personnel or 
in a transmission copied to Legal or Compliance personnel; and
    (ii) any [such] oral communication concerning the content 
[accuracy] of a research report[s] between [the Investment Banking] 
non-research personnel and Research [Departments] personnel must be 
documented and made either with Legal or Compliance personnel acting as 
intermediary or in a conversation conducted in the presence of Legal or 
Compliance personnel.
    (4) [(3)] A member or member organization may not submit a research 
report to the subject company prior to publication, [distribution,] 
except for the review of sections of a draft of the research report 
solely to verify facts. Members and member organizations may not, under 
any circumstances, provide the subject company sections of research 
reports that include the research summary, the research rating or the 
price target.
    (i) Prior to submitting any sections of the research report to the 
subject company, the Research Department must provide a complete draft 
of the research report to the Legal or Compliance Department.
    (ii) If after submission to the subject company, the Research 
Department intends to change the proposed rating or price target, the 
Research Department must provide written justification to, and receive 
prior written authorization from, the Legal or Compliance Department 
for any change. The Legal or Compliance Department must retain copies 
of any drafts and changes thereto of the research reports provided to 
the subject company.
    (iii) The member or member organization may not notify a subject 
company that a rating will be changed until after the close of trading 
in the principal market of the subject company one business day prior 
to the announcement of the change.
    (5) No member or member organization may publish or otherwise 
distribute a research report prepared by an associated person nor may 
an associated person make a public appearance concerning a subject 
company if the associated person engaged in any communication with the 
subject company in furtherance of obtaining investment banking business 
prior to the time the subject company entered into a letter of intent 
or other written agreement with the member or member organization 
designating the member or member organization as an underwriter of an 
initial public offering by the subject company. This provision shall 
not apply to any due diligence communication between the associated 
person and the subject company, the sole purpose of which was to 
analyze the financial condition and business operations of the subject 
company.
Written Procedures
    (c) Each member and member organization must establish written 
procedures reasonably designed to ensure that members, member 
organizations, and their associated persons are in compliance with this 
Rule (see Rule 351(f) and Rule 472(h)(2) for attestations to the 
Exchange regarding compliance).
Retention of Communications
    (d) Communications with the public prepared or issued by a member 
or member organization must be retained in accordance with Rule 440 
(``Books and Records''). The names of the persons who prepared and who 
reviewed and approved the material must be ascertainable from the 
retained records and the records retained must be readily available to 
the Exchange, upon request.
Restrictions on Trading Securities by Associated Persons
    (e)(1) No associated person or member of the associated person's 
household may purchase or receive an issuer's securities prior to its 
initial public offering (e.g., so-called pre-IPO shares), if the issuer 
is principally engaged in the same types of business as companies (or 
in the same industry classification) which the associated person 
usually covers in research reports.
    (2) No associated person or member of the associated person's 
household may trade in any recommended subject company's securities or 
derivatives of such securities for a period of thirty (30) calendar 
days prior to and five (5) calendar days after the member's or member 
organization's publication [issuance] of research reports concerning 
such security or a change in rating or price target of a subject 
company's securities.
    (3) No associated person or member of the associated person's 
household may effect trades contrary to the member's or member 
organization's most current recommendations (i.e., sell securities 
while maintaining a ``buy'' or ``hold'' recommendation, buy securities 
while maintaining a ``sell'' recommendation, or effecting a ``short 
sale'' in a security while maintaining a ``buy'' or ``hold'' 
recommendation on such security).
    (4) The following are exceptions to the prohibitions contained in 
paragraphs (1), (2), and (3):

[[Page 32150]]

    (i) transactions by associated persons and household members that 
have been pre-approved in writing by the Legal or Compliance Department 
that are made due to an unanticipated significant change in their 
personal financial circumstances;
    (ii) a member or member organization may permit the publication 
[issuance] of research reports or permit a change to the rating or 
price target on a subject company, regardless of whether an associated 
person and/or household members traded the subject company's securities 
or derivatives of such securities, within the thirty (30) calendar day 
period described in paragraph (e)(2), when the publication [issuance] 
of such research reports, or change in such rating or price target is 
attributable to some significant news or events regarding the subject 
company, provided that the publication [issuance] of such research 
reports, or change in rating or price target on such subject company 
has been pre-approved in writing by the Legal or Compliance Department;
    (iii) sale transactions by an associated person and/or household 
member who is new to the member or member organization within thirty 
(30) calendar days of such associated person's employment with the 
member or member organization when such associated person and/or 
household member had previously purchased such security or derivatives 
of such security prior to the associated person's employment with the 
member or member organization;
    (iv) sale transactions by an associated person and/or household 
member within thirty (30) calendar days from the date of the member's 
or member organization's publication [issuance] of research reports or 
changes to the rating or price target on a subject company when such 
associated person and/or household member had previously purchased the 
subject company's securities or derivatives of such securities prior to 
initiation of coverage of the subject company by the associated person;
    (v) transactions in accounts not controlled by the associated 
person and for investment funds in which an associated person or 
household member participates as a passive investor, provided the 
interest of the associated person or household member in the assets of 
the fund does not exceed 1% of the fund's assets, and the fund does not 
invest more than 20% of its assets in securities of issuers principally 
engaged in the same types of business as companies (or in the same 
industry classification) which the associated person usually covers in 
research reports. If an investment fund distributes securities in kind 
to an associated person before the issuer's initial public offering, 
the associated person must either divest those securities immediately 
or refrain from participating in the preparation of research reports 
concerning that issuer;
    (vi) transactions in a registered diversified investment company as 
defined under section 5(b)(1) of the Investment Company Act of 1940.
Restrictions on Member's or Member Organization's Issuance of Research 
Reports and Participation in Public Appearances
    (f)(1) A member or member organization may not publish or otherwise 
distribute [issue] research reports regarding an issuer or recommend an 
issuer's securities in a public appearance, for which the member or 
member organization acted as manager or co-manager of an initial public 
offering within forty (40) calendar days following the offering date 
[effective date of the offering].
    (2) A member or member organization may not publish or otherwise 
distribute [issue] research reports regarding an issuer or recommend an 
issuer's securities in a public appearance, for which the member or 
member organization acted as manager or co-manager of a secondary 
offering within ten (10) calendar days following the offering date 
[effective date of the offering]. This prohibition shall not apply to 
research reports [issued] published or otherwise distributed under 
Securities Act Rule 139 regarding issuers whose securities are actively 
traded, as defined in Securities Exchange Act Rule 101(c)(1) of 
Regulation M.
    (3) No member or member organization that has agreed to participate 
or is participating as an underwriter or dealer (other than as manager 
or co-manager) of an issuer's initial public offering may publish or 
otherwise distribute a research report regarding that issuer for 
twenty-five (25) calendar days following the offering date.
    (4) No member or member organization which has acted as a manager 
or co-manager of a securities offering may publish or otherwise 
distribute a research report or make a public appearance within fifteen 
(15) days prior to or after the expiration, waiver or termination of a 
lock-up agreement or any other agreement that the member or member 
organization has entered into with a subject company and its 
shareholders that restricts or prohibits the sale of the subject 
company's or its shareholder's securities after the completion of a 
securities offering.
    (5) [(3)] A member or member organization may permit exceptions to 
the prohibitions in paragraphs (f)(1), [and] (2), (3) and (4) 
(consistent with other securities laws and rules) for research reports 
that are published or otherwise distributed [issued] due to significant 
news or events, provided that such research reports are pre-approved in 
writing by the member's or member's organization's Legal or Compliance 
Department.
    (6) If a member or member organization withdraws its research 
coverage of a subject company, notice of this withdrawal must be made. 
Such notice must be made in the same manner as when research coverage 
was first initiated by the member or member organization and must 
include the member's or member organization's final recommendation or 
rating.
Prohibition on [of] Offering Favorable Research for Business and 
Retaliation Against Associated Persons
    (g)(1) No member or member organization may directly or indirectly 
offer a favorable research rating or specific price target, or offer to 
change a rating or price target, to a subject company as consideration 
or inducement for the receipt of business or for compensation.
    (2) No member or member organization and no employee of a member or 
member organization who is involved with the member's or member 
organization's investment banking activities may, directly or 
indirectly, retaliate against or threaten to retaliate against any 
associated person employed by the member or member organization or its 
affiliates as a result of an adverse, negative, or otherwise 
unfavorable research report written or public appearance made by the 
associated person that may adversely affect the member's or member 
organization's present or prospective investment banking relationship 
with the subject company of a research report. This prohibition shall 
not limit a member's or member organization's authority to discipline 
or terminate an associated person, in accordance with the member's or 
member organization's policies and procedures, for any cause other than 
the writing of such an unfavorable research report or the making of 
such unfavorable public appearance.

[[Page 32151]]

Restrictions on Compensation to Associated Persons
    (h)(1) No member or member organization may compensate an 
associated person(s) for specific investment banking services 
transactions. An associated person may not receive an incentive or 
bonus that is based on a specific investment banking services 
transaction. However, a member or member organization is not prohibited 
from compensating an associated person based upon such member's or 
member organization's [person's] overall performance, including 
[services provided to] the performance of the Investment Banking 
Department (see Rule 472(k)(2) for disclosure of such compensation).
    (2) An associated person's compensation must be reviewed and 
approved at least annually by a committee which reports to the Board of 
Directors or, where the member or member organization has no Board of 
Directors, to a senior executive officer of the member or member 
organization. Such committee may not include representatives from the 
member's or member organization's Investment Banking Department. The 
committee must, among other things, consider the following factors, if 
applicable, when reviewing an associated person's compensation:
    i. The associated person's individual performance, (e.g., 
productivity, and quality of research product);
    ii. The correlation between the associated person's recommendations 
and stock price performance;
    iii. The overall ratings received from clients, sales force, and 
peers independent of the Investment Banking Department, and other 
independent rating services.
    The committee may not consider as a factor in determining the 
associated person's compensation, his or her contributions to the 
member's or member organization's investment banking business.
    The committee must document the basis upon which each associated 
person's compensation was established. The annual attestation required 
by Rule 351(f) must certify that the committee reviewed and approved 
each associated person's compensation and has documented the basis upon 
which such compensation was established.
General Standards for All Communications
    (Formerly positioned at Supplementary Material .30)
    A. (i) No change.
Specific Standards for Communications
    (Formerly positioned at Supplementary Material .40)
    B. (j) No change (except for deletion of .40(2)).
Disclosure
    (k)(1) Disclosures Required in Research Reports and Public 
Appearances Disclosure of Member's, Member Organization's, and 
Associated Person's Ownership of Securities and Subject Company 
Relationships
    (i) A member or member organization must disclose in research 
reports and an associated person must disclose in public appearances:
    a. if, as of the last day of the month before the publication or 
appearance (or the end of the second most recent month if the 
publication or appearance is less than ten (10) calendar days after the 
end of the most recent month), the member or member organization or its 
affiliates beneficially own 1% or more of any class of common equity 
securities of the subject company. The member or member organization 
must make the required beneficial ownership computation no later than 
ten (10) calendar days after the end of the prior month. Computation of 
beneficial ownership of securities must be based upon the same 
standards used to compute ownership for purposes of the reporting 
requirements under section 13(d) of the Securities Exchange Act of 
1934,
    b. if the associated person or a household member has a financial 
interest in the securities of the subject company, and the nature of 
the financial interest, including, without limitation, whether it 
consists of any option, right, warrant, futures contract, long or short 
position, [or]
    c. if the subject company currently is a client of the member or 
member organization or was a client of the member or member 
organization during the 12-month period preceding the date of 
distribution of the research report or date of the public appearance by 
the associated person (if the associated person knows or has reason to 
know). In such instances, the member or member organization or 
associated person (if such associated person knows or has reason to 
know) also must disclose the types of services provided to the subject 
company (For purposes of this paragraph, the types of services provided 
to the subject company may be described as investment banking services, 
non-investment banking-securities related services, and non-securities 
services.),
    d. [c.] any other actual, material conflict of interest of the 
associated person, or member or member organization, of which the 
associated person knows, or has reason to know, at the time the 
research report is published [issued] or at the time the public 
appearance is made.
    e. if the associated person or member of the associated person's 
household is an officer, director, or advisory board member of the 
subject company; or
    f. if the associated person received any compensation from the 
subject company in the past twelve (12) months.

Associated Person Disclosure

    (ii) An associated person must disclose in public appearances (if 
the associated person knows or has reason to know) if the member or 
member organization or any affiliate thereof, received any compensation 
from the subject company in the past twelve (12) months.
Member, Member Organization, and Affiliate Compensation
    (iii) [(ii)] A member or member organization must disclose in 
research reports if the member or member organization or its 
affiliates: (a) Has managed or co-managed a public offering of [equity] 
securities for the subject company in the past twelve (12) months; (b) 
has received compensation for investment banking services from the 
subject company in the past twelve (12) months; (c) received any 
compensation other than for investment banking services from the 
subject company in the past twelve (12) months; or (d) [c] expects to 
receive or intends to seek compensation for investment banking services 
from the subject company in the next three (3) months.
    [When an associated person recommends securities in a public 
appearance, the associated person must disclose if the subject company 
is an investment banking services client of the member, member 
organization, or one of its affiliates; when the associated person 
knows or has reason to know of this relationship.]
[Disclosure of Associated Person's Affiliations With Subject Company
    (iii) A member or member organization must disclose in research 
reports, and an associated person must disclose in public appearances, 
whether the associated person or member of the associated person's 
household is an officer, director or advisory board member of the 
recommended issuer.]
Exceptions to the Required Disclosures
    (iv) A member or member organization or an associated person will 
not be required to make a

[[Page 32152]]

disclosure required by Rule 472(k)(1)(i)c. and (iii) (b) and (d) to the 
extent such disclosure would reveal material non-public information 
regarding specific potential future investment banking services 
transactions of the subject company.
    (k)(2) Disclosures Specific to Research Reports.
    The front page of a research report either must include the 
disclosures required under this Rule or must refer the reader to the 
page(s) on which each such disclosure is found. Disclosures, and 
references to disclosures, must be clear, comprehensive, and prominent.
    A member or member organization must disclose in research reports 
if the associated person preparing such reports received compensation 
that is based upon (among other factors) the member's or member 
organization's overall investment banking revenues.
    A member or member organization must disclose in research reports 
that recommend securities:
    (i) if it is making a market in the subject company's securities at 
the time the research report is issued.
    (ii) the valuation methods used, and any price objectives must have 
a reasonable basis and include a discussion of risks.
    (iii) the meanings of all ratings used by the member or member 
organization in its ratings system. (For example, a member or member 
organization might disclose that a ``strong buy'' rating means that the 
rated security's price is expected to appreciate at least 10% faster 
than other securities in its sector over the next twelve (12)-month 
period[)]. Definitions of ratings terms also must be consistent with 
their plain meaning. Therefore, for example, a ``hold'' rating should 
not mean or imply that an investor should sell a security.)
    (iv) the percentage of all securities that the member or member 
organization recommends an investor ``buy,'' ``hold,'' or ``sell.'' 
Within each of the three (3) categories, a member or member 
organization must also disclose the percentage of subject companies 
that are investment banking services clients of the member or member 
organization within the previous twelve (12) months[.] ([S]see Rule 
472.70 for further information[.]).
    (v) a chart that depicts the price of the subject company's stock 
over time and indicates points at which a member or member organization 
assigned or changed a rating or price target. This provision would 
apply only to securities that have been assigned a rating for at least 
one (1) year, and need not extend more than three (3) years prior to 
the date of the research report. The information in the price chart 
must be current as of the end of the most recent calendar quarter (or 
the second most recent calendar quarter if the publication date is less 
than fifteen (15) calendar days after the most recent calendar 
quarter).
    When a member or member organization distributes a research report 
covering six (6) or more subject companies for purposes of the 
disclosures required in paragraph (k) of this Rule, such research 
report may direct the reader in a clear and prominent manner as to 
where they may obtain applicable current disclosures in written or 
electronic format.

Other Communications Activities

    (l) Other communications activities are deemed to include, but are 
not limited to, conducting interviews with the media, writing books, 
conducting seminars or lecture courses, writing newspaper or magazine 
articles, or making radio/TV appearances.
    Members and member organizations must establish specific written 
supervisory procedures applicable to members, allied members, and 
employees who engage in these types of communications activities. These 
procedures must include provisions that require prior approval of such 
activity by a person designated under the provisions of Rule 342(b)(1). 
These types of activities are subject to the general standards set 
forth in paragraph (i). In addition, any activity which includes 
discussion of specific securities and/or industries is subject to the 
specific standards in paragraph (j) and the disclosure requirements of 
paragraphs (k)(1) and (k)(2)(i).

Small Firm Exception

    (m) The provisions of Rule 472(b)(1), (2) and (3) do not apply to 
members and member organizations that over the three previous years, on 
average per year, have participated in 10 or fewer investment banking 
services transactions as manager or co-manager and generated $5 million 
or less in gross investment banking services revenues from those 
transactions. For purposes of this paragraph the term ``investment 
banking services transactions'' shall include both debt and equity 
underwritings. Members and member organizations that qualify for this 
exemption must maintain records for three years of any communications 
that, but for this exemption, would be subject to paragraphs (b)(1), 
(2), and (3) of this Rule. 
    .10 Definitions
    (1) Communication--The term ``Communication'' is deemed to include, 
but is not limited to, advertisements, market letters, research 
reports, sales literature, electronic communications, communications in 
and with the press, and wires and memoranda to branch offices or 
correspondent firms which are shown or distributed to customers or the 
public.
    (2) Research Report--``Research report'' is generally defined as a 
written or electronic communication which includes an analysis of 
equity securities of individual companies or industries, and provides 
information reasonably sufficient upon which to base an investment 
decision [and includes a recommendation].
    For purposes of approval by a supervisory analyst pursuant to Rule 
472(a)(2), research report includes, but is not limited to, reports 
which recommend equity securities, derivatives of such securities, 
including options, debt and other types of fixed income securities, 
single stock futures products, and other investment vehicles subject to 
market risk.
    (3) Advertisement--``Advertisement'' is defined to include, but is 
not limited to, any sales communications that is published, or designed 
for use in any print, electronic or other public media such as 
newspapers, periodicals, magazines, radio, television, telephone 
recording, Web sites, motion pictures, audio or video device, 
telecommunications device, billboards, or signs.
    (4) Market letters--``Market letters'' are defined as, but are not 
limited to, any written comments on market conditions, individual 
securities, or other investment vehicles that are not defined as 
research reports. They also may include ``follow-ups'' to research 
reports and articles prepared by members or member organizations which 
appear in newspapers and periodicals.
    (5) Sales literature--``Sales literature'' is defined as, but is 
not limited to, written or electronic communications including, but not 
limited to, telemarketing scripts, performance reports or summaries, 
form letters, seminar texts, and press releases discussing or promoting 
the products, services, and facilities offered by a member or member 
organization, the role of investment in an individual's overall 
financial plan, or other material calling attention to any other 
communication.
    .20 For purposes of this Rule, ``investment banking services'' 
includes, without limitation, acting as an underwriter in an offering 
for the issuer; acting as a financial adviser in a merger or 
acquisition; providing venture

[[Page 32153]]

capital, equity lines of credit, PIPEs (private investment, public 
equity transaction), or similar investments; or serving as placement 
agent for the issuer.
    .30 For purposes of this Rule, the term ``Investment Banking 
Department'' means any department or division of the member or member 
organization, whether or not identified as such, that performs any 
investment banking services on behalf of the member or member 
organization.
    .40 For purposes of this Rule, the term ``associated person'' 
includes a member, allied member, or employee of a member or member 
organization responsible for, and any person who reports directly or 
indirectly to such associated person in connection with, the 
preparation of [making of the recommendation to purchase, sell or hold 
an equity security in] research reports, or making recommendations or 
offering opinions in public appearances or establishing a rating or 
price target of a subject company's equity securities. For purposes of 
this Rule, the term ``household member'' means any individual whose 
principal residence is the same as the associated person's principal 
residence. Paragraphs (e)(1), (2), (3); (4)(i), (ii), (iii), (iv) and 
(v); (k)(1)(i)b., and (k)(1)(i)e. [(k)(1)(iii)] apply to any account in 
which an associated person has a financial interest, or over which the 
associated person exercises discretion or control, other than an 
investment company registered under the Investment Company Act of 1940.
    This term ``associated person'' also includes such ``other 
persons,'' e.g., Director of Research, Supervisory Analyst, or member 
of a committee, who have direct influence and/or control with respect 
to (1) preparing research reports, or (2) establishing or changing a 
rating or price target of a subject company's equity securities. Such 
other persons are subject to the provisions of paragraph (e)(1)-(4) of 
this Rule.
    .50 For purposes of this Rule, the term ``public appearance'' 
includes, without limitation, participation in a seminar, forum 
(including an interactive electronic forum), radio, [or] television or 
print media interview, or other public appearance or public speaking 
activity, or the writing of a newspaper article or other type of public 
written medium in which an associated person makes a recommendation or 
offers an opinion concerning [an] any equity [security] securities and/
or industries.
    .60 For purposes of this Rule, ``subject company'' is the company 
whose equity securities are the subject of research reports.
    .70 For purposes of Rule 472(k)(2)(iv), a member or member 
organization must determine, based on its own ratings system, into 
which of the three (3) categories each of their securities ratings 
utilized falls. This information must be current as of the end of the 
most recent calendar quarter (or the second most recent calendar 
quarter if the publication date is less than fifteen (15) calendar days 
after the most recent calendar quarter). For example, a research report 
might disclose that the member or member organization has assigned a 
``buy'' rating to 58% of the securities that it follows, a ``hold'' 
rating to 15%, and a ``sell'' rating to 27%.
    Rule 472(k)(2)(iv) requires members or member organizations to 
disclose the percentage of companies that are investment banking 
services clients for each of the three ratings categories within the 
previous twelve (12) months. For example, if twenty (20) of the twenty-
five (25) companies to which a member or member organization has 
assigned a ``buy'' rating are investment banking clients of the member 
or member organization, the member or member organization would have to 
disclose that 80% of the companies that received a ``buy'' rating are 
its investment banking clients. Such disclosure must be made for the 
``buy,'' ``hold'' and ``sell'' ratings categories as appropriate.
    .80 For purposes of this Rule, the term ``Legal or Compliance 
Department'' also includes, but is not limited to, any department of 
the member or member organization which performs a similar function.
    .90 For purposes of Rule 472(a)(1), a qualified person is one who 
has passed an examination acceptable to the Exchange.
    .100 For purposes of this Rule, the term ``initial public 
offering'' refers to the initial registered equity security offering by 
an issuer, regardless of whether such issuer is subject to the 
reporting requirements of section 13 or 15(d) of the Securities 
Exchange Act of 1934, prior to the time of the filing of such issuer's 
registration statement.
    .110 For purposes of this Rule, a secondary offering shall include 
a registered follow-on offering by an issuer or a registered offering 
by persons other than the issuer involving the distribution of 
securities subject to Regulation M of the Securities Exchange Act of 
1934.
    .120 For purposes of this Rule, the term ``offering date'' refers 
to the later of the effective date of the registration statement or the 
first date on which the security was bona fide offered to the public.
Reporting Requirements

Rule 351

    (a)-(e) No change.
    (f) Each member and member organization that prepares, issues or 
distributes [communications to the public, (including but not limited 
to,] research reports and whose associated persons make public 
appearances [, media presentations and interviews)], is required to 
submit to the Exchange annually, a letter of attestation signed by a 
senior officer or partner that the member or member organization has 
established and implemented procedures reasonably designed to comply 
with the provisions of Rule 472. The attestation must also specifically 
certify that each associated person's compensation was reviewed and 
approved in accordance with the requirements of Rule 472(h)(2) and that 
the basis for such approval has been documented.
* * * * *
    .11 For purposes of Rule 351(f), the attestation must be submitted 
by April 1 of each year.
    .12 The term ``research report'' is defined in Rule 472.10 and the 
term ``public appearance'' is defined in Rule 472.50.

Securities Analysts and Supervisory Analysts

    Rule 344. Securities analysts and supervisory analysts must be 
registered with, qualified by, and approved by the Exchange.
    [Supervisory analysts required under Rule 472 shall be acceptable 
to, and approved by, the Exchange.]
    .10 For purposes of this Rule, the term ``securities analyst'' 
includes a member, allied member, or employee who is directly 
responsible for the preparation of research reports. Securities analyst 
candidates must pass a qualification examination acceptable to the 
Exchange.
    .11 [.10] For purposes of this Rule, the term ``supervisory 
analyst'' includes a member, allied member, or employee who is 
responsible for approving research reports under Rule 472(a)(2). In 
order to show evidence of acceptability to the Exchange as a 
supervisory analyst, a member, allied member, or employee may do one of 
the following:
    (1) Present evidence of appropriate experience and pass an Exchange 
Supervisory Analyst[s] Examination (Series 16).
    (2) Present evidence of appropriate experience and successful 
completion of

[[Page 32154]]

a specified level of the Chartered Financial Analysts Examination 
prescribed by the Exchange and pass only that portion of the Exchange 
Supervisory Analyst[s] Examination (Series 16) dealing with Exchange 
rules on research standards and related matters.
    [In addition, if not a member, allied member or registered 
representative, the candidate is subject to Exchange investigation of 
character and conduct and should submit personal information on Form U-
4 for this purpose.]
    The Exchange publishes a Study Outline for the Securities Analyst 
Examination and the Supervisory Analyst[s] Examination (Series 16). 
[Examinations are requested and given under the procedures described in 
Para. of 2345.15 for registered representative examinations.]
Continuing Education for Registered Persons
    Rule 345A. (a) Regulatory Element--No change.
    (b) Firm Element.
    (1) Persons Subject to the Firm Element--The requirements of 
section (b) of this Rule shall apply to any registered person who has 
direct contact with customers in the conduct of the member's or member 
organization's securities sales, trading or investment banking 
activities, and to the immediate supervisors of such persons, and to 
registered persons who function as supervisory analysts, and securities 
analysts as defined in Rule 344 (collectively, ``covered registered 
persons'').
    (2) Standards--No Change.
    (3) Participation in the Firm Element--No Change.
    (4) Specific Training Requirements--The Exchange may require a 
member or member organization, either individually or as part of a 
larger group, to provide specific training to its covered registered 
persons in such areas the Exchange deems appropriate. Such a 
requirement may stipulate the class of covered registered persons for 
which it is applicable, the time period in which the requirement must 
be satisfied and, where appropriate, the actual training content.
    .10 For purposes of this Rule, the term ``registered person'' means 
any member, allied member, registered representative, or other person 
registered or required to be registered under Exchange rules, but does 
not include any such person whose activities are limited solely to the 
transaction of business on the Floor with members or registered broker-
dealers. For purposes of the Regulatory Element required under Rule 
345A(a), the term does not include persons registered as securities 
analysts, or supervisory analysts pursuant to Rule 344.
    .20-.40 No Change.
    .50 Pursuant to Rule 345A(b)(1), all persons registered as 
securities analysts and supervisory analysts pursuant to Rule 344 must 
participate in a Firm Element Continuing Education program that 
includes training in applicable rules and regulations, ethics, and 
professional responsibility.

Interpretation

Rule 472 Communications With the Public

    (k)(1) Disclosure Required in Research Reports and Public 
Appearances.
    /01 Public Appearances--Print Media.
    When an associated person recommends securities in a print or 
broadcast media interview, newspaper article or other type of public 
medium all of the disclosures required under Rule 472(k)(1) are 
required to be provided to the media outlet for inclusion in the 
published interview, article, broadcast, or other medium.
    Whenever an associated person recommends securities in a print 
media interview, newspaper article prepared under his or her name, or 
broadcast, the associated person, before the opening of business on the 
next business day, must prepare a record of such interview, article or 
broadcast. Such record must include, at minimum, the name of the 
analyst(s), the name of the publication, the date of the interview, 
article, or broadcast the name of the interviewer (if applicable), the 
name(s) of the securities recommended and the specific disclosures 
provided to the print or broadcast media source and/or interviewer. 
Such record must be made regardless of whether the media outlet 
published or broadcast the required disclosures. The associated 
person's member or member organization must retain the record of such 
interview, article, or broadcast and the disclosures made in accordance 
with Rules 17a- and 17a-4 of the Securities Exchange Act of 1934. The 
record retained must be readily available to the Exchange, upon 
request.
B. NASD's Proposed Rule Text

1050. Registration of Research Analysts

    All persons associated with a member who are to function as 
research analysts as that term is defined in Rule 2711 shall be 
registered with NASD. Before their registrations can become effective, 
they shall pass a Qualification Examination for Research Analysts as 
specified by the Board of Governors. For purposes of this Rule 1050, 
``research analyst'' shall mean an associated person who is directly 
responsible for the preparation of research reports.
* * * * *
1120. Continuing Education Requirements
    This Rule prescribes requirements regarding the continuing 
education of certain registered persons subsequent to their initial 
qualification and registration with the Association. The requirements 
shall consist of a Regulatory Element and a Firm Element as set forth 
below.
(a) Regulatory Element
    (1) through (4) No change.
    (5) Definition of Registered Person.
    For purposes of this Rule, the term ``registered person'' means any 
person registered with [the Association] NASD as a representative, 
principal, [or] assistant representative or research analyst pursuant 
to Rule 1020, 1030, 1040, 1050 and 1110 Series.
    (6) No change.
(b) Firm Element
    (1) Persons Subject to the Firm Element.
    The requirements of this subparagraph shall apply to any person 
registered with the member who has direct contact with customers in the 
conduct of the member's securities sales, trading and investment 
banking activities, and to the immediate supervisors of such persons, 
and to any person registered as a research analyst pursuant to Rule 
1050 (collectively, ``covered registered persons''). ``Customer'' shall 
mean any natural person and any organization, other than another broker 
or dealer, executing securities transactions with or through or 
receiving investment banking services from a member.
    (2) Standards for the Firm Element.
    (A) No change.
    (B) Minimum Standards for Training Programs--Programs used to 
implement a member's training plan must be appropriate for the business 
of the member and, at a minimum must cover the following matters 
concerning securities products, services, and strategies offered by the 
member:
    (i) General investment features and associated risk factors;
    (ii) Suitability and sales practice considerations; [and]
    (iii) Applicable regulatory requirements[.]; and

[[Page 32155]]

    (iv) With respect to registered research analysts, training in 
ethics, professional responsibility and the requirements of Rule 2711.
    (3) through (4) No change.
* * * * *
2711. Research Analysts and Research Reports
(a) Definitions
    For purposes of this rule, the following terms shall be defined as 
provided.
    (1) through (3) No change.
    (4) ``Public appearance'' means any participation in a seminar, 
forum (including an interactive electronic forum), radio, television or 
print media interview, or other public speaking activity, or the 
writing of a print media article, in which a research analyst makes a 
recommendation or offers an opinion concerning an equity security.
    (5) ``Research analyst'' means the associated person who is 
principally responsible for, and any associated person who reports 
directly or indirectly to such a research analyst in connection with, 
preparation of the substance of a research report, whether or not any 
such person has the job title of ``research analyst.'' Solely for 
purposes of paragraph (g), the term ``research analyst'' also includes 
such other persons as the director or research, supervisory analyst, or 
member of a committee who have direct influence or control with respect 
to (A) the preparation of research reports, or (B) establishing or 
changing a rating or price target of a subject company's equity 
securities.
    (6) through (7) No change.
    (8) ``Research report'' means a written or electronic communication 
which includes an analysis of equity securities of individual companies 
or industries, and which provides information reasonably sufficient 
upon which to base an investment decision [and includes a 
recommendation].
    (9) No change.
(b) Restrictions on [Investment Banking Department] Relationships with 
Research Department
    (1) No research analyst may be subject to the supervision or 
control of any employee of the member's investment banking department.
    (2) Except as provided in paragraph (b)(3), no employee of the 
investment banking department or any other employee of the member who 
is not directly responsible for investment research (``non-research 
personnel''), other than legal or compliance personnel, may review or 
approve a research report of the member before its publication.
    (3) [Investment banking] Non-research personnel may review a 
research report before its publication as necessary only to verify the 
factual accuracy of information in the research report or [to review 
the research report for] identify any potential conflict of interest, 
provided that:
    (A) any written communication between [investment banking] non-
research personnel and research department personnel concerning [such] 
the content of a research report must be made either through [an] 
authorized legal or compliance [official] personnel of the member or in 
a transmission copied to such [an official] personnel; and
    (B) any oral communication between [investment banking] non-
research personnel and research department personnel concerning [such] 
the content of a research report must be documented and made either 
through [an] authorized legal or compliance [official] personnel acting 
as intermediary or in a conversation conducted in the presence of such 
[an official] personnel.
(c) Restrictions on Review of a Research Report by the Subject Company
    (1) No change.
    (2) A member may submit sections of such a research report to the 
subject company before its publication for review as necessary only to 
verify the factual accuracy of information in those sections, provided 
that:
    (A) No change.
    (B) a complete draft of the research report is provided to [the] 
legal or compliance [department] personnel before sections of the 
report are submitted to the subject company; and
    (C) if after submitting the sections of the research report to the 
subject company the research department intends to change the proposed 
rating or price target, it must first provide written justification to, 
and receive written authorization from, [the] legal or compliance 
[department] personnel for the change. The member must retain copies of 
any draft and the final version of such a research report for three 
years following its publication.
    (3) No change.
    (4) No research analyst may issue a research report or make a 
public appearance concerning a subject company if the research analyst 
engaged in any communication with the subject company in furtherance of 
obtaining investment banking business prior to the time the subject 
company entered into a letter of intent or other written agreement with 
the member designating the member as an underwriter of an initial 
public offering by the subject company. This provision shall not apply 
to any due diligence communication between the research analyst and the 
subject company, the sole purpose of which was to analyze the financial 
condition and business operations of the subject company.
(d) [Prohibition of Certain Forms of] Restrictions on Research Analyst 
Compensation
    (1) No member may pay any bonus, salary or other form of 
compensation to a research analyst that is based upon a specific 
investment banking services transaction.
    (2) A research analyst's compensation must be reviewed and approved 
at least annually by a committee that reports to the member's board of 
directors, or when the member has no board of directors, to a senior 
executive officer of the member. This committee may not have 
representation from the member's investment banking department. The 
committee must consider the following factors when reviewing a research 
analyst's compensation, if applicable:
    (A) the research analyst's individual performance, including the 
analyst's productivity and the quality of the analyst's research;
    (B) the correlation between the research analyst's recommendations 
and the stock price performance; and
    (C) the overall ratings received from clients, sales force, and 
peers independent of the member's investment banking department, and 
other independent ratings services.
    The committee may not consider as a factor in determining the 
research analyst's compensation his or her contributions to the 
member's investment banking business. The committee must document the 
basis upon which each research analyst's compensation was established. 
The annual attestation required by Rule 2711(i) must certify that the 
committee reviewed and approved each research analyst's compensation 
and documented the basis upon which this compensation was established.
    (e) No change.
(f) [Imposition of Quiet Periods] Restrictions on Publishing Research 
Reports and Public Appearances; Termination of Coverage
    (1) No member may publish or otherwise distribute a research report 
regarding a subject company or recommend a subject company's securities 
in a public appearance for

[[Page 32156]]

which the member acted as manager or co-manager of:
    [(1)](A) an initial public offering, for 40 calendar days following 
the date of the offering; or
    [(2)](B) a secondary offering, for 10 calendar days following the 
date of the offering; provided that:
    [(A)](i) paragraphs (f)(1)(A) and (f)[(2)](1)(B) will not prevent a 
member from publishing or otherwise distributing a research report 
concerning the effects of significant news or a significant event on 
the subject company within such 40- and 10-day periods, and provided 
further that [the] legal [and] or compliance [department] personnel 
authorize[s] publication of that research report before it is [issued] 
published or otherwise distributed; and
    [(B)](ii) paragraph (f)[(2)](1)(B) will not prevent a member from 
publishing or otherwise distributing a research report pursuant to SEC 
Rule 139 regarding a subject company with ``actively-traded 
securities,'' as defined in Regulation M, 17 CFR 242.101(c)(1).
    (2) No member that has agreed to participate or is participating as 
an underwriter or dealer (other than as manager or co-manager) of an 
issuer's initial public offering may publish or otherwise distribute a 
research report regarding that issuer for 25 calendar days following 
the date of the offering.
    (3) For purposes of paragraphs (f)(1) and (f)(2), the term ``date 
of the offering'' refers to the later of the effective date of the 
registration statement or the first date on which the security was bona 
fide offered to the public.
    (4) No member that has acted as a manager or co-manager of a 
securities offering may publish or otherwise distribute a research 
report or make a public appearance concerning a subject company 15 days 
prior to and after the expiration, waiver or termination of a lock-up 
agreement or any other agreement that the member has entered into with 
a subject company or its shareholders that restricts or prohibits the 
sale of securities held by the subject company or its shareholders 
after the completion of a securities offering. This paragraph will not 
prevent a member from publishing or otherwise distributing a research 
report concerning the effects of significant news or a significant 
event on the subject company within such period, provided that legal or 
compliance personnel authorize publication of that research report 
before it is issued.
    (5) If a member intends to discontinue its research coverage of a 
subject company, notice of this withdrawal must be made in the same 
manner as when research coverage was first initiated by the member and 
must include the member's final recommendation or rating.
(g) Restrictions on Personal Trading by Research Analysts
    (1) No change.
    (2) (A) No change.
    (B) a member may permit a research analyst account to purchase or 
sell any security issued by a subject company within 30 calendar days 
before the publication of a research report or change in the rating or 
price target of the subject company's securities due to significant 
news or a significant event concerning the subject company, provided 
that [the member's] legal or compliance [department] personnel pre-
approve[s] the research report and any change in the rating or price 
target.
    (3) No change.
    (4) [A member's l]Legal or compliance [department] personnel may 
authorize a transaction otherwise prohibited by paragraphs (g)(2) and 
(g)(3) based upon an unanticipated significant change in the personal 
financial circumstances of the beneficial owner of the research analyst 
account, provided that:
    (A) [the] legal or compliance [department] personnel authorize[s] 
the transaction before it is entered;
    (B) through (C) No change.
    (5) No change.
(h) Disclosure Requirements
    (1) No change.
    (2) Receipt of Compensation.
    (A) A member must disclose in research reports if [:(i)] the 
research analyst principally responsible for preparation of the report 
received compensation that is based upon (among other factors) the 
member's investment banking revenues.[; and]
    (B)[(ii) the member or its affiliates:] A member must disclose in 
research reports if the member or any affiliate:
    (i)[(a)]managed or co-managed a public offering of securities for 
the subject company in the past 12 months;
    (ii)[(b)] received compensation for investment banking services 
from the subject company in the past 12 months; or
    (iii)[(c)] expects to receive or intends to seek compensation for 
investment banking services from the subject company in the next 3 
months.
    (C) A member must disclose in research reports if the member or any 
affiliate received any compensation other than for investment banking 
services from the subject company in the past 12 months.
    (D) A member must disclose in research reports and a research 
analyst must disclose in public appearances if the research analyst 
received any compensation from the subject company in the past 12 
months.
    (E) A research analyst must disclose in public appearances (if the 
analyst knows or has reason to know) if the member or any affiliate 
received any compensation from the subject company in the past 12 
months.
    (F) A member must disclose in research reports and a research 
analyst must disclose in public appearances (if the analyst knows or 
has reason to know) if the subject company currently is a client of the 
member or was a client of the member during the 12-month period 
preceding the date of distribution of the research report or date of 
the public appearance. In such cases, the member or research analyst 
(if the analyst knows or has reason to know) also must disclose the 
types of services provided to the subject company. For purposes of this 
paragraph (h)(2)(F), the types of services provided to the subject 
company may be described as investment banking services, non-investment 
banking securities-related services, and non-securities services.
    (G) A member or research analyst will not be required to make a 
disclosure required by paragraphs (h)(2)(B)(ii), (h)(2)(B)(iii), or 
(h)(2)(F) to the extent such disclosure would reveal material non-
public information regarding specific potential future investment 
banking services transactions of the subject company.
    [(B) A research analyst must disclose in public appearances if the 
analyst knows or has reason to know that the subject company is a 
client of the member or its affiliates.]
    (3) through (11) No change.
    (i) No change.

(j) Prohibition of Retaliation Against Research Analysts

    No member and no employee of a member who is involved with the 
member's investment banking activities may, directly or indirectly, 
retaliate against or threaten to retaliate against any research analyst 
employed by the member or its affiliates as a result of an adverse, 
negative, or otherwise unfavorable research report or public appearance 
written or made by the research analyst that may adversely affect the 
member's present or prospective investment banking relationship with 
the subject company of a research report. This prohibition shall not 
limit a member's authority to discipline or terminate a research 
analyst, in accordance with the member's policies and procedures, for 
any cause other than the writing of such

[[Page 32157]]

an unfavorable research report or the making of such an unfavorable 
public appearance.

(k) Exemption for Small Firms

    The provisions of paragraph (b) shall not apply to members that 
over the previous three years, on average per year, have participated 
in 10 or fewer investment banking services transactions as manager or 
co-manager and generated $5 million or less in gross investment banking 
services revenues from those transactions. For purposes of this 
paragraph (k), the term ``investment banking services transactions'' 
includes the underwriting of both debt and equity securities. Members 
that qualify for this exemption must maintain records for three years 
of any communication that, but for this exemption, would be subject to 
paragraph (b) of this Rule.

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

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

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

1. NYSE's Purpose
    The Exchange recently adopted sweeping and dramatic rule changes 
governing the manner in which members and member organizations, their 
investment banking departments and associated persons (hereinafter 
referred to as research analysts) manage and disclose conflicts of 
interest between their investment-banking and research departments. 
According to NYSE, these amendments were precipitated by a series of 
events that had eroded investor confidence in the equities markets and 
called into question the ways in which these conflicts of interest were 
managed and disclosed to the investing public. According to the NYSE, 
the additional amendments, pending approval of the SEC and new proposed 
changes discussed below, were developed by the Exchange in 
collaboration with the NASD under the guidance of the SEC.
    The Exchange believes that the amendments to the NYSE rules 
proposed in this filing are necessary in order to comply with the 
mandates of the SOA, which amends the Exchange Act \7\ by adding new 
section 15D \8\ which requires the SEC, ``or upon authorization and 
direction of the Commission, a self-regulatory organization,'' to adopt 
not later than one year after July 30, 2002, the date of enactment of 
the SOA, ``rules reasonably designed to address conflicts of interest 
that can arise when securities analysts recommend equity securities in 
research reports and public appearances, in order to improve the 
objectivity of research and provide investors with more useful and 
reliable information.'' \9\
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78a et seq.
    \8\ 15 U.S.C. 78o-6.
    \9\ Id. at (a).
---------------------------------------------------------------------------

    The Exchange believes that certain of the disclosure requirements 
and prohibitions that the SOA mandates have already been adopted in new 
NYSE Rules. The Exchange believes that the SOA appears to impose 
different, and in some instances more stringent, requirements than 
current NYSE Rule 472. According to NYSE, given the complexity and 
possible ramifications of the changes necessitated by the SOA, the SROs 
in conjunction with the SEC, spent considerable time examining which 
aspects of the SRO rules would require further amendments. Accordingly, 
proposed conforming SOA changes are being made in two phases. In the 
Original Notice, the Exchange proposed an amendment, discussed below, 
to the definition of the term ``research report'' contained in NYSE 
Rule 472.10(2), to conform to the requirements of section 15D(c)(2) of 
the Exchange Act.\10\ The Exchange also proposed an amendment, 
discussed below, that it believes would satisfy the requirements of 
section 15D(a)(1)(B) of the Exchange Act by limiting the ``compensatory 
evaluation of securities analysts to officials employed by the broker 
or dealer who are not engaged in investment banking activities.'' \11\ 
These proposed amendments are pending with the Commission. According to 
NYSE, as discussed in more detail below, the Exchange is currently 
proposing further amendments to its rules in order to conform to the 
requirements of the SOA.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78o-6 (c)(2).
    \11\ 15 U.S.C 78o-6(a)(1)(B).
---------------------------------------------------------------------------

February 2002 Filing

    In February 2002, the Exchange filed with the Commission proposed 
amendments to Exchange Rules 472 and 351, which were approved by the 
Commission in May 2002.\12\ In the May 10th Order, the SEC also 
simultaneously approved comparable changes to NASD rules (new NASD Rule 
2711--``Research Analysts and Research Reports'').
---------------------------------------------------------------------------

    \12\ See Securities Exchange Act Release No. 45908 (May 10, 
2002), 67 FR 34969 (May 16, 2002) (``May 10th Order'').
---------------------------------------------------------------------------

    The rule amendments generally: restrict the relationship between 
research and investment banking departments and the companies that are 
the subjects of research reports; require disclosure of a financial 
interest in a subject company by an analyst or a member or member 
organization; require disclosure of existing and potential investment 
banking relationships with a subject company; impose quiet periods for 
the issuance of research reports following the completion of a 
company's securities offering; restrict personal trading by research 
analysts in the securities of the companies covered by such analysts; 
and generally require extensive disclosure in research reports of 
certain important information to help customers monitor the correlation 
between a research analyst's ratings and the price movements of subject 
companies' securities.
    The rule amendments have been phased in incrementally to provide 
members and member organizations time to develop and implement 
policies, procedures and systems and hire additional personnel to 
comply with the new requirements. The staggered implementation of the 
SRO rules began July 9, 2002, with September 9, 2002 and November 6, 
2002 as the effective dates for certain specified provisions.
    According to NYSE, as a result of comments received, the SEC 
approved, on a temporary basis, NYSE rule proposals providing for an 
exemption from the gatekeeper provisions (NYSE Rules 472(b)(1), (2), 
and (3)) for members and member organizations that over the three 
previous 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'').\13\ As 
discussed in more detail below, the NYSE is proposing that certain 
elements of the temporary small firm exemption to the gatekeeper 
provisions be made permanent. During

[[Page 32158]]

the interim period, the Exchange, in a separate filing, extended the 
implementation date for the gatekeeper provisions for small firms until 
July 30, 2003, or until such date as a permanent exemption is approved 
by the SEC and becomes effective.\14\
---------------------------------------------------------------------------

    \13\ See Securities Exchange Act Release No. 46182 (July 11, 
2002), 67 FR 47013 (July 17, 2002); Securities Exchange Act Release 
No. 46949 (December 4, 2002), 67 FR 76202 (December 11, 2002).
    \14\ See Securities Exchange Act Release No. 47876 (May 15, 
2003).
---------------------------------------------------------------------------

    According to NYSE, as a result of numerous interpretive requests, 
on June 26, 2002, the Exchange and the NASD issued interpretive 
guidance to certain rule provisions.\15\ According to NYSE, upon 
adoption of the new amendments to the SRO rules, the SROs intend to 
provide written clarification as to how these rules will impact 
existing guidance in this area as well as additional issues that may 
arise once the amendments are adopted.
---------------------------------------------------------------------------

    \15\ See NYSE Information Memo No. 02-26, dated June 26, 2002, 
and NASD Notice to Members 02-39, dated July 2002.
---------------------------------------------------------------------------

    According to the NYSE, the Exchange, together with other regulatory 
organizations, also conducted examinations of members' and member 
organizations' research practices to determine compliance with the new 
SRO Rules. The Exchange believes that some of the interpretive issues 
raised by the industry and the preliminary findings from the 
examinations necessitated certain additional changes, discussed below, 
to existing NYSE Rules.

October 2002 Filing

    In October 2002, the Exchange filed with the SEC proposed 
amendments to Exchange Rules 472, 351, 344 and 345A.\16\ Comparable 
amendments were also filed by the NASD. The amendments pending with the 
SEC generally provide for further restrictions on research analysts' 
compensation, trading activities, issuance of research reports, and 
notification of research coverage termination, and impose additional 
disclosure requirements for research reports and research analysts. In 
addition, pending amendments place certain restrictions on research 
analysts participating in solicitation or ``pitch'' meetings with 
prospective investment banking clients.
---------------------------------------------------------------------------

    \16\ See Securities Exchange Act Release No. 47110 (December 31, 
2002), 68 FR 826 (January 7, 2003) (SR-NYSE-2002-49; SR-NASD-2002-
154) (``October 2002 Filing'').
---------------------------------------------------------------------------

    Amendments pending with the SEC expand the definition of ``research 
analyst'' (associated person) to include research directors, 
supervisory analysts and others, (e.g., committee members who have 
direct influence, or control over the preparation of research reports 
and establishment or change in ratings or price targets) and thereby 
subject them to the same trading and ownership prohibitions that the 
Rule imposes on research analysts.
    Following approval, the current 10 and 40-day quiet periods for the 
issuance of research reports by managers and co-managers of initial and 
secondary offerings will be extended to include public appearances.
    Upon approval by the SEC, the definition of ``public appearance'' 
will be amended to include research analysts' making a recommendation 
in a newspaper article or similar public medium. Extending the 
definition of ``public appearance'' to recommendations in a newspaper 
article will require research analysts to make the same disclosures 
that they are required to make in other public appearances. As 
discussed in more detail below, the Exchange received comments on this 
proposed amendment.
    Proposed amendments to NYSE Rule 344 (``Supervisory Analysts'') 
pending with the SEC would establish a new registration category and 
require a qualification examination for research analysts (NYSE Rule 
344). In addition, NYSE Rule 345A (``Continuing Education for 
Registered Persons'') would be amended to include research analysts and 
supervisory analysts as covered persons subject to the Firm Element of 
the Continuing Education Program to address applicable rules and 
regulations, ethics, and professional responsibility.
    According to NYSE, pending proposed amendments to the definition of 
``research report'' began the process of conforming NYSE Rules to the 
mandates of the SOA. As proposed, the term ``research report'' as it is 
currently defined in the NYSE Rule 472.10(2) is being amended to 
conform to the SOA's definition by deleting the criterion of providing 
a recommendation from the criteria that determines what constitutes a 
research report.
    According to NYSE, the Exchange filed NYSE Amendment No. 1 for the 
purpose of conforming proposed NYSE rules to those of the NASD and to 
establish effective dates, noted below, for the various rule 
provisions.

Sarbanes-Oxley Act Compliance

    According to NYSE, as a result of discussions with the NASD and 
SEC, the Exchange is filing Amendment No. 2 to propose the following 
additional changes to NYSE Rule 472 to conform it to the requirements 
of the SOA.
    Section 15D(a)(1)(A) of the Exchange Act requires that rules be 
designed to restrict ``the prepublication review or approval of 
research reports by persons employed by the broker-dealer who are 
engaged in investment banking activities, or persons not directly 
responsible for investment research, other than legal or compliance 
staff.'' \17\ In the May 10th Order, the Commission approved NYSE Rule 
472(b)(1), which prohibits investment banking department review and 
approval of research reports prior to distribution. According to NYSE, 
the purpose of that amendment was to help promote fair, objective and 
unbiased research through the elimination of potential conflicts of 
interest that are present when an investment banker is able to review, 
and possibly influence, a research report prior to its publication.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78o-6(a)(1)(A).
---------------------------------------------------------------------------

    In accordance with the requirements of section 15D(a)(1)(A) of the 
Exchange Act,\18\ the Exchange is proposing amendments that would 
extend the existing prepublication review and approval prohibition 
beyond investment banking personnel to anyone associated with the 
broker or dealer, other than research department personnel (See 
proposed NYSE Rule 472(b)(2) and (3)). In doing so, the Exchange is 
augmenting its existing rule prohibitions, which it believes is thus 
helping to foster a better climate for research analysts to produce 
unbiased research free of the conflicts that had beset the industry 
prior to the adoption of the SRO Rules last year.
---------------------------------------------------------------------------

    \18\ Id.
---------------------------------------------------------------------------

    Section 15D(a)(1)(C) of the Exchange Act requires ``that a broker 
or dealer and persons employed by such broker or dealer who are 
involved in investment banking activities may not, directly or 
indirectly retaliate against or threaten to retaliate against any 
securities analyst employed by that broker or dealer or its affiliates 
as a result of an adverse, negative or otherwise unfavorable research 
report that may adversely affect the present or prospective investment 
banking relationship of the broker or dealer with the issuer that is 
the subject of the research report.''\19\
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78o-6(a)(1)(C).
---------------------------------------------------------------------------

    NYSE believes that, although recently enacted NYSE Rule 472 
amendments have, to some extent, already addressed this issue, proposed 
amendments will incorporate the substance of this requirement and 
extend it to ``public appearances'' as well (See proposed NYSE Rule 
472(g)(2)). In this regard, the Exchange believes that NYSE Rule 
472(b)(1) already prohibits research analysts from being under the 
supervision and control of an investment banking department, and thus 
limits, to some degree, the ability

[[Page 32159]]

of such personnel directly to retaliate against research analysts. 
According to NYSE, it is generally established that ``control'' refers 
to the ability to ``hire, fire, reward and punish'' and, thus, 
prohibiting control of research analysts by an investment banking 
department limits such opportunities for retaliation.
    Further, amendments filed pursuant to the October 2002 Filing that 
are pending with the SEC would provide for the review and approval of 
research analysts' compensation by a committee of the member or member 
organization that reports to its Board of Directors, or where the 
member or member organization has no Board of Directors, to a senior 
executive officer of the member or member organization. Such committee 
would be prohibited from having representatives from the member's or 
member organization's investment banking department serving on such a 
committee, and would thus foreclose opportunities for the investment 
banking department to retaliate against a research analyst by adversely 
impacting his or her compensation. According to NYSE, in conforming to 
the SOA's anti-retaliation requirement, the Exchange will expand upon 
the limitations already imposed and pending limitations on such conduct 
in NYSE Rule 472.
    Section 15D(a)(2) of the Exchange Act imposes quiet periods (e.g., 
prohibition against publishing or otherwise distributing research 
reports) on brokers or dealers who have participated, or are to 
participate in a public offering as underwriters or dealers.\20\ 
Current SRO rules impose quiet periods on the issuance of research 
reports of 40-days for initial public offerings (``IPOs'') and 10 days 
for certain secondary offerings.\21\ However, these prohibitions apply 
only to managers and co-managers of securities offerings. NYSE believes 
that the current SRO quiet periods exceed those provided for under the 
Federal securities laws.
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78o-6(a)(2).
    \21\ See NYSE Rule 472(f)(1), (2); NASD Rule 2711(f).
---------------------------------------------------------------------------

    According to NYSE, in enacting quiet periods that exceeded those 
currently prescribed under the Federal securities laws,\22\ the 
Exchange was seeking to minimize incentives that managing underwriters, 
by virtue of their relationships with issuers, would have to reward 
such issuers for their underwriting business by publishing favorable 
research soon after the completion of a securities offering. As such, 
the Exchange believes that extended quiet periods would allow market 
forces to determine the price of the security in the after-market, 
regardless of research reports with favorable and potentially biased 
recommendations.
---------------------------------------------------------------------------

    \22\ Currently, Rule 174(d) under the Securities Act of 1933 
(the ``Securities Act'') provides for a twenty-five (25)-day 
prospectus delivery requirement for an issuer's IPO if the security 
is to be listed on an exchange or authorized for inclusion in an 
interdealer quotation system such as Nasdaq. 17 CFR 230.174(d). The 
twenty-five (25)-day quiet period coincides with the twenty-five 
(25)-day prospectus delivery requirement under this rule. See 
Proposed NYSE Rule 472(f)(3). In addition, the restrictions 
regarding publication of research reports in Rule 101 of Regulation 
M do not apply to research reports that comply with Rules 138 or 139 
(available to certain S-2 and/or S-3 issuers) under the Securities 
Act. 17 CFR 242.101(b)(1); 17 CFR 230.138; 17 CFR 230.139.
---------------------------------------------------------------------------

    The proposed amendments impose a 25-day quiet period on 
underwriters and dealers who are not managers or co-managers of an 
issuer's IPO (See proposed NYSE Rule 472(f)(3)). In doing so, the 
Exchange will place limitations on the issuance of research reports on 
any and all distribution participants following an issuer's IPO. The 
Exchange believes that this will eliminate any possible or potential 
competitive disadvantage that managers and co-managers are subject to 
under the current NYSE rule provisions.
    In proposing a shorter quiet period for such dealers and 
underwriters than what is provided for under NYSE Rule 472(f)(1), the 
Exchange recognizes that such distribution participants, do not, by 
virtue of their relationships and compensation arrangements with 
issuers, have the same incentives and opportunities to publish 
favorable research for such issuers as do managers and co-managers of 
such offerings. Accordingly, the NYSE believes that a 25-day quiet 
period is appropriate for such distribution participants. According to 
NYSE, the Exchange, along with the NASD, is proposing a uniform 
definition of the term ``offering date'' that will be applied to this 
new quiet period as well as to the existing ones (NYSE Rule 472(f)(1) 
and (2)) (See proposed NYSE Rule 472.120).
    Further, section 15D(a)(2) of the Exchange Act utilizes the term 
``publish or otherwise distribute'' in its rule text.\23\ Accordingly, 
the Exchange is proposing to make conforming changes where applicable 
to its current rule provisions (See proposed NYSE Rules 472(b)(2) and 
(3), NYSE Rules 472(e)(2), (4)(ii) and (iv), (f)(1), (2) and (3)). In 
addition, the Exchange will be renumbering paragraphs 472(f)(3) through 
(5) as a result of the above changes.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78o-6(a)(2).
---------------------------------------------------------------------------

    Section 15D(b)(2) of the Exchange Act requires disclosure of 
``whether any compensation has been received by a broker or dealer, or 
any affiliate thereof, including the securities analyst, from the 
issuer, that is the subject of the appearance or research report, 
subject to such exemptions as the Commission may determine appropriate 
and necessary to prevent disclosure of material non-public information 
regarding specific potential future investment banking transactions of 
such issuer.'' \24\
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78o-6(b)(2).
---------------------------------------------------------------------------

    Currently, Exchange Rule 472(k)(1)(ii)(b) requires that a member or 
member organization must disclose in research reports if the member or 
member organization or its affiliate has received compensation for 
investment banking services from a subject company in the past twelve 
(12) months. In addition to this required disclosure, proposed 
amendments would require disclosure in research reports of receipt of 
any compensation, other than for investment banking services, by a 
member or member organization from a subject company in the prior 
twelve (12) months (with no forward-looking provision) (See proposed 
NYSE Rule 472(k)(1)(iii)(c)).
    According to NYSE, in requiring this additional disclosure, the 
Exchange recognizes that the receipt of any compensation, not just that 
resulting from investment banking services, may lend itself to the 
types of potential conflicts of interest between members and member 
organizations and their subject companies, that the initial rule 
amendments approved in the May 10th Order were promulgated to address, 
and thus in the interest of investor protection should be disclosed in 
research reports.
    In addition, proposed NYSE Rule 472(k)(1)(ii) would require a 
research analyst (associated person) to disclose in public appearances 
(if such person knows or has reason to know) whether the member or 
member organization or any affiliate thereof, received any compensation 
from a subject company in the past twelve (12) months. Further, 
proposed NYSE Rule 472(k)(1)(i)(f) will require disclosure in a 
research report and public appearances of whether a research analyst 
(associated person) received any compensation from a subject company in 
the past twelve (12) months.
    Although current NYSE Rules prohibit a research analyst from being 
compensated for specific investment banking services transactions (See 
NYSE Rule 472(h)(1)), and require disclosure in research reports of 
whether a research analyst received compensation, based in

[[Page 32160]]

part on a member's or member organization's investment banking revenue 
(See NYSE Rule 472(k)(2)), the breadth of the new proposed rule 
requirement is greater in that it would require disclosure of the 
receipt of any compensation received by a research analyst from the 
subject company. According to NYSE, the potential for conflicts of 
interest between a member, member organization, or its research 
analyst, and a subject company can exist irrespective of the type of 
compensation received from the subject company. The NYSE believes that 
the proposed rule requirement will better address this potential 
conflict by requiring disclosure of any compensation that might 
possibly compromise a firm, its analyst, and the issuance of a research 
report on such subject company.
    Further, the NYSE believes that the proposed new disclosure 
requirements are also in keeping with the spirit of the Commission's 
recently enacted Regulation Analyst Certification (``Regulation 
AC''),\25\ which requires, if applicable, that a research analyst in a 
research report attest 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,'' and ``further disclosing that the 
compensation could influence the recommendations or views expressed by 
the research report.'' \26\ As proposed, the Exchange believes that the 
new disclosure requirements would better enable public investors to 
determine whether such recommendations made in research reports and 
during public appearances could have been influenced by the receipt of 
compensation by the research analyst and his or her member or member 
organization.
---------------------------------------------------------------------------

    \25\ See Securities Exchange Act Release No. 47384 (February 20, 
2003), 68 FR 9482 (February 27, 2003).
    \26\ 17 CFR 242.501.
---------------------------------------------------------------------------

    Section 15D(b)(3) of the Exchange Act requires disclosure of 
``whether an issuer, whose securities are recommended in a public 
appearance or research report, currently is, or was, during the 1-year 
period preceding the appearance or date of distribution of the research 
report, a client of the broker or dealer, and if so, * * * [a statement 
of] the type of services provided to the issuer.'' \27\ Currently, NYSE 
Rule 472(k)(1)(ii) requires a research analyst (associated person) to 
disclose during a public appearance (when such person knows or has 
reason to know) if a subject company is an investment banking services 
client of the member or member organization.
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 78o-6(b)(3).
---------------------------------------------------------------------------

    According to NYSE, the proposed amendments will provide for 
disclosure by a member or member organization in research reports and a 
research analyst (associated person) during a public appearance, of 
whether a subject company is a client of the member or member 
organization, and the types of services provided to the client (See 
proposed NYSE Rule 472(k)(1)(i)(c)).
    The types of services have been categorized into: investment 
banking services (which are currently required to be disclosed under 
NYSE Rule 472(k)(1)(ii)(a)); non-investment banking-securities related 
services; and non-securities services (See proposed NYSE Rule 
472(k)(1)(i)(c.).
    The Exchange believes that requiring disclosure of whether a 
subject company is a client and the types of services provided, and not 
merely an investment banking client of a member or member organization, 
should provide investors with potentially more meaningful insight into 
the nature of the relationship between the subject company and the 
member or member organization and the potential conflicts attendant to 
such relationships. For example, the Exchange believes that it might be 
more beneficial for an investor, in determining whether a firm has real 
conflicts of interest inherent in conducting investment banking on 
behalf of a subject company, to know that a member or member 
organization is actually providing non-investment banking securities 
related services to a subject company, such as conducting a share-buy-
back for such company, rather than a securities underwriting.
    In requiring that firms and their research analysts enumerate the 
types of services provided to subject companies, the Exchange 
recognizes that there is a possibility that this could result in the 
tipping of material non-public information. This issue was raised with 
the prior rule amendments, which require disclosure of prospective 
investment banking compensation (See NYSE Rule 472(k)(1)(ii)(c)). 
According to NYSE, in this regard, the SROs had defined investment 
banking services broadly enough to mitigate the issue of tipping 
material non-public information. The Exchange believes that it has also 
addressed this issue with the proposed new disclosure requirements. As 
proposed, the rule provides for an exemption from the disclosure 
requirements of proposed NYSE Rule 472(k)(1)(i)(c) and NYSE Rule 
472(k)(1)(iii)(b) and (d) \28\ to the extent that such disclosure would 
reveal material non-public information regarding specific potential 
future investment banking services transactions of the subject company 
(See proposed NYSE Rule 472(k)(1)(iv)).
---------------------------------------------------------------------------

    \28\ NYSE Rule 472(k)(1)(iii)(b) and (d), were approved, as part 
of the original amendments as NYSE Rule 472(k)(1)(ii)(b) and (c). 
Both provisions have been renumbered as part of NYSE Amendment No. 
2.
---------------------------------------------------------------------------

    The Exchange is proposing to amend NYSE Rule 472(k)(1)(iii)(a),\29\ 
which requires a member or member organization or its affiliate to 
disclose in a research report if it has managed or co-managed a public 
offering of equity securities for a subject company in the past twelve 
(12) months, by deleting the word ``equity'' from the rule text. 
According to NYSE, the purpose of the proposed amendment is to make the 
Exchange's rule language consistent with the comparable NASD rule 
provision. As proposed, members and member organizations would be 
required to make such disclosures if they participated in debt 
offerings for a subject company as well. In amending this disclosure 
requirement, the Exchange recognizes that the same potential conflicts 
of interest exist, regardless of the type of security offering 
conducted by a member or member organization on behalf of a subject 
company.
---------------------------------------------------------------------------

    \29\ NYSE Rule 472(k)(1)(iii)(a), was approved, as part of the 
original amendments as NYSE Rule 472(k)(1)(ii)(a). This provision 
has been renumbered as part of NYSE Amendment No. 2.
---------------------------------------------------------------------------

Print Media Disclosures

    As noted above, amendments currently pending with the SEC expand 
the definition of ``public appearance'' to include associated persons 
(research analysts) making a recommendation in a newspaper article or 
similar public medium thereby requiring such persons to make the same 
disclosures (e.g., whether the associated person has a financial 
interest in and/or is an officer or director of the subject company) 
that are required in other public appearances (e.g., TV broadcasts).
    The Exchange received comments from representatives of the print 
media industry that extending the definition of ``public appearance'' 
to include print media would, in their view, infringe upon their First 
Amendment rights in view of the fact that the Exchange has interpreted 
NYSE Rule 472 to require research analysts to refrain from continued 
contacts with media outlets that have failed to publish or have

[[Page 32161]]

edited out the disclosures required by the Rule.\30\
---------------------------------------------------------------------------

    \30\ See Letters to Jonathan G. Katz, Secretary, Commission 
from: Bloomberg News, dated February 19, 2003; Securities Industry 
Association, dated March 10, 2003; and Newspaper Association of 
America, dated March 10, 2003.
---------------------------------------------------------------------------

    After consideration of comments, the Exchange proposes to address 
this issue by providing written interpretive guidance that is hereby 
filed with the SEC as a proposed rule change. The proposed 
interpretation would require a research analyst (associated person) 
that recommends securities in a print media interview, newspaper 
article prepared under his or her name, or broadcast, to maintain a 
record of such interview, article, or broadcast. Such record must 
contain pertinent information regarding the event and the required 
disclosures provided to the media source. Further, such record must be 
made regardless of whether the media outlet publishes or broadcasts the 
required disclosures. In addition, records of such interviews, 
articles, or broadcasts and the requisite disclosures must be made in 
accordance with Rules 17a-3 and 17a-4 under the Exchange Act.\31\
---------------------------------------------------------------------------

    \31\ 17 CFR 240.17a-3 and 17 CFR 240.17a-4.
---------------------------------------------------------------------------

    The proposed interpretation would not require a research analyst 
(associated person) to refrain from further interviews, articles or 
broadcasts if the media source failed to publish or broadcast the 
required disclosures, provided the research analyst (associated person) 
had provided the required disclosures to the media source.

Small Firm Exemption

    Currently NYSE Rules 472(b)(1), (2) and (3) (the gatekeeper 
provisions) prohibit ``associated persons,'' as defined in NYSE Rule 
472.40, from being subject to the supervision or control of any 
employees of a member's or member organization's investment banking 
department, and 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 by the research department. As noted 
above, the SEC approved exemptions from the gatekeeper provisions for 
small firms, on a temporary basis.\32\ The Exchange is proposing that 
certain elements of the temporary small firm exemption to the 
gatekeeper provisions of NYSE Rules 472(b)(1), (2) and (3) be made 
permanent.\33\ Those members and member organizations that meet the 
requirements for the small firm permanent exemption would still be 
required to maintain records of communications that would otherwise be 
subject to the gatekeeper provisions of NYSE Rules 472(b)(3)(i) and 
(ii). According to NYSE, proposed new NYSE Rule 472(m) would conform 
NYSE rules to the NASD proposal.
---------------------------------------------------------------------------

    \32\ See note 13 supra.
    \33\ The Exchange is not proposing to exempt these members and 
member organizations from NYSE Rule 472(b)(4), which restricts 
communications between the research department and the subject 
company, because the Exchange believes that those communications do 
not result in the same burdens as NYSE Rules 472(b)(1), (2), and 
(3). NYSE Rule 472(b)(1), (2), and (3) were approved as part of the 
original amendments. NYSE Rule 472(b)(3) has been renumbered as part 
of NYSE Amendment No. 2 as NYSE 472(b)(4).
---------------------------------------------------------------------------

Implementation Schedule/Effective Dates

    The Exchange is requesting the following implementation schedule 
for the proposed amendments being made in accordance with the SOA (all 
time periods commence on the date that the SEC approves the amendments) 
in order for members and member organizations to have adequate lead 
time to develop and implement procedures necessary to comply with the 
additional requirements of the rules.\34\
---------------------------------------------------------------------------

    \34\ See NYSE Amendment No. 1 for proposed implementation dates 
for amendments pending with the Commission.
---------------------------------------------------------------------------

    [sbull] NYSE Rules 472(k)(1)(i)(c), (k)(1)(ii), (k)(1)(iii)(c), and 
(k)(1)(iv) (except as it pertains to Rule 472(k)(1)(iii)(b) and (d), 
effective immediately upon approval))--Compensation and Client 
Disclosure Provisions--120 days
    [sbull] NYSE Rules 472(g)(2) and 472(m)--Anti-Retaliation and Small 
Firm Exemption Provisions--effective immediately upon approval
    [sbull] All other Rule provisions--60 days
2. NYSE's Statutory Basis
    The Exchange believes that the statutory basis for the proposed 
rule change is section 6(b)(5) of the Exchange Act,\35\ 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.
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

3. NASD's Purpose
    In the October 2002 Filing, NASD proposed a rule change to further 
improve the quality and objectivity of research and provide investors 
with better information to make their investment decisions. Generally, 
the proposed rule change would effectuate the following: further 
separate analyst compensation from investment banking influence; 
prohibit analysts from issuing ``booster shot'' research reports; 
extend to public appearances quiet periods on research issued by 
underwriting managers and co-managers; prohibit analysts from issuing 
research where they participated in solicitation of the issuer to be an 
underwriter for the issuer's initial public offering; require members 
to publish a final research report when they terminate coverage of a 
subject company; change the definitions of research analyst and 
research report; impose registration, qualification and continuing 
education requirements on research analysts; and certain other changes.
    According to NASD, NASD Amendment No. 2 implements provisions of 
the SOA regarding securities analysts. The SOA, which amends section 15 
of the Exchange Act,\36\ requires either the SEC or a registered 
securities association to enact by July 30, 2003 rules reasonably 
designed to address conflicts of interest that can arise when 
securities analysts recommend equity securities in research reports and 
public appearances. The SOA further sets forth certain specific rules 
that must be promulgated. According to NASD, NASD Amendment No. 2 would 
implement those specific rules that are not already contained in 
current NASD Rule 2711 or the pending rule change proposals that were 
published in the Original Notice.
---------------------------------------------------------------------------

    \36\ See note 8 supra.
---------------------------------------------------------------------------

    NASD Amendment No. 2 also would create an exemption from certain 
provisions of NASD Rule 2711 for smaller firms that engage in limited 
underwriting activity. Finally, NASD Amendment No. 2 would make certain 
other changes to clarify language in current or proposed rules or 
conform language to that used in the SOA. The proposed changes are 
explained in more detail below.

Restrictions on Relationships With the Research Department

    Section 15D(a)(1)(A) \37\ of the Exchange Act restricts 
prepublication clearance or approval of research reports by persons not 
directly responsible for investment research, other than legal or 
compliance staff. NASD Rule 2711(b) already bans review and approval by 
investment banking personnel. NASD Amendment No. 2 would extend the 
prohibition to other non-research personnel and also require that 
communications about the content of a research report between all non-
research

[[Page 32162]]

personnel and the research department be intermediated by legal or 
compliance staff.
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 78o-6(a)(1)(A).
---------------------------------------------------------------------------

Quiet Periods

    Section 15D(a)(2) \38\ of the Exchange Act requires establishment 
of periods during which brokers or dealers who have participated or are 
to participate in a public securities offering as underwriters or 
dealers may not publish or otherwise distribute research reports 
related to the issuer of the offering. NASD Rule 2711(f) currently 
imposes such quiet periods--for 40 calendar days following an initial 
public offering and 10 calendar days following a secondary offering--on 
underwriting managers and co-managers, but not on other members of the 
underwriting syndicate or selling group. According to NASD, to comply 
with the SOA, NASD Amendment No. 2 would establish a 25-day period 
after the ``date of the offering'' during which an underwriter or 
dealer other than a manager or co-manager would be prohibited from 
publishing or distributing research on the issuing company's 
securities. This 25-day prohibition effectively codifies a de facto 
quiet period that exists because of the prospectus delivery 
requirements under Rule 174 under the Securities Act.\39\ In general, 
brokers or dealers refrain from issuing research on exchange-listed or 
National Market System securities for 25 days after a registration 
statement becomes effective or bona fide public trading begins to avoid 
the risk that such communications may be deemed prospectuses that do 
not meet the requirements of section 10 of the Securities Act.\40\
    NASD Amendment No. 2 also would define ``date of the offering'' for 
all quiet period provisions to mean the later of the effective date of 
the registration statement or the first date on which the security was 
bona fide offered to public.
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78o-6(a)(2).
    \39\ 17 CFR 230.174.
    \40\ 15 U.S.C. 77j.
---------------------------------------------------------------------------

Prohibition of Retaliation Against Research Analysts

    Section 15D(a)(1)(C) \41\ of the Exchange Act prohibits a broker or 
dealer engaged in investment banking activities from directly or 
indirectly retaliating, or threatening to retaliate, against a research 
analyst who publishes a research report that may adversely affect a 
member's present or prospective investment banking relationship. NASD 
Amendment No. 2 creates new NASD Rule 2711(j) to implement this 
directive and extends the prohibition to public appearances. The 
proposed rule incorporates language in SOA that clarifies that the 
prohibition does not limit a member's authority to discipline a 
research analyst, in accordance with the member's policies and 
procedures, for any cause other than writing a research report or the 
making of a public appearance that is unfavorable to a current or 
potential investment banking relationship. NASD has further clarified 
in the proposal that the anti-retaliation provision would not preclude 
termination, in accordance with firm policies and procedures, for 
causes unrelated to issuing or distributing such adverse research or 
for making an unfavorable public appearance regarding a current or 
potential investment banking relationship.
---------------------------------------------------------------------------

    \41\ 15 U.S.C. 78o-6(a)(1)(C).
---------------------------------------------------------------------------

Receipt of Compensation and Disclosure of Client Relationships

    Section 15D(b)(2) \42\ of the Exchange Act requires disclosure by a 
broker or dealer in research reports, and by a research analyst in 
public appearances, if any compensation has been received by the broker 
or dealer, or any affiliate thereof (including the analyst), from the 
issuer that is the subject of the report or public appearance. Section 
15D(b)(3) \43\ of the Exchange Act further requires disclosure if the 
subject issuer is, or has been during the previous year, a client of 
the broker dealer, and if so, the types of services provided to the 
issuer. Section 15D(b)(2) \44\ of the Exchange Act is subject to 
exemptions as the Commission may determine appropriate and necessary to 
prevent disclosure of material non-public information regarding 
specific potential future investment banking transactions of the 
issuer.\45\
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 78o-6(b)(2).
    \43\ 15 U.S.C. 78o-6(b)(3).
    \44\ 15 U.S.C. 78o-6(b)(2).
    \45\ The exemptive language of the SOA appears only in section 
15D(b)(2) of the Exchange Act (15 U.S.C. 78o-6(b)(2)). However, NASD 
and the staff of the Exchange believe that the exemption must be 
interpreted to apply to certain other disclosure requirements that 
could tip material non-public information regarding a specific 
potential future investment banking transaction or else the purpose 
of the exemption would be frustrated.
---------------------------------------------------------------------------

    According to NASD, these mandates necessitate several changes to 
current NASD Rule 2711. First, NASD Rule 2711 currently requires 
disclosure only of investment banking compensation received from a 
subject company or its affiliates in the past 12 months. Accordingly, 
NASD Amendment No. 2 would expand the required disclosure to cover any 
compensation received by a member or its affiliates from the subject 
company. While the SOA does not specify a look-back period, NASD has 
established a 12-month retrospective period to be consistent with 
existing NASD Rule 2711 and section 15D(b)(3) \46\ of the Exchange Act, 
which imposes the same timeframe for disclosure of a client 
relationship with the subject company.
---------------------------------------------------------------------------

    \46\ 15 U.S.C. 78o-6(b)(3).
---------------------------------------------------------------------------

    NASD Amendment No. 2 would require separate disclosure of 
investment banking compensation and other, non-investment banking 
compensation received from the subject company or its affiliates. NASD 
believes this approach will result in more meaningful disclosure by 
separating out investment banking compensation, which NASD believes 
generally is the primary influence on research objectivity. Absent the 
separate disclosure, investors might not learn whether disclosure of 
compensation received by the member from the subject company came from 
lucrative Investment banking services or less remunerative and 
influential business lines. NASD specifically requests comment on 
whether a de minimis exemption would be appropriate for this provision, 
and if so, at what dollar level such exemption should be set.
    Second, NASD Rule 2711 currently does not expressly require 
disclosure of compensation received by a research analyst from a 
subject company. To the extent that receipt of such compensation 
constitutes an actual, material conflict of interest, disclosure would 
be required under NASD Rule 2711(h)(1)(C). Nonetheless, NASD is 
amending NASD Rule 2711 to require disclosure of any compensation 
received by an analyst from the subject company in the past 12 months.
    Third, NASD is amending NASD Rule 2711 to add a provision that 
requires a research analyst to disclose in public appearances if the 
member or any of its affiliates received any compensation from the 
subject company within the past 12 months. A research analyst must only 
disclose this fact if the analyst knows or has reason to know it to be 
the case.
    Fourth, NASD is amending NASD Rule 2711 to require disclosure in 
research reports and public appearances if the subject company is, or 
has been over the preceding 12 months, a client of the member. If this 
disclosure is applicable, the member (in research reports) or the 
research analyst in public appearances (if the research analyst knows 
or has reason to know) must also disclose the types of client services 
provided to the subject company. These services may be described as 
falling into

[[Page 32163]]

one of the following three categories: (1) Investment banking services, 
(2) non-investment banking securities-related services, or (3) non-
securities services.

Small Firm Exemption

    NASD Amendment No. 2 also would create new NASD Rule 2711(k), an 
exemption from NASD Rule 2711(b) for certain firms that engage in 
limited underwriting activity. NASD Rule 2711(b) prohibits a research 
analyst from being subject to the supervision or control of any 
employee of a member's investment banking department and further 
requires legal or compliance personnel to intermediate certain 
communications between the research department and the investment 
banking department.
    As the Commission noted in the May 10th Order, several commenters 
argued that the gatekeeper provisions of NASD Rules 2711(b) and (c) 
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. These comments 
raised the prospect that the rules might force some firms out of 
business or reduce important sources of capital and research coverage 
for smaller companies and companies of regional or local interest.
    To temporarily address those concerns while it considered an 
appropriate exemption, NASD delayed effectiveness of NASD Rules 2711(b) 
and (c) until July 30, 2003, or until a superseding permanent exemption 
is approved by the SEC and becomes effective, for those members that 
over the previous three years, on average per year, have participated 
in 10 or fewer investment banking transactions or underwritings as 
manager or co-manager and generated $5 million or less in gross 
investment banking revenues from those transactions.\47\ NASD Amendment 
No. 2 would create a permanent exemption from NASD Rule 2711(b) for 
those members that meet the same eligibility requirements as was 
required for the temporary exemption. NASD is not proposing to exempt 
these members from NASD Rule 2711(c), which restricts communications 
between the research department and the issuer, because NASD believes 
those communications do not result in the same burdens as NASD Rule 
2711(b).
---------------------------------------------------------------------------

    \47\ See Securities Exchange Act Release No. 47876 (May 15, 
2003); See also Securities Exchange Act Release No. 46165 (July 3, 
2002), 67 FR 46555 (July 15, 2002).
---------------------------------------------------------------------------

    NASD Amendment No. 2 also would require members that qualify for 
this exemption to maintain records for three years of any communication 
that otherwise would be subject to the review and monitoring provisions 
of NASD Rule 2711(b)(3).

Other Changes

    NASD Amendment No. 2 also would conform certain existing rule 
language with that used in the SOA. For example, the term ``publish or 
otherwise distribute'' has been substituted in place of references to 
research reports that are ``issued'' or ``published.'' The amendment 
also would make a few other non-substantive language changes.

Effective Dates

    NASD suggests the following effective dates for the new provisions 
contained in SR-NASD-2002-154 and this Amendment thereto:
    [sbull] NASD Rule 1050--Registration of Research Analysts: such 
time as announced in a Notice to Members after SEC approval of the rule 
change, but not less than 180 days from such approval
    [sbull] NASD Rule 1120(a)(5) and (b)(1)--Regulatory and Firm 
Elements: Not less than 180 days after SEC approval of the rule change
    [sbull] NASD Rule 2711(h)(2)(C)--Disclosure of Non-Investment 
Banking Compensation: 120 days after SEC approval of the rule change
    [sbull] NASD Rule 2711(h)(2)(E)--Disclosure in Public Appearances 
of Compensation Received from Issuer and Affiliates: 120 days after SEC 
approval of the rule change
    [sbull] NASD Rule 2711(h)(2)(F)--Disclosure of Client Relationship 
and Types of Services: 120 days after SEC approval of the rule change
    [sbull] NASD Rule 2711(h)(2)(G)--Exemption from Disclosure 
Requirements:

--As applied to disclosures under NASD Rules 2711(h)(2)(B)(ii) and 
(iii): Immediate upon SEC approval of the rule change
--As applied to disclosures under NASD Rule 2711(h)(2)(F): 120 days 
after SEC approval of the rule change

    [sbull] NASD Rule 2711(j)--Prohibition of Retaliation Against 
Research Analysts: Immediate upon SEC approval of the rule change
    [sbull] NASD Rule 2711(k)--Small Firm Exemption: Immediate upon SEC 
approval of the rule change
    [sbull] All other provisions: 60 days after SEC approval of the 
rule change
4. NASD's Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Exchange Act,\48\ which 
requires, among other things, that NASD's rules 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 
will 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.
---------------------------------------------------------------------------

    \48\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

B. Self-Regulatory Organizations' Statements on Burden on Competition

    The NYSE and the NASD do not believe that the proposed rule changes 
will impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act, as amended.

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

    The NYSE and NASD have neither solicited nor received written 
comments on the proposed rule changes. Comments received by the SEC in 
response to the Original Notice will be addressed together with 
comments received after publication of NYSE Amendment No. 2 and NASD 
Amendment No. 2.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the Exchange consents,\49\ the Commission:
---------------------------------------------------------------------------

    \49\ See Letters to James Brigagliano, Assistant Director, 
Trading Practices, Division, Commission from: Darla Stuckey, 
Corporate Secretary, NYSE, consenting to an extension of the 
statutory time under section 19(b)(2) of the Exchange Act, until the 
Commission takes action on Rule filing SR-NYSE-2002-49 (December 27, 
2002); and Philip Shaikun, Assistant General Counsel, NASD 
consenting to an extension of the statutory time under section 
19(b)(2) of the Exchange Act, until the Commission takes action on 
Rule filing SR-NASD-2002-154 (December 27, 2003).

---------------------------------------------------------------------------

[[Page 32164]]

    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning NYSE Amendment No. 2 and NASD Amendment No. 2, 
including whether the amendments are consistent with the Exchange Act 
and whether there are any differences between the NYSE and NASD 
proposals that present compliance or interpretive issues.
    On April 28, 2003, Commission Chairman William H. Donaldson, NASD 
Chairman and CEO Robert Glauber, NYSE Chairman and CEO Richard Grasso, 
and other regulators, announced the completion of enforcement actions 
against a number of the nation's largest investment banking firms.\50\ 
The enforcement actions finalized a settlement in principle reached and 
announced by regulators last December.\51\ The settlement followed 
joint investigations by the regulators of allegations of undue 
influence of investment banking interests on securities research at 
brokerage firms. The Commission notes that certain elements of the 
settlement cover areas addressed by the SROs in the Original Notice; 
however, the requirements are not identical. In light of the 
settlement, the Commission solicits additional comment on the NYSE and 
NASD rule changes that were proposed in the Original Notice.
---------------------------------------------------------------------------

    \50\ SEC Press Release No. 2003-54 (April 28, 2003).
    \51\ SEC Press Release No. 2002-179 (December 20, 2002).
---------------------------------------------------------------------------

    In addition, the Commission specifically solicits comment on 
proposed NASD 2711(k) and proposed NYSE 472(m), which address small 
firms. In particular, the Commission requests comment on whether the 
proposed thresholds for the small firm exception are appropriate (ten 
or fewer investment banking services transactions as manager or co-
manager and $5 million or less in gross investment banking revenues 
from those transactions). Should the $5 million limit apply to gross 
revenues from all investment banking services transactions rather than 
only to those for which the firm acted as manager or co-manager?
    The Commission notes that, in addition to proposing rules to meet 
the requirements of the SOA and the small firm exception, in NYSE 
Amendment No. 2 the Exchange also proposed an Interpretation relating 
to public appearances and the print media that would require members to 
make and keep records of information relating to public appearances. 
The NASD has not included a similar record-keeping requirement in NASD 
Amendment No. 2. The Commission requests comment on whether this 
record-keeping requirement is appropriate, and whether both SROs should 
adopt such a requirement.
    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 submission, 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 in 450 Fifth Street, NW., Washington, DC 20549-0609. 
Copies of such filing will also be available for inspection and copying 
at the principal offices of the SROs. All submissions should refer to 
File Nos. SR-NYSE-2002-49 and SR-NASD-2002-154 and should be submitted 
by June 19, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\52\
---------------------------------------------------------------------------

    \52\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-13446 Filed 5-28-03; 8:45 am]
BILLING CODE 8010-01-P