[Federal Register Volume 68, Number 149 (Monday, August 4, 2003)]
[Notices]
[Pages 45875-45890]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-19730]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48252; File No. SR-NASD-2002-154; SR-NYSE-2002-49]


Self-Regulatory Organizations; Order Approving 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 Research Analyst Conflicts of 
Interest and Notice of Filing and Order Granting Accelerated Approval 
of Amendment No. 3 to the Proposed Rule Change by the New York Stock 
Exchange, Inc. and Amendment No. 3 to the Proposed Rule Change by the 
National Association of Securities Dealers, Inc. Relating to Research 
Analyst Conflicts of Interest

July 29, 2003.

I. Introduction

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ on 
October 9, 2002, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange''), and on October 25, 2002, the National Association of 
Securities Dealers (``NASD''), filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') proposed rule changes relating 
to research analyst conflicts of interest.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    On December 4, 2002, NYSE submitted Amendment No. 1 to its proposed 
rule change \3\ and on December 18, 2002, NASD submitted Amendment No. 
1 to its proposed rule change.\4\ The proposed rule changes, as

[[Page 45876]]

amended, were published for comment in the Federal Register on January 
7, 2003.\5\ The comment period expired on March 10, 2003. The 
Commission received 19 comment letters on the proposed rule changes 
from 18 different commenters in response to the Original Notice.\6\
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    \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.
    \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'').
    \6\ See Letters to Jonathan G. Katz, Secretary, Commission, 
from: Adams, Harkness & Hill, Inc., AG Edwards, Keefe, Bruyette & 
Woods, Inc., Pacific Growth Equities, LLC, RBC Capital Markets, 
Stephens Inc., Stifel Nicolaus & Company, and William Blair & 
Company, dated March 10, 2003 (``Adams et al''); The Advest Group, 
Inc., dated April 28, 2003 (``Advest''); Association for Investment 
Management and Research, dated March 6, 2003 (``AIMR March 6th''); 
Bloomberg News, dated February 19, 2003 (``Bloomberg''); Charles 
Schwab Corporation, dated March 20, 2003 (``Schwab March 20th''); 
Credit Suisse First Boston, dated April 16, 2003 (``CSFB''); Gibson, 
Dunn & Crutcher LLP, dated March 10, 2003 (``Gibson''); Investment 
Company Institute, dated March 10, 2003 (``ICI March 10th''); 
Investorside Research Association, dated March 10, 2003 
(``Investorside''); Vahan Janjigian, dated February 27, 2003; Robert 
Lin, dated November 17, 2002; Newspaper Association of America, 
dated March 10, 2003 (``NAA''); North American Securities 
Administrators Association, Inc., dated March 10, 2003 (``NASAA''); 
Securities Industry Association, letters dated March 10, 2003 (``SIA 
March 10th'') and May 9, 2003 (``SIA May 9th''); Stifel, Nicolaus & 
Company, Incorporated, dated March 10, 2003 (``Stifel''); SunTrust 
Capital Markets, Inc., dated March 10, 2003 (``SunTrust''); Weiss 
Ratings, Inc., dated March 10, 2003 (``Weiss''); Wilmer Cutler & 
Pickering, dated March 11, 2003 (``Wilmer March 11th'').
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    On May 16, 2003, NYSE filed with the Commission Amendment No. 2 to 
its proposed rule change (``NYSE Amendment No. 2''), and on May 20, 
2003, the NASD filed Amendment No. 2 to its proposed rule change 
(``NASD Amendment No. 2''). NYSE Amendment No. 2 and NASD Amendment No. 
2 were published together in the Federal Register on May 29, 2003.\7\ 
The comment period expired on June 19, 2003. The Commission received 
seven comment letters in response to the notice.\8\ On July 29, 2003, 
the NASD submitted a letter responding to comments.\9\ On July 29, 
2003, NYSE filed Amendment No. 3 to its proposed rule change (``NYSE 
Amendment No. 3''), which included its response to comments. On July 
29, 2003, NASD filed Amendment No. 3 to its proposed rule change 
(``NASD Amendment No. 3''). This order approves the proposed rule 
changes, as amended by NASD Amendment Nos. 1, 2, and 3, and by NYSE 
Amendment Nos. 1, 2, and 3. The Commission also seeks comment from 
interested persons on NYSE Amendment No. 3 and NASD Amendment No. 3.
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    \7\ See Securities Exchange Act Release No. 47912 (May 22, 
2003), 68 FR 103 (``May 29th Notice'').
    \8\ See Letters to Jonathan G. Katz, Secretary, Commission, 
from: Association for Investment Management and Research, dated July 
15, 2003 (``AIMR July 15th''); Banc of America Securities LLC, dated 
June 26, 2003 (``BOA''); Charles Schwab Corporation, dated June 30, 
2003 (``Schwab June 30th''); Investment Company Institute, dated 
June 19, 2003 (``ICI June 19th''); Investment Counsel Association of 
America, dated June 19, 2003 (``ICAA''); Securities Industry 
Association, dated June 26, 2003 (``SIA June 26th''); Sullivan & 
Cromwell LLP, dated June 19, 2003 (``Sullivan''); Wilmer Cutler & 
Pickering, dated June 25, 2003 (``Wilmer June 25th'').
    \9\ See Letter from Philip A. Shaikun, Associate General 
Counsel, NASD to James A. Brigagliano, Assistant Director, Division, 
Commission (July 29, 2003) (``NASD Response to Comments'').
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II. Background

    On May 10, 2002, the Commission approved rule changes filed by the 
NYSE and NASD (the ``SROs'') governing research analyst conflicts of 
interest.\10\ Those rules took considerable steps towards promoting 
greater independence of research analysts and significantly enhanced 
the disclosure of actual and potential conflicts of interest to 
investors. In the Original Notice, the Commission published for comment 
a second set of proposed rules filed by the SROs to further address 
research analyst conflicts of interest. In its May 10, 2002 approval 
order of the first round of new analyst rules, the Commission asked the 
SROs to report on the operation and effectiveness of those rules on or 
before November 1, 2003. In light of the approval of these additional 
rules and the Global Settlement,\11\ the Commission believes that a 
report at that time may be premature. Thus, the Commission will request 
a report from the SROs when it deems such report warranted. On July 30, 
2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 
(``SOA''), which requires, among other things, that the Commission, or 
upon authorization and direction of the Commission, a registered 
securities association or national securities exchange, \12\ adopt 
rules governing analyst conflicts.\13\
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    \10\ See Securities Exchange Act Release No. 45908, 67 FR 34968 
(May 16, 2002) (``May 2002 approval order'').
    \11\ See note 15 infra.
    \12\ See Letter from Annette Nazareth, Director, Division of 
Market Regulation, Commission, to Mary Schapiro, Vice Chairman and 
President, Regulatory Policy and Oversight, NASD, and Richard 
Grasso, Chairman and Chief Executive Officer, NYSE (March 13, 2003).
    \13\ See Pub. L. 107-204, 116 Stat. 745 (2002). The SOA amends 
the Exchange Act by adding new Section 15D. See 15 U.S.C. 78a et 
seq.; 15 U.S.C. 78o-6.
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    Certain of the SOA's mandates were satisfied by NASD and NYSE rule 
provisions existing at the time of the enactment of the SOA. Other of 
the SOA's mandates necessitated amendments to the existing rules. The 
SOA requires rules governing analyst conflicts of interest, including 
rules: limiting the supervision and compensatory evaluation of 
securities analysts to certain officials; defining periods in which 
brokers or dealers engaged in a public offering of a security as an 
underwriter or dealer may not publish research on such security; and 
requiring securities analysts and brokers or dealers to disclose 
specified conflicts of interest. The primary purposes of NASD Amendment 
No. 2 and NYSE Amendment No. 2 were to satisfy the remaining SOA 
requirements.
    In February 2003, the Commission approved Regulation Analyst 
Certification (``Regulation AC''), which requires that broker-dealers 
(and certain associated persons) include in research reports a 
statement by the research analyst certifying that the views expressed 
in the research report accurately reflect his or her personal views; 
and a statement by the research analyst certifying either that no part 
of his or her compensation was, is, or will be directly or indirectly 
related to the specific recommendations or views contained in the 
research report; or that part or all of his or her compensation was, 
is, or will be directly or indirectly related to the specific 
recommendations or views contained in the research report.\14\
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    \14\ See Securities Exchange Act Release No. 47384 (February 20, 
2003), 68 FR 9482 (February 27, 2003).
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    On April 28, 2003, the Commission, along with other regulators, 
announced a global settlement of enforcement actions against ten of the 
nation's largest investment firms that followed joint investigations by 
regulators of allegations of undue influence of investment banking 
interests on securities research at brokerage firms. \15\
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    \15\ The terms of the settlement are available at http://www.sec.gov/litigation/litreleases/finaljudgadda.pdf (``Global 
Settlement'').
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A. Current NYSE and NASD Rules Governing Disclosure of Conflicts of 
Interest

    In the May 2002 approval order, prior to the enactment of the SOA, 
the Commission approved rule changes filed by the SROs governing 
analyst conflicts of interest. Those rule changes were designed to 
address analyst conflicts of interest in connection with the 
preparation and publication of research reports and public appearances

[[Page 45877]]

made on equity securities. The rules contain a number of elements, 
including:
    [sbull] A prohibition on offering favorable research to induce 
investment banking business;
    [sbull] Structural reforms to increase analyst independence, 
including a prohibition on investment banking personnel supervising 
analysts or approving research reports;
    [sbull] A prohibition on tying analyst compensation to a specific 
investment banking services transaction;
    [sbull] Increased disclosures of conflicts of interest in research 
reports and public appearances by analysts;
    [sbull] Restrictions on personal trading by analysts; and
    [sbull] Disclosure in research reports of data and price charts 
showing the firm's ratings track record.

B. Proposed Changes to NYSE and NASD Rules

    The proposed SRO rule changes further address research analyst 
conflicts of interest in connection with equity research reports, and 
are designed to achieve full compliance with the mandates of the SOA. 
The Commission provides here a general overview of the proposed rule 
changes. The Commission notes, in particular, that while the NASD and 
NYSE rules may differ to some degree in their texts, the provisions are 
intended to operate in substantially the same way.\16\
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    \16\ See NASD Amendment No. 3 and NYSE Amendment No. 3.
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    First, the proposals further separate research analyst compensation 
from investment banking influence. Specifically, the proposals require 
that a compensation committee of the broker-dealer review and approve 
the compensation of its research analysts that are primarily 
responsible for the preparation of the substance of research reports. 
The committee would report to the Board of Directors and may not have 
representation from the firm's investment banking department. Among 
other things, the committee would consider the analyst's individual 
performance (e.g., quality of research product); correlation between a 
research analyst's recommendations and stock prices; and overall 
ratings from various internal or external parties exclusive of the 
firm's investment banking personnel. The committee may not consider a 
research analyst's contribution to the firm's overall investment 
banking business. In addition, in order to comply with the SOA, the 
proposals prohibit investment banking personnel influence or control 
over the compensatory evaluation of research analysts.
    Second, the proposed rules prohibit analysts from issuing positive 
research reports or reiterating a ``buy'' recommendation around the 
expiration of a lock-up agreement (sometimes called ``booster shot'' 
research reports). The proposals accomplish this by prohibiting the 
issuance of research reports by the manager or co-manager of a 
securities offering for fifteen days prior to and after the expiration 
of lock-up agreements.
    Third, the amendments extend the current ten and forty-day quiet 
periods for the issuance of written research reports to communications 
in public appearances by managers and co-managers of initial and 
secondary offerings. The proposals also establish a 25-day quiet period 
during which broker-dealers who have agreed to participate (or who are 
participating) as underwriters or dealers (other than a manager or co-
manager) of an issuer's initial public offering would be prohibited 
from publishing research reports and analysts would be prohibited from 
making public appearances regarding that issuer.
    Fourth, the proposed rules further insulate research analysts from 
investment banking interests by prohibiting analysts from participating 
in ``pitches'' or other communications for the purpose of soliciting 
investment banking business.
    Fifth, the proposed rules require that a member provide notice to 
customers that it is terminating research coverage of an issuer that is 
the subject of a research report (``subject company''). The final 
report must include a final recommendation or rating (unless it is 
impracticable to do so).
    Sixth, the proposed SRO rule changes restrict the prepublication 
review and approval of research reports by persons not directly 
responsible for research. The rules also require that prepublication 
communications about the content of a research report between all non-
research personnel and the research department be intermediated by 
legal or compliance staff.
    Seventh, the proposals prohibit members engaged in investment 
banking activities from directly or indirectly retaliating, or 
threatening to retaliate, against a research analyst who publishes a 
research report or makes a public appearance that may adversely affect 
the member's present or prospective investment banking relationship. 
The SROs have clarified in the rules that the anti-retaliation 
provision would not preclude termination of a research analyst, in 
accordance with the member's policies and procedures, for causes 
unrelated to issuing or distributing such adverse research or for 
making an unfavorable public appearance regarding the member's current 
or potential investment-banking relationship with the issuer.
    Eighth, the proposals expand on the current SRO compensation 
disclosure requirements by requiring disclosure by a member in research 
reports, to the extent the member knows or has reason to know, and by a 
research analyst in public appearances, to the extent the analyst knows 
or has reason to know, of whether the member, or any affiliate thereof 
(including the research analyst), received any compensation during the 
past twelve months from the issuer that is the subject of the report or 
public appearance. The rule changes further require disclosure of 
whether the subject company is, or has been during the previous year, a 
client of the member, and if so, the types of services provided to the 
issuer. The types of services provided to the subject company must be 
described as: (1) Investment banking services, (2) non-investment 
banking securities-related services, or (3) non-securities services. 
Both the compensation disclosure and the client services disclosure 
provisions provide for an exception in order to prevent the disclosure 
of material non-public information regarding specific potential future 
investment banking transactions of the issuer.
    Ninth, the proposed SRO rule changes also create an exception from 
the existing ``gatekeeper'' provisions of the SRO rules for certain 
members that engage in limited underwriting activity.\17\ The 
gatekeeper provisions prohibit a research analyst from being subject to 
the supervision or control of any employee of a member's investment 
banking department, and further require legal or compliance personnel 
to intermediate certain communications between research and investment 
banking personnel.
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    \17\ See NYSE Rule 472(b)(1) and (3), and NASD Rule 2711(b)(1) 
and (3) (``gatekeeper'' provisions).
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    Tenth, the proposed rules require that legal or compliance 
personnel pre-approve all securities transactions of persons who 
oversee research analysts, including the members of a committee and 
certain others, that have direct influence or control with respect to 
the preparation of research reports or establishing or changing a 
rating or price target of a subject company's equity securities, to the 
extent that the transactions involve securities of subject

[[Page 45878]]

companies covered by research analysts that they oversee.
    Finally, the proposed rules impose additional registration, 
qualification, and continuing education requirements on research 
analysts. The proposed amendments would establish a new registration 
category and require a qualification examination for research analysts. 
The proposals would also impose requirements regarding the continuing 
education of certain registered persons consisting of a Regulatory 
Element and a Firm Element \18\ to address applicable rules and 
regulations, ethics, and professional responsibility.
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    \18\ The Firm Element requires broker-dealers to keep employee 
education current by means of a formal, ongoing training program. 
Broker-dealers must ensure that training is relevant to identified 
needs and that it is adequate to convey the desired information 
relating to products and job functions. The Regulatory Element 
requires that broker-dealers conduct an annual needs analysis and 
focuses on compliance, regulatory, ethical, and sales-practice 
standards. All registered persons must participate in a prescribed 
computer-based training session within 120 days of their second 
registration anniversary date, and every third year thereafter. See 
generally Content Outline For The Regulatory Element, Securities 
Industry/Regulatory Council on Continuing Education (December 2000).
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III. Discussion

    The Commission received a total of 26 comment letters from 22 
commenters on the proposed rule changes.\19\ As discussed in detail 
below, although commenters generally supported the fundamental goals 
and objectives behind the proposed rule changes, many commenters also 
believed that certain of the initial proposals should be revised, and 
some suggested substantive changes. In response to various concerns and 
suggestions raised by commenters, the NYSE filed NYSE Amendment No. 3, 
and the NASD filed NASD Amendment No. 3, to their proposed rule 
changes.
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    \19\ See notes 6 and 8 supra.
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    After careful review, the Commission finds, as discussed more fully 
below, that the proposed rule changes, as amended, are consistent with 
the requirements of the Exchange Act and the regulations thereunder 
applicable to the NYSE and NASD.\20\ In particular, the Commission 
believes that the proposals are consistent with Sections 6(b)(5) and 
6(b)(8) of the Exchange Act,\21\ Sections 15A(b)(6) and 15A(b)(9) of 
the Exchange Act,\22\ and Section 15D of the Exchange Act, which was 
enacted as part of the SOA.
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    \20\ See 15 U.S.C. 19(b)(2).
    \21\ 15 U.S.C. 78f(b)(5) and (8).
    \22\ 15 U.S.C. 78o-3(b)(6) and (9).
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    Section 6(b)(5) requires, among other things, that the rules of an 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of free trade, to 
remove impediments to and perfect the mechanism of a free and open 
market, and to protect investors and the public interest. Section 
6(b)(5) also requires that the rules of an exchange not be designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers. Section 6(b)(8) of the Exchange Act prohibits the rules of an 
exchange from imposing any burden on competition not necessary or 
appropriate in furtherance of the purposes of the statute.
    Section 15A(b)(6) requires that the rules of a registered national 
securities association be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest. Section 15A(b)(9) requires 
that the rules of an association not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Exchange Act.
    The Commission also believes that the rules, as amended, fulfill 
the mandates of the SOA \23\ that require that rules be implemented 
that are reasonably designed to address conflicts of interest that can 
arise when securities analysts recommend equity securities in research 
reports and public appearances, and to improve the objectivity of 
research, provide investors with more useful and reliable information, 
and to require disclosure in public appearances and research reports of 
conflicts of interest that are known or should have been known by the 
securities analyst or the broker-dealer to exist at the time of the 
appearance or the date of distribution of the report.
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    \23\ See Exchange Act Section 15D, 15 U.S.C. 78o-6.
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    Section 3(f) of the Exchange Act directs the Commission to 
consider, in addition to the protection of investors, whether approval 
of a rule change will promote efficiency, competition, and capital 
formation.\24\ In approving the proposed rule changes, the Commission 
has considered their impact on efficiency, competition, and capital 
formation.
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    \24\ 15 U.S.C. 78c(f).
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    The Commission believes the rule changes, as amended, promote the 
independence of research analysts and the objectivity of research. The 
rule proposals are reasonably designed to require analysts to disclose 
in public appearances, and broker-dealers to disclose in research 
reports, conflicts of interest of which they know or should know to 
exist at the time of the appearance or the date of the report. As such, 
the rules should provide investors with more useful and reliable 
information and promote greater public confidence in securities 
research.

A. Solicitation of Investment Banking Business [NYSE Rule 472(b)(5) and 
NASD Rule 2711(c)(4)]

    Under the initial proposals, a research analyst would have been 
prohibited from issuing research reports or making public appearances 
concerning a company if the analyst engaged in any communication with 
the company in ``furtherance of obtaining investment banking business'' 
prior to the time the company entered into a letter of intent or other 
written agreement that designated the analyst's firm as underwriter of 
the company's initial public offering.
    Commenters expressed substantial concern regarding this provision, 
largely arguing that the phrase ``in furtherance of obtaining 
investment banking business'' was overly broad and several suggested 
alternative language.\25\ They also expressed concern that the 
vagueness of the proposals would discourage analysts from visiting and 
communicating with private companies because firms would be unsure of 
what communications would, especially in hindsight, be considered ``in 
furtherance of obtaining investment banking business.'' \26\
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    \25\ See Adams et al. letter; SIA March 10th letter; Stifel 
letter; SunTrust letter; and Wilmer March 11th letter.
    \26\ See SIA March 10th letter; Stifel letter; and SunTrust 
letter.
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    Commenters also requested clarification on whether the consequence 
of a research analyst's participation in a communication ``in 
furtherance of obtaining investment banking business'' would be a 
permanent ban on the analyst writing research reports on that issuer, 
even where the analyst was no longer employed by the same firm. 
Commenters argued for a time limit on the research ban, and against the 
retroactive application to communications made prior to the effective 
date of the rule or in cases

[[Page 45879]]

where the research analyst is no longer employed by the same firm.\27\
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    \27\ See Adams et al. letter; SIA March 10th letter; SunTrust 
letter; and Wilmer March 11th letter.
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    Commenters also noted that the proposed provisions referred to the 
signing of a letter of intent, or other written agreement, in 
determining the date the firm received an investment-banking mandate. 
They argued that letters of intent are not common industry practice 
and, therefore, should not be used as evidence of the receipt of a 
mandate.\28\
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    \28\ See SIA March 10th letter and Wilmer March 11th letter.
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    The proposals also provided that the prohibition would not apply to 
``due diligence communications'' between the research analyst and the 
subject company, the sole purpose of which is to analyze the financial 
condition and business operations of the subject company. Commenters 
requested clarification as to the meaning of ``due diligence 
communications'' and several suggested specific language or 
parameters.\29\
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    \29\ See Adams et al. letter; SIA March 10th letter; Stifel 
letter; and Wilmer March 11th letter.
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    After considering commenters' concerns, the SROs modified their 
proposals in Amendment No. 3 to provide for an outright prohibition on 
research analyst participation in ``pitches'' for investment banking 
business or other communications with companies ``for the purpose of 
soliciting investment banking business.'' \30\ While the original 
proposals sought to provide a disincentive for analyst involvement in 
pitches by prohibiting an analyst from preparing research reports on 
issuers with whom the analyst engaged in a pitch, the amended proposals 
take the approach of prohibiting analyst involvement in pitches.
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    \30\ The Global Settlement also prohibits research analyst 
involvement in ``pitches.''
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    The NASD believes that this amendment will not only promote 
regulatory consistency, but will also further the goals of research 
objectivity and investor confidence by eliminating all participation by 
research analysts in solicitation efforts, which could suggest a 
promise of favorable research in exchange for underwriting 
business.\31\ Because the SROs believe that the same potential 
conflicts exist with respect to solicitation of all investment banking 
business, the amendment is not limited to initial public offerings.\32\
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    \31\ See NASD Response to Comments.
    \32\ See NASD Response to Comments and NYSE Amendment No. 3.
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    The final amendments also address commenters' concerns regarding 
what communications are permissible for research analysts. The SROs 
note that certain activities are traditionally associated with research 
functions within a multi-service securities firm, and are separate from 
the solicitation activities of concern that analysts may have recently 
been called upon to engage in by their firms.\33\ For example, the NASD 
notes that the proposed amendment would not curtail research analysts 
from performing activities traditionally associated with research 
functions that do not involve solicitation of investment banking 
business, such as helping to screen potential investment banking 
clients.\34\ The NYSE also recognizes the need for critical financial 
analysis of a subject company, during the period after the receipt of 
an investment banking mandate by the member while an issuer is 
preparing to engage in a securities offering to the public.\35\ By 
prohibiting analyst participation in pitches and other activities 
involving the solicitation of investment banking business, the final 
amendments also avoid the implementation issues associated with the 
initial proposals.
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    \33\ Id.
    \34\ See NASD response to Comments.
    \35\ See NYSE Amendment No. 3.
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    The amended proposals further insulate research analysts from 
investment banking interests, while addressing commenters' concerns 
regarding vagueness, by clarifying the parameters of the kind of 
activities the rule is designed to address. The SROs note that the 
prohibition on analysts' involvement in solicitations of investment 
banking business is intended to support the prohibition on promising 
favorable research as a marketing tool to prospective investment 
banking clients of members, and is designed to encourage issuers to 
choose an investment banking firm based on the merits of the firm's 
underwriting capabilities.\36\
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    \36\ Promising favorable research to companies as an inducement 
for business is currently explicitly prohibited by NASD Rule 2711(e) 
and NYSE Rule 472(g). In addition, according to the SROs, promising 
favorable research to companies as an inducement for business would 
constitute a violation of just and equitable principles of trade. 
See Securities Exchange Act Release No. 45526 (March 8, 2002), 67 FR 
11526 at 11539 (March 14, 2002) (Notice of SRO rules approved by the 
Commission in May 2002 approval order).
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    In our view, it is appropriate for the SROs to prohibit analyst 
involvement in pitches or other communications by research analysts 
that are made for the purpose of soliciting investment banking 
business. The Commission believes that the rules address concerns 
regarding analyst objectivity and independence from investment banking 
interests while permitting research analysts to provide certain 
services to their firm that several commenters viewed as valuable. The 
Commission also finds that the rules relating to research analyst 
involvement in solicitations for investment banking business are 
consistent with the Exchange Act, particularly Sections 6(b)(5), 
6(b)(8), 15A(b)(6), and 15A(b)(9).

B. Compensation of Research Analysts [NYSE Rule 472(h) and NASD Rule 
2711(d)]

    The rule proposals reinforce the separation of research analyst 
compensation from investment banking influence by requiring procedures 
for review and approval of a research analyst's compensation by a 
committee that reports to the Board of Directors or a senior executive 
of the broker-dealer. No employee of a member's investment banking 
department may participate in the committee. At a minimum, the 
committee must consider the following factors: the research analyst's 
individual performance (e.g., quality of research product), the 
correlation between a research analyst's recommendations and stock 
prices, and overall ratings from various internal (other than 
investment banking) or external parties.
    Further, in reviewing and approving an individual research 
analyst's compensation, the committee may not consider his or her 
direct contribution to the firm's overall investment banking business. 
The basis for a research analyst's compensation would have to be 
documented and the committee must provide an annual attestation to 
certify that the committee reviewed and approved the compensation of 
research analysts who are primarily responsible for the preparation of 
the substance of research reports \37\ and documented the basis for 
such approval.
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    \37\ The research analyst who is primarily responsible for the 
preparation of the substance of a research report is often referred 
to as the ``lead'' analyst. The Commission notes that a research 
report may have more than one lead analyst.
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    Several commenters expressed concern regarding the compensation 
committee provisions and suggested alternatives.\38\ One commenter 
believed that the ban on consideration by a compensation review 
committee of contributions to the firm's investment banking business 
should not preclude considering contributions to the extent that they 
benefit investors.\39\ Other commenters asked for clarification that a 
member's overall profitability may be considered in determining a 
research

[[Page 45880]]

analyst's compensation.\40\ Others requested confirmation that a 
research analyst's compensation could be based not only on a member's 
overall profitability, but also on the profitability of a firm's 
capital markets division, investment banking department, or an industry 
group within an investment banking department, and requested that the 
SROs explicitly acknowledge certain additional permissible compensation 
factors set forth in the Global Settlement.\41\
---------------------------------------------------------------------------

    \38\ See SIA March 10th letter, Stifel letter, and Weiss letter.
    \39\ See SIA March 10th letter.
    \40\ See SIA May 9th letter and Sullivan letter.
    \41\ Id.
---------------------------------------------------------------------------

    The SROs agree that the general financial success of a member may 
be considered in determining analyst compensation.\42\ NASD does not 
believe that it would be appropriate for a member to determine a 
research analyst's compensation based upon the profitability of the 
member's capital markets division, investment banking department, or 
some subgroup of such a division or department.\43\ NASD acknowledges 
that several other factors may be appropriate to consider when 
determining compensation, the rules do not attempt to list all possible 
permissible considerations, and the NASD does not think it necessary to 
do so.\44\
---------------------------------------------------------------------------

    \42\ See NYSE 472(h)(1) and NASD Response to Comments.
    \43\ See NASD Response to Comments.
    \44\ Id.
---------------------------------------------------------------------------

    Several commenters argued that the SRO rules should adopt the 
Global Settlement approach by applying obligations concerning how to 
calculate compensation only for the ``lead analyst'' (those analysts 
that are required to provide certifications under Regulation AC).\45\ 
As such, commenters argued that the compensation committee provision 
should apply only to the compensation of analysts who are primarily 
responsible for a research report's substance.\46\
---------------------------------------------------------------------------

    \45\ See SIA May 9th letter and Sullivan letter.
    \46\ See SIA March 10th letter.
---------------------------------------------------------------------------

    Upon consideration of commenters' concerns, the SROs agree that 
such a limitation on the scope of this provision is reasonable, and 
filed amendments to apply the compensation restrictions only to those 
research analysts who are primarily responsible for the preparation of 
the substance of a research report.\47\ Thus, research analysts who are 
not primarily responsible for a research report's substance, such as 
junior analysts who report to the lead analyst, would not be covered by 
the compensation committee provision.
---------------------------------------------------------------------------

    \47\ See NASD Response to Comments and NYSE Amendment No. 3.
---------------------------------------------------------------------------

    Commenters requested clarification on the intended role of the 
compensation committee and asserted that the proposed language was 
unclear as to whether the appropriate role of the committee was to 
``review and approve'' research analyst compensation or to 
``determine'' research analyst compensation; the commenter argued that 
the appropriate role for the committee should be to serve a review and 
approval function.\48\
    The SROs amended the proposals to require that research analyst 
compensation be reviewed and approved by the compensation 
committee.\49\ The amendments clarify that the committee must review 
and approve a research analyst's compensation. With the exception of 
the prohibitions of NYSE Rule 472(b)(1) and NASD Rule 2711(b)(1) on 
research analysts being subject to compensatory evaluation by 
investment banking personnel, the rules do not address who may 
initially determine that compensation.
---------------------------------------------------------------------------

    \48\ See SIA March 10th letter.
    \49\ See NYSE Rule 472(h)(2) and NASD Rule 2711(d)(2).
---------------------------------------------------------------------------

    The SOA requires that the ``compensatory evaluation'' of research 
analysts be limited to ``officials employed by the broker or dealer who 
are not engaged in investment banking activities.''\50\ In order to 
satisfy the mandates of the SOA, the SROs have filed amendments to 
prohibit employees of the member's investment banking department from 
evaluating the compensation of research analysts.\51\ As such, 
investment banking department personnel may not have input in 
determining research analyst compensation. Unlike the compensation 
committee provisions, this prohibition applies to the compensatory 
evaluation of all research analysts, and is not limited to those 
research analysts that are primarily responsible for the preparation of 
the substance of a research report.
---------------------------------------------------------------------------

    \50\ See 15 U.S.C. 78o-6(a)(1)(B).
    \51\ See Amendment No. 3.
---------------------------------------------------------------------------

    The Commission notes that neither the current nor proposed SRO 
rules prohibit the consideration of the revenues or results of the firm 
as a whole in determining research analyst compensation. \52\ The NASD 
has recognized that a research analyst, as part of his or her 
professional duties, may advise his or her firm's investment banking 
department concerning certain matters, such as whether a potential 
underwriting client is prepared for an initial public offering.\53\ 
Therefore, for example, NASD has stated that such activities may be 
considered in determining an analyst's compensation; however, it may 
not be given undue weight relative to evaluating the quality of other 
research work product.\54\
---------------------------------------------------------------------------

    \52\ The SROs' rules permit consideration of firm revenues as a 
whole, so long as a research analyst's compensation is not based on 
a specific investment banking transaction, and so long as the member 
discloses in research reports if the research analyst received 
compensation that is based upon (among other factors) the member's 
investment banking revenues. See NYSE Rule 472(h)(1) and (2), and 
NASD Rule 2711(d)(2).
    \53\ See NASD Response to Comments.
    \54\ Id.
---------------------------------------------------------------------------

    The Commission believes that the proposed compensation committee 
amendments are consistent with the SOA and promote the alignment of 
investor interests with those of research analysts who are primarily 
responsible for the preparation of the content of research reports by 
requiring that the committee, in reviewing and approving research 
analyst compensation, consider the quality of the research product and 
the correlation between the research analyst's recommendations and the 
stock price performance. The Commission also believes that the proposed 
prohibition on investment banking input regarding the compensatory 
evaluation of all research analysts is an important restriction in 
reducing the influence of investment banking interests on research 
analysts, and satisfies the mandates of Section 15D of the Exchange 
Act. The Commission also finds that the amendments relating to research 
analyst compensation are consistent with the Exchange Act, including 
Sections 6(b)(5), 6(b)(8), 15A(b)(6), and 15A(b)(9).

C. Definition of ``Research Report'' [NYSE Rule 472.10(2) and NASD Rule 
2711(a)(8)]

    Several commenters expressed concern regarding the proposals' 
amended definitions of ``research report.''\55\ The proposals adopt the 
SOA definition of ``research report'' by eliminating the current 
definitional requirement that a research report contain a 
``recommendation.'' The NASD Rule 2711 and NYSE Rule 472 contain 
substantially similar amended definitions of ``research report,'' 
defining the term as a written or electronic communication that 
includes an analysis of equity securities of individual companies or 
industries, and provides information reasonably

[[Page 45881]]

sufficient upon which to base an investment decision.
---------------------------------------------------------------------------

    \55\ See BOA letter, CSFB letter, Schwab March 20th letter, SIA 
March 10th letter, Stifel letter, Sullivan letter, and Wilmer March 
11th letter.
---------------------------------------------------------------------------

    While commenters acknowledge the SOA definition,\56\ some 
nevertheless urge the SROs to interpret the SOA's definition to be a 
non-substantive change to the current NASD and NYSE definitions of 
``research report.'' \57\ One commenter, for example, believes that the 
SROs should interpret the SOA definition effectively to continue to 
require a recommendation or a ``subjective view or conclusion.''\58\ 
Commenters argued that, otherwise, the proposed definition would be 
over-inclusive, encompassing many types of communications that 
traditionally have not been classified as research reports, including 
those by individuals who are not typically considered research 
analysts.\59\ Consequently, these commenters argue that the scope of 
the modified definition would result in unnecessary regulation and 
could constrict the free flow of information to the investing 
public.\60\
---------------------------------------------------------------------------

    \56\ See 15 U.S.C. 78o-6(c)(2).
    \57\ See SIA March 10th letter.
    \58\ See Wilmer March 11th letter.
    \59\ For example, Wilmer's June 25th comment letter, Wilmer 
suggested that communications such as prospectuses, trading 
commentary or company profiles could be deemed research reports 
under the proposed definition.
    \60\ See ICI March 10th letter and Wilmer March 11th letter.
---------------------------------------------------------------------------

    The SROs do not believe that the commenters' suggestions are 
consistent with the requirements of the SOA.\61\ The NASD notes that 
Congress adopted a definition of ``research report'' that is very 
similar to the current definitions of ``research report'' in NASD Rule 
2711, except for the deletion of the requirement that there be a 
recommendation.\62\ The NASD believes that they must therefore 
recognize the import of that distinction.\63\ As such, the NASD 
declines to interpret the definition in a way that they would consider 
to be rendering a conscious Congressional act to be superfluous.\64\ In 
this regard, the NASD notes that the Commission adopted the SOA 
definition of ``research report'' in Regulation AC, and declined to 
incorporate interpretations suggested by commenters that would continue 
to require a recommendation or subjective conclusion.\65\
---------------------------------------------------------------------------

    \61\ See NASD Response to Comments and NYSE Amendment No. 3.
    \62\ See NASD Response to Comments.
    \63\ Id.
    \64\ Id.
    \65\ Id. Regulation AC defines ``research report'' as ``a 
written communication (including an electronic communication) that 
includes an analysis of a security or an issuer and provides 
information reasonably sufficient upon which to base an investment 
decision.'' See Regulation AC.
---------------------------------------------------------------------------

    Commenters also suggested several other measures to narrow the 
scope of the proposed ``research report'' definition, such as limiting 
the definition of ``research report'' to communications ``furnished by 
the firm to investors in the U.S.'' \66\ The SROs believe that all 
research reports produced by members, irrespective of where or to whom 
they are distributed, should embody the same standards of 
integrity.\67\ The NASD notes that some aspects of NASD 2711 may 
reflect a more restrictive policy than the terms agreed to by the many 
parties, including NASD, to the Global Settlement, because the purposes 
behind NASD Rule 2711 may differ from the objectives in seeking a 
resolution to an enforcement matter.\68\ For this reason, the SROs 
decline to modify their proposals to apply only to research that 
relates either to a U.S. company or a non-U.S. company for which a U.S. 
market is the principal equity trading market as provided in the Global 
Settlement.\69\
---------------------------------------------------------------------------

    \66\ See Sullivan letter.
    \67\ See NASD Response to Comments and NYSE Amendment No. 3.
    \68\ See NASD Response to Comments.
    \69\ See NASD Response to Comments and NYSE Amendment No. 3.
---------------------------------------------------------------------------

    Some commenters noted that Regulation AC applies only to ``covered 
persons,'' generally exempting from the rule, among others, those 
affiliates of a broker or dealer that have no officers or employees in 
common with the broker or dealer.\70\ Commenters also requested that 
the SROs narrow the scope of their rules to carve out ``departments or 
divisions that have a sufficient level of independence from the member 
firm'' and are not subject to pressure from investment banking.\71\
---------------------------------------------------------------------------

    \70\ See Sullivan letter.
    \71\ Id.
---------------------------------------------------------------------------

    The NASD does not believe it necessary or appropriate to adopt a 
``covered persons'' definition.\72\ The NASD also notes that the 
Commission's jurisdiction is broader than the NASD, whose jurisdiction 
extends only to their members.\73\ As such, research produced by non-
member affiliates is already excluded from the scope of SRO analyst 
rules, except in cases where members distribute research produced by 
non-member affiliates. To the extent that commenters' concerns are more 
specifically about the application of the rules to investment advisers, 
the SROs note that the Joint Memorandum, which provides members with 
guidance regarding the operation of the analyst rules, explains that 
those advisers are excluded from the definition of ``research 
analyst.'' \74\
---------------------------------------------------------------------------

    \72\ See NASD Response to Comments.
    \73\ Id.
    \74\ See NYSE Information Memorandum. No. 02-26 (June 26, 2002) 
and NASD Notice to Members 02-39 (July 2002) (``Joint Memorandum'').
---------------------------------------------------------------------------

    Several commenters requested that the SROs restate their previous 
guidance set forth in their Joint Memorandum, which excluded certain 
communications from the definition of ``research report.'' \75\ 
Commenters requested that the SROs exclude from the definition certain 
additional communications excepted by Regulation AC or the Global 
Settlement.
---------------------------------------------------------------------------

    \75\ See BOA letter, Schwab June 30th letter, SIA June 26th 
letter, and Sullivan letter (e.g., research reports commenting on 
trading conditions).
---------------------------------------------------------------------------

    The Commission understands that the SROs intend to review existing 
interpretive guidance for continued applicability, and note their 
belief that the guidance in the Joint Memorandum excluding certain 
communications from the definition of ``research report'' would remain 
effective.\76\ Moreover, the SROs have indicated agreement that certain 
additional categories of communications, discussed in the release 
adopting Regulation AC, would not fall within the amended definition of 
``research report.'' \77\ The SROs determined that an analysis prepared 
for a specific person or a limited group of fewer than fifteen persons; 
and periodic reports or other communications prepared for investment 
company shareholders or discretionary investment account clients 
discussing past performance or the basis for previously made 
discretionary investment decisions, would not fall within the 
definition of ``research report.''\78\ The NASD continues to note that 
whether a particular communication falls within the definition of 
``research report'' depends on specific facts and circumstances.\79\
---------------------------------------------------------------------------

    \76\ See NASD Response to Comments and NYSE Amendment No. 3.
    \77\ Id.; See note 14 supra.
    \78\ See NASD Response to Comments and NYSE Amendment No. 3.
    \79\ See NASD Response to Comments.
---------------------------------------------------------------------------

    Some commenters asserted that all ``technical analysis'' and 
``quantitative'' research should be excluded from the definition of 
``research report.'' \80\ However, the NASD does not agree that such 
exclusions are appropriate beyond current interpretations.\81\ Neither 
NASD or NYSE modified their proposals in response to this comment. The 
NYSE did not further elaborate on its reasoning for this determination. 
The Joint Memorandum excludes from the definition of ``research 
report''

[[Page 45882]]

communications of ``technical analysis concerning the demand and supply 
for a sector, index or industry based on trading volume and price.'' 
The NASD does not believe it is consistent with the purposes of the 
rules to extend the exclusion to technical analysis of individual 
securities.\82\ The NASD also notes that the Commission similarly 
excluded from the definition of ``research report'' in Regulation AC 
only sector, index, and industry technical analysis.\83\ The Commission 
believes that the SROs' determination not to apply the exception to 
individual securities is reasonable.
---------------------------------------------------------------------------

    \80\ See CSFB letter, Schwab March 20th letter, and SIA March 
10th letter.
    \81\ See NASD Response to Comments.
    \82\ Id.
    \83\ Id.
---------------------------------------------------------------------------

    Commenters argue that ``quantitative'' reports are based on 
objective criteria, such as mathematical models, and are therefore not 
subject to influence by virtue of a member's conflicts.\84\ The NASD 
believes the term ``quantitative,'' as applied to research, may be 
vague and open to many interpretations.\85\ In fact, the NASD observes 
that many research reports typically labeled ``quantitative'' by 
members have raised conflicts concerns.\86\ Further, the NASD does not 
agree that all mathematical models are inherently ``objective.'' \87\ 
Many such models are based on subjective formulas where a person or 
persons selects the inputs; for example, a particular performance ratio 
or consensus earnings estimates. The NASD believes that such 
mathematical models can be manipulated to produce a particular desired 
result, depending on, for example, the ratios or other criteria 
selected, the universe of securities, and the formula employed.\88\
---------------------------------------------------------------------------

    \84\ See CSFB letter, Schwab March 20th letter, and SIA March 
10th letter.
    \85\ See NASD Response to Comments.
    \86\ Id.
    \87\ Id.
    \88\ Id.
---------------------------------------------------------------------------

    Consequently, the NASD does not believe it appropriate or 
practicable to provide for a blanket exclusion of ``quantitative 
research.'' \89\ The NASD acknowledges the possibility that certain 
``quantitative models'' devised by members may effectively eliminate 
the role of a ``research analyst'' and sufficiently guard against any 
potential conflicts of interest to render them outside the definition 
of a ``research report;'' however, the NASD believes that such facts 
and circumstances are best considered on a case-by-case basis.\90\
---------------------------------------------------------------------------

    \89\ Id.
    \90\ Id.
---------------------------------------------------------------------------

    The Commission notes that the SROs have tailored their definitions 
of ``research report'' to the definition of ``research report'' in the 
SOA and have indicated that they intend to review the exceptions to the 
definition provided in the Global Settlement, in order to provide 
additional guidance on the rules' application where appropriate.\91\
---------------------------------------------------------------------------

    \91\ See NASD Response to Comments and NYSE Amendment No. 3.
---------------------------------------------------------------------------

    The Commission believes that the SRO amendments to the definition 
of the term ``research report'' are consistent with Section 15D of the 
Exchange Act in that they do not require that there be a 
``recommendation.'' The Commission also finds that the rules relating 
to research analyst involvement in solicitations for investment banking 
business are consistent with the Exchange Act, particularly Sections 
6(b)(5), 6(b)(8), 15A(b)(6), and 15A(b)(9).

D. Definition of ``Public Appearance'' [NYSE Rule 472.50 and NASD Rule 
2711(a)(4)]

    The SROs amended their definitions of ``public appearance'' to 
include print media appearances. Several commenters were critical of 
this provision in light of the SROs' guidance in the Joint Memorandum, 
which stated that research analysts should decline subsequent 
appearances with media outlets that previously edited out required 
analyst disclosures, absent assurances that the disclosures will no 
longer be edited out.\92\ Commenters expressed concern that the rules 
infringed upon the editorial discretion of the media by directing 
analysts to decline appearances with media outlets that previously have 
not included the analyst disclosures.\93\
---------------------------------------------------------------------------

    \92\ See Gibson letter, NAA letter, and SIA March 10th letter.
    \93\ See Bloomberg letter, Gibson letter, NAA letter, and SIA 
March 10th letter.
---------------------------------------------------------------------------

    Commenters argued that the Joint Memorandum should be revised to 
reflect the NASD's updated guidance in the Original Notice that an 
analyst would not violate the rule if he or she makes the required 
disclosures to the print, radio or television media in good faith, even 
if the media outlet does not print or broadcast the information.\94\ A 
commenter also recommended that the proposed rules be clarified to make 
explicit that print journalists may, in their editorial discretion, and 
without penalty to their publications or imposing restrictions upon 
access to a research analyst, decline to publish the conflict 
disclosures provided by the analyst.\95\
---------------------------------------------------------------------------

    \94\ See Gibson letter, Schwab March 20th letter, and SIA March 
10th letter. See also Original Notice at 836.
    \95\ See Bloomberg letter.
---------------------------------------------------------------------------

    The SROs recognized that it is important that media audiences, as 
well as readers of research reports, receive disclosures of potential 
conflicts of interests.\96\ In response to commenters' concerns, 
however, the SROs modified their guidance to state that an analyst 
would not violate the rule if the analyst continues to make appearances 
with a media outlet that has, in the past, not printed or broadcast the 
disclosures, so long as the analyst makes the required disclosures in 
good faith.\97\
---------------------------------------------------------------------------

    \96\ See NASD Rule 2711(a)(4) and NYSE Rule 472.50.
    \97\ See NASD Amendment No. 1 and NYSE Amendment No. 2.
---------------------------------------------------------------------------

    In NYSE Amendment No. 2, the Exchange would require a research 
analyst that recommends securities in a print media interview, article 
prepared under his or her name, or broadcast, to prepare a record of 
such interview, article, or broadcast before the close of the next 
business day. Such record must contain pertinent information regarding 
the event and the required disclosures provided the media source. 
Further, such record must be made regardless of whether the media 
outlet publishes or broadcasts the required disclosures. In addition, 
the SROs require that the records of such interviews, articles, or 
broadcasts and the requisite disclosures must be maintained in a manner 
consistent with Rule 17a-4 of the Exchange Act.\98\
---------------------------------------------------------------------------

    \98\ Rule 17a-4 requires that records be preserved for a period 
of not less than three years, the first two in an easily accessible 
place. 17 CFR 240.17a-4.
---------------------------------------------------------------------------

    While commenters supported the NYSE's proposed interpretation, they 
were concerned that the new recordkeeping requirements for public 
appearances were impractical and failed to take into account the 
realties of research analysts' business and travel schedules.\99\ 
According to the commenters, the difficulty in requiring that research 
analysts themselves make the required records before the close of the 
next business day, would result in a reduction in the number of public 
appearances.\100\
---------------------------------------------------------------------------

    \99\ See Schwab June 30th letter, SIA June 26th letter, and 
Wilmer June 25th letter.
    \100\ See Wilmer June 25th letter.
---------------------------------------------------------------------------

    In response to commenters' concerns, the NYSE amended its proposal 
to require that the record be made within 48 hours of such interview, 
article or broadcast, and would permit such record to be prepared by 
the research analyst, legal or compliance personnel, or research 
department management.\101\
---------------------------------------------------------------------------

    \101\ See NYSE Rule 472(k)(1)/01.
---------------------------------------------------------------------------

    In Amendment No. 3, the NASD also amended its rule proposal to 
explicitly

[[Page 45883]]

require that research analysts prepare a record of the disclosures made 
by the research analyst in a print or broadcast media interview, 
newspaper article, or other public appearance.\102\ These records must 
be made regardless of whether the media source published or broadcast 
the disclosures and the record must be maintained for three years. NASD 
has not expressly included a required period of time regarding when the 
record must be made.
---------------------------------------------------------------------------

    \102\ See NASD Rule 2711(h)(12).
---------------------------------------------------------------------------

    The Commission finds that the amendments to the definition of 
``public appearance'' will provide media audiences, including the print 
media, with useful information to better evaluate the nature and extent 
of a firm's relationship with a subject company. The proposed 
amendments to the definition of ``public appearance,'' along with the 
proposed recordkeeping requirements and the SROs' guidance regarding 
media appearances, strike an appropriate balance between addressing 
commenters' concerns and providing investors with important disclosure 
information.\103\ The Commission believes that the proposed 
recordkeeping requirements will serve as a useful tool in promoting and 
monitoring the disclosure of potential conflicts of interests to 
investors. Therefore, the Commission finds that the proposed amendments 
are consistent with the Exchange Act, including Sections 6(b)(5), 
6(b)(8), 15A(b)(6), and 15A(b)(9).
---------------------------------------------------------------------------

    \103\ The Commission notes that Rule 17a-4(b)(4) requires that a 
broker-dealer shall preserve originals of all communications by the 
broker-dealer, including those subject to the rules of an SRO of 
which the broker-dealer is a member regarding communications with 
the public.
---------------------------------------------------------------------------

E. Supervisory Analyst Personal Trading Restrictions [NYSE Rule 
472(e)(5) and NASD Rule 2711(g)(6)]

    The original proposals would have extended the existing personal 
trading restrictions to include other persons: the director of 
research, supervisory analyst, or member of a committee who have direct 
influence or control with respect to the preparation of research 
reports or establishing or changing a rating or price target of a 
subject company's equity securities.
    Commenters were generally critical of this proposal.\104\ 
Commenters argued that many persons who supervise or oversee research 
analysts review a wide range of research reports, including, in some 
cases, reports on all of the subject companies covered by the 
member.\105\ They argued that expansion of the personal trading 
restrictions to supervisory personnel would effectively prevent these 
persons from owning any equity securities except diversified investment 
companies. This, commenters argued, would discourage many qualified 
persons from acting in supervisory capacities because of the trading 
blackout provisions and the prohibitions on trading against current 
recommendations. Commenters recommended that the SROs adopt less 
restrictive provisions regarding supervisory personnel, such as having 
legal or compliance personnel review their securities holdings or pre-
approve trades to ensure that there is no conflict of interest.\106\ 
Commenters recommended that the proposals be replaced by a requirement 
that firms implement policies and procedures reasonably designed to 
ensure that the trading transactions of supervisory personnel, 
committee members, and others, do not create a conflict of interest 
between their professional responsibilities and personal trading 
activities.\107\
---------------------------------------------------------------------------

    \104\ See Schwab March 20th letter, SIA March 10th letter, 
Stifel letter, and Wilmer March 11th letter.
    \105\ Id.
    \106\ See SIA March 10th letter.
    \107\ See Schwab March 20th letter and SIA March 10th letter.
---------------------------------------------------------------------------

    In response to commenters' concerns, the SROs modified their 
proposals in several respects. Rather than applying the same trading 
restrictions to supervisory personnel that apply to research analysts, 
the amended proposals would require a member's legal or compliance 
personnel to pre-approve all securities transactions of persons who 
supervise research analysts and other persons, such as the director of 
research or member of a committee who has direct influence or control 
with respect to the preparation of research reports or establishing or 
changing a rating or price target of a subject company's equity 
securities, to the extent that the transactions involve securities of 
subject companies covered by research analysts.\108\
---------------------------------------------------------------------------

    \108\ See NYSE Rule 472(e)(5) and NASD Rule 2711(g)(6).
---------------------------------------------------------------------------

    The Commission believes it is appropriate for the SROs to require 
pre-approval of securities transactions by supervisory research 
analysts and certain others where the securities traded are those of 
companies covered by the research analysts that they supervise. The 
Commission believes that this approach addresses the concerns regarding 
a possible disincentive from holding supervisory analyst positions, 
while still providing for a means of monitoring the trading activity of 
those who have direct influence or control with respect to the 
preparation of the substance of research reports or the establishment 
or changing of a rating or price target of a company's equity 
securities. Therefore, the Commission finds that the proposed rules are 
consistent with the Exchange Act, particularly Sections 6(b)(5), 
6(b)(8), 15A(b)(6), and 15A(b)(9).

F. Research Analyst Ownership Disclosure and Personal Trading 
Restrictions [NYSE Rule 472(k)(1)(iii)(b) and (k)(2)(i)(b) and 472(e) 
and NASD Rule 2711(h)(1)(A) and 2711(g)]

    Commenters recommended that managed accounts not controlled by the 
account owner should be excepted from the trading restrictions placed 
on research analysts.\109\ One commenter believed that NYSE Rule 
472(e)(4)(v) currently seems to exempt such accounts from the trading 
restrictions for research analysts, while NASD Rule 2711(g)(5) does 
not.\110\
---------------------------------------------------------------------------

    \109\ See Schwab March 20th letter and SIA March 10th letter.
    \110\ See SIA March 10th letter.
---------------------------------------------------------------------------

    In several instances, both NASD and NYSE have interpreted these 
provisions to exclude from the personal trading restrictions so-called 
``blind trusts'' of research analysts or their household members where 
the account owner is unaware of the account's holdings or 
transactions.\111\ The SROs have proposed modifications to the rules in 
Amendment No. 3 to exclude ``blind trust'' accounts that are controlled 
by a person other than the research analyst or member of the research 
analyst's household and where neither the research analyst nor member 
of the research analyst's household knows of the account's investments 
or investment transactions.
---------------------------------------------------------------------------

    \111\ See NYSE Rule 472.40 and NASD Rule 2711(a)(6).
---------------------------------------------------------------------------

    Several commenters argued that research analysts who prepare 
technical and quantitative research should be treated differently under 
the rules because those models do not present the same conflicts 
concerns.\112\ These commenters also asserted that the personal trading 
restrictions effectively bar many of these ``technical'' and 
``quantitative'' research analysts from owning any stocks because the 
broad universe of securities they cover makes ownership impractical. As 
such, commenters suggested that the SROs either interpret the 
definition of ``research report'' to exclude ``technical analysis'' and 
``quantitative research,'' or amend the research analyst trading 
restriction provisions to require only

[[Page 45884]]

pre-approval and disclosure requirements for such research 
analysts.\113\
---------------------------------------------------------------------------

    \112\ See Schwab March 20th letter and SIA March 10th letter.
    \113\ See CSFB letter and Schwab March 20th letter.
---------------------------------------------------------------------------

    The SROs do not believe that it is appropriate to provide 
exemptions from the trading limitations for a certain class of 
individuals who meet the definition of ``research analyst.'' \114\ The 
SROs further note that the current rules provide for exceptions to the 
trading restrictions for certain investment funds, including 
investments in registered diversified investment companies as defined 
in Section 5(b)(1) of the Investment Company Act of 1940.\115\
---------------------------------------------------------------------------

    \114\ See NASD Response to Comments and NYSE Amendment No. 3.
    \115\ See NYSE Rule 472(e)(4)(v) and (vi), and NASD Rule 
2711(g)(5)(A) and (B); 15 U.S.C. 80a-5(b)(1).
---------------------------------------------------------------------------

    The SOA requires disclosure of the extent to which a research 
analyst has debt or equity investments in the issuer that is the 
subject of the research report or public appearance.\116\ Current NASD 
Rule 2711(h)(1)(A) requires disclosure of whether the ``research 
analyst or a member of the research analyst's household 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, future, long or short 
position).'' \117\ The Commission believes that NASD Rule 2711(h)(2), 
and NYSE Rule 472(k)(1) and (2), as amended, satisfy the requirements 
of Exchange Act 15D(b)(1).\118\
---------------------------------------------------------------------------

    \116\ See 15 U.S.C. 78o-6(b)(1).
    \117\ In NYSE Amendment No. 3, the Exchange proposed to amend 
NYSE Rule 472(k)(1)(iii)(b) in order to require disclosure of the 
nature of the analyst's financial interest.
    \118\ 15 U.S.C. 78o-6(b)(1).
---------------------------------------------------------------------------

    The Commission believes that the modified rule proposals reflect an 
appropriate compromise between addressing commenters' concerns and 
mitigating conflicts of interest that can arise when an analyst invests 
in the securities of companies the analyst covers. The Commission finds 
that the proposals are consistent with the Exchange Act, particularly 
Sections 6(b)(5), 6(b)(8), 15A(b)(6), and 15A(b)(9).

G. Termination of Coverage [NYSE Rule 472(f)(5) and NASD Rule 
2711(f)(6)]

    The original proposals require notification to customers when a 
firm withdraws research coverage of a subject company, and 
distributions of a final research report that includes a final 
recommendation or rating. The proposed rules also would require that 
notice of this withdrawal must be made in the same manner as the 
initial research coverage provided by the broker-dealer.
    Several commenters expressed support for requiring firms to publish 
notice of withdrawal of research coverage of a company.\119\ However, 
commenters requested clarification with respect to the meaning of the 
term ``withdrawal,'' and requested guidance regarding the requirement 
that notice of withdrawal must be made ``in the same manner as when 
research coverage was first initiated by the member.'' \120\
---------------------------------------------------------------------------

    \119\ See AIMR March 6th letter; NASAA letter; and SIA March 
10th letter.
    \120\ See Schwab March 20th letter and SIA March 10th letter.
---------------------------------------------------------------------------

    After considering commenters' concerns, the SROs filed amendments 
to require notice of ``termination'' of research coverage, rather than 
withdrawal or discontinuation. The NASD intends to provide general 
guidance as to what constitutes ``termination,'' and will also consider 
such scenarios on a case-by-case basis.\121\
---------------------------------------------------------------------------

    \121\ See NASD Response to Comments.
---------------------------------------------------------------------------

    The SROs also filed amendments to respond to commenters' concerns 
regarding the meaning of the requirement that the final notice must be 
``made in the same manner'' as when research coverage was ``first 
initiated by the member.'' \122\ After considering comments, the SROs 
modified the proposals to require that the member make the final 
research report on the subject company available using means of 
dissemination equivalent to those it ordinarily uses to provide the 
customer with its research reports on that subject company. The SROs 
also require that the final report must be comparable in scope and 
detail to prior research reports.
---------------------------------------------------------------------------

    \122\ See SIA March 10th letter.
---------------------------------------------------------------------------

    The rule proposals continue to require that the final report 
include a final recommendation or rating. However, the SROs have 
specified that a final recommendation or rating will not be required in 
cases where it is impracticable for the member to produce a comparable 
report (e.g., if the research analyst covering the subject company has 
left the member, or where the member has terminated coverage on an 
industry or sector). In such cases, the rationale for termination will 
be required.
    The Commission finds that the proposed amendments requiring notice 
of termination of coverage will provide investors with important 
information to better evaluate the usefulness of research, including 
whether the firm is no longer covering the issuer. The public may not 
be fully informed where a firm terminates coverage of a company without 
disclosing the termination to customers, and without providing 
customers with a final rating or recommendation, even in cases where a 
ratings change may have been warranted. The Commission believes that 
the amendments requiring notice of ``termination'' respond to 
commenters' concerns regarding what would constitute ``withdrawal,'' 
while providing investors with important information. Therefore, the 
Commission believes these proposals are consistent with the Exchange 
Act, including sections 6(b)(5), 6(b)(8), 15A(b)(6) and 15A(b)(9).

H. Quiet Periods on the Issuance of Research Reports [NYSE Rule 472(f) 
and NASD Rule 2711(f)]

    The SOA requires establishment of periods during which brokers or 
dealers who have participated or are to participate in a securities 
offering as underwriters or dealers may not publish or otherwise 
distribute research reports related to such securities. \123\ Current 
SRO rules impose quiet periods on underwriting managers and co-managers 
for 40 calendar days following an initial public offering and 10 
calendar days following a secondary offering, but do not impose these 
restrictions on other members of the underwriting syndicate or selling 
group. In order to comply with the SOA, the SRO proposals establish a 
25 calendar-day period after the ``date of the offering'' during which 
a 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 not publish or otherwise 
distribute a research report or make a public appearance regarding that 
issuer.\124\
---------------------------------------------------------------------------

    \123\ See 15 U.S.C. 78o-6(a)(2).
    \124\ See NYSE 472(f)(3) and NASD 2711(f)(2). The Commission 
notes that the SROs have not proposed to impose a quiet period on 
non-managers that participate in secondary offerings.
---------------------------------------------------------------------------

    Most commenters did not object to this proposed provision. One 
commenter, however, argued that the SOA does not require the SROs to 
apply the research blackout to every dealer that participates in the 
offering in any manner, including where the dealer has no agreement 
with the issuer or any underwriter to distribute the securities or to 
provide research about the issuer.\125\
---------------------------------------------------------------------------

    \125\ See Sullivan letter.
---------------------------------------------------------------------------

    The SROs have not modified this proposal. The NYSE notes that the 
25-day prohibition effectively codifies quiet periods that exist 
because of the

[[Page 45885]]

prospectus delivery requirements under Rule 174 under the Securities 
Act \126\ pursuant to which 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.\127\
---------------------------------------------------------------------------

    \126\ 17 CFR 230.174.
    \127\ 15 U.S.C. 77j.
---------------------------------------------------------------------------

    The SRO proposals would amend the quiet period provisions in two 
other ways. First, the proposals would prohibit a member that has acted 
as a manager or co-manager of a securities offering from distributing a 
research report or making a public appearance concerning a subject 
company 15 days prior to and after the expiration, waiver, or 
termination of a lock-up agreement that restricts the sale of 
securities held by the subject company or its shareholders after the 
completion of a securities offering.
    Commenters argued that this provision would raise difficult 
compliance issues, since co-managing underwriters often have no 
knowledge of a lead manager's waiver of a lock-up agreement.\128\ 
Commenters also expressed concern that this provision could dissuade 
issuance of lock-up waivers prior to their normal expiration time.\129\ 
One commenter suggested, as an alternative, that the SROs bar firms and 
their analysts from issuing research reports ``for the purpose, in 
whole or in part, of affecting the price of the issuer's securities for 
the benefit of a selling shareholder.'' \130\
---------------------------------------------------------------------------

    \128\ See SIA March 10th letter.
    \129\ Id.
    \130\ Id.
---------------------------------------------------------------------------

    The SROs determined not to modify the proposals in this regard. The 
SROs believe that the concern regarding a co-managing underwriter's 
lack of knowledge of a lead manager's waiver of a lock-up agreement can 
be addressed through a provision in an underwriting agreement to 
require a lead or co-managing underwriter to notify the other managers 
or co-managers of its intention to grant such a waiver a specified 
number of days prior to doing so.\131\ The SROs believe that such a 
notification would avoid the inadvertent issuance of research reports 
or making of public appearances within the blackout periods surrounding 
waivers of lock-up agreements.\132\
---------------------------------------------------------------------------

    \131\ See NASD Response to Comments and NYSE Amendment No. 3.
    \132\ Id.
---------------------------------------------------------------------------

    Several commenters requested that the blackout period regarding 
lock-up agreements not apply to the publication of research reports 
pursuant to Securities Act Rule 139 \133\ regarding a subject company 
with ``actively traded securities,'' as defined in SEC Regulation 
M,\134\ or to public appearances regarding such companies.\135\ These 
commenters noted that, because the quiet period following secondary 
offerings does not apply to these types of companies, the quiet period 
surrounding waivers or expirations of a lock-up agreement also should 
not apply.
---------------------------------------------------------------------------

    \133\ 17 CFR 230.139.
    \134\ 17 CFR 242.101(c)(1)
    \135\ See Sullivan letter.
---------------------------------------------------------------------------

    After consideration of commenters' concerns, the SROs modified 
their proposals to apply the exception for actively traded securities 
to the provisions prohibiting ``booster shot'' research reports. The 
SROs note that such an exception would not be appropriate in the 
context of an IPO, where there is not a developed secondary trading 
market or widespread research coverage.\136\ The SROs agree that, for 
certain seasoned issuers and actively traded securities, the proposed 
blackout surrounding the expiration of lock-up agreements is not 
necessary.\137\ Accordingly, the SROs have amended this provision to 
provide for such an exception.
---------------------------------------------------------------------------

    \136\ See NASD Response to Comments and NYSE Amendment No. 3.
    \137\ Id.
---------------------------------------------------------------------------

    Second, the SRO proposals also extend the current 40 and 10-day 
quiet period provisions to public appearances by research analysts 
regarding securities that are covered by a research report blackout 
during the same period of time.\138\ Commenters did not oppose this 
proposal. The SRO amendments 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.\139\
---------------------------------------------------------------------------

    \138\ See NYSE Rule 472(f)(1) and (2), and NASD Rule 
2711(f)(1)(A) and (B).
    \139\ See NYSE Rule 472.120 and NASD Rule 2711(f)(3).
---------------------------------------------------------------------------

    The Commission believes that the SRO rules relating to quiet 
periods will encourage market forces to determine the price of the 
security in the aftermarket following an offering unaffected by 
research reports and public appearances by firms with the most 
substantial interest in the offering--those firms that are a part of 
the underwriting syndicate. The Commission believes that the SROs' 
proposals to extend the current quiet period provisions to cover public 
appearances is a reasonable extension of the prohibition on research 
reports during the same period of time.
    The Commission believes that the proposed 25-day quiet period 
provisions satisfy the requirements of Section 15D(a)(2) of the 
Exchange Act because they are reasonably designed to ``define periods 
during which brokers or dealers who have participated, or are to 
participate, in a public offering of securities as underwriters or 
dealers should not publish or otherwise distribute research reports 
relating to such securities or to the issuer of such securities.'' The 
Commission finds that the quiet period provisions are consistent with 
the Exchange Act, particularly Sections 6(b)(5), 6(b)(8), 15A(b)(6) and 
15A(b)(9).

I. Disclosure of Compensation and Client Arrangements [NYSE Rule 472(k) 
and NASD Rule 2711(h)]

    The SOA requires that rules be adopted reasonably designed to 
require that firms disclose in research reports and public appearances 
any compensation received by the broker-dealer or its affiliates from 
the subject company that is known or should have been known by the 
research analyst or broker-dealer at the time the research report is 
issued and at the time the public appearance is made.\140\
---------------------------------------------------------------------------

    \140\ See 15 U.S.C. 78o-6(b)(2).
---------------------------------------------------------------------------

    Current SRO rules require firms to disclose investment banking 
compensation received from a subject company or its affiliates in the 
past 12 months.\141\ The SROs have not proposed to change this 
provision. However, in NASD Amendment No. 2 and in NYSE Amendment No. 
2, the SROs proposed amendments to expand the required compensation 
disclosures to mandate disclosure in research reports and public 
appearances of any non-investment banking compensation received by a 
member or its affiliates from the subject company. In addition, the SRO 
amendments would require separate disclosure of investment banking 
compensation and non-investment banking compensation received from the 
subject company or its affiliates in research report disclosures.\142\
---------------------------------------------------------------------------

    \141\ See NYSE Rule 472(k)(1)(i)(a)(2) and NASD Rule 
2711(h)(2)(A)(ii)(b).
    \142\ See NYSE Rule 472(k)(1)(i)(a)(2) and (K)(1)(i)(d)(2), and 
NASD Rule 2711(h)(2)(A)(ii)(b) and (iii)(a).
---------------------------------------------------------------------------

    While the SOA does not specify a look-back period for the 
compensation disclosure provision, the SROs proposed a 12-month 
retrospective

[[Page 45886]]

period \143\ to be consistent with the SOA's client disclosure 
provision,\144\ which imposes this timeframe for disclosure of a client 
relationship with the subject company. In addition, the current 
requirement in the SRO rules for disclosure of investment banking 
compensation is also based on this timeframe.\145\
---------------------------------------------------------------------------

    \143\ See NYSE Rule 472(k)(1)(i)(d)(2) and NASD Rule 
2711(h)(2)(A)(iii)(a).
    \144\ See 15 U.S.C. 78o-6(b)(3).
    \145\ See NYSE Rule 472(k)(1)(i)(a)(2) and NASD Rule 
2711(h)(2)(A)(ii)(b).
---------------------------------------------------------------------------

    Several commenters were strongly critical of this proposed 
amendment.\146\ In particular, these commenters asserted that requiring 
disclosure of non-investment banking compensation received by a member 
and its affiliates from the subject company would be extremely 
burdensome and complex, and therefore not in the public interest. 
Commenters expressed heightened concerns regarding the difficulties of 
tracking affiliate compensation received from the subject company. 
\147\ They argued that real-time tracking of such compensation would be 
unduly burdensome and asserted that firms would be unable to implement 
a real-time tracking system capable of 100% accuracy with regard to 
disclosure of affiliate compensation.\148\ Commenters argued that the 
SRO proposals did not give effect to the SOA requirements that the 
mandated rules be ``reasonably designed to address conflicts of 
interest,'' and would provide little useful information to 
investors.\149\ Commenters recommended that the SROs adopt a narrower 
version of this proposal that would tie disclosure of the receipt of 
compensation by a member or its affiliates from a subject company to 
the research analyst's knowledge of such compensation.\150\
---------------------------------------------------------------------------

    \146\ See BOA letter, Schwab June 30th letter, SIA June 26th 
letter, and Wilmer June 25th letter.
    \147\ See BOA letter and Wilmer June 25th letter.
    \148\ The Commission notes that, in requiring disclosure of any 
compensation, the SOA did not mandate, and the SRO proposals do not 
require, that broker-dealers disclose how much compensation was 
received, but rather requires affirmative disclosure (if such is the 
case) of whether any compensation has been received.
    \149\ See SIA June 26th letter and Wilmer June 25th letter.
    \150\ Id.
---------------------------------------------------------------------------

    As noted by commenters, the SOA mandates disclosure of conflicts of 
interests that are ``known or should have been known'' \151\ by the 
analyst or broker or dealer, and the SROs agree that the proposals 
should be modified to reflect this qualification.\152\ Accordingly, the 
SROs revised their proposals in several respects regarding the 
disclosure of non-investment banking compensation received by the 
member or affiliates from the subject company.
---------------------------------------------------------------------------

    \151\ The SROs use ``have reason to know'' in their proposals, 
because that language appears in other related rules. However, the 
SROs interpret ``have reason to know'' as having the same meaning as 
``should have been known'' as used in the Section 501(b) of the SOA. 
17 U.S.C. 78o-6(b). See NASD Response to Comments and NYSE Amendment 
No. 3.
    \152\ See NASD Response to Comments and NYSE Amendment No. 3.
---------------------------------------------------------------------------

    While the original proposals implied that ``real-time'' disclosure 
was required, the modified proposals provide for periodic disclosure in 
certain circumstances. For example, if the member received any non-
investment banking compensation from the subject company, the proposals 
require disclosure as of the end of the month immediately preceding the 
date of publication of the research report. Real time disclosure would 
only be required if the analyst or an employee of the member with the 
ability to influence the substance of the research report 
(``influential employee'') possesses actual knowledge of such member 
non investment banking compensation.\153\
---------------------------------------------------------------------------

    \153\ See NYSE Rule 472(k)(1)(i)(d)(2) and (k)(1)(ii)(b)(2), and 
NASD Rule 2711(h)(2)(A)(iii)(a).
---------------------------------------------------------------------------

    The SROs revised their proposals to require disclosure in research 
reports of affiliate non-investment banking compensation of which the 
analyst or influential employee knows,\154\ or of which the analyst or 
member or has reason to know.\155\
    The modified SRO proposals respond to commenters' concerns by 
requiring disclosure in research reports of affiliate non-investment 
banking compensation of which the analyst or member ``has reason to 
know.''\156\ The proposals create two mechanisms by which analysts and 
members may satisfy the disclosure requirements relating to what the 
analyst or member would have reason to know about affiliate non-
investment banking compensation.\157\
---------------------------------------------------------------------------

    \154\ See NYSE Rule 472(k)(1)(ii)(b)(2) and NASD Rule 
2711(h)(2)(A)(iv).
    \155\ See NYSE Rule 472(k)(1)(iii)(a) and NASD Rule 
2711(h)(2)(A)(v).
    \156\ See NYSE Rule 472(k)(1)(ii)(b)(2) and NASD Rule 
2711(h)(2)(A)(v).
    \157\ See NYSE Rule 472(k)(1)(iii)(a)(1) and (2), and NASD Rule 
2711(h)(2)(a)(v)(a) and (b).
---------------------------------------------------------------------------

    The rules provide that this disclosure requirement will be deemed 
satisfied if the member has taken steps reasonably designed to identify 
affiliate non-investment banking compensation during that calendar 
quarter and discloses such in research reports within 30 days after 
completion of the last calendar quarter.\158\ In the alternative, the 
proposals provide that a member and analyst would be presumed not to 
have a reason to know of affiliate non-investment banking compensation 
from the subject company, if the member maintains and enforces policies 
and procedures reasonably designed to prevent the analyst and any 
influential employee from, directly or indirectly, receiving 
information from the affiliate concerning whether the affiliate 
received such compensation.\159\ If such procedures are maintained and 
enforced by the member, then the member and analyst would be presumed 
not to have reason to know of affiliate non-investment banking 
compensation. However, because this is a presumption of a lack of 
knowledge, to the extent that the research analyst or an employee of 
the member with the ability to influence the substance of a research 
report obtains actual knowledge of affiliate non-investment banking 
compensation, disclosure would be required under NASD Rule 
2711(h)(2)(A)(iv) and NYSE Rule 472(k)(1)(ii)(b)(2).
---------------------------------------------------------------------------

    \158\ See NYSE Rule 472(k)(1)(iii)(a)(1) and NASD Rule 
2711(h)(2)(a)(v)(a).
    \159\ See NYSE Rule 472(k)(1)(iii)(a)(2) and NASD Rule 
2711(h)(2)(a)(v)(b).
---------------------------------------------------------------------------

    Unlike the original proposals, which required absolute disclosure 
of any compensation received by the member and its affiliates, the 
revised proposals would limit certain of the disclosure requirements to 
the actual knowledge of research analysts and influential employees, 
and in cases where the analyst or member has reason to know. Thus, 
real-time tracking by the member non-investment banking compensation 
may not be necessary.
    Commenters have argued that all of the compensation disclosure 
requirements should be tied to the knowledge of the research analyst or 
supervisor.\160\ However, the SROs do not agree.\161\ Certain of the 
disclosure requirements, such as the receipt of investment banking 
compensation to the member or its affiliates from the subject company, 
are not tied to the knowledge of specific individuals, but require that 
the firm track the receipt of such compensation sufficient to make 
affirmative disclosures where warranted.\162\ The SOA also requires 
that disclosure of firm and affiliate compensation be made by research 
analysts in public appearances.\163\ Therefore, the SRO proposals 
require the disclosure of any compensation

[[Page 45887]]

received by the member and affiliates to be disclosed in public 
appearances, to the extent that the analyst knows or has reason to know 
of such compensation in the past 12 months.\164\ This requirement, 
unlike current SRO rules, mandates disclosure of investment banking 
compensation in public appearances.\165\
---------------------------------------------------------------------------

    \160\ See SIA June 26th letter and Wilmer June 25th letter.
    \161\ See NASD Response to Comments and NYSE Amendment No. 3.
    \162\ This requirement is part of the original amendments. See 
NYSE Rule 472(k)(1)(i)(a)(2) and (3), and NASD Rule 
2711(h)(2)(A)(ii)(b) and (c).
    \163\ See 15 U.S.C. 78o-6(b).
    \164\ See NYSE Rule 472(k)(2)(i)(c)(2) and NASD Rule 
2711(h)(2)(B)(i).
    \165\ Id.
---------------------------------------------------------------------------

    The SOA mandates the establishment of rules that require disclosure 
of whether a subject company currently is, or was, a client of the 
broker or dealer during the 1-year period preceding the appearance or 
date of distribution of the research report, and if so, a statement of 
the type of services provided to the client.\166\ This is broader than 
the current SRO rules which require a research analyst to disclose 
during a public appearance (when such research analyst knows or has 
reason to know) if the subject company is an investment banking 
services client of the member.\167\
---------------------------------------------------------------------------

    \166\ See 15 U.S.C. 78o-6(b)(3).
    \167\ See NYSE Rule 472(k)(2)(i)(c)(1) and NASD Rule 
2711(h)(2)(B)(iii).
---------------------------------------------------------------------------

    In order to meet the mandates of the SOA, the proposed SRO 
amendments would provide for disclosure by a member in research 
reports, and by a research analyst during a public appearance (if the 
analyst knows or has reason to know), of whether a subject company is a 
client of the member and the types of services provided to the 
client.\168\ The types of services have been categorized into: 
Investment banking services (which are required to be disclosed under 
current SRO rules); non-investment banking securities-related services; 
and non-securities services.\169\
---------------------------------------------------------------------------

    \168\ See NYSE Rule 472(k)(1)(i)(d)(1) and NASD Rule 
2711(h)(2)(A)(iii)(b).
    \169\ Id.
---------------------------------------------------------------------------

    Commenters expressed concerns regarding the client disclosure 
provisions that were similar to those noted above regarding the 
compensation disclosure provisions.\170\ Commenters suggested that the 
client disclosure provision should be amended to require broker-dealers 
to disclose only those services most likely to present an actual or 
potential conflict of interest.\171\
---------------------------------------------------------------------------

    \170\ See SIA June 26th letter and Wilmer June 25th letter.
    \171\ Id.
---------------------------------------------------------------------------

    Commenters also requested guidance as to what would constitute a 
client relationship.\172\ In response to commenters' concerns, the SROs 
have clarified that a subject company is a client of the member if they 
have received compensation from the subject company, or if the member 
has entered into an agreement to provide services.\173\
    Commenters argued that the proposals should be modified to require 
broker-dealers to provide disclosures regarding services provided to 
subject companies on an annual basis, and should be linked to the 
receipt of compensation for non-investment banking, securities-related, 
or non-securities services.\174\
---------------------------------------------------------------------------

    \172\ See Schwab June 30th letter and SIA June 26th letter.
    \173\ See NASD Response to Comments and NYSE Amendment No. 3.
    \174\ Id.
---------------------------------------------------------------------------

    NYSE believes that requiring disclosure of whether a subject 
company is a client and the types of services provided, including non-
investment banking services, should provide investors with potentially 
more meaningful insight into the nature of the relationship between the 
subject company and the member and the potential conflicts attendant to 
such relationships.\175\ NYSE, for example, observes 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 is also providing 
non-investment banking securities-related services to a subject 
company.\176\
---------------------------------------------------------------------------

    \175\ See NYSE Amendment No. 3.
    \176\ Id.
---------------------------------------------------------------------------

    While there is some overlap between disclosure of the receipt of 
compensation from a subject company and a client relationship, the SROs 
have declined to modify their proposals to link or merge the receipt of 
compensation provision to the client disclosure provision.
    The SROs also modified their proposals to require disclosure of 
client relationships and types of services provided to the issuer, as 
of the end of the month immediately preceding the date of publication 
of the research report, or sooner, if the analyst or influential 
employee possess actual knowledge of such member non investment banking 
compensation.\177\ The Commission believes this would provide firms 
with additional time to identify and aggregate the required 
information, while providing investors with relevant disclosure 
information and complying with the requirements of Section 15D of the 
Act.\178\
---------------------------------------------------------------------------

    \177\ See NYSE Rule 472(k)(1)(i)(d)(1) and NASD Rule 
2711(h)(2)(A)(iii)(b).
    \178\ See 15 U.S.C. 78o-6(b)(3).
---------------------------------------------------------------------------

    In requiring that firms and their research analysts identify the 
types of services provided to subject companies, the SROs recognize 
that there is a possibility that this could result in the dissemination 
of material non-public information.\179\ This issue was raised when the 
Commission considered amendments to the NASD and NYSE's analyst rules 
in 2002.\180\ The rules, approved by the Commission, require disclosure 
of prospective investment banking compensation.\181\ In light of this 
concern, the SROs had structured the disclosure of information related 
to investment banking services to mitigate the possibility of 
disclosing material non-public information by requiring a general 
disclosure of investment banking compensation received from the subject 
company in the past 12 months, along with a three-month forward-looking 
investment banking compensation disclosure if the member ``expects to 
receive or intends to seek'' compensation for investment banking 
services from the subject company in the next three months.\182\
---------------------------------------------------------------------------

    \179\ See NASD Response to Comments and NYSE Amendment No. 3.
    \180\ See May 2002 approval order.
    \181\ Id. at 34972.
    \182\ See NYSE Rule 472(k)(1)(i)(a)(2) and (3), and NASD Rule 
2711(h)(2)(A)(ii)(b) and (c); See also May 2002 approval order.
---------------------------------------------------------------------------

    The SROs believe that they have also addressed concerns regarding 
the disclosure of material non-public information with the proposed new 
disclosure requirements.\183\ The amendments provide for an exemption 
from the proposed compensation and client disclosure provisions to the 
extent that such disclosure would reveal material non-public 
information regarding specific potential future investment banking 
services transactions of the subject company.\184\ The SOA explicitly 
authorized us to permit an exception for material non-public 
information regarding specific potential future investment banking 
services transactions of the subject company in the compensation 
disclosure provision.\185\ The Commission notes that this exception 
applies only to specific potential future transactions of an investment 
banking nature and that relate to a particular issuer. The SROs have 
determined that such an exception should also apply to the client 
disclosure provision.\186\ The Commission finds that providing for such 
an exception in the client disclosure provision is consistent with the 
SOA's compensation disclosure provision. Further, the exception as to

[[Page 45888]]

compensation is appropriate to address concerns regarding the 
dissemination of material non-public information regarding specific 
potential future investment banking services transactions of the 
subject company. Finally, the Commission believes that the SRO rules, 
by providing an exemption in the client disclosure provision fulfill 
the SOA mandate to adopt rules reasonably designed to provide 
disclosure of broker-dealers' clients and client services, while 
appropriately addressing concerns related to the potential 
dissemination of material non-public information.
---------------------------------------------------------------------------

    \183\ See NASD Response to Comments and NYSE Amendment No. 3.
    \184\ See NYSE Rule 472(k)(3)(i) and NASD Rule 2711(h)(2)(c).
    \185\ See 15 U.S.C. 78o-6(b)(2).
    \186\ See NASD Response to Comments and NYSE Amendment No. 3.
---------------------------------------------------------------------------

    In the Joint Memorandum, the SROs provided guidance that ``knows or 
has reason to know'' requires disclosure of such information of which 
the analyst has actual knowledge, as well as such information that 
should be reasonably discovered in the ordinary course of business. The 
SROs note that they expect that a research analyst would have reason to 
know of disclosures made in prior research reports.\187\ In addition, a 
research analyst would have reason to know of such information by 
virtue of the steps taken by the member or member organization to 
identify compensation received by a client pursuant to proposed NYSE 
Rule 472(k)(1)(iii)(a)(1) and NASD Rule 2711(h)(2)(A)(v)(a).\188\
---------------------------------------------------------------------------

    \187\ Id.
    \188\ Id.
---------------------------------------------------------------------------

    The SOA also mandates rules requiring disclosure of compensation 
received by a research analyst from the subject company.\189\ Current 
SRO rules do not expressly require such disclosure. To the extent that 
receipt of such compensation constitutes an actual, material conflict 
of interest, the SROs believe that disclosure would be required under 
NASD Rule 2711(h)(1)(C) and NYSE Rule 472(k)(1)(iii)(d). The SROs 
proposed amendments specifically require disclosure of any compensation 
received by an analyst from the subject company in the past 12 
months.\190\
---------------------------------------------------------------------------

    \189\ See 15 U.S.C. 78o-6(b)(2).
    \190\ See NYSE Rule 472(k)(2)(ii)(a)(1) and NASD Rule 
2711(h)(2)(A)(i)(b).
---------------------------------------------------------------------------

    The Commission believes that the proposed SRO compensation 
disclosure amendments are appropriate and satisfy the mandates of the 
SOA. Several commenters expressed concern regarding the difficulty of 
tracking non-investment banking compensation, especially that of member 
affiliates.\191\ The Commission believes that the SROs have 
significantly modified the rule amendments from proposal in a manner 
that addresses commenters' concerns regarding the difficulties 
presented by real-time tracking of non-investment banking compensation, 
while meeting the requirements of the SOA. In summary, the Commission 
finds that the SRO rules relating to disclosure by the broker-dealer 
and research analyst in research reports and public appearances of 
broker-dealer, research analyst, and affiliate compensation from 
subject companies satisfy the requirements of Section 15D(b)(2) of the 
Exchange Act \192\ in that they are reasonably designed to require each 
securities analyst to disclose in public appearances, and each 
registered broker or dealer to disclose in each research report whether 
any compensation has been received by the registered broker or dealer, 
or any affiliate thereof, including the analyst, from the issuer that 
is the subject of the appearance or research report, that are known or 
should have been known by the securities analyst or the broker or 
dealer, to exist at the time of the appearance or the date of 
distribution of the report.
---------------------------------------------------------------------------

    \191\ See BOA letter, SIA June 26th letter, and Wilmer June 25th 
letter.
    \192\ 15 U.S.C. 78o-6(b)(2).
---------------------------------------------------------------------------

    The Commission also believes that the proposed provisions regarding 
disclosure of whether the subject company is a client of the broker-
dealer and the services provided satisfy the requirements of the SOA. 
The Commission also finds that the proposals are consistent with the 
Exchange Act, including Sections 6(b)(5), 6(b)(8), 15A(b)(6) and 
15A(b)(9).

J. Registration and Continuing Education Requirements [NYSE 344 and 
345A; NASD 1050 and 1120]

    The proposed amendments would mandate certain registration 
requirements for research analysts who are primarily responsible for 
the preparation of the substance of research reports. The proposals 
would impose both the regulatory element and the firm element of the 
continuing education requirements on research analysts.\193\
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    \193\ See note 15 supra.
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    Commenters expressed several concerns with this proposal. First, 
commenters requested clarification that the registration and 
qualification requirements apply only to research analysts who are 
primarily responsible for the substance of a research report.\194\ 
Second, commenters recommended that research analysts who have a 
certain level of industry experience, or who have already attained a 
commonly used industry qualification, be exempt from the qualification 
examinations.\195\ Commenters also argued that research analysts who 
work for members that are not engaged in investment banking activities 
should be exempt from the proposed requirements.\196\
    In response to these comments, the SROs modified their proposals so 
that the registration and qualification requirements apply only to 
research analysts who are primarily responsible for the preparation of 
the substance of research reports or whose name appears on research 
reports; therefore, junior analysts would not be required to register. 
The SROs are also considering whether there are certain classes of 
research analysts, who otherwise would be required to comply, that 
should be exempted from portions of the qualification 
requirements.\197\ However, because the qualification examination will 
cover, in part, the provisions of NASD Rule 2711 and the research 
analyst provisions of NYSE Rule 472, the NASD has indicated that it is 
unlikely that any current research analysts will be wholly exempt from 
all parts of the qualification examination.\198\ The SROs are also 
considering whether they will accept, as a substitute, other industry 
qualification exams in place of the new research analyst qualification 
exam.\199\
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    \194\ See SIA March 10th letter.
    \195\ See AIMR March 6th letter, Schwab March 20th letter, and 
SIA March 10th letter.
    \196\ See Investorside letter.
    \197\ See NASD Response to Comments and NYSE Amendment No. 3.
    \198\ See NASD Response to Comments.
    \199\ See NASD Response to Comments and NYSE Amendment No. 3.
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    Commenters also noted that the NASD and the NYSE proposals differed 
as to whether the regulatory element component of their continuing 
education requirements applies to research analysts.\200\ After further 
consideration, the SROs have agreed that research analysts should be 
required to complete both the regulatory element and the firm element 
of the continuing education requirements.\201\ The NYSE has modified 
its proposals accordingly.
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    \200\ See SIA March 10th letter.
    \201\ See NASD Response to Comments and NYSE Amendment No. 3.
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    The Commission finds that these proposals are consistent with the 
Exchange Act, particularly Sections 6(b)(5), 6(b)(8), 15A(b)(6) and 
15A(b)(9).

K. Retaliation [NYSE Rule 472(g)(2) and NASD Rule 2711(j)]

    The SOA mandates the establishment of rules that prohibit broker-
dealers engaged in investment banking activities from directly or 
indirectly

[[Page 45889]]

retaliating, or threatening to retaliate, against a research analyst 
who publishes an adverse, negative, or otherwise unfavorable research 
report research report that may adversely affect the broker-dealer's 
present or prospective investment banking relationship.\202\ The SOA 
specifies that the rules may not limit the authority of a broker-dealer 
to discipline an analyst for causes other than such research report in 
accordance with the policies and procedures of the firm. The SROs have 
extended the anti-retaliation provisions to cover public appearances 
and have clarified that the rule would not preclude termination of a 
research analyst for causes unrelated to issuing or distributing 
adverse research or for making an unfavorable public appearance 
regarding a current or potential investment-banking relationship.
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    \202\ See 15 U.S.C. 78o-6(1)(C).
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    Commenters did not oppose this provision. The Commission believes 
that the SRO proposals are designed to protect the objectivity and 
independence of research analysts, and meet the requirements of Section 
15D of the Exchange Act, which requires that a rule be adopted that 
prohibits broker-dealers engaged in investment banking activities from, 
directly or indirectly retaliating or threatening to retaliate, against 
a research analyst who publishes a negative, adverse, or otherwise 
unfavorable research report that may adversely affect the broker-
dealer's present or prospective investment banking relationship with an 
issuer. The Commission further believes that the SROs' determination to 
apply the retaliation provision to cover adverse statements made in 
public appearances is consistent with Sections 6(b)(5), 6(b)(8), 
15A(b)(6) and 15A(b)(9).

L. Small Firm Exemption [NYSE Rule 472(m) and NASD Rule 2711(k)]

    The SROs have proposed an exemption from certain of the 
requirements that legal or compliance personnel must act as 
intermediaries regarding communications for firms that engage in 
limited underwriting activity.\203\ Current NASD Rule 2711(b)(1) and 
(3) and current NYSE Rule 472(b)(1) and (3), the gatekeeper provisions, 
prohibit a research analyst from being subject to the supervision or 
control of any employee of a member's investment banking department, 
and further require legal or compliance personnel to intermediate 
certain communications between the research department and non-research 
personnel.
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    \203\ See NYSE Rule 472(b) and NASD Rule 2711(b).
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    As the Commission noted in the May 2002 approval order when the 
Commission approved these gatekeeper provisions, several commenters 
argued that they would impose significant costs, especially for smaller 
firms that would have to hire additional personnel. Commenters said 
that personnel in smaller firms often perform multiple functions, and 
therefore the separation rules impose a greater burden on these firms. 
These comments raised the prospect that the rules might force some 
firms to curtail their research, potentially reducing research coverage 
for smaller companies and companies of regional or local interest.
    To temporarily address those concerns while the SROs considered 
whether an exemption was appropriate, the effectiveness of the 
gatekeeper provisions was delayed until July 30, 2003, or until a 
superseding permanent exemption is approved 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 services revenues from those transactions 
(``small firms'').\204\ The rules approved today create a permanent 
exemption from the gatekeeper provisions for small firms, and supersede 
the temporary exemption filed by the SROs in May 2003.\205\
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    \204\ 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).
    \205\ See NYSE Rule 472(m) and NASD Rule 2711(k).
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    However, the permanent exemptions for small firms, unlike the 
temporary exemptions, do not apply to NASD Rule 2711(c) and NYSE Rule 
472(b)(4), which restrict communications between the research 
department and the issuer, because the SROs do not believe that it 
would be appropriate to provide for a permanent exception from the 
gatekeeper provisions for the voluntary submission of sections of a 
draft research report to a subject company for the purpose of checking 
the factual accuracy of the draft report.\206\ In addition, for the 
purposes of the small firm exception computations, the SROs have 
determined that ``investment banking services'' shall not include 
municipal securities transactions.\207\
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    \206\ Id.
    \207\ NYSE notes its belief that municipal securities 
underwritings are not subject to the same potential conflicts of 
interest as equity securities. See NYSE Amendment No. 3.
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    The SRO proposals also 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) and NYSE Rule 472(b)(1), (2), and (3).
    The Commission finds that the exceptions for small firms from 
certain of the rules addressing the relationships between research, 
investment banking, and companies that are the subject of research 
reports, are appropriate to address concerns unique to smaller firms 
who may share supervisory personnel across different offices or 
departments. The Commission finds that the proposals are consistent 
with the Exchange Act, particularly Sections 6(b)(5), 6(b)(8), 
15A(b)(6), and 15A(b)(9).

M. Implementation

    Commenters requested that the SROs coordinate the effective dates 
of their proposed changes and ensure that firms have adequate time to 
implement new rules.\208\ In response to comments, the SROs decided 
upon the following implementation schedule for the proposed amendments 
(all time periods run from the date that the Commission approves the 
filings) in order to provide reasonable time periods for members and 
member organizations to develop and implement policies, procedures and 
systems to comply with the new requirements:
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    \208\ See SIA March 10th letter.
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    NYSE suggests the following effective dates for the provisions 
contained in SR-NYSE-2002-49:

    Firm and Affiliate Compensation Disclosure Provisions--(NYSE 
Rules 472(k)(1)(i)d.2. and (k)(1)(iii)a.)--180 days, except upon 
written request to the Exchange for an extension of up to an 
additional 90 days thereafter.
    Analyst and Firm Compensation Disclosure Provisions--(NYSE Rules 
472(k)(1)(ii)a., (k)(1)(iii)a., (k)(2)(i)c.2. and f.)--180 days, 
except upon written request to the Exchange for an extension of up 
to an additional 90 days thereafter.
    Client Disclosure Provisions--(NYSE Rules 472(k)(1)(i)d.1, 
(k)(1)(ii)b.1. and (K)(2)(1)c.1)--180 days, except upon written 
request to the Exchange for an extension of up to an additional 90 
days thereafter.
    Exceptions to Disclosures Required In Rule 472(k)(1) and (2)--
(NYSE Rule 472(k)(3)(1)):
    As applied to disclosures under Rule 472(k)(1)((i)a.,2., and 3.; 
effective immediately.\209\
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    \209\ NYSE notes the disclosures required pursuant to Rule 
472(k)(1) and (2), approved as part of the original amendments have 
been renumbered as part of Amendment No. 3 and remain in effect. See 
NYSE Amendment No. 3.

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[[Page 45890]]

    As applied to disclosures under Rules 472(k)(1)(i)d.1., 
(k)(1)(ii)b.1., and (k)(2)(i)c.--180 days.
    Qualification, Examination, and Registration Requirement for 
Research Analysts (NYSE Rule 344)--365 days after the completion of 
Qualification Examination (180 days after approval to develop and 
implement examination).
    Continuing Education Requirement for Research Analyst--(Exchange 
Rule 345A)--Firm Element--180 days. Regulatory Element--In 
accordance with industry rules and regulations upon registration/
qualification of research analysts.
    Compensation Committee Review/Procedures (NYSE Rule 472(h)(2)--
90 days.
    Anti-Retaliation and Small Firm Exemption Provisions--(NYSE 
Rules 472(g)(2) and 472(m))--effective immediately upon approval.
    All other Rule provisions--60 days.
    NASD suggests the following effective dates for the provisions 
contained in SR-NASD-2002-154:
    Qualification, examination, registration and continuing 
education requirements for research analysts (proposed new Rule 1050 
and proposed amendments to Rule 1120): 180 days or such longer 
period as determined by NASD.
    New compensation and client disclosure provisions (proposed Rule 
2711(h)(2)): 180 days, plus up to an additional 90 days as deemed 
appropriate on a case-by-case basis.
    Rule 2711(h)(2)(C)--Exemption from Disclosure Requirements:
    As applied to disclosures under Rules 2711(h)(2)(A)(ii)(a) and 
(b): Immediate upon SEC approval of the rule change
    As applied to disclosures under Rule 2711(h)(2)(A)(iii)(b), 
(h)(2)(B)(i) and (iii): 180 days
    Research analyst compensation review procedures (proposed Rule 
2711(d)(2)): 90 days.
    Prohibition against retaliation against research analysts 
(proposed Rule 2711(j)): immediately.
    Exceptions for small firms (proposed Rule 2711(k)): immediately.
    All other proposed rule changes: 60 days.
    The Commission believes that the above implementation schedule 
suggested by the SROs is reasonable.

IV. Accelerated Approval of Amendments; Solicitation of Comments

    The Commission find good cause to approve NYSE Amendment No. 3 and 
NASD Amendment No. 3 to the proposed rule changes prior to the 
thirtieth day after the date of publication of notice of filing of the 
amendments in the Federal Register. The original proposed rule changes 
and NASD Amendment No. 1 and Amendment No. 2 and NYSE Amendment No. 1 
and Amendment No. 2 were published in the Federal Register.\210\ The 
Commission believes that NYSE Amendment No. 3 and NASD Amendment No. 3 
clarify the obligations of SRO members under the rules, refine the 
rules and make the NASD and NYSE proposals consistent with each other. 
The amendments do not contain major modifications from the scope and 
purpose of the rules as originally proposed, and were developed from 
the original proposal. Further, the majority of the modifications 
contained in the amendments submitted by the NASD and NYSE were made in 
response to comments received on the proposed rule changes. The 
Commission believes, moreover, that approving NYSE Amendment No. 3 and 
NASD Amendment No. 3 will provide greater clarity, thus furthering the 
public interest and the investor protection goals of the Exchange Act. 
Finally, the Commission also finds that it is in the public interest to 
approve the rules as soon as possible to expedite the implementation of 
the new and amended rules.
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    \210\ See notes 5 and 7 supra.
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    Accordingly, the Commission believes good cause exists, consistent 
with Sections 6(b)(5), 15A(b)(6) and 19(b) of the Exchange Act,\211\ to 
approve NYSE Amendment No. 3 and NASD Amendment No. 3 to the proposed 
rule changes on an accelerated basis.
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    \211\ 15 U.S.C. 78f(b)(5), 78o-3(b)(6), and 78s(b).
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    Interested persons are invited to submit written data, views, and 
arguments concerning NYSE Amendment No. 3 and NASD Amendment No. 3, 
including whether the amendments are consistent with the Exchange Act. 
Persons making written submissions should file six copies thereof with 
the Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW., Washington, DC 20549-0609. Copies of the submission, all 
subsequent amendments, all written statements with respect to the 
proposed amendments that are filed with the Commission, and all written 
communications relating to the amendments 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 at the Commission's Public Reference Room. 
Copies of such filing also will be available for inspection and copying 
at the principal office of the SROs.
    All submissions should refer to File No. SR-NASD-2002-154 and SR-
NYSE-2002-49 and should be submitted by September 3, 2003.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\212\ that the proposed rule changes (SR-NASD-2002-154; 
SR-NYSE-2002-49), as amended, are approved.
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    \212\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\213\
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    \213\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-19730 Filed 8-1-03; 8:45 am]
BILLING CODE 8010-01-P