06.15.2005

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Updates

The SEC recently approved new rules adopted by the New York Stock Exchange and National Association of Securities Dealers to limit conflicts of interest between the selling and research arms of investment banks. Under these rules, research analysts at investment banks may not

    • participate in road show meetings relating to an investment banking services transaction or

       

    • communicate with current or prospective customers while investment banking personnel or company management is present.

In addition, investment bankers may not direct research analysts to participate in sales and marketing efforts for investment banking services transactions.

While the ten largest investment banks have been subject to similar limitations since 2003 as part of a global settlement with the NASD, NYSE, SEC and state officials, starting in June 2005 these new rules apply to all investment banks.

This Update highlights the key changes imposed on investment banking transactions by the new rules and offers practical guidance.

New Rules Designed to Maintain Objectivity and Independence of Research Generated by Investment Banks

The NYSE and NASD adopted the new rules to maintain the objectivity and independence of research generated by investment banks. By removing analysts from the sales side of an investment banking services transaction and direct sales and marketing efforts of the investment bank, these rules seek to

    • alleviate the pressure analysts might feel to issue favorable research reports in order to market or sell the investment bank's services and

       

    • enhance the perceived integrity of research data.

Research Analysts May Still Communicate with Investors During Investment Banking Transactions. Acknowledging that research analysts serve an important function as providers of independent information to investors, the NYSE and NASD rules allow analysts to continue to educate investors about investment banking transactions, as long as the communication is fair, balanced and not misleading. This requirement also extends to written and oral interactions between analysts and the investment banking personnel from their own firm when the communication relates to an investment banking transaction.

Practical Tip

New Rules Also Affect Investment Banking Transactions from the Company's Perspective. While the new rules do not create any new duties for companies or impose any new penalties on companies for noncompliance, companies should be more cognizant of the context and situation in which they communicate with research analysts during transactions involving investment banks.

    • Research analysts will not be able to attend road show meetings, or discuss any information relating to the company's transaction with a potential investor while company personnel are present, during road shows or otherwise.
    • All communications between research analysts and companies must be conducted outside the presence of investors and investment bankers.

Additional Information

You can find the full text of the SEC's order implementing these rules at: http://www.sec.gov/rules/sro/nyse/34-51593.pdf. You can find the full text of the NYSE rule at: http://rules.nyse.com/NYSETools/ExchangeViewer.asp?selectednode=chp%5F1%5F6%5F1%5F2&manual=%2Fnyse%2Fnyse%5Frules%2Fnyse%2Drules%2F You can find the full text of the NASD rule at: http://nasd.complinet.com/nasd/display/display.html?rbid=1189&element_id=1159000532. 

 

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