Securities and Exchange Commission
will meet Wednesday to consider adopting new regulations designed to curtail potential conflicts of interest between securities firms' research departments and investment banking divisions.
The eight proposed rules would require, among other things, more disclosure by firms and analysts regarding stock recommendations and their holdings, limits on analysts' personal trading of stocks they cover, and a crackdown on the practice of tying analysts' compensation to the amount of investment banking business their firm receives.
"These rules are much more burdensome then any internal policies these firms might have," Annette Nazareth, market regulation director of the SEC, said at a press conference Tuesday.
If approved, some of the rules could go into effect immediately, while others would be phased in by the end of the year. Nazareth said the proposed rules would prevent the promise of bonuses from clouding the judgment of research analysts, though the regulations wouldn't prevent a firm from telling its employees to push its investment banking business.
Days of Prohibition
Research analysts would be prohibited from offering favorable research or price targets in order to induce investment-banking business from the companies they cover. The proposals also require a "quiet period" in which firms handling the securities offering are barred from issuing a report on a company within 40 days after an initial public offering, or within 10 days after a secondary offering for an inactively traded company. The SEC's Nazareth told reporters that firms objected to the quiet period proposal.
Firms would no longer be allowed to link analysts' compensation to specific investment transactions. If an analyst's compensation were based on a firm's general investment banking revenue, it would have to be disclosed in research reports.
A firm would also have to disclose in research reports if it had a hand in a public offering of equity securities for the company or if it received any investment banking fees from the company within the past 12 months.
Another proposed regulation would prohibit investment banking departments from supervising research analysts and bar investment banking staff from discussing research reports with analysts prior to the distribution, unless the firm's legal or compliance department monitored the communications. Analysts would also have to refrain from sharing yet-to-be published reports with the companies being covered.
Analysts and their families would be unable to invest in a company's securities prior to its initial public offering if the company is in the business sector that the analyst covers. Analysts would also be subject to "blackout periods" prohibiting them from trading securities of any company they cover for 30 days before and five days after they issue a research report on the company. Analysts would have to tell investors if they own shares in the companies they follow.
Firms would also have to disclose if they own 1% or more of a company's equity securities as of the previous month's end, a topic that was a sticking point for many firms, Nazareth said.
Additionally, the proposed rules would require firms to clearly explain their ratings and terminology, and reveal what percentage of all ratings they have assigned to buy, hold or sell categories and the percentage of investment banking clients in each category.
Finally, analysts making public appearances on television or radio would have to disclose whether they or their firm have any stock positions or investment banking business in the companies they are discussing.
Penalties for breaking the rules are the same for violating other SEC regulations and can include fines and censoring.
Look Back in Anger
With investors angry over the conflicts that may have arisen when research analysts publicly recommended stocks for which their firms also garnered investment banking fees, in February the
National Association of Securities Dealers
New York Stock Exchange
each proposed new rules governing analysts.
The public comment period on the rules ended April 18, during which time the SEC received more than 45 comment letters.
SEC officials refused to say if the proposed rules had any relation to talks between
and the New York state attorney general over conflicts of interest between analysts' stock recommendations and the firm's investment banking business. Merrill recently proposed its own new disclosure policies after New York Attorney General Eliot Spitzer produced evidence that analysts in the firm's Internet research group were privately disparaging certain companies while publicly telling investors to buy the stocks.
Since then, Merrill has been at the center of a widening probe of Wall Street's biggest and best-known investment banks. In addition to the New York attorney general and the SEC, other government agencies have been looking into possible conflicts of interest between investment banks' research departments and their underwriting divisions.