The

Securities and Exchange Commission

unanimously approved new rules aimed at curtailing the conflicts of interest between securities firms' research departments and investment banking divisions that have sparked a series of inquiries into Wall Street's practices.

The new regulations, which among other things prevent analysts from being part of the investment banking "sales team," may lead to some restructuring at firms of all sizes. Securities firms also are expected to incur a variety of costs to comply with the new rules.

Commissioners noted at their meeting in Washington on Wednesday that the roughly eight main rules, some of which go into effect immediately, may pose difficulties for small firms where the chief compliance officer may also be a lead investment banker or chief executive.

SEC officials also said an inquiry that began last month into analysts' practices could lead to further regulations or even possible criminal charges if any evidence of fraud is found.

The SEC asked that the

National Association of Securities Dealers

and the

New York Stock Exchange

, both of which proposed the rule changes in February, come back in a year with a progress report on how the new regulations are working and any recommended changes.

In a statement, SEC Chairman Harvey Pitt said the rules "are an impressive first step toward educating investors of, and protecting them from, potential conflicts analysts face, realigning the motivations of analysts, and preventing and detecting misconduct. We appreciate the hard work of the NASD and NYSE in recognizing the need for major reform, even before recent allegations of misconduct had come to light."

Much Ado About Disclosure

The new rules will require 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.

Nazareth said at the time that 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.

Research analysts will 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 can no longer link analysts' compensation to specific investment transactions. If an analyst's compensation is based on a firm's general investment banking revenue, it will have to be disclosed in research reports.

A firm will 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.

Explaining Things

Another regulation will 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 also have to refrain from sharing yet-to-be published reports with the companies being covered.

Analysts and their families won't be able 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 will 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 will have to tell investors if they own shares in the companies they follow.

Firms also now 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 Tuesday.

Additionally, the new rules 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 will 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.

Flashpoints

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 NASD and the NYSE 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 Tuesday if the rules had any relation to talks between

Merrill Lynch

(MER)

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. (The two sides are

reportedly near a deal that will allow Merrill to avoid any criminal or civil charges.)

Since the findings of the Spitzer investigation were made public, 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.