[Federal Register: May 22, 2003 (Volume 68, Number 99)]
[Notices]
[Page 28039-28041]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22my03-116]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47876; File Nos. SR-NASD-2003-79; SR-NYSE-2003-17]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Changes by the National Association of
Securities Dealers, Inc. and the New York Stock Exchange, Inc. Relating
to Establishing Effective Dates for Certain Provisions of NASD Rule
2711, Research Analysts and Research Reports, and NYSE Rule 472,
Communications with the Public
May 15, 2003.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on May 6, 2003, the National Association of Securities Dealers, Inc.
(``NASD''), and on May 9, 2003, the New York Stock Exchange, Inc.
(``NYSE'' or ``Exchange''), filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') the proposed rule changes as
described in Items I, II, and III below, which Items have been prepared
by the respective self-regulatory organizations (``SROs''). The SROs
have designated the proposed rule changes as constituting stated
policies, practices, or interpretations with respect to the meaning,
administration, or enforcement of an existing rule series under
paragraph (f)(1) of Rule 19b-4 under the Act,\3\ which render the
proposals effective upon filing with the Commission. The Commission is
publishing this notice to solicit comments on the proposed rule changes
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 17 CFR 240.19b-4(f)(1).
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I. Self-Regulatory Organizations' Statements of the Terms of Substance
of the Proposed Rule Changes
A. NASD
NASD is filing with the SEC a proposed rule change to establish
July 30, 2003, or until a superseding permanent exemption is approved
by the SEC and becomes effective, as the effective date for NASD Rules
2711(b) and (c) for members that over the previous three years, on
average, have participated in 10 or fewer investment banking
transactions as manager or co-manager and generated $5 million or less
in gross investment banking revenues from those transactions. NASD
Rules 2711(b) and (c), when effective, prohibit a research analyst from
being subject to the supervision or control of any employee of a
member's investment banking department, and will further require legal
or compliance personnel to intermediate certain communications between
the research department and either the investment banking department or
the company that is the subject of a research report or recommendation
(``subject company'').
B. NYSE
The NYSE is filing with the SEC a proposed rule change that would
establish July 30, 2003, or until such date as a permanent exemption is
approved by the SEC and becomes effective, as the effective date for
certain provisions of Rule 472 (``Communications with the Public'') for
certain members and member organizations.
II. Self-Regulatory Organizations' Statements of the Purpose of, and
Statutory Basis for, the Proposed Rule Changes
In their original rule filings with the Commission, the SROs
included statements concerning the purpose of, and basis for, the
proposed rule changes and discussed any comments they received on the
proposed rule changes. The text of these statements may be examined at
the places specified in Item IV below. The SROs have prepared
summaries, set forth in sections A, B, and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organizations' Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Changes
1. NASD's Purpose
NASD is filing the proposed rule change to establish July 30, 2003,
or until the date a superseding permanent exemption is approved by the
SEC and becomes effective, as the effective date for NASD Rules 2711(b)
and (c) for members that over the previous three years, on average per
year, have participated in 10 or fewer investment banking transactions
as manager or co-manager and generated $5 million or less in gross
investment banking revenues from those transactions. Pursuant to the
SEC's approval of SR-NASD-2002-87 \4\ and SR-NASD-2002-161 \5\, NASD
Rules 2711(b) and (c), as applied to this class of members, otherwise
would have gone into effect on May 5, 2003. NASD seeks to delay
implementation of these provisions for these members while it finalizes
a proposal to create a permanent exemption for firms that engage in
limited underwriting activity. The purpose of the delayed
implementation--and ultimately a permanent exemption--is to preserve
the role of certain smaller firms that often are the sole or primary
source of underwriting and research coverage for some smaller or
regional companies.
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\4\ See Securities Exchange Act Release No. 46165 (July 3,
2002), 67 FR 46555 (July 15, 2002).
\5\ See Securities Exchange Act Release No. 46949 (December 4,
2002), 67 FR 76202 (December 11, 2002).
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On May 10, 2002, the Commission approved new NASD Rule 2711, which
governs conflicts of interest when research analysts recommend equity
securities in research reports and during public appearances.\6\ The
Commission approved a staggered implementation period for the rule.
Most provisions of the rule became effective on July 9, 2002, including
those that restrict supervision and control of research analysts by the
investment banking department. The ``gatekeeper'' provisions, described
below, became effective September 9, 2002. The remaining provisions of
the Rule became effective on November 6, 2002.
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\6\ See Securities Exchange Act Release No. 45908 (May 10,
2002), 67 FR 34968 (May 16, 2002) (``May 10th order'').
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NASD Rule 2711(b) contains provisions that generally restrict the
relationship between the research and investment banking departments,
including ``gatekeeper'' provisions that require a legal or compliance
person to intermediate certain communications between the research and
investment banking departments. NASD Rule 2711(b)(1) prohibits a
research analyst from being under the control or supervision of any
employee of the investment banking department. NASD Rule 2711(b)(2)
prohibits employees in the investment banking department from reviewing
or approving any research report prior to publication. NASD Rule
2711(b)(3) creates an exception to (b)(2) to allow investment banking
personnel to review a research report prior to publication to verify
the factual information contained therein and to screen for potential
conflicts of interest. Any permissible written communications must be
made through an authorized legal or compliance official or copied to
such official. Oral communications must be made through, or in the
presence of, an authorized legal or compliance official and must be
documented.
Similarly, NASD Rule 2711(c) restricts communications between a
member and the subject company of a research report, except that a
member
[[Page 28040]]
may submit sections of the research report to the company to verify
factual accuracy and may notify the subject company of a ratings change
after the ``close of trading'' on the business day preceding the
announcement of the ratings change. Submissions to the subject company
may not include the research summary, the rating or the price target,
and a complete draft of the report must be provided beforehand to legal
or compliance personnel. Finally, any change to a rating or price
target after review by the subject company must first receive written
authorization from legal or compliance.
As the Commission noted in the May 10th order, several commenters
argued that the gatekeeper provisions would impose significant costs,
especially for smaller firms that would have to hire additional
personnel. Commenters also noted that personnel often wear multiple
hats in smaller firms, thereby causing a greater burden to comply with
the restriction on supervision and control by investment banking
personnel over research analysts. NASD received similar comments in
response to Notice to Members 02-44, which sought comment on whether
certain members should be exempted from certain provisions of the Rule
and what criteria should be employed to fashion such an exemption.
NASD received 10 comments in response to the Notice to Members.\7\
Generally, the comments emphasized the financial and administrative
burdens imposed by NASD Rule 2711 to implement the gatekeeper
provisions and to structure firms so that research personnel are not
subject to supervision by investment banking personnel. Commenters
argued that the conflicts addressed by NASD Rule 2711 are less
pronounced with respect to smaller firms and that the burdens of
compliance could force firms to discontinue their research business.
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\7\ Letter from David Amster, CRT Capital Group, dated August
19, 2002; Letter from Peter V.B. Unger, Fulbright & Jaworski, LLP,
dated August 30, 2002; Letter from First Analysis Securities Corp.,
dated August 30, 2002; Letter from Scott Cleland and John Eade,
Investorside Research Association, dated August 29, 2002; Letter
from W. Gray Medlin, The Carson Medlin Co., dated August 29, 2002;
Letter from Cathryn Streeter, BioScience Securities, Inc., dated
August 28, 2002; E-mail from James Nelson, Minnesota Valley
Investments, dated July 31, 2002; E-mail from Joe B. Kercheville,
Kercheville & Company, dated August 28, 2002; E-mail from Ray Chin,
DBS Vickers Securities (USA) Inc., dated July 29, 2002; Letter from
Stuart J. Kaswell, Securities Industry Association, dated August 30,
2002.
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In response to the comments, NASD has been developing a proposed
permanent exemption to preserve the role of smaller firms in the
capital raising process and to ensure research coverage for smaller or
regional companies.
NASD believes that compliance with both NASD Rules 2711(b) and (c)
continues to pose financial and administrative challenges for certain
smaller firms. As such, NASD believes it appropriate to extend the
effective date of those provisions for members that over the previous
three years, on average per year, have participated in 10 or fewer
investment banking transactions as manager or co-manager and generated
$5 million or less in gross investment banking revenues from those
transactions. NASD proposes to delay the effective date of NASD Rules
2711(b) and (c) until July 30, 2003, or until the date a superseding
permanent exemption is approved by the SEC and becomes effective.
As a further condition for the delayed implementation date, those
firms that meet the eligibility requirements outlined above would be
required to maintain records of communications that would otherwise be
subject to the gatekeeper provisions of NASD Rules 2711(b) and (c).
2. NASD's Statutory Basis
NASD believes that the proposed rule change is consistent with the
provisions of section 15A(b)(6) of the Act,\8\ which requires, among
other things, that NASD's rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. NASD believes that this proposed rule change would
reduce or expose conflicts of interest and thereby significantly
curtail the potential for fraudulent and manipulative acts. NASD
further believes that the proposed rule change will provide investors
with better and more reliable information with which to make investment
decisions.
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\8\ 15 U.S.C. 78o-3(b)(6).
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3. NYSE's Purpose
The Exchange is filing the proposed rule change to establish July
30, 2003, or until such date as a permanent exemption is approved by
the SEC and becomes effective, as the effective date for NYSE Rule
472(b)(1), (2) and (3), subject to certain conditions, for members and
member organizations that over the previous three years, on average per
year, have participated in ten or fewer investment banking services
transactions as manager or co-manager and generated $5 million or less
in gross investment banking revenues from those transactions
(hereinafter referred to as ``small firms'').
In the May 10th order, the Commission approved amendments to NYSE
Rules 351 (``Reporting Requirements'') and 472, which place
prohibitions and/or restrictions on Investment Banking Department,
Research Department, and Subject Company relationships and
communications and impose new disclosure requirements on members and
member organizations and their associated persons. At the same time,
the Commission also approved a staggered implementation period for the
rules. Most provisions of the rules became effective on July 9, 2002,
including those that restrict supervision and control of associated
persons by the investment banking department and those that require
disclosure of investment banking compensation received from a subject
company. The ``gatekeeper'' provisions, described below, became
effective on September 9, 2002.
On July 9, 2002, the Exchange filed, for immediate effectiveness,
SR-NYSE-2002-23\9\ that extended the effective date to November 6, 2002
for NYSE Rule 472(b)(1), (2) and (3) (``gatekeeper'' provisions) for
small firms.
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\9\ See Securities Exchange Act Release No. 46182 (July 11,
2002), 67 FR 47013 (July 17, 2002).
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On November 7, 2002, the Exchange filed, for immediate
effectiveness, SR-NYSE-2002-60,\10\ which extended the delayed
effective date of the gatekeeper provisions for small firms until May
5, 2003.
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\10\ See note 5 supra.
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Small Firm Relief
NYSE Rule 472 contains provisions that generally restrict the
relationship between the research and investment banking departments,
including ``gatekeeper'' provisions that require a legal or compliance
person to intermediate certain communications between the research and
investment banking departments. NYSE Rule 472(b)(1) prohibits an
associated person (also referred to throughout this filing as a
``research analyst'') from being under the control or supervision of
any employee of the investment banking department.
NYSE Rule 472(b)(1) also prohibits the investment banking
department from reviewing or approving any research reports prior to
distribution. NYSE Rule 472(b)(2) creates an exception to the
prohibition of (b)(1) to allow investment banking personnel to review a
research report prior to
[[Page 28041]]
publication to verify the accuracy of information contained therein and
to review for any potential conflicts of interest. Any permissible
written communications must be made through legal or compliance or
copied to legal or compliance. Oral communications must be made
through, or in the presence of, legal or compliance personnel and must
be documented.
Similarly, NYSE Rule 472(b)(3) restricts communications between a
member or member organization and the subject company of a research
report, except that a member or member organization may submit sections
of the research report to the subject company to verify factual
accuracy and may notify the subject company of a ratings change after
the ``close of trading'' on the business day preceding the announcement
of the ratings change. Submissions to the subject company may not
include the research summary, the rating or the price target, and a
complete draft of the research report must be provided beforehand to
legal or compliance personnel. Finally, any change to a rating or price
target after review by the subject company must first receive written
authorization from legal or compliance.
As the Commission noted in the May 10th order, several commenters
argued that the ``gatekeeper'' provisions would impose significant
costs, especially for smaller firms that may have to hire additional
personnel to comply with the requirements. Commenters also noted that
personnel often wear multiple hats in smaller firms, thereby causing a
greater burden to comply with the restriction on supervision and
control by investment banking personnel over research analysts. These
comments raised the prospect that the Rules might force some firms out
of the investment banking or research business and/or reduce important
sources of capital and research coverage for smaller companies.
Accordingly, the Exchange is proposing to delay implementation of
NYSE Rules 472(b)(1), (2), and (3) until July 30, 2003, or until a
permanent exemption is approved by the SEC and becomes effective, for
small firms. Those members or member organizations that meet the
eligibility requirements outlined above for the delayed implementation
date would also be required to maintain records of communications that
would otherwise be subject to the gatekeeper provisions of NYSE Rule
472(b).
4. NYSE's Statutory Basis
The statutory basis for the proposed rule change is section 6(b)(5)
of the Exchange Act \11\ which requires, among other things, that the
rules of the Exchange be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade and in general to protect investors and the public
interest.
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\11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organizations' Statements on Burden on Competition
The SROs do not believe that the proposed rule changes will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended.
C. Self-Regulatory Organizations' Statements on Comments on the
Proposed Rule Changes Received From Members, Participants, or Others
The NASD and NYSE have not solicited or received written comments
on the proposed rule changes.
III. Date of Effectiveness of the Proposed Rule Changes and Timing for
Commission Action
The proposed rule changes have been filed by the SROs as stated
policies, practices, or interpretations with respect to the meaning,
administration, or enforcement of an existing rule series under Rule
19b-4(f)(1) under the Act.\12\ Consequently, they have become effective
pursuant to section 19(b)(3)(A) of the Act \13\ and Rule 19b-4(f)(1)
thereunder.\14\
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\12\ 17 CFR 240.19b-4(f)(1).
\13\ 15 U.S.C. 78s(b)(3)(A).
\14\ 17 CFR 240.19b-4(f)(1).
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At any time within 60 days of the filing of such proposed rule
changes, the Commission may summarily abrogate such rule changes if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing including whether the proposed rule
changes are consistent with the 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 submissions, all subsequent amendments, all written
statements with respect to the proposed rule changes that are filed
with the Commission, and all written communications relating to the
proposed rule changes between the Commission and any person, other than
those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room. Copies of such
filings will also be available for inspection and copying at the
principal offices of the SROs. All submissions should refer to the file
numbers SR-NASD-2003-79 and SR-NYSE-2003-17 and should be submitted by
June 12, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-12873 Filed 5-21-03; 8:45 am]
BILLING CODE 8010-01-P