The NYSE and NASD unveiled new rule proposals covering the way member organizations, their research analysts and investment-banking departments manage and disclose conflicts of interest, and also announced a new committee they have formed at the SEC's behest to extensively review the initial public offering process and recommend ways to address recent problems and strengthen the underwriting process.
Tightening Rules Concerning Research and Investment Banking
The NYSE board of directors today approved additional amendments to Exchange rules that would expand upon the prohibitions and disclosure requirements of the recently enacted rule changes regarding research analysts, and require further restrictions on compensation and trading activities, as well as additional disclosure. The proposed amendments were developed in a collaborative effort among the NYSE, the SEC and NASD, and will be proposed to the SEC by the NYSE and NASD.
Some interpretive issues raised by the industry and preliminary findings from recent investigations by the NYSE, the SEC, and the NASD highlighted the need for certain additional changes to the existing SRO rules.
"In recent months, we have gained experience with the new analyst rules and member firm compliance," said NYSE Chairman and Chief Executive Officer Dick Grasso. "We have found there is a need for further tightening of the rules. These amendments require further separation of analysts from investment-banking activities and are part of our ongoing efforts to restore investor confidence in the integrity of a process that is absolutely critical to the financial markets."
"Alleviating conflict-of-interest issues and other questions relating to the research and IPO processes is essential," Mr. Grasso added. "We look forward to working in partnership with SEC Chairman Harvey L. Pitt, New York State Attorney General Eliot Spitzer and NASD to enhance regulation of these areas."
"NASD is committed to ensuring that investors have access to high-quality research that is unaffected by factors like investment banking relationships," said Robert R. Glauber, Chairman and CEO of NASD. "Today's proposals provide the framework critical to take us one step closer to achieving this goal."
The first two phases of the SRO rules were implemented on July 9 and Sept. 9, 2002. The final phase of the initial amendments comes into effect on Nov. 6, 2002.
Additional amendments to the SRO rules will be required to comply with the Sarbanes-Oxley Act of 2002. Certain disclosure requirements and prohibitions mandated by the Act have already been adopted in the new SRO rules. The NYSE, the SEC and the NASD are analyzing the differences between the Act and the SRO rules to determine the extent of additional amendments to be made.
Summary of Proposed Amendments
Research Analysts: Further separates an analyst's compensation from investment banking influence by requiring a compensation committee review and approval of research analysts' compensation; prohibits the compensation committee from considering a research analyst's contribution to the firm's overall investment banking business; requires the basis for compensation to be documented and certified by an annual attestation to the Exchange; prohibits research analysts from participating in solicitation or "pitch" meetings with prospective investment-banking clients; amends the definition of research analyst to include research directors and supervisory analysts or others who supervise, influence or control the preparation of research reports and establishment or change in ratings or price targets. Also implements new registration category and qualification exam for research analysts, as well as continuing education to address applicable rules and regulations, ethics, and professional responsibility.
Member Organizations: Prohibits issuance of research reports by the manager or co-manager of a securities offering for 15 days prior to and after expiration time of any "lock-up agreement"; requires notification to customers when a member or member organization terminates research coverage of a subject company.
Member Organizations and Research Analysts: Amends the definition of "public appearance" to apply restrictions to research analysts making a recommendation in a newspaper article or similar public medium; extends the 10-day and 40-day quiet periods for research reports of managers and co-managers of initial and secondary offerings to making public appearances.
New Committee to Recommend Changes to IPO Process
At the request of SEC Chairman Harvey L. Pitt, the NYSE and NASD named a group of leading representatives of the private and public sectors. The IPO Advisory Committee will be chaired by Geoffrey Bible, retired chairman and chief executive officer of Philip Morris Companies Inc., and will present its report to NYSE and NASD. The two self-regulatory organizations will then make rule proposals or other recommendations to the SEC.
"The integrity of the process is critical to the investing public as well as to the capital-raising process as a whole. The committee will evaluate existing rules and statutes and recommend any changes needed to strengthen that integrity," said Mr. Pitt. "The Commission and the self-regulatory organizations continue to investigate possible violations of existing rules concerning IPOs. At the same time, the U.S. securities markets will benefit from the committee's broad review of the IPO process."
"The guiding principle that we must reinforce here is that these are, after all, initial public offerings," said NYSE Chairman and Chief Executive Officer Dick Grasso. "If, through the work of this committee, we can better serve the public's interest in the IPO process, we will have enhanced the process and served the interests of all."
"We've assembled a committee of leaders representing all of the interests in the IPO process, from investors to investment bankers, from issuers to venture capitalists," said NASD Chairman and Chief Executive Officer Robert R. Glauber. "The breadth of the committee will ensure that we gain the perspective of diverse market participants on existing practices and the regulatory changes we're contemplating."
Following is a list of confirmed committee members. Additional members may be added.
IPO Advisory Committee Members
- Geoffrey Bible, retired chairman and chief executive officer, Philip Morris Cos. (committee chair)
- John J. Brennan, Chairman and Chief Executive Officer, The Vanguard Group
- Peter A. Brooke, Chairman, Advent International
- Myra R. Drucker, Chief Investment Officer, GM Trust Company
- William R. Hambrecht, Founder, Chairman and Chief Executive Officer, WR Hambrecht + Co
- Martin Lipton, Partner, Wachtell, Lipton, Rosen & Katz
- John D. Markese, President, American Association of Individual Investors
- Robert C. Mendelson, Partner, Morgan Lewis
- Jay R. Ritter, Eminent Scholar, Finance, Insurance & Real Estate, University of Florida
- Lawrence W. Sonsini, Chairman and Chief Executive Officer, Wilson Sonsini Goodrich & Rosati
- Daniel P. Tully, Former Chairman and Chief Executive Officer, Merrill Lynch
