[Federal Register Volume 67, Number 153 (Thursday, August 8, 2002)]
[Proposed Rules]
[Pages 51510-51516]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-20031]
[[Page 51510]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 242
[Release Nos. 33-8119; 34-46301; File No. S7-30-02]
RIN 3235-AI60
Regulation Analyst Certification
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Commission is seeking public comment on proposed
Regulation Analyst Certification. The proposed regulation would require
that any research report disseminated by broker or dealer include
certifications by the research analyst that the views expressed in the
research report accurately reflect the analyst's personal views, and
whether the analyst received compensation or other payments in
connection with his or her specific recommendations or views. A
research analyst would also be required to provide certifications and
disclosures in connection with public appearances. Although research
analysts are often viewed by investors as experts and as important
sources of information about the securities and companies they cover,
many factors can create pressure on their independence and objectivity.
By requiring these certifications and disclosures, the proposed
regulation should promote the integrity of research reports and
investor confidence in the recommendations contained in those reports.
DATES: Comments must be received on or before September 23, 2002.
ADDRESSES: To help us process and review your comments more
efficiently, comments should be sent by one method only.
Persons wishing to submit written comments should send three copies
to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450
Fifth Street, NW., Washington, DC 20549-0609. Comments also may be
submitted electronically at the following E-mail address: [email protected]. All comment letters should refer to File No. S7-30-
02. Comments submitted by E-mail should include this file number in the
subject line. Comment letters received will be available for public
inspection and copying in the Commission's Public Reference Room, 450
Fifth Street, NW., Washington, DC 20549. Electronically submitted
comment letters will be posted on the Commission's Internet Web site
(http://www.sec.gov). The Commission does not edit personal,
identifying information, such as names or e-mail addresses, from
electronic submissions. Submit only the information you wish to make
publicly available.
FOR FURTHER INFORMATION CONTACT: James Brigagliano, Thomas Eidt, or
Racquel Russell in the Office of Risk Management and Control, Division
of Market Regulation, at (202) 942-0772.
SUPPLEMENTARY INFORMATION: We are proposing new Regulation Analyst
Certification (``Regulation AC'') \1\ under the Securities Act of 1933
(``Securities Act'') and the Securities Exchange Act of 1934
(``Exchange Act'').
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\1\ 17 CFR 242.500 through 502.
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I. Introduction
Research analysts study publicly-traded companies and make
recommendations about the securities of those companies, often through
the issuance of research reports. Analysts typically work for full-
service broker-dealers \2\ and, as such, are ``persons associated with
a broker or dealer.'' \3\ The Commission has stated that analysts, who
``ferret out and analyze information,'' play an important role in the
securities markets.\4\
Research analysts at full-service brokerage firms, so called sell-
side analysts, are often viewed by investors as experts and as
important sources of information about the securities and the companies
they cover.\5\ At the same time, however, many factors can create
pressure on an analyst's independence and objectivity. Among other
things, investment banking relationships and certain compensation
arrangements may adversely affect analyst objectivity and, as a result,
the integrity of the views expressed in research reports and public
appearances.
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\2\ Full-service broker-dealers provide a wide range of services
to clients, including investment banking, financial planning, and
other financial services.
\3\ See Exchange Act Section 3(a)(18).
\4\ Dirks v. SEC, 463 U.S. 646, 658 (1983). See also Securities
Act Release No. 7606A (November 13, 1998), 63 FR 67174 (December 4,
1998).
\5\ Sell-side analysts typically work for full-service broker-
dealers that sell securities to the public and make recommendations
on the securities they cover. Many of the more popular sell-side
analysts work for prominent brokerage firms that also provide
investment banking services for corporate clients--including
companies whose securities the analysts cover.
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Proposed Regulation AC seeks to address these concerns by requiring
broker-dealers issuing research reports to include clear and prominent
certifications by the research analysts that the research report
accurately reflects the analyst's personal views about the subject
securities and issuers and whether the analyst received compensation
for views or specific recommendations in the research report. The
proposed regulation would also require the analyst to make quarterly
certifications that the views expressed by the analyst in public
appearances accurately reflected the analyst's personal views and
whether or not he or she received any related compensation for his or
her views or recommendations. In so doing, the proposed regulation
should promote the integrity of research reports and investor
confidence in the research analyst's recommendations contained in those
reports.
II. Proposed Rule
A. Reasons for Proposal
During 1999, the Commission and Congress began to examine research
analysts' conflicts of interest in greater depth. The Commission was
particularly concerned that many investors who rely on analysts'
recommendations may not know, among other things, that favorable
research could be used as a component of the marketing of investment
banking services provided by the analyst's firm, and that analyst
compensation may be based significantly on generating investment
banking business.
Beginning in the summer of 1999, Commission staff began a review of
industry practices regarding disclosure of research analyst conflicts
of interest. Commission staff conducted on-site examinations of full-
service broker-dealers that focused on analysts' financial interests in
companies they cover, reporting structures (in particular whether
analysts report to investment banking personnel) and analyst
compensation arrangements. In June and July 2001, the Subcommittee on
Capital Markets, Insurance and Government Sponsored Enterprises of the
House of Representatives' Committee on Financial Services held hearings
on research analyst conflict of interest issues.\6\ In addition, also
in July 2001, the staff of the Commission's Office of Investor
Education and Assistance issued an Investor Alert highlighting the
numerous biases that may affect analyst recommendations.\7\ The Senate
Committee on Governmental Affairs held a hearing on analysts on
February 27, 2002.\8\
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\6\ Analyzing the Analysts: Hearings Before the Subcomm. on
Capital Markets Insurance and Government Sponsored Enterprises of
the House Comm. on Financial Services (June 14 and July 31, 2001).
\7\ See www.sec.gov/investor/pubs/analysts.htm.
\8\ The Watchdogs Didn't Bark: Enron and the Wall Street
Analysts: Hearing Before the Senate Comm. on Governmental Affairs
(February 27, 2002).
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[[Page 51511]]
On April 25, 2002, the Commission announced the commencement of a
formal inquiry into market practices concerning research analysts and
the personal conflicts that can arise from the relationship between
research and investment banking.\9\ Further, on May 10, 2002, the
Commission approved rule changes proposed by the National Association
of Securities Dealers (``NASD'') and the New York Stock Exchange
(``NYSE'') relating to research analyst conflicts of interest.\10\ The
NASD and NYSE filed these rule changes with the Commission in February
2002. New NASD Rule 2711 and amended NYSE Rule 472 established
standards governing member broker-dealer communications with the public
to address research analyst conflicts of interest. Specifically, the
rules contain, among other things:
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\9\ See www.sec.gov/news/press/2002-56.htm.
\10\ See Securities Exchange Act Release No. 45908 (May 10,
2002), 67 FR 34968 (May 16, 2002).
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A prohibition on tying analyst compensation to specific
investment banking transactions;
A prohibition on offering favorable research to induce
firm business;
Restrictions on personal trading by analysts in securities
of companies followed by the analyst; and
Requirements mandating increased disclosures of conflicts
of interest in research reports and public appearances, such as
business relationships with, compensation from, or ownership interests
in the company that is the subject of the research report.
New NASD Rule 2711 and amended NYSE Rule 472 also require that
members attest annually that the member has adopted and implemented
written supervisory procedures reasonably designed to ensure that
employees comply with the provisions of the rule. These SRO rules close
regulatory gaps and take a significant step toward restoring investor
confidence in the role of sell-side research in the capital markets.
However, it is possible that the Commission's formal inquiry may
indicate the need for further SRO rule changes or additional Commission
action. Moreover, the Commission has requested that the NASD and NYSE
report within a year of implementing these rules on their operation and
effectiveness, and whether they recommend any changes or additions to
the rules.
Proposed Regulation AC is part of an ongoing process by the
Commission to address conflicts of interest affecting the production
and dissemination of research by securities firms, and to provide
increased disclosure to investors. The Commission encourages brokers,
dealers, and persons associated with brokers and dealers, to consider
voluntarily implementing the types of disclosures that proposed
Regulation AC, if adopted, would require. The Commission will continue
its efforts to determine whether any additional action may be necessary
to improve the integrity of research and to restore investor
confidence.\11\
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\11\ We note that the recently-enacted Sarbanes-Oxley Act of
2002 directs the Commission to conduct rulemaking, itself or through
the SROs, to address a broad range of issues stemming from analysts
conflicts. See Sarbanes-Oxley Act of 2002, Public Law 107-204. The
Commission voted to propose Regulation AC on July 24, 2002, before
the passage of the Act. The Commission will, of course, abide by the
directives of the Act as it continues to address analyst conflicts
of interest issues, including with respect to the possible adoption
of Regulation AC.
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B. Description of Proposal
We propose new Regulation AC to further address conflicts of
interest faced by research analysts and their firms. The proposed
regulation would require certification by ``research analysts'' that
the views they express in ``research reports'' and ``public
appearances'' accurately reflect their personal views about the subject
securities and issuers. Analysts would also have to disclose whether
they received compensation for their specific recommendations or views.
The proposed regulation defines ``research report'' as ``a written
communication that includes an analysis of securities of an issuer or
issuers, provides information reasonably sufficient upon which to base
an investment decision and includes a recommendation.'' Proposed
Regulation AC requires certain certifications and disclosures regarding
a ``public appearance,'' which is defined as ``any participation in a
seminar, forum (including an interactive electronic forum), radio or
television interview, or other public speaking activity in which a
research analyst makes a specific recommendation or offers an opinion
concerning a security or an issuer.'' ``Research analyst'' is defined
as ``any natural person who is principally responsible for the analysis
of any security or issuer included in a research report.''
Proposed Regulation AC would require that broker-dealers and
persons associated with broker-dealers include in their research
reports:
A statement by the research analyst certifying that the
views expressed in the research report accurately reflect such research
analyst's personal views about the subject securities and issuers;
A statement by the research analyst certifying that no
part of his or her compensation \12\ was, is, or will be directly or
indirectly related to the specific recommendation or views contained in
the research report; or
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\12\ The Commission notes that the term ``compensation,'' for
the purposes of Regulation AC, would also include payments received
from sources other than the research analyst's employer, including
issuers, underwriters, dealers, and other related persons.
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A statement by the research analyst certifying that part
or all of his or her compensation was, is, or will be directly or
indirectly related to the specific recommendation or views contained in
the research report. If the analyst did receive such related
compensation, the statement must include the source and amount of such
compensation, and the purpose of the compensation, and further disclose
that such compensation may influence the recommendation in the research
report;
All certifications must be clear and prominent.\13\
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\13\ The Commission would expect that the required
certifications be included on the front page of the research report,
or that the front page would specify the page or pages on which each
certification is found.
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Additionally, under proposed Regulation AC, broker-dealers must
make a record related to public appearances by research analysts.\14\
Specifically, a broker-dealer who publishes, circulates, or provides,
directly or indirectly, a research report by a research analyst, would
be required to make a record within thirty days after each calendar
quarter in which the research analyst made the public appearance, that
includes:
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\14\ If an associated person of a broker-dealer publishes a
research report, the broker-dealer would be required to make and
keep the mandated records.
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A written statement by the research analyst certifying
that the views expressed in each public appearance accurately reflected
such research analyst's personal views about the subject securities and
issuers; and
A written statement by the research analyst certifying
that no part of such research analyst's compensation was, is, or will
be directly or indirectly related to any specific recommendations or
views expressed in any public appearance.
In cases where the analyst is unable to make the certifications in
connection with public appearances as described above, the broker-
dealer must make, keep, and maintain a record of a statement from the
research analyst that he or she is unable to provide the written
certifications specified in Rule 502 (a)(1) of proposed Regulation AC
[[Page 51512]]
and the reasons therefor. The broker-dealer must also disclose in all
research reports for the next 120 days that the research analyst did
not comply with the certification requirements specified in Rule 502
(a)(1) of proposed Regulation AC and the reasons therefor. It should be
noted that the 120 day disclosure period prescribed in paragraph (a)(2)
of proposed Rule 502, which is longer than a calendar quarter, runs
from the time the analyst notifies the broker-dealer employer that he
or she is unable to provide the written certifications specified in
paragraph (a)(1). The broker-dealer must also promptly provide copies
of statements that the analyst is unable to provide the certifications
in connection with public appearances to its examining authority,
designated pursuant to section 17(d) of the Exchange Act and Rule 17d-2
thereunder. Further, broker-dealers must keep and maintain these
records pursuant to Rule 17a-4(b)(4).
Proposed Regulation AC is intended to complement other rules
governing conflicts of interest disclosure by research analysts,
including NYSE Rule 472 and NASD Rule 2711. We note that SRO rules
currently address an analyst who writes a research report that does not
reflect his or her personal views, even if the analyst states that the
report does not reflect his or her views. Thus, we do not see a need to
allow for a negative certification concerning an analyst's personal
views. Should Regulation AC also provide an analyst a negative
certification option that the views expressed in the research report do
not accurately reflect his or her personal views? Similarly, given that
SRO rules currently prohibit an analyst from receiving compensation for
a specific investment banking transaction, is it necessary or desirable
for Regulation AC to permit an analyst to disclose the receipt of
compensation for a specific recommendation?
The scope of proposed Regulation AC is broader than the scope of
the current SRO rules in that the proposed regulation covers debt as
well as equity securities. We believe that some of the same concerns
regarding analyst conflicts also pertain to debt securities. Thus, we
propose to coverer debt securities in the regulation. In addition, we
understand that the SROs are considering expanding the coverage of
their rules regarding analyst research reports to cover debt
securities.
Proposed Regulation AC focuses on core issues of analysts'
integrity: their beliefs in their recommendations and the influence of
compensation on their recommendations. It is important for an investor
to know whether an analyst potentially is biased with respect to
securities or issuers that are the subject of a research report.
Further, in evaluating a research report, it is reasonable for an
investor to want to know about an analyst's compensation. We believe
that proposed Regulation AC is reasonably designed to prevent acts and
practices that are fraudulent, deceptive, or manipulative. The proposed
regulation does not preclude an analyst from providing services to his
or her firm's investment banking department within the requirements of
governing SRO rules, and it does not prohibit analysts generally from
receiving compensation for covering issuers or for preparing research
reports. Rather, proposed Regulation AC focuses on disclosure where the
analyst is compensated for making a specific recommendation or rating.
The Commission also notes that the proposed regulation is intended to
address analysts' beliefs about their expressed views and
recommendations, not the accuracy of the recommendations or opinions
regarding securities discussed. Proposed Regulation AC also does not
impose new liability. Even without proposed Regulation AC, analysts may
be found to have violated the anti-fraud provisions of the federal
securities laws if they make baseless recommendations or
recommendations that they disbelieve.\15\ Regulation AC is not intended
to create duties under section 10(b) of the Exchange Act. As a result,
no private liability will arise from a broker, dealer, or associated
person's failure to make the required disclosure, or make, keep, and
maintain required records.
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\15\ Regulation AC does not alter or effect any other existing
obligation under the federal securities laws for research analysts
or broker-dealers.
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III. General Request for Comment
We encourage any interested person to submit written comments on
all aspects of the proposed regulation. In particular, we request
comment on:
Would the proposed certification and disclosure
requirements, if adopted, promote investor confidence in the views
expressed by research analysts and provide investors with useful
information with which to evaluate potential biases?
Would the required disclosures and certifications reduce
public appearances by analysts and the amount of useful information
available to investors?
Should the proposed definitions of ``research report,''
``research analyst,'' or ``public appearance'' be broader or narrower
than proposed?\16\
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\16\ For example, we note the term research analyst would not
include an investment adviser, such as a mutual fund portfolio
manager, who is not principally responsible for preparing research
reports, even if the investment adviser is a registered person of a
member. See Joint Memorandum of the NASD and the New York Stock
Exchange. Discussion and Interpretation of Rules Governing Research
Analysts and Research Reports (NASD Rule 2711 and NYSE Rules 351 and
472) at 3.
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Should the proposed definition of ``research report'' be
limited to cover only equity securities?
What disclosures, if any, should be required during public
appearances? We also request comment on whether the proposed
requirements relating to public appearances should also apply to
research analyst's recommendations in the print media.
Broker-dealers often choose to publish research reports
that cover multiple issuers, securities, or an industry segment, in a
compendium report. Certain portions of the NASD and NYSE rules permit
different treatment of these compendium reports. Should the regulation
make allowances for compendium research reports covering six or more
securities? For example, should a broker-dealer be permitted to publish
the required disclosures for such a compendium in a place other than
the research report?
If a research analyst is unable to provide the
certifications relating to public appearances in Rule 502(a)(1) and
instead provides the certifications in Rule 502(a)(2), the broker-
dealer is required to disclose that fact in all research reports for
120 days after the analyst has provided his or her certification under
Rule 502(a)(2). Is 120 days the appropriate amount of time the broker-
dealer should be required to make such disclosure? Should the
disclosure period be longer or shorter?
Are the recordkeeping requirements of Regulation AC
appropriate?
What additional procedures would firms need to put in
place in order to ensure compliance with the proposed regulation,
beyond those already established or that will be established to comply
with the recently-approved SRO rules?
The application of proposed Regulation AC broadly covers
brokers or dealers and any person associated with a broker or dealer
because we believe that these entities are subject to the greatest
conflicts. We request comment on whether the proposed regulation should
cover banks that are not associated persons and other independent
entities. Are there certain classes of persons associated with a
broker-dealer that should not be subject to the rule? Should the rule
explicitly exclude investment advisers?
[[Page 51513]]
Would the required disclosures be utilized by investors if
they are not on the cover page, given the numerous other disclosures
that firms must make?
Should Rule 501 of proposed Regulation AC allow for a
statement that the research analyst is ``unable to provide the written
certifications required,'' similar to Rule 502?
Should Rule 502 require research analysts to provide their
employers with a list identifying each public appearance made during
the calendar quarter?
We solicit comment on our approach and the specific proposed
certifications and disclosures. The Commission encourages commenters to
provide information regarding the advantages and disadvantages of the
proposed regulation.
IV. Paperwork Reduction Act
The proposed regulation contains ``collection of information''
requirements within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').\17\ We will submit the proposal to the Office of Management
and Budget (``OMB'') for review in accordance with the PRA.\18\ The
Commission is proposing to create a new information collection entitled
``Regulation AC--Analyst Certification.'' An agency may not conduct or
sponsor, and a person is not required to respond to, an information
collection unless it displays a currently valid OMB control number.
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\17\ 44 U.S.C. 3501 et seq.
\18\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
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A. Summary of Collection of Information
Proposed Regulation AC, if adopted, would require that any research
report published, circulated, or provided by a broker or dealer or
person associated with a broker or dealer contain a statement attesting
to the fact that the views expressed in each research report accurately
reflect the analyst's personal views and whether or not the research
analyst received or will receive any compensation in connection with
the views or recommendations in the research report. The proposed
regulation would also require broker-dealers to, on a quarterly basis,
make, keep, and maintain records of research analyst statements
regarding whether the views expressed in public appearances accurately
reflected the analyst's views, and whether any part of the analyst's
compensation is related to the specific recommendation or views
expressed in the public appearance.
B. Reporting and Cost Burden Estimates
The proposed regulation would provide that broker-dealers, and
persons associated with broker-dealers, must include in research
reports they publish certain certifications and disclosures about the
analyst's views expressed in the research reports and any relationship
between the analyst's compensation and the specific recommendations or
views expressed. The proposed regulation would also require broker-
dealers to make, keep, and maintain records of research analyst
certifications and disclosures in connection with public appearances.
The staff of the Commission believes that the average amount of
time it would take a broker-dealer to include the required
certifications and disclosures in each research report is one minute
per report. The Commission staff estimates that broker-dealers publish
approximately 657,000 research reports per year.\19\ Therefore, the
Commission estimates that the total annual burden in hours for all
broker-dealers to comply with the research report certification and
disclosure requirements of the proposed regulation is approximately
10,950 hours per year [(1 minute x 657,000 reports) / 60 minutes].
The Commission staff expects that research analysts will likely be the
employees primarily charged with executing certifications and including
them in research reports. According to industry sources, research
analysts, on average, earn $189,250 per year, for an hourly pay rate of
approximately $90. Including 35% overhead, Commission staff estimates
that the hourly pay rate for a research analyst would be approximately
$121.50. Therefore, the Commission estimates that the total annual
burden in dollars of complying with the research report certification
and disclosure requirements is approximately $1,330,425 per year
[10,950 hours x $121.50 per hour].
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\19\ Based on data provided by First Call, the staff of the
Commission estimates that approximately 657,000 research reports
were published in 2001.
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The staff of the Commission believes that the average amount of
time it would take a research analyst to prepare the quarterly
statements regarding public appearances as required by the proposed
regulation is ten minutes per analyst. The staff of the Commission
believes that, on average, approximately 519 public appearances by
research analysts occur per quarter,\20\ or about 2,076 per year.
Therefore, the Commission believes that the total annual burden in
hours of complying with the public appearance certification and
disclosure requirements would be approximately 346 hours per year [(10
minutes x 2076 appearances) / 60 minutes].
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\20\ 519 is approximately 10% of the estimated 5,186 research
analysts employed in the U.S., which is based on information
provided by Nelson Information.
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In cases where the analyst is unable to make the certifications in
connection with public appearances as specified in Rule 502 (a)(1) of
proposed Regulation AC, the firm is required to make, keep, and
maintain a record of a statement from the research analyst that he or
she is unable to make the specified certifications, and the reasons
therefor, and to provide copies of that statement to its examining
authority. The staff of the Commission believes that there will be few,
if any, instances where a broker-dealer will provide copies of
statements to their examining authority, as analysts and their firms
will have strong incentives to avoid having to make the type of
disclosures required to be provided to their examining authority.
Therefore, the total annual burden, in dollars, of complying with the
public appearance certification requirements would be approximately
$42,039 [2,076 appearances x $20.25 pay per 10 minutes].
The proposed regulation requires that the records of statements
regarding public appearances submitted by research analysts to their
broker-dealers be preserved in accordance with Exchange Act Rule 17a-
4(b)(4). Exchange Act Rule 17a-4(b)(4) requires that any communication
relating to a broker-dealer's business, including inter-office
communications, must be kept for at least three years. In light of the
existing record preservation requirement for brokers and dealers under
Exchange Act Rule 17a-4(b)(4),\21\ the staff of the Commission believes
that any additional costs to preserve the records of the certifications
required by the proposed regulation would be minimal.
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\21\ OMB Control No. 3235-0279.
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Proposed Regulation AC, if adopted, would require that brokers and
dealers establish and follow sufficient procedures to comply with the
provisions of the proposed regulation and would require that the broker
or dealer is able to: collect, process, and disclose the information
required to be included in research reports; ensure the submission of
information required to be submitted to the firm's compliance
department; and periodically review and evaluate these procedures.
Brokers or dealers should already have these procedures in place to
meet existing obligations under the SRO rules relating
[[Page 51514]]
to research analysts that recently were approved by the Commission.\22\
Therefore, the Commission estimates that the proposed regulation would
result in a total annual time burden of approximately 11,296 hours
[10,950 hours to comply with research report requirements + 346 hours
to comply with public appearance requirements], and a total annual cost
in dollars of approximately $1,372,464 [$1,330,425 to comply with the
research report requirements + $42,039 to comply with the public
appearance requirements].
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\22\ Supra note 10.
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C. Request for Comment
The Commission solicits comments in order to: (i) Evaluate whether
the proposed collection of information is necessary for the proper
performance of the functions of the agency, including whether the
information shall have practical utility; (ii) evaluate the accuracy of
the Commission's estimate of the burden of the proposed collection of
information; (iii) determine whether there are ways to enhance the
quality, utility, and clarity of the information to be collected; and
(iv) evaluate whether there are ways to minimize the burden of the
collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology. We also request comment on how many public
appearance certifications would likely be submitted to brokerage firms
per quarter, and how many of those statements would be required to be
provided to the firm's examining authority.
Persons submitting comments on the collection of information
requirements should direct them to the Office of Management and Budget,
Attention: Desk Officer for the Securities and Exchange Commission,
Office of Information and Regulatory Affairs, Washington, DC 20503, and
should also send a copy of their comments to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609, with reference to File No. S7-30-02.
Requests for materials submitted to OMB by the Commission with regard
to this collection of information should be in writing, refer to File
No. S7-30-02, and be submitted to the Securities and Exchange
Commission, Records Management, Office of Filings and Information
Services. OMB is required to make a decision concerning the collections
of information between 30 and 60 days after publication. Consequently,
a comment to OMB is best assured of having its full effect if OMB
receives it within 30 days of publication.
V. Costs and Benefits of the Proposed Rule
The Commission is considering the costs and the benefits of
proposed Regulation AC. The Commission encourages commenters to discuss
any costs or benefits in addition to those discussed below. In
particular, the Commission requests comment on any potential costs, as
well as any potential benefits, resulting from the proposals for
investors, issuers, broker-dealers, other securities industry
professionals, SROs, or others. Commenters should provide analysis and
data to support their views on the costs and benefits associated with
the proposed amendments.
A. Benefits
We believe that investor confidence in the integrity of research
has suffered because some investors may believe that research analyst
objectivity has been compromised due to, among other things, analysts'
personal compensation and firms' investment banking relationships with
issuers that are the subjects of research reports. Requiring that
research analysts certify that the views expressed in research reports
reflect their personal views, and requiring disclosure of information
regarding whether analyst compensation is related to the specific
recommendations made, would help bolster investor confidence in the
quality of research. This, in turn, should help bolster investor
confidence in the securities markets.
Proposed Regulation AC would require that broker-dealers include
certifications in research reports regarding the accuracy of the views
expressed in the research report. Firms would be required to include in
their research reports certifications that the views expressed in the
research report accurately reflect the analyst's personal views
regarding the subject securities or issuers and whether or not the
analyst received compensation in connection with the reports. Many
investors rely on the research reports and recommendations provided by
their brokers. To the extent that the proposed regulations require
disclosures that provide more transparency than provided by current
regulation, these disclosures should provide investors with important
information with which to determine the value of the research available
to them.
Proposed Regulation AC may result in an increase in the overall
quality of the research available to the public because a broker-dealer
would be in violation of the securities laws when issuing research
reports unless the reports include the required certifications and
disclosures. The proposed requirement that the research analyst
principally responsible for preparing the research report personally
certify that the views expressed in the report accurately reflect his
or her personal views creates an incentive for analysts to examine,
even more carefully, the basis and foundations for his or her
recommendations in preparing research reports.
Proposed Regulation AC may also result in an increase in the
quality of research because of competitive reasons. Firms that publish
research reports that do not contain certain analyst certifications
will be in violation of the proposed regulation, and firms whose
research analysts' compensation is related to the specific
recommendations or views provided in research reports may lose some
business to firms that are less conflicted. The proposed regulation is
intended to enhance investor confidence in the integrity of the
research available to them. We believe that by requiring research
analysts to certify as to the accuracy of the views expressed in
research reports, investor confidence in the securities markets should
be enhanced, thereby leading to the benefit of more liquid and
efficient markets. These benefits are difficult to quantify.
B. Costs
While the proposed regulation may lead to some additional costs for
brokers or dealers, we believe that any costs should not be
significant. The proposed certification and disclosure requirements
would require research analysts to even more carefully consider the
accuracy of the views expressed in research reports and public
appearances, to consider their compensation arrangements, and then to
make the required certifications and disclosures. In light of current
requirements under SRO rules, the Commission estimates that, beyond the
paperwork costs described above, any additional costs that would result
from the required certifications and disclosures would be minimal.
Moreover, with respect to the compensation certifications and
disclosures that would be required by proposed Regulation AC, brokers
and dealers are already required to make certain disclosures regarding
research analyst compensation under SRO rules.\23\ Additionally,
Exchange Act Rule 17a-3(a)(19) currently requires
[[Page 51515]]
brokers or dealers to maintain a record of all agreements pertaining to
the relationship between each associated person and the broker-dealer,
including a summary of each associated person's compensation
arrangement or plan.\24\ Brokers or dealers should also already have in
place procedures necessary to comply with many components of the
proposed regulation due to existing obligations under SRO rules,
although these procedures might require some minor modifications to
conform with proposed Regulation AC. As noted previously, the
Commission estimates that the annual paperwork costs in dollars of
complying with the proposed regulation would be approximately
$1,372,464.
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\23\ See NASD Rule 2711 and NYSE Rule 472.
\24\ These subparagraphs of the rule may be redesignated as Rule
17a-3(a)(12)(ii) and Rule 17a-3(a)(12)(iii), should the Commission
adopt amendments proposed in October 2001. See Securities Exchange
Act Release No. 44992 (October 26, 2001).
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C. Request for Comments
As an aid in evaluating costs associated with proposed Regulation
AC, the Commission requests the public's views and any supporting
information. We request comment on all aspects of this cost-benefit
analysis, including identification of any additional costs or benefits
of, or suggested alternatives to, the proposed regulation. Commenters
are requested to provide empirical data and other factual support for
their views to the extent possible.
VI. Regulatory Flexibility Act Certification
The Commission certifies, pursuant to 5 U.S.C. 605(b), that the
proposed regulation would not, if adopted, have a significant economic
impact on a substantial number of small entities. The purpose of the
proposed regulation is to increase analyst independence; further manage
conflicts of interest; require increased disclosures to investors; and
promote investor confidence in the integrity of research. By improving
the quality of disclosure, the proposed regulation should enhance
investor confidence in the fairness and integrity of the securities
markets. The requirements of the proposed regulation are closely
related to information, procedures, and disclosures required by
existing SRO rules, which apply to both large and small broker-dealers
that publish or circulate research reports.
The Division of Market Regulation estimates that the total burden
in hours required to comply with proposed Regulation AC would, at most,
be approximately two hours and two minutes per small firm. Accordingly,
the Commission certifies that proposed regulation should not have a
significant impact on a substantial number of small entities.
VII. Consideration of Impact on the Economy
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, or ``SBREFA,''\25\ we must advise OMB as to whether the
proposed regulation constitutes a ``major'' rule. Under SBREFA, a rule
is considered ``major'' where, if adopted, it results or is likely to
result in:
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\25\ Public Law 104-121, Title II, 110 Stat. 857 (1996)
(codified in various sections of 5 U.S.C., 15 U.S.C., and as a note
to 5 U.S.C. Section 601).
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An annual effect on the economy of $100 million or more
(either in the form of an increase or a decrease);
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment or
innovation.
Where a rule is ``major,'' its effectiveness will generally be
delayed for 60 days pending Congressional review. We request comment on
the potential impact of the proposed regulation on the economy on an
annual basis. Commenters are requested to provide empirical data and
other factual support for their views to the extent possible.
VIII. Effects on Competition, Efficiency and Capital Formation
Section 3(f) of the Exchange Act \26\ requires us, when engaging in
rulemaking where we are required to consider or determine whether an
action is necessary or appropriate in the public interest, to consider
whether the action will promote efficiency, competition, and capital
formation. In addition, section 23(a)(2) \27\ of the Exchange Act
requires the Commission to consider the impact any rule would have on
competition. Further, the law requires that the Commission not adopt
any rule that would impose a burden on competition not necessary or
appropriate in furtherance of the purposes of the Exchange Act.
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\26\ 15 U.S.C. Section 78c(f).
\27\ 15 U.S.C. Section 78w(a)(2).
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The proposed regulation is intended to enhance investor confidence
in the integrity of the research available to them. We believe that
requiring broker-dealers to include analyst certifications in research
reports, as well as the other disclosures required by proposed
Regulation AC, should enhance investor confidence in the securities
markets, thereby leading to a more efficient market. The Commission has
considered the proposed regulation in light of the standards cited in
section 23(a)(2) and believes preliminarily that it, if adopted, would
not impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act.
We request comment on whether the proposed amendments, if adopted,
would impose a burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act. We also request
comment on whether the proposed amendments, if adopted, would promote
efficiency, competition, and capital formation. Specifically, research
analysts are employed by different kinds of entities. Therefore, we
seek comment on whether the regulation should be more expansive. For
example, should the proposed regulation cover banks that are not
associated persons? Commenters are requested to provide empirical data
and other factual support for their views if possible.
IX. Statutory Authority
Regulation AC is being proposed pursuant to sections 3, 15, 17, and
23 of the Exchange Act and pursuant to sections 17 and 19 of the
Securities Act.
Text of the Proposed Regulation
List of Subjects in 17 CFR Part 242
Securities.
In accordance with the foregoing, Title 17, Chapter II, of the Code
of Federal Regulations is proposed to be amended as follows:
PART 242--REGULATIONS M, ATS and AC
1. The authority citation for part 242 is revised to read as
follows:
Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2),
78i(a), 78j, 78k-1(c), 78l, 78m, 78mm, 78n, 78o(b), 78o(c), 78o(g),
78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 80a-23, 80a-29, and 80a-37.
2. The part heading for part 242 is revised as set forth above.
3. Part 242 is amended by adding Regulation AC, Secs. 242.500
through 242.502 to read as follows:
Regulation AC--Analyst Certification
Sec.
242.500 Definitions.
242.501 Research reports.
242.502 Public appearances.
Regulation AC--Analyst Certification
Sec. 242.500 Definitions.
For purposes of Regulation AC (Secs. 242.500 through 242.502):
[[Page 51516]]
Public appearance means any participation in a seminar, forum
(including an interactive electronic forum), radio or television
interview, or other public speaking activity in which a research
analyst makes a specific recommendation or offers an opinion concerning
a security or an issuer.
Research analyst means any natural person who is principally
responsible for the analysis of any security or issuer included in a
research report.
Research report means a written communication that includes an
analysis of the securities of an issuer or issuers, provides
information reasonably sufficient upon which to base an investment
decision and includes a recommendation.
Sec. 242.501 Research reports.
A broker or dealer, or any person associated with a broker or
dealer, that publishes, circulates, or provides, directly or
indirectly, a research report prepared by a research analyst shall
include in that research report a clear and prominent certification by
the research analyst containing the following statements:
(a) A statement attesting that the views expressed in the research
report accurately reflect the research analyst's personal views about
any and all of the subject securities or issuers; and
(b)(1) A statement attesting that no part of the research analyst's
compensation was, is, or will be, directly or indirectly, related to
the specific recommendations or views expressed by the research analyst
in the research report; or
(2) A statement:
(i) Attesting that part or all of the research analyst's
compensation was, is, or will be, directly or indirectly, related to
the specific recommendations or views expressed by the research analyst
in the research report;
(ii) Identifying the source and amount of such compensation and the
purpose therefor; and
(iii) Further disclosing that the compensation could influence the
recommendations or views expressed in the research report.
Sec. 242.502 Public appearances.
(a) If a broker or dealer, or any person associated with a broker
or dealer, publishes, circulates, or provides, directly or indirectly,
a research report prepared by a research analyst, the broker or dealer
must make a record within thirty days after each calendar quarter in
which the research analyst has made a public appearance that includes a
certification by the research analyst containing the following
statements:
(1) A statement:
(i) Attesting that the views expressed by the research analyst in
each public appearance accurately reflected the research analyst's
personal views at that time about any and all of the subject securities
or issuers; and
(ii) Attesting that no part of the research analyst's compensation
was, is, or will be, directly or indirectly, related to the specific
recommendations or views expressed by the research analyst in any
public appearance; or
(2) A statement attesting that the research analyst is unable to
provide the written certifications specified in paragraph (a)(1) of
this section and the reasons therefor. The broker or dealer must also
disclose in all research reports prepared by the research analyst for
the next 120 days that the research analyst did not provide the
certifications specified in paragraph (a)(1) of this section and the
reasons therefor.
(b) A broker or dealer shall promptly provide copies of all
statements prepared pursuant to paragraph (a)(2) of this section to its
examining authority, designated pursuant to Section 17(d) of the
Securities Exchange Act of 1934 (15 USC 78q(d)) and Sec. 240.17d-2 of
this chapter.
(c) A broker or dealer shall preserve the records specified in
paragraph (a) of this section in accordance with Sec. 240.17a-4(b)(4)
of this chapter.
By the Commission.
Dated: August 2, 2002.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-20031 Filed 8-7-02; 8:45 am]
BILLING CODE 8010-01-P