Lawyer Article

Published in the May 10, 2005 issue of Southeast Tech Wire

In late April, the SEC approved changes to NASD and NYSE research analyst conflict-of-interest rules with respect to investment banking transactions.^[1] The new rules are the latest in a series of rules that have been adopted in recent years in an effort to improve investor protection and reduce external pressures on analysts that may affect their objectivity. Members of senior management should become familiar with the new rules, as they will affect interactions between company management and research analysts. Scheduled to become effective on June 6, 2005, the new rules specifically:

• Prohibit Analyst Participation in Road Shows. Research analysts cannot participate (directly or indirectly) in road shows regarding an investment banking services transaction.
• Prohibit Discussions with Investors in the Presence of Investment Banking Department Personnel or Company Management. Research analysts may not communicate with current or prospective customers regarding investment banking transactions in the presence of investment banking department personnel or company management. Thus, "three-way" communications between research analysts, customers and issuers, as well as between research analysts, customers and banking department personnel, are prohibited.
• Prohibit Directing Analysts to Engage in Sales or Communications with Investors. Investment banking personnel cannot direct a research analyst to engage in sales and marketing efforts or other communications related to investment banking transactions with current or prospective customers.
• Require Fair and Balanced Communications. Research analyst communications (written and oral) with a current or prospective customer or internal personnel relating to an investment banking services transaction must be fair, balanced and not misleading, taking into consideration the overall context in which the communication is made.
• What To Do Now: Since the new rules apply to investment banking firms, not their clients, it is not necessary for issuers to adopt procedures in response to the new rules. However, issuers should make sure that appropriate members of senior management are aware of the prohibitions referred to above so that they will not make inappropriate requests of their investment bankers for participation by analysts in investment banking transactions.  

Note

^[1] See http://www.sec.gov/rules/sro/nyse/34-51593.pdf (April 21, 2005).
The full text of the new rules is available at http://www.sec.gov/rules/sro/nyse/34-51358.pdf.