SEC Trading and Markets FAQ: Research Analysts and Underwriters

Oct. 11, 2017

Division of Trading and Markets

August 22, 2012

In these Frequently Asked Questions (“FAQs”), the Division of Trading and Markets (“staff”) is providing guidance on certain provisions of the Jumpstart Our Business Startups Act (“JOBS Act”) as they affect firms and their obligations with respect to securities analysts (“analysts”) and research reports. These FAQs are not rules, regulations or statements of the Commission. The Commission has neither approved nor disapproved these FAQs.

The staff may update these questions and answers periodically. In each update, the questions added after publication of the last version will be marked with “MODIFIED” or “NEW.”

For Further Information Contact: Any of the following at (202) 551-5777: Brian A. Bussey, Associate Director, Josephine Tao, Assistant Director, Elizabeth Sandoe, Senior Special Counsel, David Bloom, Branch Chief, or Bradley Gude, Special Counsel, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-7010.

Background

These FAQs address questions about certain research provisions in Title I of the JOBS Act. These provisions include:

Analyst Communications. Section 105(b) of the JOBS Act amends Section 15D of the Securities Exchange Act of 1934 (“Exchange Act”) to prohibit the Commission or a national securities association registered under Section 15A of the Exchange Act from adopting or maintaining any rule or regulation in connection with an initial public offering (“IPO”) of the common equity of an emerging growth company that:

1. Restricts, based on functional role, which associated persons of a broker, dealer, or member of a national securities association, may arrange for communications between an analyst and a potential investor; or
2. Restricts an analyst from participating in any communications with the management of an emerging growth company that is also attended by any other associated person of a broker, dealer, or member of a national securities association whose functional role is other than as an analyst.

Testing the Waters. Section 105(c) of the JOBS Act amends Section 5 of the Securities Act of 1933 (“Securities Act”) to permit an emerging growth company or any person authorized to act on behalf of an emerging growth company to engage in oral or written communications with potential investors that are qualified institutional buyers or institutions that are accredited investors as defined in Securities Act Rules 144A and 501(a) (or any successors to such rules) either prior to or following the date of filing of a registration statement with respect to such securities with the Commission, subject to the requirement of Section 5(b)(2) of the Securities Act. Section 5(b)(2) of the Securities Act makes it unlawful for any person to, directly or indirectly, carry or cause to be carried through the mails or in interstate commerce any such security for the purpose of sale or for delivery after sale unless accompanied or preceded by a prospectus that meets the requirements of Section 10(a) of the Securities Act.

Post Offering Communications. Section 105(d) of the JOBS Act prohibits the Commission or any national securities association registered under Section 15A of the Exchange Act from adopting or maintaining any rule or regulation that prohibits any broker, dealer, or member of a national securities association from publishing or distributing any research report or making a public appearance, with respect to the securities of an emerging growth company, either:

1. Within any prescribed period of time following the IPO date of the emerging growth company; or
2. Within any prescribed period of time prior to the expiration date of any agreement between the broker, dealer, or member of a national securities association and the emerging growth company or its shareholders that restricts or prohibits the sale of securities held by the emerging growth company or its shareholders after the IPO date.

Responses to Frequently Asked Questions

Question 1: Does the ability of an emerging growth company to “test the waters” under Section 105(c) of the JOBS Act conflict with Rule 15c2-8(e) under the Exchange Act?

Answer: Section 105(c) of the JOBS Act allows emerging growth companies to continue to “test the waters” after a registration statement has been filed under the Securities Act. As described below, we believe that this activity can take place in a manner consistent with the requirements of Rule 15c2-8(e).

Rule 15c2-8(e) states that it is a deceptive act or practice for a broker or dealer to participate in the distribution of securities with respect to which a registration statement has been filed under the Securities Act unless, among other things, the broker or dealer takes reasonable steps to make available a copy of the preliminary prospectus relating to such securities to each of that broker or dealer’s associated persons who are expected, prior to the effective date, to solicit customers’ orders for such securities before sales efforts by such associated persons. A broker or dealer participating in such a distribution also is required to take reasonable steps to make available to these associated persons a copy of any amended preliminary prospectus promptly after the filing thereof.

The JOBS Act did not change the meaning of the term “solicit customers' orders” for purposes of Rule 15c2-8(e). Whether an activity falls within the meaning of that term is based on the relevant facts and circumstances. An underwriter, for example, may wish to seek non-binding indications of interest from its customers in relation to a potential offering for the purpose of gathering information from prospective investors. This information can assist in the underwriter’s determination of the appropriate price, volume and market demand for a potential offering.

In such circumstances, the underwriter might ask its customers how many shares they might seek to purchase in the potential offering at various price ranges without requiring the customer to make any commitment to order. Generally, if an underwriter is requesting from a customer a non-binding indication of interest that includes the amount of shares the customer might purchase in the potential offering at particular price levels - but does not ask the customer to commit to purchase the relevant securities - the underwriter, absent other factors, would likely not be soliciting a customer order for purposes of Rule 15c2-8(e).

Finally, Rule 15c2-8 is applicable only where a registration statement has been filed with the Commission under the Securities Act. Submitting a confidential draft registration statement for staff review in accordance with Section 106(a) of the JOBS Act does not constitute a “filing” of a registration statement for these purposes.

Question 2: In 2003 and 2004, the Commission, self-regulatory organizations (“SROs”), and other regulators instituted settled enforcement actions against 12 broker-dealers to address conflicts of interest between the firms’ research and investment banking functions (“Global Settlement”). Does the JOBS Act affect the structural reforms mandated by Global Settlement or any other part of that court order?

Answer: The JOBS Act does not amend or modify the Global Settlement. If the settling firms were to seek an amendment or modification of the Global Settlement in light of the JOBS Act, one or more of the settling firms would have to make an application to the court. Under the terms of the Global Settlement, the Commission would have an opportunity to consider any such request and the Commission could support or oppose a proposed amendment or modification after considering whether it would be in the public interest. Any amendment or modification to the Global Settlement would have to be approved by the court overseeing the Global Settlement. The Global Settlement also provides that a provision of the Global Settlement can be modified or removed if the Commission adopts a rule (or approves an SRO rule) “with the stated intent to supersede” that provision.

Question 3: Section 105(b) of the JOBS Act prohibits the Commission or a national securities association from adopting or maintaining any rule or regulation in connection with an IPO of common equity of an emerging growth company restricting, based on functional role, which associated persons of a broker, dealer, or member may arrange for communications between an analyst and a potential investor. Does this “arranging” provision of the JOBS Act affect any existing Commission or SRO rule?

Answer: Under Section 105(b) of the JOBS Act, an associated person of a broker-dealer, including investment banking personnel, may arrange communications between analysts and investors. This activity would include, for example, an investment banker forwarding a list of clients to the analyst that the analyst could, at his or her own discretion and with appropriate controls, contact. In turn, an analyst could forward a list of potential clients it intends to communicate with to investment banking as a means to facilitate scheduling. Investment bankers can also arrange, but not participate in, calls between analysts and clients.

Although neither the Commission nor the SROs have a rule that directly prohibits this activity, the staff has been asked whether we would consider such arranging activity, without more, to be a method for investment banking personnel to direct a research analyst to engage in sales or marketing efforts or any communication with a current or prospective customer regarding an investment banking services transaction in violation of NASD Rule 2711(c)(6) and NYSE Rule 472(b)(6)(ii). The staff would not read NASD Rule 2711(c)(6) and NYSE Rule 472(b)(6)(ii) to prohibit such activity. Firms should be mindful that other provisions of the Exchange Act and Commission and SRO rules were not changed by the JOBS Act, such as the requirement that communications with current or prospective customers related to an investment banking services transaction be fair, balanced, and not misleading taking into consideration the overall context in which the communication was made. Firms subject to the Global Settlement should also be mindful of the requirements of that court order as they remain in place, including the requirement to create and enforce firewalls between research and investment banking personnel reasonably designed to prohibit all communications between the two except as expressly permitted. Firms are also reminded that they need to have appropriate policies and procedures to ensure compliance with the federal securities laws and SRO rules.

Question 4: Does Section 105 of the JOBS Act now allow analysts to attend meetings with company management in the presence of investment banking personnel in connection with the IPO of an emerging growth company?

Answer: Section 105(b) of the JOBS Act permits analysts to participate in any communication with the management of an emerging growth company concerning an IPO that is also attended by any other associated person of a broker, dealer, or member of a national securities association whose functional role is other than as an analyst. The staff interprets this section as primarily reflecting a Congressional intent to allow analysts to participate in emerging growth company management presentations with sales force personnel so that the issuer’s management would not need to make separate and duplicative presentations to analysts at a time when senior management resources are limited. This approach is consistent with a recommendation in the October 20, 2011 “Rebuilding the IPO On-Ramp” report issued by the IPO Task Force.

The Global Settlement was not affected by the JOBS Act. Accordingly, analysts of Global Settlement firms are still subject to the provisions of that court order, including the requirement to create and enforce firewalls between research and investment banking personnel reasonably designed to prohibit all communications between the two except as expressly permitted in the court order. Unless an exception to this requirement is applicable, the analyst is not permitted to participate in a communication in the presence of investment banking personnel. In addition, other Commission and SRO rules regarding analysts continue to apply.

Prior to enactment of Section 105(b), SRO rules prohibited analysts of non-Global Settlement firms from attending meetings with issuer management that are also attended by investment banking personnel in connection with an IPO, including pitch meetings. Pursuant to Section 105(b), analysts may now attend such meetings, provided that the issuer qualifies as an emerging growth company. Section 105(b) does not, however, permit analysts to engage in otherwise prohibited conduct in such meetings. Section 105(b) does not, for example, affect SRO rules that otherwise prohibit an analyst from engaging in efforts to solicit investment banking business. Section 105(b) also does not affect other prohibitions as discussed below.

Therefore, before a firm is formally retained to underwrite an offering, analysts of non-Global Settlement firms in attendance at such meetings could, for example, introduce themselves, outline their research program and the types of factors that the analyst would consider in his or her analysis of a company, and ask follow-up questions to better understand a factual statement made by the emerging growth company’s management. In addition, after the firm is formally retained to underwrite the offering, analysts at non-Global Settlement firms could, for example, participate in presentations by the management of an emerging growth company to educate a firm’s sales force about the company and discuss industry trends, provide information obtained from investing customers, and communicate their views.

Firms and analysts should be mindful of the antifraud provisions of the federal securities laws, the Global Settlement, and any other Commission or SRO rule that governs research analyst conflicts. An analyst, for example, remains prohibited from changing his or her research as a result of a communication in an effort to obtain investment banking business. In addition, an analyst continues to be prohibited from giving tacit acquiescence to overtures from the management of an emerging growth company that attempt to create an expectation of favorable research coverage if the analyst’s firm is chosen to underwrite the emerging growth company’s IPO. Further, an analyst remains prohibited from providing views that are inconsistent with the analyst’s personal views about the emerging growth company or its securities, or from making a statement that is misleading taking into consideration the overall context in which the statement was made. Moreover, investment banking personnel remain prohibited from directly or indirectly directing a research analyst to engage in sales or marketing efforts related to an investment banking services transaction. Firms should ensure that they have instituted and enforce appropriate controls to make sure that analysts are not engaging in prohibited conduct, such as solicitation, at any meetings with company management that are also attended by investment banking personnel, or otherwise.

The examples given above are not exhaustive.

Question 5: Does the JOBS Act permit an analyst to participate in a roadshow or otherwise engage in communications with a current or prospective customer in the presence of investment banking department personnel or the management of an emerging growth company about an investment banking services transaction?

Answer: As discussed above, Section 105(b)(2) of the JOBS Act allows a firm to avoid the ministerial burdens of organizing separate and potentially duplicative meetings and presentations among an emerging growth company’s management team, investment banking personnel, and research analysts. Section 105(b)(2) did not address communications where investors are present together with company management, analysts and investment banking personnel. This provision of the JOBS Act thus does not affect NASD Rules 2711(c)(5)(A) and (B) and NYSE Rules 472(b)(6)(i)(a) and (b), which prohibit analysts from participating in roadshows or otherwise engaging in communications with customers about an investment banking transaction in the presence of investment bankers or the company’s management. These rules ““ which are intended to reduce the pressure on analysts to give overly optimistic assessments of investment banking deals and guard against analysts being perceived as part of the sales and marketing team for a transaction ““ apply to communications with customers and other investors and do not depend on whether analysts, investment bankers, and management are participating jointly in such communications. Moreover, as noted above, the Global Settlement is not affected by the JOBS Act, so firms subject to that court order must be mindful of its provisions.

Question 6: Does Section 105 of the JOBS Act affect NYSE Rule 472?

Answer: For the limited purpose of interpreting the applicability of JOBS Act Sections 105(b) and (d), the staff believes that Sections 105(b) and (d) were intended to apply to NYSE Rule 472 to the same extent as NASD Rule 2711.

Question 7: Does the JOBS Act affect the application of the SRO Rules regarding the supervision, compensation, or evaluation of analysts?

Answer: NASD Rules 2711(b)(1) and (d) and corresponding NYSE Rules 472(b)(1) and (h), which address these issues, are not affected by the JOBS Act.

Question 8: Does the JOBS Act affect the application of the SRO Rules regarding pre-publication review of research reports by non-research personnel or an emerging growth company?

Answer: NASD Rules 2711(b)(2), (b)(3), (c)(1), and (c)(2) and corresponding NYSE Rules 472(b)(2), (b)(3), and (b)(4), which address these issues, are not affected by the JOBS Act.

Question 9: Does the JOBS Act permit firms to promise favorable research in exchange for the business of or compensation from an emerging growth company?

Answer: NASD Rule 2711(e) and corresponding NYSE Rule 472(g)(1), which prohibit members from directly or indirectly offering favorable research, a specific rating, or a specific price target, or threatening to change research, a rating, or price target, to a company as consideration or inducement for the receipt of business or compensation, are not affected by the JOBS Act.

Question 10: Does Section 105(d) of the JOBS Act affect the SRO rules that establish quiet periods after the expiration of a lock-up agreement? What about the SRO rules that establish quiet periods before and after the termination or waiver of a lock-up agreement and the SRO rules that apply to quiet periods for secondary offerings?

Answer: The JOBS Act permits the publication or distribution of a research report or public appearances with respect to the securities of an emerging growth company at any time after an IPO or prior to the expiration date of any lock-up agreements. Although the JOBS Act does not explicitly permit publication or distribution of a research report or public appearance relating to an emerging growth company before the termination or waiver of a lock-up agreement, the staff believes that the intent of Congress in adopting this provision was to fully address the quiet periods imposed by the SRO rules on research relating to emerging growth companies prior to the end of a lock-up agreement. Therefore, the staff interprets Section 105(d)(2) of the JOBS Act to apply equally to NASD Rule 2711(f)(4) and NYSE Rule 472(f)(4) no matter by which method the lock-up agreement ends ““ by termination, expiration, or waiver ““ prior to the termination, expiration, or waiver of the agreement.

The JOBS Act did not explicitly permit publication or distribution of a research report or public appearance relating to an emerging growth company after the expiration, termination, or waiver of a lock-up agreement. It also did not expressly address quiet periods after a secondary offering of an emerging growth company’s securities. The staff believes that the policies underlying the change in Section 105(d) are equally applicable to quiet periods during these other time periods. We understand that FINRA is considering filing with the Commission a proposal to eliminate the remaining quiet periods imposed by NASD Rules 2711(f)(1), (2), and (4) and NYSE Rules 472(f)(1) through (4) with regard to an emerging growth company and its securities. We expect this filing would eliminate these other quiet periods related to emerging growth companies not addressed by Section 105(d).

Question 11: Does the definition of research report under the JOBS Act affect the analysis of the types of communications that constitute a research report for purposes of Regulation Analyst Certification (“Regulation AC”)?

Answer: No. In general, under Regulation AC the following communications would not be research reports if they do not include an analysis of, or recommend or rate, individual securities or companies:

• Reports discussing broad-based indices, such as the Russell 2000 or S&P 500 index.
• Reports commenting on economic, political, or market conditions.
• Reports commenting on or analyzing particular types of debt securities or characteristics of debt securities.
• Technical analysis concerning the demand and supply for a sector, index, or industry based on trading volume and price.
• Reports that recommend increasing or decreasing holdings in particular industries or sectors or types of securities.

The following communications would generally not be research reports even if they recommend or rate individual securities or companies:

• Statistical summaries of multiple companies' financial data (including listings of current ratings) that do not include any analysis of individual companies' data.
• An analysis prepared for a specific person or a limited group of fewer than fifteen persons.
• Periodic reports or other communications prepared for investment company shareholders or discretionary investment account clients discussing past performance or the basis for previously made discretionary investment decisions.
• Internal communications that are not given to customers.

The Commission stated in the adopting release for Regulation AC that “[i]t is not possible to provide a complete list of all types of communications that would or would not fall within the definition of research report. Whether a particular communication constitutes a research report for the purpose of Regulation AC will turn on the individual facts and circumstances surrounding that communication.”

Question 12: Is Regulation AC affected by the JOBS Act in other respects?

Answer: Regulation AC is not affected by the JOBS Act. Regulation AC requires that brokers, dealers, and certain persons associated with a broker or dealer include in research reports certifications by the analyst that the views expressed in the report accurately reflect his or her personal views, and disclose whether or not the analyst received compensation or other payments in connection with his or her specific recommendations or views. Broker-dealers are also required to obtain periodic certifications by analysts in connection with views expressed by the analysts in public appearances.

Question 13: Does the JOBS Act impact any of the requirements under NASD Rule 2210 relating to communications with the public?

Answer: No. NASD Rule 2210 requirements, including requirements relating to the content, filing, and approval of communications, are not altered by the JOBS Act and remain in full effect.

Question 14: Is there anything else that firms should consider when making changes based on research provisions of the JOBS Act?

Answer: We remind firms contemplating new activities based on the research provisions of the JOBS Act to review and update their policies and procedures, as well as their educational and training efforts, to make corresponding changes to promote compliance with Commission and SRO rules that are designed to minimize conflicts of interest and facilitate the objectivity and reliability of research.1

1 See, e.g., 17 CFR 242.500-505; FINRA Rule 5280; and NASD Rule 2711.

Last Reviewed or Updated: Aug. 22, 2012