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Staff Provides Guidance on Compliance with Global Settlement

The SEC's Division of Market Regulation, in consultation with the Division of Enforcement and other regulators, has issued interpretive guidance for 10 firms and two individuals that are subject to the global research analyst settlement alleging that their investment banking interests had undue influence over the securities research at brokerage firms. The guidance addresses the restrictions and requirements to which the firms are subject as outlined in an addendum to the settlement.

The staff advised that, under the settlement, non-equity capital markets investment banking personnel and research may not communicate with each other regarding the preparation of internal memoranda and other materials aimed at educating the sales force. However, the staff said that it would not be inconsistent with the addendum to permit non-equity capital markets investment banking personnel to listen in, from a remote location, to research personnel efforts to educate the sales force.

The staff also advised that it would not be inconsistent with the addendum if investment banking personnel listens in on widely disseminated communications to the sales force, such as so-called "morning calls, " daily notes and " blast" voicemails that are in a non-deal context or that relate to a publicly announced deal. Investment banking must access the communications only from a remote location, according to the staff.

The addendum permits research personnel, through management or in the presence of legal or compliance staff, to initiate communications with investment banking personnel relating to market or industry trends, conditions or developments as long as the communications are consistent with the type that an analyst would have with investing customers. Any communications between research and investment banking personnel cannot be made for the purpose of having research personnel identify potential investment banking transactions.

Neither equity capital management nor non-credit capital management investment banking personnel may listen in on or otherwise access any research call with an investor or group of investors. Once a firm has received an investment banking mandate, the staff has concluded that it would not be inconsistent with the addendum to permit research personnel to listen to or view a live Web cast of a road show or other widely attended presentation to investors or the sale force as long as the access is from a remote location. If the road show or presentation is at the firm's office, research personnel may listen in from the same address, but may not be in the same room as investment banking, investors or the sales force.

Investment banking management and research management may communicate about category-by-category coverage decisions as outlined in the addendum, including individual companies to the extent necessary to discuss a category. They may not communicate about company-specific coverage decisions. These communications do not have to be chaperoned, but research personnel who cover the company, industry or sector, or who review or edit research reports on the company that is the subject of the communication, should not be included.

Once research has made a final, independent decision about its coverage plan, there is no longer a concern that investment banking will influence the decision. Accordingly, research management may inform investment banking, in writing, of its coverage plan, including initiations, terminations and the analysts who are assigned to cover particular companies. The plan may also include information on the decision not to pick up coverage on a company. Research management may provide this information to investment banking regardless of whether investment banking initiated an inquiry.

The staff explained that permitting investment banking to contact research to inquire about company-specific coverage decisions may lead investment banking to communicate its views about a company. For that reason, investment banking may not contact research management to ask whether a decision has been made to provide coverage of a particular company. Investment banking may ask research management for the written coverage plan, however, including information on initiations, terminations and the decision not to pick up coverage on a company.