(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

NASD and NYSE Issue Interpretation of Analyst Rules

The NASD and NYSE have jointly issued the first interpretation of their research analyst rules since the SEC approved changes in the rules intended to comply with provisions of the Sarbanes-Oxley Act dealing with research analysts and conflicts of interest. The guidance deals with issues surrounding the pre-approval of transactions in the stocks that the analyst follows, the pre-publication submission of research reports, the quiet period during which research reports cannot be published and trading against recommendations.

The SRO rules require a firm's legal or compliance personnel to pre-approve the transactions of the supervisors of analysts in the stock of the companies covered by the analysts they supervise. With regard to managed accounts over which the supervisor has no control, the SROs would consider the firm to have met its pre-approval obligation if the firm has in place procedures to monitor the managed account's trades. If such are in place, legal or compliance personnel would not have to pre-approve each transaction within the managed account.

The SRO rules prohibit the pre-publication submission of an entire research report to a subject company, but do allow submission of sections of the report to verify facts. The interpretation clarifies that compliance personnel may not merely "rubberstamp" changes in the report after sections have been submitted to the subject company. Rather, they must review the report and the changes made to it and document the basis for approval. When a change in a rating or price target is to be made, compliance personnel must review the written justifications provided by the research department and compare them with comments received from the company.

A "quiet period" is imposed by the rules during which a firm may not publish a research report, such as 40 calendar days after an initial public offering. There is an exception for significant events which, according to the SROs, are generally the events that would trigger the filing of a Form 8-K. The SROs would not regard an announcement about earnings as a significant event falling within the exception. They also cautioned that a research report issued under the exception must be limited to discussing the effects of the event triggering the exception.

The SROs also clarified that analysts would not have to make the disclosures required for public appearances in a password-protected Web cast conference call provided that all of the call participants previously received the most current research report that included the required disclosure. The rules prohibit a research analyst account from trading any security in a manner inconsistent with the analyst's recommendation as reflected in the most recent published report. The SROs clarified that this restriction applies only to trades in the securities of companies covered by that particular analyst and does not extend to all companies covered by the firm.