(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.)

SEC Approves SRO Rules on Analyst Conflicts

The SEC unanimously approved rules proposed jointly by the New York Stock Exchange and the National Association of Securities Dealers to require stock analysts to disclose any possible conflicts of interest. The SRO rules seek to strengthen the division between a firm's research and investment banking division and to ensure that the public is aware of any interests that researchers may have in stocks they discuss. Under the new rules, analysts are prohibited from offering to provide favorable ratings or specific price targets as part of an effort to obtain investment banking business. Research firms will face a 40-day "quiet period" when they will not be allowed to comment on a company if the firm acted as a manager of co-manager of the subject company's initial public offering. A 10-day quiet period will also apply after a secondary offering for securities issued by an inactively traded company. An exception exists for cases where there is significant news coverage of the security.

Analysts must also disclose if their firms are market markers in the stocks the analysts cover. Investment banking departments may not, under the new rules, supervise the research department. Under the rules, the firm's legal or compliance staff should monitor any reports circulated between the research and investment banking departments prior to the report's release. Furthermore, analysts cannot share draft reports with subject companies, except for factual verification under the supervision of the legal or compliance staff.

The rules also address analyst compensation by barring firms from tying analyst compensation to a specific investment banking transaction. If an analyst's compensation is based on the firm's general investment banking revenue, this fact must be disclosed in the firm's research reports. Additionally, research reports must disclose if the research firm either managed or co-managed an equity public offering of the target company within the last 12 months or if it received any investment banking income from the company in that time. Further disclosure would be required if the firm expects to receive any investment banking compensation from the company in the next three months. This final provision is stronger than earlier drafts, which would only have required such disclosure, if the analyst made a "buy" recommendation.

The rules also create several restrictions on the personal and immediate family accounts of analysts. Analysts and their households may not receive pre-IPO shares of a security in an area covered by the analysts. A blackout period restricts analysts from trading securities that they follow for 30 days before and for 5 days after they issue a report. Analysts also may not not trade against their most recent recommendations. Analysts must also now disclose if they own shares in companies that they discuss. Additional disclosure is also required if an analyst reports on a security that is held by the analyst's firm, if the firm owns over one percent of the company's equity securities as of the end of the previous month.

Research companies must clearly explain the meaning of the terms they use, such as "buy" and "hold." Under the new SRO rules, firms will be required to disclose the percentage break down of their recommendations in the buy, hold and sell categories. The SEC stated that that this rule should give the public a basis to evaluate the analyst's accuracy based on past performance. The SEC set the effective date of the rule changes varying from 60 to 180 days following May 10, 2002, the date of the SEC order that approved the amendments.

¨  Release No.34-45908 will be published in a forthcoming Report