(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 Analyst Conflict Rules

Fulfilling a mandate of the Sarbanes-Oxley Act, the SEC approved a series of SRO research analyst rules designed to promote the independence and objectivity of research by, most significantly, separating research analyst compensation from investment banking. This goal is effected by requiring firms to establish compensation committees to review and approve the compensation of their research analysts that are primarily responsible for the preparation of the substance of research reports. The firm's investment banking department is excluded from the committee.

More broadly, investment banking department personnel may not have any input in determining research analyst compensation. Unlike the compensation committee provisions, this prohibition applies to the compensatory evaluation of all research analysts and is not limited to those that are primarily responsible for the preparation of the substance of a research report. The rules further insulate research analysts from investment banking interests by prohibiting analysts from participating in "pitches" or other communications for the purpose of soliciting investment banking business.

Section 501 of the Sarbanes-Oxley Act mandated structural changes and enhanced disclosure is an effort to foster greater public confidence in securities research and protect the independence and objectivity of stock analysts who publish research intended for the public. The statute aims to eliminate pressures on analysts that could compromise their objectivity.

The rules implementing the act also prohibit analysts from issuing positive research reports or reiterating a buy recommendation around the expiration of a lock-up agreement, thus eliminating the so-called booster shot research reports. Similarly, the quiet periods for the issuance of written research reports were extended to public appearances by managers and co-managers of initial and secondary offerings.

Expanding on existing disclosure duties, the rules require disclosure of whether the firm or the research analyst received any compensation from the issuer that is the subject of the research report or public appearance. Moreover, disclosure is required as to whether the subject company is or recently was a client of the firm, and if so, the types of services provided to the company.

As required by the Sarbanes-Oxley Act, the rules prohibit firms engaged in investment banking activities from directly or indirectly retaliating, or threatening to retaliate, against a research analyst who publishes a research report or makes a public appearance that may adversely affect the firm's present or prospective investment banking relationship. But the rules do not preclude termination of an analyst for causes unrelated to issuing adverse research.

Finally, the SRO rules impose additional registration, qualification, and continuing education requirements on research analysts. For example, a qualification examination for research analysts is required and there is a continuing education obligation consisting of a regulatory element and a firm element to address regulations, ethics and professional responsibility. The firm element requires broker-dealers to keep employee education current by means of a formal, ongoing training program, while the regulatory element requires them to conduct an annual needs analysis and focuses on compliance, regulatory ethical, and sales-practice standards.

¨ Release No. 34-48252 will be published in a forthcoming REPORT .