Research Analysts and Research Reports

In 1999, the SEC launched an investigation of possible conflicts of interest by research analysts in the investment banking industry. Its conclusions led it in 2001 to request that NASD and NYSE compose new rules meant to restore investor confidence in analysts’ research. By the following year, their recommendations became NASD Rule 2711. New restrictions were added to the rule in 2003 to comply with specific changes mandated by the Sarbanes-Oxley Act of 2002.

Let’s take a breath and get familiar with a term that will figure prominently over the next couple of pages. A subject company is a company whose equity securities are the subject of a brokerage’s research report or the public appearance by one of the report’s analysts. Pretty simple. Now for the substance of NASD Rule 2711.

Firewall Between the Research and Investment Banking Departments

Research analysts may not be supervised or controlled by any employee of the member firms’ investment banking department, nor may any member of that department exert any influence on an analyst’s compensation.

No employee outside the research department other than legal or compliance personnel may review or approve a research report before its publication, except as necessary to verify the accuracy of its information.

Any written communication with the research department concerning the content of a research report must be made through authorized legal or compliance personnel. Any oral communication of that kind must likewise be conducted either through or in the presence of authorized legal or compliance personnel, and it must be thoroughly documented.

Firewall Between a Member Firm and a Subject Company

A member firm may not submit any portion of a research report to the subject company prior to publication, except as necessary to verify the factual accuracy of its information. If sections of a report must be submitted, the firm must comply with thes