10.4. Disclosure in Research Reports

Written policies and procedures must require that purported facts in research reports are based on reliable information and that recommendations have a reasonable basis and are clearly explained.

If the firm employs a rating system, it must clearly define in its research reports the meaning of each rating, including the time horizon and any benchmarks on which the rating is based. Such reports must also disclose the percentage of all securities rated by the member firm to which it has assigned a “buy,” “hold/neutral,” or “sell” rating and the percentage of companies within each of these three categories for whom the firm has provided investment banking services in the previous year. (A company that has assigned a “buy” to 90% of the companies it rated in the past year, the majority of whom are the company’s customers, might have less credibility than a firm with a more balanced set of ratings.)

The member firm must also disclose in its research reports:

• Whether th