[Federal Register: January 17, 2007 (Volume 72, Number 10)]
[Notices]
[Page 2058-2078]
[DOCID:fr17ja07-94]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55072; File Nos. SR-NYSE-2006-78; SR-NASD-2006-113]

Self-Regulatory Organizations; New York Stock Exchange LLC and
the National Association of Securities Dealers, Inc.; Notice of Filing
of Proposed Rule Changes To Amend NYSE Rules 472 and 344, and NASD
Rules 1050 and 2711 Relating to Research Analyst Conflicts of Interest

January 9, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 27, 2006, the New York Stock Exchange LLC (``NYSE'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change. On December 20,
2006, NYSE filed Amendment No. 1 to its proposed rule change.\3\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ NYSE Amendment No. 1 makes minor revisions to the original
filing.
---------------------------------------------------------------------------

    On September 27, 2006, the National Association of Securities
Dealers, Inc. (``NASD'') filed with the Commission the proposed rule
change. On November 17, 2006, NASD filed Amendment No. 1 to its
proposed rule change.\4\
---------------------------------------------------------------------------

    \4\ NASD Amendment No. 1 makes minor revisions to the original
filing.
---------------------------------------------------------------------------

    The proposed rule changes are described in Items I, II, and III
below, which Items have substantially been prepared by the NYSE and
NASD (the ``SROs''). The Commission is publishing this notice to
solicit comments on the proposed rule changes, as amended, from
interested persons.

I. Self-Regulatory Organizations' Statements of the Terms of Substance
of the Proposed Rule Changes

    The Exchange proposes to amend certain provisions of NYSE Rules 472
and 344. These amendments eliminate the exception for pre-publication
factual verification review of research reports by non-research
personnel; change the quiet periods surrounding securities offerings
and the release of lock-up agreements; allow member organizations to
develop policies and procedures if they choose to prohibit research
analysts from holding securities for companies they cover; alter the
format for certain disclosures in research reports; and extend the
anti-retaliation prohibitions to all employees of a member
organization, not just investment banking.

    NASD is proposing to amend NASD Rules 1050 and 2711 to implement
certain recommendations contained in the December 2005 Joint Report by
NASD and the NYSE on the Operation and Effectiveness of the Research
Analyst Conflict of Interest Rules.\5\ NASD believes that the proposed
rule changes are intended to improve the effectiveness of the research
analyst conflict of interest rules and registration requirements by
making certain changes to the existing provisions regarding, among
other things: Disclosure of conflicts; quiet periods; restrictions on
review of research reports by non-research personnel; and restrictions
on personal trading by research analysts.
---------------------------------------------------------------------------

    \5\ http://www.[fxsp0]nasd.[fxsp0]com/web/groups[fxsp0]/rules--

regs/documents/rules--regs/[fxsp0]nasdw--015803.[fxsp0]pdf
---------------------------------------------------------------------------

    Below is the text of the proposed rule changes.\6\ Proposed new
language is italicized; proposed deletions are in [brackets].
---------------------------------------------------------------------------

    \6\ The rule text reflects the changes contained in SR-NYSE-
2006-77 and SR-NASD-2006-112, which were filed for immediate
effectiveness on September 27, 2006.
---------------------------------------------------------------------------

A. NYSE's Proposed Rule Text

Rule 472. Communications With the Public Approval of Communications and
Research Reports
    (a)(1) through (2) No Change.
Investment Banking, Research Department and Subject Company
Relationships and Communications
    (b)(1) Research analysts may not be subject to the supervision, or
control, of any employee of the member organization's investment
banking department and personnel engaged in investment banking
activities may not have any influence or control over the compensatory
evaluation of a research analyst.
    (2) Research reports may not be subject to review or approval prior
to publication by Investment Banking personnel or any other employee of
the member organization who is not directly responsible for investment
research (``non-research personnel'') other than Legal or Compliance
personnel.
    [(3) Non-research personnel may review research reports prior to
publication only to verify the factual accuracy of information in the
research report or to identify any potential conflicts of interest that
may exist, provided that:
    (i) Any written communication concerning the content of research
reports between non-research personnel and Research personnel must be
made either through Legal or Compliance personnel or in a transmission
copied to Legal or Compliance personnel; and
    (ii) any oral communication concerning the content of research
reports between non-research personnel and Research personnel must be
documented and made either with Legal or Compliance personnel acting as
intermediary or in a conversation conducted in the presence of Legal or
Compliance personnel.]
    (b)(4) through (6) renumbered as (b)(3) through (5).
Written Procedures
    (c) No change.
Retention of Communications
    (d) No change.
Restrictions on Trading Securities by Associated Persons
    (e)(1) No research analyst or household member may purchase or
receive an issuer's securities prior to its initial public offering
(e.g., so-called pre-IPO shares), if the issuer is principally engaged
in the same types of business as companies (or in the same industry
classification) which the research analyst usually covers in research
reports.
    (2) No research analyst or household member may trade in any
subject company's securities or derivatives of such securities that the
research analyst follows for a period of thirty (30) calendar days
prior to and five (5) calendar days after the member organization's
publication of research reports concerning such security or a change in
rating or price target of a subject company's securities.
    (3) No research analyst or household member may effect trades in a
manner inconsistent with the research analyst's most current
recommendations (i.e., sell securities while maintaining a ``buy'' or
``hold'' recommendation, buy securities while maintaining a ``sell''
recommendation, or effecting a ``short sale'' in a security while
maintaining a ``buy'' or ``hold'' recommendation on such security).
    (4) No change.
    (5) The prohibitions in paragraphs (e)(1) through (e)(3) do not
apply when the following conditions are satisfied:
    (A) The research analyst is employed by a member organization that
has adopted an internal policy that prohibits research analysts from
owning any securities issued by the subject company for which the
research analyst provides coverage and requires analysts to completely
divest themselves of their existing holdings in such securities;
    (B) The research analyst abides by a reasonable plan of liquidation
under which all securities issued by subject companies that the analyst
follows are to be sold within 120 days of the effective date of the
member organization's policy;
    (C) The research analyst files such liquidation plan with the
member organization's legal or compliance department within fifteen
(15) days of the effective date of the member organization's policy;
    (D) The research analyst receives written approval of the
liquidation plan from the member organization's legal or compliance
department prior to the sale of any securities under the plan; and
    (E) The member organization must maintain written records
sufficient to document compliance with each liquidation plan approved
by its legal or compliance department for three years following the
date on which the liquidation plan is approved.
    (e)(5) through (6) renumbered as (e)(6) through (7).
Restrictions on Member Organization's Issuance of Research Reports and
Participation in Public Appearances
    (f)(1) A member organization may not publish or otherwise
distribute research reports regarding an issuer and a research analyst
may not recommend or offer an opinion on an issuer's securities in a
public appearance, for which the member organization acted as manager
[or], co-manager, underwriter or dealer [of] for an initial public
offering within [forty (40)] twenty-five (25) calendar days following
the offering date.
    [(2) A member organization may not publish or otherwise distribute
research reports regarding an issuer and a research analyst may not
recommend or offer an opinion on an issuer's securities in a public
appearance, for which the member organization acted as manager or co-
manager of a secondary offering within ten (10) calendar days following
the offering date. This prohibition shall not apply to public
appearances or research reports published or otherwise distributed
under Securities Act Rule 139 regarding issuers whose securities are
actively traded, as defined in Securities Exchange Act Rule 101(c)(1)
of Regulation M.
    (3) No member organization that has agreed to participate or is
participating as an underwriter or dealer (other than as manager or co-
manager) of an issuer's initial public offering may publish or
otherwise distribute a research report regarding that issuer and a
research analyst may not recommend or offer an opinion on that issuer's
securities in a public appearance for twenty-five (25) calendar days
following the offering date.]
    [(4)] (2) No member organization which has acted as a manager or
co-

manager of a securities offering may publish or otherwise distribute a
research report and a research analyst may not recommend or offer an
opinion on an issuer's securities in a public appearance within
[fifteen (15)] five (5) days prior to or after the expiration, waiver
or termination of a lock-up agreement or any other agreement that the
member organization has entered into with a subject company and its
shareholders that restricts or prohibits the sale of the subject
company's or its shareholders' securities after the completion of a
securities offering. This prohibition shall not apply to public
appearances or research reports published or otherwise distributed
under Securities Act Rule 139 regarding issuers whose securities are
actively traded, as defined in Securities Exchange Act Rule 101(c)(1)
of Regulation M.
    [(5)] (3) A member organization may permit exceptions to the
prohibitions in paragraphs (f)(1)[,] and (2)[, and (4)] (consistent
with other securities laws and rules) for research reports that are
published or otherwise distributed or recommendations or opinions on an
issuer's securities made in a public appearance due to significant news
or events, e.g. an announcement of earnings, provided that such
research reports are pre-approved in writing by the member
organization's Legal or Compliance personnel.
    [(6)] (4) If a member organization intends to terminate its
research coverage of a subject company, notice of this termination must
be made. The member organization must make available a final research
report on the subject company using the means of dissemination
equivalent to those it ordinarily uses to provide the customer with its
research reports on the subject company. The report must be comparable
in scope and detail to prior research reports and must include a final
recommendation or rating, unless it is impracticable for the member
organization to produce a comparable report (e.g., if the research
analyst covering the subject company or sector has left the employ of
the member organization, or where the member organization terminates
coverage on the industry or sector). In instances where it is
impracticable for the member organization to provide a final
recommendation or rating, the member organization must provide the
rationale for the decision to terminate coverage.
Prohibition of Offering Favorable Research for Business
    (g)(1) No change.
    (2) No member organization and no employee of a member organization
[who is involved with the member organization's investment banking
activities] may, directly or indirectly, retaliate against or threaten
to retaliate against any research analyst employed by the member
organization or its affiliates as a result of an adverse, negative, or
otherwise unfavorable research report written or public appearance made
by the research analyst that may adversely affect the member
organization's present or prospective investment banking relationship
with the subject company of a research report. This prohibition shall
not limit a member organization's authority to discipline or terminate
a research analyst, in accordance with the member organization's
policies and procedures, for any cause other than the writing of such
an unfavorable research report or the making of such unfavorable public
appearance.
Restrictions on Compensation to Research Analysts
    (h) No change.
General Standards for All Communications
    (i) No change.
Specific Standards for Communications
    (j) No change.
Disclosure
    (k)(1) Disclosures Required in Research Reports.
Disclosure of Member Organization's, and Research Analyst's Ownership
of Securities, Receipt of Compensation, and Subject Company
Relationships
    [The front page cover of a research report either must include the
disclosures required under this Rule or must refer the reader to the
page(s) on which each such disclosure is found.] Any member
organization that has a conflict of interest or whose research analyst
has a conflict of interest concerning the subject company of a research
report must disclose that conflict of interest either (i) on its Web
site and prominently state the following on the front page of the
research report: ``[Name of firm and/or the research analyst preparing
this report] has a conflict of interest that may affect the ability of
the firm or the analyst to provide objective analysis about the
company. For more information about this conflict of interest, please
see [Reference to the firm's Web site]'' or (ii) the front page cover
of a research report either must include the disclosures required under
this Rule or must refer the reader to the page(s) on which each such
disclosure is found. Disclosures, and references to disclosures, must
be clear, comprehensive, and prominent. For purposes of paragraph
(k)(1), ``conflict of interest'' shall include any of the following:
    (i) A member organization must disclose in research reports: a. If
the member organization or its affiliates:
    1. Has managed or co-managed a public offering of securities for
the subject company in the past twelve (12) months;
    2. Has received compensation for investment banking services from
the subject company in the past twelve (12) months; or
    3. Expects to receive or intends to seek compensation for
investment banking services from the subject company in the next three
(3) months.
    b. If the member organization is making a market in the subject
company's securities at the time the research report is issued;
    c. If, as of the last day of the month immediately preceding the
date the publication (or the end of the second most recent month if the
publication is less than ten (10) calendar days after the end of the
most recent month), the member organization or its affiliates
beneficially own 1% or more of any class of common equity securities of
the subject company. The member organization must make the required
beneficial ownership computation no later than ten (10) calendar days
after the end of the prior month. Computation of beneficial ownership
of securities must be based upon the same standards used to compute
ownership for purposes of the reporting requirements under Section
13(d) of the Securities Exchange Act of 1934;
    d. If, as of the last day of the month immediately preceding the
date of publication of the research report (or the end of the second
most recent month if the publication date is less than thirty (30)
calendar days after the end of the most recent month):
    1. The subject company currently is a client of the member
organization or was a client of the member organization during the
twelve (12)-month period preceding the date of distribution of the
research report (In such instances, the member organization also must
disclose the types of services provided to the subject company. For
purposes of this paragraph, the types of services provided to the
subject company may be described as investment banking services, non-
investment banking-securities related services, and non-securities
services.);

    2. The member organization received any compensation for products
or services other than for investment banking services from the subject
company in the past twelve (12) months.
    e. If a research report contains a price target, the valuation
methods used, and any price objectives must have a reasonable basis and
include a discussion of risks;
    f. If a research report contains a rating, the meanings of all
ratings used by the organization in its ratings system (For example, a
member organization might disclose that a ``strong buy'' rating means
that the rated security's price is expected to appreciate at least 10%
faster than other securities in its sector over the next twelve (12)-
month period. Definitions of ratings terms also must be consistent with
their plain meaning. Therefore, for example, a ``hold'' rating should
not mean or imply that an investor should sell a security.);
    g. If a research report contains a rating, the percentage of all
securities that the member organization recommends an investor ``buy,''
``hold,'' or ``sell.'' Within each of the three (3) categories, a
member organization must also disclose the percentage of subject
companies that are investment banking services clients of the member
organization within the previous twelve (12) months (see Rule 472.70
for further information);
    h. If a research report contains either a rating or a price target,
and the member organization has assigned a rating or price target to
the subject company for at least one (1) year, the research report must
include a chart that depicts the price of the subject company's stock
over time and indicates points at which a member organization assigned
or changed a rating or price target. This provision would apply only to
securities that have been assigned a rating or price target for at
least one (1) year, and need not extend more than three (3) years prior
to the date of the research report. The information in the price chart
must be current as of the end of the most recent calendar quarter (or
the second most recent calendar quarter if the publication date is less
than fifteen (15) calendar days after the most recent calendar
quarter).
    (ii) A member organization must include the following disclosures
in research reports:
    a. If a research analyst received any compensation:
    1. From the subject company in the past twelve (12) months;
    2. That is based upon (among other factors) the member
organization's overall investment banking revenues.
    b. If, to the extent the research analyst or an employee of the
member organization with the ability to influence the substance of a
research report, knows:
    1. The subject company currently is a client of the member
organization or was a client of the member organization during the
twelve (12)-month period preceding the date of distribution of the
research report. In such instances, such member organization also must
disclose the types of services provided to the subject company (For
purposes of paragraph (k)(1) of this Rule, the types of services
provided to the subject company may be described as investment banking
services, non-investment banking-securities related services, and non-
securities services.). (For purpose of paragraph (k)(1) of this Rule,
an employee of a member organization with the ability to influence the
substance of the research report is an employee who, in the ordinary
course of that person's duties, has the authority to review the
particular research report and to change that research report prior to
publication.);
    2. That the member organization or any affiliate thereof, received
any compensation for products or services other than investment banking
services from the subject company in the past twelve (12) months.
    (iii) A research analyst and a member organization must disclose in
research reports:
    a. If, to the extent the research analyst or member organization
has reason to know, an affiliate of the member organization received
any compensation for products or services other than investment banking
services from the subject company in the past twelve (12) months;
    1. This requirement will be deemed satisfied if such compensation
is disclosed in research reports within thirty (30) days after
completion of the most recent calendar quarter, provided that the
member organization has taken steps reasonably designed to identify
such compensation during that calendar quarter.
    2. The member organization and the research analyst will be
presumed not to have reason to know whether an affiliate received
compensation for other than investment banking services from the
subject company in the past twelve (12) months if the member
organization maintains and enforces policies and procedures reasonably
designed to prevent all research analysts and employees of the member
organization with the ability to influence the substance of research
reports from, directly or indirectly, receiving information from the
affiliate concerning such compensation.
    3. Paragraph 472(k)(1)(iii)a. shall not apply to any subject
company as to which the member organization initiated coverage since
the beginning of the current calendar quarter.
    b. If the research analyst or a household member has a financial
interest in the securities of the subject company, and the nature of
the financial interest, including, without limitation, whether it
consists of any option, right, warrant, futures contract, long or short
position;
    c. If the research analyst or a household member is an officer,
director, or advisory board member of the subject company;
    d. Any other actual, material conflict of interest of the research
analyst, or member organization, of which the research analyst knows,
or has reason to know, at the time the research report is published or
otherwise distributed.
    When a member organization publishes or otherwise distributes a
research report covering six (6) or more subject companies (a
``compendium report'') for purposes of the disclosures required in
paragraph (k)(1) of this Rule, the compendium report may direct the
reader in a clear and prominent manner as to where the reader may
obtain applicable current disclosures. Electronic compendium reports
may include a hyperlink to the required disclosures. Paper-based
compendium reports must provide either a toll-free number to call or a
postal address to write for the required disclosures and may also
include a web address of the member organization where the disclosures
can be found.
(k)(2) Disclosures Required in Public Appearances
Disclosure of Member Organization's, and Research Analyst's Ownership
of Securities, Receipt of Compensation, and Subject Company
Relationships
    (i) A research analyst must disclose the following conflicts of
interest in public appearances:
    a. If, as of the last day of the month before the appearance (or
the end of the second most recent month if the appearance is less than
ten (10) calendar days after the end of the most recent month), the
member organization or its affiliates beneficially own 1% or more of
any class of common equity securities of the subject company. The
member organization must make the required beneficial ownership
computation no later than ten (10) calendar days after the end of the
prior month.

Computation of beneficial ownership of securities must be based upon
the same standards used to compute ownership for purposes of the
reporting requirements under Section 13(d) of the Securities Exchange
Act of 1934;
    b. If the research analyst or a household member has a financial
interest in the securities of the subject company, and the nature of
the financial interest, including, without limitation, whether it
consists of any option, right, warrant, futures contract, long or short
position;
    c. If, to the extent the research analyst knows or has reason to
know:
    1. The subject company currently is a client of the member
organization or was a client of the member organization during the
twelve (12)-month period preceding the date of the public appearance by
the research analyst. In such instances, the research analyst also must
disclose the types of services provided to the subject company (For
purposes of this paragraph, the types of services provided to the
subject company may be described as investment banking services, non-
investment banking-securities related services, and non-securities
services.);
    2. The member organization or any affiliate thereof, received any
compensation from the subject company in the past twelve (12) months.
    d. Any other actual, material conflict of interest of the research
analyst, or member organization, of which the research analyst knows,
or has reason to know, at the time the public appearance is made;
    e. If the research analyst or a household member is an officer,
director, or advisory board member of the subject company;
    f. If the research analyst received any compensation from the
subject company in the past twelve (12) months.
(k)(3) Exceptions to the Required Disclosures
    (i) A member organization or a research analyst will not be
required to make a disclosure required by Rule 472(k)(l)(i)a.2. and 3.,
(k)(1)(i)d.1., (k)(1)(ii)b.1., and (k)(2)(i)c. to the extent such
disclosure would reveal material non-public information regarding
specific potential future investment banking services transactions of
the subject company.
(k)(4) Third-Party Research Reports
    (i) Subject to paragraph (k)(4)(ii), if a member organization
distributes or makes available research reports produced by another
member organization, a non-member organization affiliate of a member
organization, such as a foreign or domestic broker-dealer or investment
adviser, or an independent third party, the member organization must
accompany the research report with the applicable disclosures, as they
pertain to the member organization, that are required by paragraphs
(k)(1)(i)c, (k)(1)(i)a, (k)(1)(i)b and (k)(1)(iii)d of this Rule.
    a. A supervisory analyst qualified under NYSE Rule 344 must
approve, pursuant to Rule 472(a)(2), by signature or initial any third-
party research distributed by a member organization; and
    b. A supervisory analyst or qualified person designated pursuant to
Rule 342(b)(1) (e.g., a person who has taken and passed the Series 9/
10, or another examination acceptable to the Exchange which
demonstrates competency relevant to assigned responsibilities,
including the Series 24 if taken and passed after July 1, 2001) must
review third-party research distributed by a member organization to
determine that the disclosures required by Rule 472(k)(1)(i)c,
(k)(1)(i)a, (k)(1)(i)b and (k)(1)(iii)d are complete and accurate, and
that the content of the research report is consistent with all
applicable standards regarding communications with the public.
    (ii) The requirements in paragraph (k)(4)(i) shall not apply to
research reports prepared by an independent third party that the member
organization makes available to its customers either upon request or
through a member organization-maintained Web site.
Other Communications Activities
    (l) No change.
Small Firm Exception
    (m) The provisions of Rule 472(b)(1)[,] and (2) [and (3)] do not
apply to member organizations that over the three previous years, on
average per year, have participated in ten (10) or fewer investment
banking services transactions as manager or co-manager and generated $5
million or less in gross investment banking services revenues from
those transactions. For purposes of this paragraph, the term
``investment banking services transactions'' shall include both debt
and equity underwritings but not municipal securities underwritings.
Member organizations that qualify for this exemption must maintain
records for three (3) years of any communications that, but for this
exemption, would be subject to paragraphs (b)(1)[,] and (2)[, and (3)]
of this Rule.

* * * Supplementary Material:

.10 Definitions
    (1) No change.
    (2) Research Report--``Research report'' is generally defined as a
written or electronic communication which includes an analysis of
equity securities of individual companies or industries (other than an
open-end registered investment company that is not listed or traded on
an exchange or a public direct participant program), and provides
information reasonably sufficient upon which to base an investment
decision. This term does not include:
    (a) The following communications, provided that they do not include
an analysis, narrative discussion, recommendation or rating of
individual securities or issuers:
    (1) Reports discussing broad-based indices, e.g. the Russell 2000
or S&P 500 index;
    (2) Reports commenting on economic, political or market conditions;
    (3) Technical analysis concerning the demand and supply for a
sector, index or industry based on trading volume and price;
    (4) Statistical summaries of multiple companies' financial data
(including listings of current ratings);
    (5) Reports that recommend increasing or decreasing holdings in
particular industries or sectors; or
    (6) Notices of ratings or price target changes, provided that the
member organization simultaneously directs the readers of the notice as
to where to obtain the most recent research report on the subject
company that includes the current applicable disclosures required by
this rule and that such research report does not contain materially
misleading disclosures, including disclosures that are outdated or no
longer applicable;
    (b) The following communications, even if they include information
reasonably sufficient upon which to base an investment decision or a
recommendation or rating of individual securities or companies:
    (1) Any communication distributed to fewer than 15 persons;
    (2) Periodic reports, solicitations or other communications
prepared for investment company shareholders or discretionary
investment account clients that discuss individual securities in the
context of a fund's or account's past performance or the basis for
previously made discretionary investment decisions; or
    (3) Internal communications that are not given to customers; and

    (c) Communications that constitute statutory prospectuses that are
filed as part of the registration statement.
    For purposes of approval by a supervisory analyst pursuant to Rule
472(a)(2), the term research report includes, but is not limited to, a
report which recommends equity securities, derivatives of such
securities, including options, debt and other types of fixed income
securities, single stock futures products, and other investment
vehicles subject to market risk.
    .10 (3) through (5) No change.
    .20 through .30 No change.
    .40 For purposes of this Rule, the term ``research analyst''
includes an allied member, associated person or employee of a member
organization primarily responsible for, and any person who reports
directly or indirectly to such research analyst in connection with, the
preparation of the substance of a research report whether or not any
such person has the job title of ``research analyst''.
    For purposes of this Rule, the term ``household member'' means any
individual whose principal residence is the same as the research
analyst's principal residence. This term does not include an unrelated
person who shares the same residence as a research analyst, provided
that the research analyst and unrelated person are financially
independent of one another. Paragraphs (e)(1), (2), (3), (4)(i), (ii),
(iii), (iv) and (v), (k)(1)(iii)b., c., and (k)(2)(i)b. and e. apply to
any account in which a research analyst has a financial interest, or
over which the research analyst exercises discretion or control[, other
than an investment company registered under the Investment Company Act
of 1940]. The trading restrictions applicable to research analysts and
household members (i.e., paragraphs (e)(1), (2), (3), (4)(i), (ii),
(iii), (iv) and (v))[;] shall not include an investment company
registered under the Investment Company Act of 1940 over which the
research analyst or a household member has discretion or control,
provided that the research analyst or household member has no financial
interest in such investment company, other than a performance or
management fee, and do not apply to a ``blind trust'' account that is
controlled by a person other than the research analyst or research
analyst's household member where neither the research analyst nor
household member knows of the account's investments or investment
transactions.
    .50 through .140 No change.
Rule 344. Research Analysts and Supervisory Analysts
    Research analysts and supervisory analysts must be registered with,
qualified by, and approved by the Exchange.

* * * Supplementary Material:

    .10 [For purposes of this Rule, the term ``research analyst''
includes a member, allied member, associated person or employee who is
primarily responsible for the preparation of the substance of a
research report and/or whose name appears on such report. Such research
analysts must pass a qualification examination acceptable to the
Exchange.] For the purposes of this Rule, ``research analyst'' shall
mean an associated person whose primary job function is to provide
investment research and who is primarily responsible for the
preparation of the substance of a research report or whose name appears
on the report.
    .11 For purposes of this Rule, the term ``supervisory analyst''
includes [a member,] an allied member or employee who is responsible
for preparing or approving research reports under Rule 472(a)(2). In
order to show evidence of acceptability to the Exchange as a
supervisory analyst, [a member,] an allied member, or employee may do
one of the following:
    (1) Present evidence of appropriate experience and pass an Exchange
Supervisory Analyst Examination (Series 16).
    (2) Present evidence of appropriate experience and successful
completion of a specified level of the Chartered Financial Analysts
Examination prescribed by the Exchange and pass only that portion of
the Exchange Supervisory Analyst Examination (Series 16) dealing with
Exchange rules on research standards and related matters.
    The Exchange publishes a Study Outline for the Research Analyst
Examination and the Supervisory Analyst Examination (Series 16).
    .12 No change.

B. NASD's Proposed Rule Text

1050. Registration of Research Analysts
    (a) No change.
    (b) For the purposes of this Rule 1050, ``research analyst'' shall
mean an associated person whose primary job function is to provide
investment research and who is primarily responsible for the
preparation of the substance of a research report or whose name appears
on a research report.
    (c) through (f) No change.
* * * * *
2711. Research Analysts and Research Reports
(a) Definitions
    For purposes of this rule, the following terms shall be defined as
provided.
    (1) through (6) No Change.
    (7) ``Research analyst account'' means any account in which a
research analyst or member of the research analyst's household has a
financial interest[,] or over which such analyst has discretion or
control[, other than an investment company registered under the
Investment Company Act of 1940]. The term ``research analyst account''
shall not include an investment company registered under the Investment
Company Act of 1940 over which the research analyst or a member of the
research analyst's household has discretion or control, provided that
the research analyst or household member has no financial interest in
such investment company, other than a performance or management fee.
This term also shall [does] not include a ``blind trust'' account that
is controlled by a person other than the research analyst or member of
the research analyst's household where neither the research analyst nor
a member of the research analyst's household knows of the account's
investments or investment transactions.
    (8) No Change.
    (9) ``Research Report'' means any written (including electronic)
communication that includes an analysis of equity securities of
individual companies or industries[,] (other than an open-end
registered investment company that is not listed or traded on an
exchange or a public direct participation program) and that provides
information reasonably sufficient upon which to base an investment
decision. This term does not include:
    (A) through (C) No Change.
    (10) No Change.
(b) Restrictions on Relationship With Research Department
    (1) No Change.
    (2) [Except as provided in paragraph (b)(3), n]No employee of the
investment banking department or any other employee of the member who
is not directly responsible for investment research (``non-research
personnel''), other than legal or compliance personnel, may review or
approve a research report of the member before its publication.
    [(3) Non-research personnel may review a research report before its
publication as necessary only to verify

the factual accuracy of information in the research report or identify
any potential conflict of interest, provided that:]
    [(A) Any written communication between non-research personnel and
research department personnel concerning the content of a research
report must be made either through authorized legal or compliance
personnel of the member or in a transmission copied to such personnel;
and]
    [(B) Any oral communication between non-research personnel and
research department personnel concerning the content of a research
report must be documented and made either through authorized legal or
compliance personnel acting as intermediary or in a conversation
conducted in the presence of such personnel.]
(c) Restrictions on Communications With the Subject Company
    (1) through (4) No Change.
    (5) A research analyst is prohibited from directly or indirectly:
    (A) No Change.
    (B) Engaging in any communication with a current or prospective
customer or internal sales personnel in the presence of investment
banking department personnel or company management about an investment
banking services transaction.
    (6) through (7) No Change.
    (d) through (e) No Change.
(f) Restrictions on Publishing Research Reports and Public Appearances;
Termination of Coverage
    [(1) No member may publish or otherwise distribute a research
report and no research analyst may make a public appearance regarding a
subject company for which the member acted as manager or co-manager
of:]
    [(A) An initial public offering, for 40 calendar days following the
date of the offering; or]
    [(B) A secondary offering, for 10 calendar days following the date
of the offering; provided that:]
    [(i) Paragraphs (f)(1)(A) and (f)(1)(B) will not prevent a member
from publishing or otherwise distributing a research report, or prevent
a research analyst from making a public appearance, concerning the
effects of significant news or a significant event on the subject
company within such 40- and 10-day periods, and provided further that
legal or compliance personnel authorize publication of that research
report before it is issued or authorize the public appearance before it
is made; and]
    [(ii) paragraph (f)(1)(B) will not prevent a member from publishing
or otherwise distributing a research report pursuant to SEC Rule 139
regarding a subject company with ``actively-traded securities,'' as
defined in Regulation M, 17 CFR 242.101(c)(1), and will not prevent a
research analyst from making a public appearance concerning such a
company.]
    ([2]1) No member that has agreed to participate or is participating
as an underwriter or dealer [(other than as manager or co-manager)] of
an issuer's initial public offering may publish or otherwise distribute
a research report or make a public appearance regarding that issuer for
25 calendar days after the date of the offering. This paragraph will
not prevent a member from publishing or otherwise distributing a
research report, or prevent a research analyst from making a public
appearance, concerning the effects of significant news or a significant
event on the subject company within such 25-day period, provided
further that legal or compliance personnel authorize publication of
that research report before it is issued or authorize the public
appearance before it is made.
    ([3]2) For purpose[s] of paragraph (f)(1)[and (f)(2)], the term
``date of the offering'' refers to the later of the effective date of
the registration statement or the first date on which the security was
bona fide offered to the public.
    [(4) No member that has acted as a manager or co-manager of a
securities offering may publish or otherwise distribute a research
report or make a public appearance concerning a subject company 15 days
prior to and after the expiration, waiver or termination of a lock-up
agreement or any other agreement that the member has entered into with
a subject company or its shareholders that restricts or prohibits the
sale of securities held by the subject company or its shareholders
after the completion of a securities offering. This paragraph will not
prevent a member from publishing or otherwise distributing a research
report concerning the effects of significant news or a significant
event on the subject company within such period, provided legal or
compliance personnel authorize publication of that research report
before it is issued. In addition, this paragraph shall not apply to the
publication or distribution of a research report pursuant to SEC Rule
139 regarding a subject company with ``actively traded securities,'' as
defined in Regulation M, 17 CFR 242.101(c)(1), or to a public
appearance concerning such a subject company.]
    (3) Any member that has acted as a manager or co-manager of a
securities offering and publishes or otherwise distributes a research
report concerning a subject company during a period 15 days prior to
and after the expiration, waiver or termination of a lock-up agreement
or any other agreement that the member has entered into with a subject
company or its shareholders that restricts or prohibits the sale of
securities held by the subject company or its shareholders after the
completion of a securities offering shall provide with the research
report a certification, in such form as prescribed by NASD, stating
that the member has a bona fide reason for issuing the research report.
    ([5]4) If a member intends to terminate its research coverage of a
subject company, notice of this termination must be made. The member
must make available a final research report on the subject company
using the means of dissemination equivalent to those it ordinarily uses
to provide the customer with its research reports on the subject
company. The report must be comparable in scope and detail to prior
research reports and must include a final recommendation or rating,
unless it is impracticable for the member to produce a comparable
report (e.g., if the research analyst covering the subject company or
sector has left the member or if the member terminates coverage of the
industry or sector). If it is impracticable to produce a final
recommendation or rating, the final research report must disclose the
member's rationale for the decision to terminate coverage.
(g) Restrictions on Personal Trading by Research Analysts
    (1) through (4) No Change.
    (5) The prohibitions in paragraphs (g)(1) through (g)(3) do not
apply to a purchase or sale of the securities of[:]
    [(A) Any registered diversified investment company as defined under
Section (5)(b)(1) of the Investment Company Act of 1940; or ]
    [(B)] Any [other] investment fund over which neither the research
analyst nor a member of the research analyst's household has any
investment discretion or control, provided that the research analyst
and household member are not made aware of the fund's holdings or
transactions other than through periodic shareholder reports and sales
material based on such reports[:] and
    [(i)] The research analyst accounts collectively own interests
representing no more than 1% of the assets of the fund[;].
    [(ii) The fund invests no more than 20% of its assets in securities
of issuers principally engaged in the same types of

business as companies that the research analyst follows; and]
    [(iii) If the investment fund distributes securities in kind to the
research analyst or household member before the issuer's initial public
offering, the research analyst or household member must either divest
those securities immediately or the research analyst must refrain from
participating in the preparation of research reports concerning that
issuer.]
    (6) The prohibitions in paragraphs (g)(1) through (g)(3) do not
apply when the following conditions are satisfied:
    (A) The research analyst is employed by a member that has adopted
an internal policy that prohibits research analysts from owning any
securities issued by subject companies for which the research analyst
provides coverage and requires those analysts to completely divest
themselves of their existing holdings in such securities;
    (B) The research analyst abides by a reasonable plan of liquidation
under which all securities issued by companies that the analyst follows
are to be sold within 120 days of the effective date of the member's
policy;
    (C) The research analyst files such liquidation plan with the
member's legal or compliance department within 15 days of the effective
date of the member's policy;
    (D) The research analyst receives written approval of the
liquidation plan from the member's legal or compliance department prior
to the sale of any securities under the plan; and
    (E) The member must maintain written records sufficient to document
compliance with each liquidation plan approved by its legal or
compliance department for three years following the date on which the
liquidation plan is approved.
    ([6]7) Legal or compliance personnel of the member shall pre-
approve all transactions of persons who oversee research analysts to
the extent such transactions involve equity securities of subject
companies covered by the research analysts that they oversee. This pre-
approval requirement shall apply to all persons, such as the director
of research, supervisory analyst, or member of a committee, who have
direct influence or control with respect to the preparation of the
substance of research reports or establishing or changing a rating or
price target of a subject company's equity securities.
(h) Disclosure Requirements
    (1) [Ownership and Material]Definition of ``Conflict of Interest''
    [A member must disclose in research reports and a research analyst
must disclose in public appearances]For the purposes of paragraph
(h)(2), ``conflict of interest'' shall include any of the following:
    (A) If the research analyst or a member of the research analyst's
household has a financial interest in the securities of the subject
company, and the nature of the financial interest (including, without
limitation, whether it consists of any option, right, warrant, future,
long or short position);
    (B) If, as of the end of the month immediately preceding the date
of publication of the research report or the public appearance (or the
end of the second most recent month if the publication date is less
than 10 calendar days after the end of the most recent month), the
member or its affiliates beneficially own 1% or more of any class of
common equity securities of the subject company. Computation of
beneficial ownership of securities must be based upon the same
standards used to compute ownership for purposes of the reporting
requirements under Section 13(d) of the Securities Exchange Act of
1934;
    [(C) Any other actual, material conflict of interest of the
research analyst or member of which the research analyst knows or has
reason to know at the time of publication of the research report or at
the time of the public appearance.]
[(2) Receipt of Compensation]
    [(A) A member must disclose in research reports:]
    ([i]C) If the research analyst received compensation:
    [a.](i) Based upon (among other factors) the member's investment
banking revenues; or
    [b.](ii) From the subject company in the past 12 months.
    ([ii]D) If the member or any affiliate of the member:
    [a.](i) Managed or co-managed a public offering of securities for
the subject company in the past 12 months;
    [b.](ii) Received compensation for investment banking services from
the subject company in the past 12 months; or
    [c.](iii) Expects to receive or intends to seek compensation for
investment banking services from the subject company in the next 3
months.
    ([iii]E) If ([1]i) as of the end of the month immediately preceding
the date of publication of the research report (or the end of the
second most recent month if the publication date is less than 30
calendar days after the end of the most recent month) or ([2]ii) to the
extent the research analyst or an employee of the member with the
ability to influence the substance of the research knows:
    a. The member received any compensation for products or services
other than investment banking services from the subject company in the
past 12 months; or
    b. The subject company currently is, or during the 12-month period
preceding the date of distribution of the research report was, a client
of the member. In such cases, the member also must disclose the types
of services provided to the subject company. For purposes of this Rule
2711(h)(1), the types of services provided to the subject company shall
be described as investment banking services, non-investment banking
securities-related services, and non-securities services.
    ([iv]F) If, to the extent the research analyst or an employee of
the member with the ability to influence the substance of the research
report knows an affiliate of the member received any compensation for
products or services other than investment banking services from the
subject company in the past 12 months.
    ([v]G) If, to the extent the research analyst or member has reason
to know, an affiliate of the member received any compensation for
products or services other than investment banking services from the
subject company in the past 12 months.
    [a.](i) [This]The requirement to disclose this conflict of interest
will be deemed satisfied if such compensation is disclosed in research
reports or on a member's Web site within 30 days after completion of
the last calendar quarter, provided that the member has taken steps
reasonably designed to identify any such compensation during that
calendar quarter. [This]The disclosure requirement shall not apply to
any subject company as to which the member initiated coverage since the
beginning of the current calendar quarter.
    [b.](ii) The research analyst and the member will be presumed not
to have reason to know whether an affiliate received any compensation
for products or services other than investment banking services from
the subject company in the past 12 months if the member maintains and
enforces policies and procedures reasonably designed to prevent the
research analysts and employees of the member with the ability to
influence the substance of research reports from, directly or
indirectly, receiving information from the affiliate concerning whether
the affiliate received such compensation.

    (H) If the research analyst or member of a research analyst's
household serves as an officer, director or advisory board member of
the subject company.
    (I) If the member was making a market in the subject company's
securities at the time that the research report was published; and
    (J) Any other actual, material conflict of interest of the research
analyst or member of which the research analyst knows or has reason to
know at the time of publication of the research report or at the time
of the public appearance.
    ([vi]K) For the purposes of this Rule 2711(h)([2]1), an employee of
the member with the ability to influence the substance of the research
report is an employee who, in the ordinary course of that person's
duties, has the authority to review the particular research report and
to change that research report prior to publication.

(2) Disclosure of Conflicts of Interest

    (A) Any member that has a conflict of interest or whose research
analyst has a conflict of interest concerning the subject company of a
research report must disclose that conflict of interest either:
    (i) On its Web site and prominently state the following on the
front page of the research report:
    ``[Name of firm and/or the research analyst preparing this report]
has a conflict of interest that may affect the ability of the firm or
the analyst to provide objective analysis about the company. For more
information about this conflict of interest, please see [Reference to
the firm's Web site]'' or
    (ii) In the research report in accordance with paragraph (h)(8).
    (B) A research analyst must disclose in public appearances:
    (i) The conflicts of interest described in paragraphs (h)(1)(A),
(B) and (J);
    (ii) If, to the extent the research analyst knows or has reason to
know, the member or any affiliate received any compensation from the
subject company in the past 12 months;
    (iii) If the research analyst received any compensation from the
subject company in the past 12 months; or
    ([iii]iv) If, to the extent the research analyst knows or has
reason to know, the subject company currently is, or during the 12-
month period preceding the date of distribution of the research report,
was, a client of the member. In such cases, the research analyst also
must disclose the types of services provided to the subject company, if
known by the research analyst;[.]or
    (v) If the research analyst or a member of the research analyst's
household serves as an officer, director or advisory board member of
the subject company.
    (C) A member or research analyst will not be required to make a
disclosure required by paragraphs (h)(1)(D)(ii) and
(iii)[(h)(2)(A)(ii)(b) and (c)], (h)(1)(E)(b)[(2)(A)(iii)(b),] or
(h)(2)(B)(ii) and (iv[iii]) to the extent such disclosure would reveal
material non-public information regarding specific potential future
investment banking transactions of the subject company.
[(3) Position as Officer or Director]
    [A member must disclose in research reports and a research analyst
must disclose in public appearances if the research analyst or a member
of the research analyst's household serves as an officer, director or
advisory board member of the subject company.]
([4]3) Meaning of Ratings
    If a research report contains a rating, the member must define in
the research report the meaning of each rating used by the member in
its rating system. The definition of each rating must be consistent
with its plain meaning.
([5]4) Distribution of Ratings
    (A) Through (B) No Change.
    (C) The information that is disclosed under paragraphs (h)([5]4)(A)
and (h)([5]4)(B) must be current as of the end of the most recent
calendar quarter (or the second most recent calendar quarter if the
publication date is less than 15 calendar days after the most recent
calendar quarter) and must reflect the distribution of the most recent
ratings issued by the member for all subject companies, unless the most
recent rating was issued more than 12 months ago.
    (D) The requirements of paragraph (h)([5]4) shall not apply to any
research report that does not contain a rating.
([6]5) Price Chart
    If a research report contains either a rating or a price target,
and the member has assigned a rating or price target to the subject
company's securities for at least one year, the research report must
include a line graph of the security's daily closing prices for the
period that the member has assigned any rating or price target or for a
three-year period, whichever is shorter.
    The line graph must:
    (A) through (C) No Change.
([7]6) Price Targets
    If a research report contains a price target, the member must
disclose in the research report the valuation methods used to determine
the price target. Price targets must have a reasonable basis and must
be accompanied by a disclosure concerning the risks that may impede
achievement of the price target.
[(8) Market Making
    A member must disclose in research reports if it was making a
market in the subject company's securities at the time that the
research report was published.]
([9]7) Disclosure Required by Other Provisions
    In addition to the disclosure required by this rule, members and
research analysts must provide disclosure in research reports and
public appearances that is required by applicable law or regulation,
including NASD Rule 2210 and the antifraud provisions of the federal
securities laws.
([10]8) Prominence of Disclosure
    The disclosures required by this paragraph (h), other than those
made pursuant to paragraph (h)(2)(A)(i), must be presented on the front
page of research reports or the front page must refer to the page on
which disclosures are found. Disclosures and references to disclosures
must be clear, comprehensive and prominent.
([11]9) Disclosures in Research Reports Covering Six or More Companies
    When a member distributes a research report covering six or more
subject companies (a ``compendium report''), for purposes of the
disclosures required in paragraph (h), other than those required by
paragraph (h)(2), the compendium report may direct the reader in a
clear manner as to where they may obtain applicable current
disclosures. Electronic compendium reports may include a hyperlink to
the required disclosures. Paper-based compendium reports must provide
either a toll-free number to call or a postal address to write for the
required disclosures and may also include a web address of the member
where the disclosures can be found.
(1[2]0) Records of Public Appearances
    Members must maintain records of public appearances by research
analysts sufficient to demonstrate compliance by those research
analysts with the applicable disclosure requirements under paragraph
(h) of this Rule. Such records must be maintained for three years from
the date of the public appearance.
(1[3]1) Third-Party Research Reports
    (A) Subject to paragraph (h)(1[3]1)(B), if a member distributes or
makes available any research report that is produced by another member,
a non-

member affiliate of the member or an independent third party, the
member must accompany the research report with the current applicable
disclosures, as they pertain to the member, that are required by
paragraphs (h)(1)(B), [(h)(1)(C), (h)(2)(A)(ii) and (h)(8)] (h)(1)(D),
(h)(1)(I) and (h)(1)(J) of this Rule.
    (B) The requirements of paragraph (h)(1[3]1)(A) shall not apply to
research reports prepared by an independent third party that the member
makes available to its customers either upon request or through a
member-maintained Web site.
    (C) No Change.
(i) Supervisory Procedures
    Each member subject to this rule must adopt and implement written
supervisory procedures reasonably designed to ensure that the member
and its employees comply with the provisions of this rule (including
the attestation requirements of Rule 2711(d)(2)), and a senior officer
of such a member must [attest] annually [to]file with the NASD Member
Regulation Department by April 1 of each year an attestation that it
has adopted and implemented those procedures.
(j) Prohibition of Retaliation Against Research Analysts
    No member and no [employee of a member who is involved with the
member's investment banking activities]non-research personnel as
defined in paragraph (b)(2) may, directly or indirectly, retaliate
against or threaten to retaliate against any research analyst employed
by the member or its affiliates as a result of an adverse, negative, or
otherwise unfavorable research report or public appearance written or
made by the research analyst that may adversely affect the member's
present or prospective investment banking relationship with the subject
company of a research report. This prohibition shall not limit a
member's authority to discipline or terminate a research analyst, in
accordance with the member's policies and procedures, for any cause
other than the writing of such an unfavorable research report or the
making of such an unfavorable public appearance.
(k) No Change
* * * * *

II. Self-Regulatory Organizations' Statements of the Purpose of, and
Statutory Basis for, the Proposed Rule Changes

    In their filings with the Commission, the Exchange and NASD
included statements concerning the purpose of and basis for the
proposed rule changes and discussed any comments they received on the
proposed rule changes. The text of these statements may be examined at
the places specified in Item IV below. The Exchange and NASD have
prepared summaries, set forth in sections A, B, and C below, of the
most significant aspects of such statements.

A. Self-Regulatory Organization's Statements of the Purpose of, and
Statutory Basis for, the Proposed Rule Changes

1. NYSE's Purpose

Background

    Beginning in 2002, the Exchange and the National Association of
Securities Dealers, Inc. implemented a series of rule changes (``SRO
Rules'') to improve objectivity and transparency in equity research and
provide investors with more reliable and useful information to make
investment decisions. The NYSE believes that the rules were intended to
restore public confidence in the validity of research and the veracity
of research analysts, who are expected to function as unbiased
intermediaries between issuers and the investors who buy and sell their
securities. According to the NYSE, the trustworthiness of research had
eroded due to the pervasive influences of investment banking and other
conflicts that had manifest themselves during the market boom of the
late 1990s.
    Generally, the SRO Rules require clear, comprehensive and prominent
disclosure of conflicts of interest in research reports and public
appearances by research analysts. The rules further prohibit certain
conduct--investment banking personnel involvement in the content of
research and determination of analyst compensation, for example--when
the conflicts are considered too pronounced to be cured by disclosure.
    The SROs enacted the research analyst conflict rules in two primary
tranches and, more recently, adopted additional amendments prohibiting
analysts from participating in road shows. In addition, the SROs
supplemented their rulemaking with two joint memoranda that provided
interpretive guidance to their members on a number of issues.\7\ The
NASD and NYSE rules and interpretations are virtually identical and are
intended to operate uniformly.
---------------------------------------------------------------------------

    \7\ See NYSE Information Memos 02-26 and 04-10 and NASD Notices
to Members 02-39 (July 2002) and 04-18 (March 2004).
---------------------------------------------------------------------------

    On May 10, 2002, the SEC approved the first round of proposed SRO
Rules (``Round 1 Amendments'')--new NASD Rule 2711 (``Research Analysts
and Research Reports'') and amendments to NYSE Rules 351 (``Reporting
Requirements'') and 472 (``Communications with the Public'')--which
implemented basic reforms to separate research from investment banking
and to provide more extensive disclosure of conflicts of interest in
research reports and public appearances.\8\
---------------------------------------------------------------------------

    \8\ See Securities Exchange Act Release No. 45908 (May 10,
2002), 67 FR 34968 (May 16, 2002) (order approving SR-NASD-2002-021
and SR-NYSE-2002-09).
---------------------------------------------------------------------------

    On July 29, 2003, the SEC approved a second set of amendments to
the SRO Rules (``Round 2 Amendments'') \9\ that achieved two purposes.
First, the Round 2 Amendments implemented SRO initiatives to further
promote analyst objectivity and transparency of conflicts in research
reports. Second, the Round 2 Amendments implemented changes mandated by
the Sarbanes-Oxley Act of 2002 (``Sarbanes-Oxley'').\10\ Sarbanes-Oxley
required adoption by July 30, 2003 of rules ``reasonably designed to
address conflicts of interest that can arise when securities analysts
recommend equity securities in research reports and public
appearances,'' and set forth certain specific rules to be promulgated.
Many of those rules had already been adopted in the first round of SRO
rulemaking. The Round 2 Amendments therefore implemented those specific
Sarbanes-Oxley rules that did not already exist and conformed the
language of the SRO Rules as necessary.
---------------------------------------------------------------------------

    \9\ See Securities Exchange Act Release No. 48252 (July 29,
2003), 68 FR 45875 (Aug. 4, 2003) (order approving SR-NASD-2002-154
and SR-NYSE-2002-49).
    \10\ See Section 15D(a) of the Act, 15 U.S.C. 78o-6.
---------------------------------------------------------------------------

    As part of the Round 2 Amendments, the SEC approved rules requiring
registration and qualification requirements for research analysts. NYSE
Rule 344 requires an associated person who functions as a research
analyst on behalf of a member organization to register as such and pass
a qualification examination. For the purposes of this requirement, a
``research analyst'' is defined as an associated person or employee who
is primarily responsible for the preparation of the substance of a
research report and/or whose name appears on such ``research report,''
as that term is defined in NYSE Rule 472.
    The SROs jointly developed and implemented the Research Analyst
Qualification Examination (Series 86/87). The examination consists of
an analysis part (Series 86) and a regulatory

part (Series 87). Prior to taking either the Series 86 or 87, a
candidate also must have passed the General Securities Registered
Representative Examination (Series 7), the Limited Registered
Representative Examination (Series 17), or the Canada Module of Series
7 (Series 37 or 38).
    The SRO Rules provide three exemptions from the Series 86
examination. First, there is an exemption for research analysts who
have passed Levels I and II of the Chartered Financial Analyst
(``CFA'') examination and have either (1) completed the CFA Level II
within 2 years of application or registration, or (2) functioned as a
research analyst continuously since having passed the CFA Level II.\11\
---------------------------------------------------------------------------

    \11\ See Securities Exchange Act Release No. 49464 (March 24,
2004), 69 FR 16628 (March 30, 2004) (order approving SR-NASD-2004-
020 and SR-NYSE-2004-03).
---------------------------------------------------------------------------

    A second exemption is available to research analysts who have
passed Levels I and II of the Chartered Market Technician Examination
and produce only ``technical research reports,'' as that term is
defined under the SRO Rules.\12\
---------------------------------------------------------------------------

    \12\ See Securities Exchange Act Release No. 51240 (February 23,
2005), 70 FR 10451 (March 3, 2005) (notice of immediate
effectiveness of SR-NASD-2005-022 and SR-NYSE-2005-12).
---------------------------------------------------------------------------

    A third exemption--from both the Series 86 and Series 87--is
available to persons who may be ``associated persons'' of a member who
are employed by that member's foreign affiliate but who produce
research on behalf of the U.S. member. To be eligible for the
exemption, three primary conditions must be met: (1) A foreign analyst
must comply with the registration and qualification requirements or
other standards in an SRO-approved foreign jurisdiction whose
regulatory scheme reflects a recognition of principles that are
consonant with the SRO Rules and qualification standards; (2) the U.S.
member must apply all of the other SROs rules and other member firm
standards to the research produced by the foreign affiliate and foreign
research analysts that qualify for, and rely upon, the exemption; and
(3) the U.S. member must include a specific disclosure that the
research report has been prepared in whole or part by foreign research
analysts who may be associated persons of the member who are not
registered/qualified as a research analyst with the NYSE or NASD, but
instead have satisfied the registration/qualification requirements or
other research-related standards of a foreign jurisdiction that has
been recognized for these purposes by the NYSE and NASD. Currently, the
following jurisdictions satisfy the applicable SRO standards noted
above: China, Hong Kong, Japan, Malaysia, Singapore, Thailand and the
United Kingdom.
    On April 21, 2005, the Commission approved an amendment to the SRO
Rules that prohibits research analysts from participating in a road
show related to an investment banking services transaction and from
communicating with current or prospective customers in the presence of
investment banking department personnel or company management about
such an investment banking services transaction.\13\ Additionally, the
amendment prohibits investment banking personnel from directing a
research analyst to engage in sales and marketing efforts and other
communications with a current or prospective customer about an
investment banking services transaction.
---------------------------------------------------------------------------

    \13\ See Securities Exchange Act Release No. 51593 (April 21,
2005), 70 FR 22168 (April 28, 2005) (order approving SR-NASD-2004-
141 and SR-NYSE-2005-24). As defined under NASD Rule 2711(a)(3) and
NYSE Rule 472.20, ``investment banking services'' includes, without
limitation, acting as an underwriter in an offering for the issuer;
acting as a financial adviser in a merger or acquisition; providing
venture capital, equity lines of credit, PIPEs (private investment,
public equity transactions), or similar investments; serving as
placement agent for the issuer; or acting as a member of a selling
group in a securities underwriting.
---------------------------------------------------------------------------

Joint SRO Report

    As part of its May 2002 order approving new NASD Rule 2711 and
amendments to NYSE Rule 472, the SEC noted that it would require NASD
and the NYSE to assess the success of the rules after they have been in
place for a suitable amount of time. In April 2005, the SEC staff
requested a joint comprehensive report on the operation and
effectiveness of the rules, together with any recommendations for
changes or additions to the rules. The SRO staffs submitted that report
to the SEC on December 22, 2005.
    The SRO staffs concluded in the report that the SRO Rules have been
effective in helping to restore integrity to research by minimizing the
influences of investment banking and promoting transparency of other
potential conflicts of interest. However, the SRO staffs further
expressed their belief that certain changes to the SRO Rules would
further improve their effectiveness by striking an even better balance
between ensuring objective and reliable research on the one hand and
permitting the flow of information to investors and minimizing costs
and burdens to members on the other.
    In formulating the recommendations for rule changes in the report,
the SROs considered extensive data and qualitative feedback regarding
the range of activities under the SRO Rules, including examinations,
sweeps, enforcement activities, interpretive issues and registration
and qualification of research analysts. The SROs also surveyed academic
studies and media reports about the impact of the rules; compared the
SRO Rules to the provisions of the so-called ``Global Settlement''
among the SROs, the Commission, the North American Securities
Administrators Association and ten \14\ of the largest investment
banks; reviewed industry comment letters; and consulted with various
industry representatives. The proposed rule changes would implement the
recommendations of the SROs in the SRO report. A discussion of the
proposed rule changes is set out below.
---------------------------------------------------------------------------

    \14\ In August 2004, two additional firms settled with
regulators under the same terms as the April 2003 Global Settlement.
---------------------------------------------------------------------------

Exception to Definition of ``Research Report''

    ``Research report'' is defined in NYSE Rule 472.10(2) as a
``written or electronic communication which includes an analysis of
equity securities of individual companies or industries, and provides
information reasonably sufficient upon which to base an investment
decision.'' The proposed rule change would expressly exclude from the
definition of ``research report,'' sales material regarding open-end
registered investment companies that are not listed or traded on an
exchange and public direct participation programs (``DPPs''). Since
these investment companies and DPPs are ``equity securities'' as
defined in Section 3(a)(11) \15\ of the Exchange Act, related sales
material that contains an analysis of those securities and information
sufficient upon which to base an investment decision technically is
covered by the definition. For the following reasons, the Exchange
believes sales material for both types of products should be excluded
from the definition of ``research report.''
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78c(a)(11).
---------------------------------------------------------------------------

    Sales material regarding investment companies is already subject to
a separate regulatory regime, including NASD Rule 2210 and Securities
Act Rule 482,\16\ and all advertisements and sales literature regarding
registered investment companies must be filed with the NASD Advertising
Regulation Department (the ``Department'') within

ten (10) business days of first use.\17\ Moreover, the Exchange staff
does not believe that the conflicts underpinning the SRO Rules are
manifest to the same extent with respect to research on open-end
investment companies that are not listed or traded on an exchange.
---------------------------------------------------------------------------

    \16\ 17 CFR 230.482.
    \17\ An advertisement or sales literature concerning a
registered investment company that includes a performance ranking or
performance comparison of the investment company with other
investment companies that is not generally published or are created
by the fund or its affiliates must be filed with the Department at
least 10 business days prior to first use or publication. NASD Rule
2210(c)(4)(A).
---------------------------------------------------------------------------

    Similarly, the NYSE believes that sales material for public DPPs
also do not present the same conflicts of interest or other regulatory
concerns as research on exchange-traded securities. Publicly offered
DPPs typically are limited partnerships or limited liability companies
whose equity interests do not trade on an exchange and do not have an
active secondary market. The DPP sponsor generally produces its sales
material and sells interests in the DPP during an initial public
offering on a best efforts basis. According to the NYSE, this sales
material typically consists of ``tombstone'' advertisements whose
content is strictly limited under Securities Act Rule 134,\18\ or
supplemental sales literature that must be accompanied or preceded by a
prospectus for the DPP. Additionally, unlike equity research, NASD Rule
2210(c)(2)(B) requires members to file advertisements and sales
literature concerning public DPPs with the Department within ten
business days of first use. Thus, NASD staff review such sales material
before or shortly after it is distributed to the public.
---------------------------------------------------------------------------

    \18\ 17 CFR 230.134.
---------------------------------------------------------------------------

    Although exchange-traded funds (``ETFs'') are open-end investment
companies, they trade on an exchange and therefore those funds would
not be excepted from the definition of ``research report.'' The
Exchange requests comment on whether ETFs should also be excluded from
the definition. In addition, the NYSE believes that NASD Advertising
Regulation Department review of registered investment company and
public DPP sales material reduces the likelihood that it will contain
content that is not fair and balanced.

Exception to Registration and Qualification Requirements for Non-
Research Personnel That Produce ``Research Reports''

    The SRO Rules, in accordance with the mandates of Sarbanes-
Oxley,\19\ are constructed such that the author of a communication that
meets the definition of a ``research report'' is a ``research
analyst,'' irrespective of his or her title or primary job. This
prevents firms from circumventing the rules by redirecting through
other channels, such as registered representatives or traders,
potentially biased research that is not subject to the SRO objectivity
safeguards.
---------------------------------------------------------------------------

    \19\ See Section 15D of the Act.
---------------------------------------------------------------------------

    The Exchange believes it is important to maintain such
communications as research reports subject to the SRO Rules and those
principally responsible for their preparation as research analysts.
However, the proposed rule changes would create a limited exemption
from the NYSE Rule 344 registration requirements for non-research
personnel that produce research reports. Thus, for example, the
registration requirements would not apply to a registered
representative who occasionally produces communications that
technically meet the definition of a research report and are
distributed to fifteen (15) or more clients, or a trader who similarly
produced market commentary that included an analysis of an individual
security--also considered a research report under NYSE rules.
    The Exchange believes that the registration and qualification
requirements were intended for those individuals whose principal job
function is to produce research, while the balance of the SRO Rules are
intended to foster objective analysis of equity securities and
transparency of certain conflicts and to provide beneficial information
to investors.

Restrictions on Investment Banking Department Relationship With
Research Department

    Exchange Rule 472(b)(3) permits investment banking and other non-
research employees, other than legal and compliance personnel, to
review a research report before publication only to verify the factual
accuracy of information in the report or identify a potential conflict
of interest. This provision also requires that an authorized legal or
compliance official act as intermediary for all such permissible
communications.
    The proposed rule changes eliminate the pre-publication review of
research by investment banking and other non-research personnel, other
than by legal and compliance. The NYSE believes that the factual review
of a research report by investment banking personnel is unnecessary in
light of the numerous other sources available to verify factual
information, including the subject company, and only raises concerns
about the objectivity of the report. According to the NYSE, such review
may invite pressure on a research analyst from investment banking
personnel that could be difficult to monitor. Such factual reviews are
not permitted under the terms of the Global Settlement and the Exchange
staff is not aware of any evidence that the factual accuracy of
research produced by firms subject to the Global Settlement has
suffered. Moreover, the NYSE believes that legal and compliance can
adequately perform a conflict review without sharing draft research
reports with investment banking personnel and other non-research
personnel.

Restrictions on Publishing Research Reports and Public Appearances

    NYSE Rule 472(f) sets forth ``quiet periods'' during which a member
organization is prohibited from publishing or otherwise distributing a
research report and a research analyst is prohibited from making a
public appearance. These quiet periods apply in two circumstances: (1)
After a public offering of securities and (2) before and after the
expiration, waiver or termination of a lock-up agreement entered into
by a member organization with a subject company that restricts the sale
of securities by that company or its shareholders.
    With respect to the former, NYSE Rule 472 establishes different
quiet periods depending on whether the offering is an initial public
offering (``IPO'') or a secondary offering and whether the member
organization acted as manager or co-manager or as an underwriter or
dealer. In the current NYSE Rule 472, a member organization that acted
as a manager or co-manager of an IPO may not publish or otherwise
distribute research for 40 calendar days following the date of the
offering; all other member organizations that participated as an
underwriter or dealer in the offering are subject to a 25-day quiet
period. For secondary offerings, a ten-day quiet period applies only to
the manager and co-manager of the offering.
    NYSE Rule 472(f)(5) contains an exception that permits publication
and distribution of research or a public appearance concerning the
effects of significant news or a significant event on the subject
company during the quiet period. Prior guidance by the Exchange has
interpreted this exception to apply only to news or events that have a
material impact on, or cause a material change to, a company's
operation, earnings or financial condition. There is also an exception
in NYSE Rule 472(f)(2) to the secondary offering quiet period, which
permits publication or

distribution of research pursuant to Securities Act Rule 139 \20\
regarding a subject company with ``actively-traded securities'' as
defined in Regulation M of the Act.\21\
---------------------------------------------------------------------------

    \20\ 17 CFR 230.139.
    \21\ 17 CFR 242.101.
---------------------------------------------------------------------------

    The Exchange proposes several changes to the quiet periods
surrounding public offerings and the releases of lock-up agreements:
(a) Quiet periods following public offerings of securities
    The proposed rule changes to NYSE Rule 472(f) create a uniform IPO
quiet period for all underwriters and dealers participating in the
public offering. The amended rule applies a 25-day quiet period to
managers, co-managers, underwriters and dealers that participate in an
IPO. The NYSE believes that the objectivity and disclosure safeguards
of NYSE Rule 472 and other research rule provisions have obviated the
need for a longer quiet period for managers and co-managers than other
underwriters and dealers participating in an IPO. The NYSE believes
that these changes will promote an enhanced flow of valuable
information to investors and maintain consistency with SEC regulations.
    In addition, the proposed rule changes eliminate quiet periods
following a secondary offering. According to the NYSE, the success of
the SRO Rules in mitigating research analyst conflicts of interest
supports the repeal of the quiet periods following secondary offerings.
The NYSE believes this will expand the ability of member organizations
to release more information regarding a subject company's prospects and
financial condition, without sacrificing the reliability of the
research.
(b) Quiet periods around releases of lock-up agreements
    The proposed rule changes reduce the quiet period surrounding the
expiration, termination or waiver of a lock-up agreement from the
current 15-day period to a five-day period. The Exchange believes that
some quiet period must be maintained around the release of lock-up
agreements because an analyst can conceivably write a research report
after an offering with an honestly held positive opinion, but
advantageously time the publication of the report for inappropriate
reasons. Also, the NYSE believes that absent a quiet period around the
expiration, termination or waiver of a lock-up agreement, member
organizations may selectively time the issuance of ``booster shot''
reports intended to raise the stock price of a company just before
locked-up shares become freely saleable into the market by a company or
its major shareholders. NYSE believes a five-day quiet period strikes a
balance between guarding investors against the selective timing of the
issuance of research and allowing the prompt dissemination of valuable
information flow to the marketplace.
    While the Exchange may not have jurisdiction over some of the
participants to such agreements (e.g., the company and its
shareholders), it does retain jurisdiction over its member
organizations that can issue research and, as such, can limit the
potential for any untoward conduct by maintaining this prohibition.
    Lastly, the Exchange notes the recent strength of the IPO market
and that such offerings generally contain lock-up agreements.
Accordingly, the Exchange believes that at this juncture it is
appropriate to maintain a form of prohibition absent some compelling
empirical data/evidence to the contrary.
(c) Exceptions to quiet periods
    As noted above, Exchange Rule 472(f)(5) contains an exception that
permits publication and distribution of research or a public appearance
concerning the effects of significant news or a significant event on
the subject company during the quiet period, provided the reports are
pre-approved in writing by legal or compliance personnel. The Exchange
has interpreted this exception to apply only to news or events that
have a material impact on, or cause a material change to, a company's
operations, earnings or financial condition and that generally would
trigger the filing requirements of SEC Form 8-K. The Exchange has
previously not interpreted the exception to include earnings
announcements absent some other significant news or significant event
because these announcements generally are not causal events or news
items that materially affect a company's operations, earnings or
financial condition.
    The Exchange believes that an amendment to NYSE Rule 472 is
necessary to include earnings announcements in this exception.
Accordingly, the proposed rule changes provide that an announcement of
earnings is included in the exception to the quiet periods for
significant news or events. The NYSE believes that this amendment will
promote the flow of potentially important or noteworthy information to
the market and investors in a timely manner.\22\ According to the NYSE,
the announcement of a change to earnings estimates or a release of
earnings that vary from street expectations will, in many instances, be
accompanied by an announcement of some type of causal events. Further,
the NYSE believes that earnings announcements and guidance are
necessary pipelines of information for research analysts to support the
basis of their investment recommendations.
---------------------------------------------------------------------------

    \22\ See Securities Act Release No. 8400 and Securities Exchange
Act Release No. 49424 (March 16, 2004), 69 FR 15594 (March 25,
2004).
---------------------------------------------------------------------------

Restrictions on Personal Trading by Research Analysts

    NYSE Rule 472(e) generally restricts the trading of securities by
research analyst accounts.\23\ Specifically, the Rule prohibits any
research analyst account from:
---------------------------------------------------------------------------

    \23\ According to the NYSE, although NYSE Rule 472 does not
employ the term ``research analyst account,'' the trading
restrictions of NYSE Rule 472(e) and NASD Rule 2711(g) are
coterminous. See NYSE Rule 472.40.
---------------------------------------------------------------------------

     Purchasing or receiving any securities before the issuer's
initial public offering if the issuer is principally engaged in the
same types of business as companies that the research analyst follows;
     Purchasing or selling any security issued by a company
that the research analyst follows, or any option or derivative of such
a security, for a period beginning thirty (30) days before and ending
five (5) days after the publication of a research report concerning the
company or a change in a rating or price target of the company's
securities; and
     Purchasing or selling any security or option or derivative
of such a security in a manner inconsistent with the analyst's most
recent recommendation.
    NYSE Rule 472(e)(4) includes exceptions to these trading
restrictions for certain trades that:
     Are due to unanticipated significant changes in an
analyst's personal financial circumstances;
     Occur within the 30-day/five-day trading blackout around
the publication of a report if the report is issued due to a
significant news event;
     Occur within 30 days after an analyst initiates coverage
of a company;
     Involve shares of diversified registered investment
companies; and
     Involve interests in an investment fund over which neither
the analyst nor a household member has any investment discretion or
control, the research analyst accounts collectively own no more than 1%
of the fund's assets, and the fund invests no more

than 20% of its assets in securities of issuers principally engaged in
the same types of business as companies that the analyst follows.
    NYSE Rule 472(e)(5) currently requires legal or compliance
personnel to pre-approve all trades of persons who oversee research
analysts to the extent such trades involve equity securities of subject
companies covered by the analysts they oversee.
    The proposed rule changes would revise the exceptions to the
personal trading restrictions to create an exemption for member
organizations that voluntarily choose to prohibit their analysts from
owning shares of the companies they cover. The proposed exemption
allows such a firm to adopt policies that permit research analysts to
divest their holdings in an orderly and controlled manner with the
oversight of the firm's legal and compliance personnel.
    With the proposed changes, NYSE Rule 472 allows member
organizations that adopt ownership bans to implement the same
divestiture procedures, regardless of when they adopted such a policy,
that were permitted when NYSE Rule 472 first became effective, to allow
analysts to divest their holdings.
    NASD has chosen to amend their Rule 2711(g)(5) by expanding the
exceptions to the personal trading restrictions for investment funds to
include investments in any fund (including a registered diversified
investment company), so long as neither the analyst nor a member of his
or her household is aware of the fund's holdings or transactions other
than through periodic shareholder reports and sales material based on
such reports, and provided that the research analyst account owns no
more than 1% of the assets of the fund, eliminating the 20% asset
diversification threshold. NYSE understands that the NASD reasons that
this change will simplify the ability of analysts to invest in, for
example, mutual funds and hedge funds that do not disclose their
holdings other than through periodic reports or sales material based on
such reports. Also, according to the NYSE, NASD reasons that absent
discretion or control of an account or the contemporaneous knowledge of
the account's transactions, a minimal investment by a research analyst
will not influence the analyst to compromise research objectivity to
benefit the account.
    The Exchange is not proposing to make this change. The Exchange
believes that the 20% asset diversification threshold must be retained
for an account to be eligible for the exception. The Exchange believes
that maintaining the 20% asset diversification threshold has the
potential for limiting possible conflicts of interest in the issuance
research reports by analysts with a vested interest in a fund. The
Exchange seeks comment on whether to maintain this separate
requirement.

Disclosure Requirements

    NYSE Rule 472(k) imposes a number of disclosure requirements on
member organization research reports and research analyst public
appearances in which the analyst makes a recommendation or offers an
opinion concerning an equity security. NYSE Rule 472(k) requires
specific disclosures of conflicts of interest, including whether the
member organization, the research analyst or a member of the analyst's
household has a financial interest in the subject company's securities
or the member organization or its affiliates have received compensation
from the subject company. NYSE Rule 472(k) also requires a number of
non-conflicts related disclosures in research reports, including the
meanings of ratings used in the member organization's rating system if
the research report contains a rating, the distribution of buy, hold,
and sell ratings assigned by the member organization if a research
report contains a rating, and a price chart that plots the assignment
or changes of the analyst's ratings and price targets for the subject
company against the movement of the subject company's stock price over
time if the research report contains a rating or a price target.
According to the NYSE, the required disclosures must be presented on
the front page of research reports or the front page must refer to the
page on which the disclosures are found. Electronic research reports
may utilize hyperlinks to the disclosures. Disclosures and references
to disclosures must be clear, comprehensive and prominent.
    The Exchange is concerned that the sheer volume of the disclosures
required presently may obscure the overall message that the disclosures
are attempting to convey: That the member organization or research
analyst faces conflicts of interest with respect to the subject
company. The NYSE believes that this problem is compounded by the fact
that many member organizations include additional disclosures required
by other jurisdictions, as well as sometimes lengthy disclaimers for
their own purposes. To better realize the goal of the disclosure
requirements, the Exchange believes that it would be more effective and
useful to investors to know immediately whether the member organization
or research analyst producing the research report is conflicted, while
providing the reader the means to learn more about these conflicts if
he or she chooses to do so. The NYSE believes that this disclosure
requirement would ensure that investors obtain prominent disclosure
that a research-related conflict exists, and would permit investors to
find additional information about the conflict on the member
organization's Web site.
    To that end, the proposed rule changes would amend NYSE Rule
472(k)(1) to permit members, in lieu of publication in the research
report itself, to disclose their conflicts of interest by including a
prominent warning on the cover of a research report that such conflicts
of interest exist, together with information on how the reader may
obtain more detail about these conflicts on the member's Web site. This
alternative method of disclosure would then require a member to include
detailed conflicts information on its Web site. According to the NYSE,
member organizations could still opt to make all of the disclosures in
the report itself; however, a Web-based disclosure system can
effectively alert investors that the firm has a conflict of interest
that could affect the objectivity of a research report. The NYSE
believes that it also provides a streamlined disclosure alternative by
placing disclosures in an accessible and convenient location and
minimizes costs for many firms.
    Specifically, the proposed rule changes would require any member
that has a conflict of interest or whose research analyst has a
conflict of interest to state prominently on the front page of the
research report the following:
    ``[Name of firm and/or the research analyst preparing this report]
has a conflict of interest that may affect the ability of the firm or
the analyst to provide objective analysis about the company. For more
information about this conflict of interest, please see [Reference to
the firm's Web site].''
    According to the NYSE, conflicts of interest, as defined by the
proposed rule, include any of the circumstances that currently require
disclosure under NYSE Rule 472(k)(1), including if the research analyst
or household member has a financial interest in the subject company; if
the member organization owns 1% or more of any class of common equity
securities of the subject company; receipt by the member organization
of investment banking and other compensation from the subject company
or the expectation to seek investment banking compensation; if the
member makes a market in the

subject company's securities; if the research analyst or household
member serves as an officer, director or advisory board member of the
subject company; and any other actual, material conflict of interest of
the research analyst or member organization of which the research
analyst knows or has reason to know at the time of publication of the
research report.
    The proposed amendment would still require the Web-based
disclosures concern actual conflicts of interest, rather than the
possibility of such conflicts. According to the NYSE, a general
``health warning'' that conflicts of interest ``may or may not'' exist
are neither useful nor effective.
    The Exchange seeks comment on whether a similar approach could be
used for disclosure of conflicts in public appearances.
    The proposed rule changes would not permit Web site disclosure for
certain other disclosures, such as the meanings of the member's ratings
and the price chart showing the subject company's price movements
against the analyst's assignments of ratings and price targets, which
still require disclosure in the research report. The NYSE believes that
these disclosures provide useful information that should be accessible
to investors in the report and do not lend themselves easily to the
terse material conflict warning that would appear on the cover of the
report. Accordingly, they must be readily available to investors in the
report itself.

Prohibition on Retaliation Against Research Analysts

    NYSE Rule 472(g)(2) prohibits any member organization and any
employee of a member organization who is involved with the member
organization's investment banking activities from directly or
indirectly retaliating against a research analyst as a result of an
unfavorable research report or public appearance that may adversely
affect the member organization's current or prospective investment
banking relationship with a subject company.
    The Exchange believes that under no circumstances is retaliation
appropriate against a research analyst who expresses his or her genuine
beliefs about a subject company. As such, the proposed rule changes
extend the retaliation prohibition to all employees, not just those
involved in investment banking activities.

Other Changes

    The proposed rule amendments would also make certain other changes.
First, the proposal would amend NYSE Rule 472.40 to clarify that the
trading restrictions applicable to research analysts and household
members excludes an investment company registered under the Investment
Company Act of 1940 over which the research analyst or household member
has discretion or control, provided that the research analyst or
household member has no financial interest in such investment company,
other than a performance or management fee.
    Second, the proposed rule changes would amend NYSE Rule 472(b) to
extend the prohibition on research analysts from engaging in
communications about an investment banking services transaction with a
current or prospective customer in the presence of investment banking
department personnel or company management to communications with
internal sales personnel. This amendment is intended to further
mitigate potential conflicts of interest in intra-office
communications.
    In addition, changes are proposed to delete the term ``member'' as
used in NYSE Rule 344 to reflect the recent reorganization of the
Exchange.\24\
---------------------------------------------------------------------------

    \24\ See Securities Exchange Act Release No. 53382 (February 27,
2006), 71 FR 11251 (March 6, 2006) (order approving SR-NYSE-2005-
77).
---------------------------------------------------------------------------

    The Exchange will announce the effective date of the proposed rule
change in an Information Memo to be published no later than 60 days
following Commission approval.
2. NYSE's Statutory Basis
    The statutory basis for the proposed rule changes is Section
6(b)(5) of the Act \25\ which requires, among other things, that the
rules of the Exchange are designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to perfect the mechanism of a free
and open market and national market system, and in general to protect
investors and the public interest. The Exchange believes that the
proposed rule changes will enhance the clarity and consistency of the
research analyst rules, thereby facilitating the goals of reducing
conflicts of interest and fraudulent and manipulative practices, and
providing investors with more objective, reliable information upon
which to base investment decisions.
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

3. NASD's Purpose

Background

    Beginning in 2002, NASD and the New York Stock Exchange implemented
a series of rule changes to improve objectivity and transparency in
equity research and provide investors with more reliable and useful
information to make investment decisions. The rules were intended to
restore public confidence in the validity of research and the veracity
of research analysts, who are expected to function as unbiased
intermediaries between issuers and the investors who buy and sell their
securities. The trustworthiness of research had eroded due to the
pervasive influences of investment banking and other conflicts that had
manifest themselves during the market boom of the late 1990s.
    Generally, the SRO Rules require clear, comprehensive and prominent
disclosure of conflicts of interest in research reports and public
appearances by research analysts. The rules further prohibit certain
conduct--investment banking personnel involvement in the content of
research and determination of analyst compensation, for example--when
the conflicts are considered too pronounced to be cured by disclosure.
    The SROs enacted the research analyst conflict rules in two primary
tranches and, more recently, adopted additional amendments prohibiting
analysts from participating in road shows. In addition, the SROs
supplemented their rulemaking with two joint memoranda that provided
interpretive guidance to their members on a number of issues.\26\ The
NASD and NYSE rules and interpretations are virtually identical and are
intended to operate uniformly.
---------------------------------------------------------------------------

    \26\ See NASD Notices to Members 02-39 (July 2002) and 04-18
(March 2004).
---------------------------------------------------------------------------

    On May 10, 2002, the SEC approved the first round of SRO Rules
(``Round 1 Amendments'')--new NASD Rule 2711(''Research Analysts and
Research Reports'') and amendments to NYSE Rules 351 (``Reporting
Requirements'') and 472 (``Communications with the Public'')--which
implemented basic reforms to separate research from investment banking
and to provide more extensive disclosure of conflicts of interest in
research reports and public appearances.\27\ On July 29, 2003, the SEC
approved a second set of amendments to the SRO Rules (``Round

2 Amendments'') \28\ that achieved two purposes. First, the Round 2
Amendments implemented SRO initiatives to further promote analyst
objectivity and transparency of conflicts in research reports. Second,
the Round 2 Amendments implemented changes mandated by the Sarbanes-
Oxley.\29\ Sarbanes-Oxley required adoption by July 30, 2003 of rules
``reasonably designed to address conflicts of interest that can arise
when securities analysts recommend equity securities in research
reports and public appearances,'' and set forth certain specific rules
to be promulgated. Many of those rules had already been adopted in the
first round of SRO rulemaking. The Round 2 Amendments therefore
implemented those specific Sarbanes-Oxley rules that did not already
exist and conformed the language of the SRO Rules as necessary.
---------------------------------------------------------------------------

    \27\ See Securities Exchange Act Release No. 45908 (May 10,
2002), 67 FR 34968 (May 16, 2002) (order approving SR-NASD-2002-021
and SR-NYSE-2002-09).
    \28\ See Securities Exchange Act Release No. 48252 (July 29,
2003), 68 FR 45875 (August 4, 2003) (order approving SR-NASD-2002-
154 and SR-NYSE-2002-49).
    \29\ See Section 15D of the Act, 15 U.S.C. 78o-6.
---------------------------------------------------------------------------

    As part of the Round 2 Amendments, the SEC approved rules requiring
registration and qualification of research analysts. NASD Rule 1050
requires an associated person who functions as a research analyst on
behalf of a member to register as such and pass a qualification
examination. For the purposes of this requirement, a ``research
analyst'' is defined as ``an associated person who is primarily
responsible for the preparation of the substance of a research report
or whose name appears on a `research report,' '' as that term is
defined in NASD Rule 2711.
    The SROs jointly developed and implemented the Research Analyst
Qualification Examination (Series 86/87). The examination consists of
an analysis part (Series 86) and a regulatory part (Series 87). Prior
to taking either the Series 86 or 87, a candidate also must have passed
the General Securities Registered Representative Examination (Series
7), the Limited Registered Representative Examination (Series 17), or
the Canada Module of Series 7 (Series 37 or 38).
    The SRO Rules provide three exemptions from the Series 86
examination. First, there is an exemption for research analysts who
have passed Levels I and II of the Chartered Financial Analyst
(``CFA'') examination and have either (1) completed the CFA Level II
within 2 years of application or registration, or (2) functioned as a
research analyst continuously since having passed the CFA Level II.\30\
A second exemption is available to research analysts who have passed
Levels I and II of the Chartered Market Technician Examination and
produce only ``technical research reports'' as that term is defined
under the SRO Rules.\31\ A third exemption--from both the Series 86 and
Series 87--is available to persons who may be ``associated persons'' of
a member who are employed by that member's foreign affiliate but who
produce research on behalf of the U.S. member. To be eligible for the
exemption, three primary conditions must be met: (1) A foreign analyst
must comply with the registration and qualification requirements or
other standards in an SRO-approved foreign jurisdiction whose
regulatory scheme reflects a recognition of principles that are
consonant with the SRO Rules and qualification standards; (2) the U.S.
member must apply all of the other SROs rules and other member firm
standards to the research produced by the foreign affiliate and foreign
research analysts that qualify for, and rely upon, the exemption; and
(3) the U.S. member must include a specific disclosure that the
research report has been prepared in whole or part by foreign research
analysts who may be associated persons of the member who are not
registered/qualified as a research analyst with the NYSE or NASD, but
instead have satisfied the registration/qualification requirements or
other research-related standards of a foreign jurisdiction that have
been recognized for these purposes by the NYSE and NASD. Currently, the
following jurisdictions satisfy the applicable SRO standards noted
above: China, Hong Kong, Japan, Malaysia, Singapore, Thailand and the
United Kingdom.
---------------------------------------------------------------------------

    \30\ See Securities Exchange Act Release No. 49464 (March 24,
2004), 69 FR 16628 (March 30, 2004) (order approving SR-NASD-2004-
020 and SR-NYSE-2004-03).
    \31\ See Securities Exchange Act Release No. 51240 (February 23,
2005), 70 FR 10451 (March 3, 2005) (notice of immediate
effectiveness of SR-NASD-2005-022 and SR-NYSE-2005-12).
---------------------------------------------------------------------------

    On April 21, 2005, the Commission approved an amendment to the SRO
Rules that prohibits research analysts from participating in a road
show related to an investment banking services transaction and from
communicating with current or prospective customers in the presence of
investment banking department personnel or company management about
such an investment banking services transaction.\32\ Additionally, the
amendment prohibits investment banking personnel from directing a
research analyst to engage in sales and marketing efforts and other
communications with a current or prospective customer about an
investment banking services transaction.
---------------------------------------------------------------------------

    \32\ See Securities Exchange Act Release No. 51593 (April 21,
2005), 70 FR 22168 (April 28, 2005) (order approving SR-NASD-2004-
141 and SR-NYSE-2005-24). As defined under NASD Rule 2711(a)(3) and
NYSE Rule 472.20, ``investment banking services'' includes, without
limitation, acting as an underwriter or participating in a selling
group in an offering for the issuer; acting as a financial adviser
in a merger or acquisition; providing venture capital, equity lines
of credit, private investment, public equity transactions (PIPEs),
or similar investments; or serving as placement agent for the
issuer.
---------------------------------------------------------------------------

Joint SRO Report

    As part of its May 2002 order approving new NASD Rule 2711, the SEC
noted that it would require NASD and the NYSE to assess the success of
the rules after they have been in place for a suitable amount of time.
In April 2005, the SEC staff requested a joint comprehensive report on
the operation and effectiveness of the rules, together with any
recommendations for changes or additions to the rules. The SRO staffs
submitted that report to the SEC on December 22, 2005.
    The SRO staffs concluded in the report that the SRO Rules have been
effective in helping to restore integrity to research by minimizing the
influences of investment banking and promoting transparency of other
potential conflicts of interest. However, the SRO staffs further
expressed their belief that certain changes to the SRO Rules would
further improve their effectiveness by striking an even better balance
between ensuring objective and reliable research on the one hand and
permitting the flow of information to investors and minimizing costs
and burdens to members on the other.
    In formulating the recommendations for rule changes in the report,
the SROs considered extensive data and qualitative feedback regarding
the range of activities under the rule, including examinations, sweeps,
enforcement activities, interpretive issues and registration and
qualification of research analysts. The SROs also surveyed academic
studies and media reports about the impact of the rules; compared the
SRO Rules to the provisions of the ``Global Settlement'' among the
SROs, the Commission, the North American Securities Administrators
Association and ten \33\ of the largest investment banks; reviewed
industry comment letters; and consulted with various industry
representatives. If approved, the proposed rule changes would implement
NASD staff's

recommendations in the SRO report. A discussion of the proposed rule
changes is set out below.
---------------------------------------------------------------------------

    \33\ See SEC Litigation Release No. 18438, 2003 SEC LEXIS 2601
(October 31, 2003). In August 2004, two additional firms settled
with regulators under the same terms as the April 2003 Global
Settlement.
---------------------------------------------------------------------------

Exception to Definition of ``Research Report''

    The proposed rule changes would expressly exclude from the
definition of ``research report'' sales material regarding open-end
registered investment companies that are not listed or traded on an
exchange and public direct participation programs (``DPPs'').
``Research report'' is defined in Rule 2711(a)(9) as a ``written
(including electronic) communication that includes an analysis of
equity securities of individual companies or industries, and that
provides information reasonably sufficient upon which to base an
investment decision.'' Since these investment companies and DPPs are
``equity securities'' as defined in Section 3(a)(11) of the Securities
Exchange Act of 1934, related sales material that contains an analysis
of those securities and information sufficient upon which to base an
investment decision technically is covered by the definition. For the
following reasons, NASD believes sales material for both types of
products should be excluded from the definition of ``research report.''
    According to NASD, sales material regarding investment companies is
already subject to a separate regulatory regime, including NASD Rule
2210 and SEC Rule 482, and all advertisements and sales literature
regarding registered investment companies must be filed with the NASD
Advertising Regulation Department within ten business days of first
use.\34\ Moreover, the NASD staff does not believe that the conflicts
underpinning the SRO Rules are manifest to the same extent with respect
to research on open-end investment companies that are not listed or
traded on an exchange.
---------------------------------------------------------------------------

    \34\ An advertisement or sales literature concerning a
registered investment company that includes a performance ranking or
performance comparison of the investment company with other
investment companies that is not generally published or is created
by the fund or its affiliates must be filed with the NASD
Advertising Regulation Department at least ten business days prior
to first use or publication. NASD Rule 2210(c)(4)(A).
---------------------------------------------------------------------------

    Similarly, NASD believes that sales material for public DPPs also
do not present the same conflicts of interest or other regulatory
concerns as research on exchange-traded securities. Publicly offered
DPPs typically are limited partnerships or limited liability companies
whose equity interests do not trade on an exchange and do not have an
active secondary market. The DPP sponsor generally produces its sales
material and sells interests in the DPP during an initial public
offering on a best efforts basis. This sales material typically
consists of ``tombstone'' advertisements whose content is strictly
limited under SEC Rule 134, or supplemental sales literature that must
be accompanied or preceded by a prospectus for the DPP. Additionally,
unlike equity research, NASD Rule 2210(c)(2)(B) requires members to
file advertisements and sales literature concerning public DPPs with
the Department within ten business days of first use. Thus, NASD staff
reviews such sales material before or shortly after it is distributed
to the public.
    Although ETFs are open-end investment companies, they trade on an
exchange and therefore those funds would not be excepted from the
definition of ``research report.'' NASD requests comment on whether
ETFs should also be excluded from the definition. In addition, NASD
believes that NASD Advertising Regulation Department review of
registered investment company and public DPP sales material reduces the
likelihood that it will contain content that is not fair and balanced.

Exception to Registration and Qualification Requirements for Non-
Research Personnel that Produce ``Research Reports''

    The SRO Rules, in accordance with the mandates of Sarbanes-Oxley,
are constructed such that the author of a communication that meets the
definition of a ``research report'' is a ``research analyst,''
irrespective of his or her title or primary job. NASD believes that
this prevents firms from circumventing the rules by redirecting through
other channels, such as registered representatives or traders,
potentially biased research that is not subject to the SRO objectivity
safeguards.
    NASD believes it is important to maintain such communications as
``research reports'' subject to the rules and those principally
responsible for their preparation as ``research analysts.'' However,
the proposed rule changes would create a limited exemption from the
NASD Rule 1050 registration requirements for non-research personnel
that produce research reports. Thus, for example, the registration
requirements would not apply to a registered representative who
occasionally produces communications that technically meet the
definition of a research report and are distributed to 15 or more
clients, or a trader who similarly produced market commentary that
included an analysis of an individual security--also considered a
research report under NASD rules. NASD believes that the registration
and qualification requirements were intended for those individuals
whose principal job function is to produce research, while the balance
of the SRO Rules are intended to foster objective analysis of equity
securities and transparency of certain conflicts and to provide
beneficial information to investors.

Restrictions on Investment Banking Department Relationship With
Research Department

    Currently, NASD Rule 2711(b) permits investment banking and other
non-research employees, other than legal and compliance personnel, to
review a research report before publication only to verify the factual
accuracy of information in the report or identify a potential conflict
of interest. The rule further requires that an authorized legal or
compliance official act as intermediary for all such permissible
communications.
    The proposed rule change would eliminate paragraph (b)(3) of NASD
Rule 2711 that permits pre-publication review of research by investment
banking and other non-research personnel, other than by legal and
compliance. NASD believes that review of facts in a report by
investment banking and other non-research personnel is unnecessary in
light of the numerous other sources available to verify factual
information, including the subject company, and only raises concerns
about the objectivity of the report. According to NASD, such review may
invite pressure on a research analyst from such personnel that could be
difficult to monitor. Such factual review is not permitted under the
terms of the Global Settlement, and NASD staff is not aware of any
evidence that the factual accuracy of research produced by Global
Settlement firms has suffered. Moreover, NASD believes that legal and
compliance can adequately perform a conflict review without sharing
draft research reports with investment banking or other non-research
personnel.

Restrictions on Publishing Research Reports and Public Appearances

    NASD Rule 2711(f) sets forth ``quiet periods'' during which a
member is prohibited from publishing or otherwise distributing a
research report and a research analyst is prohibited from making a
public appearance. These quiet periods apply in two circumstances: (1)
After a public offering of securities and (2) before and

after the expiration, waiver or termination of a lock-up agreement
entered into by a member with a subject company that restricts the sale
of securities by that company or its shareholders.
    With respect to the former, NASD Rule 2711(f) establishes different
quiet periods depending on whether the offering is an IPO or secondary
offering and whether the member acted as manager or co-manager. A
member that acted as a manager or co-manager of an IPO may not publish
or otherwise distribute research for 40 calendar days following the
date of the offering; all other members that participated as an
underwriter or dealer in the offering are subject to a 25-day quiet
period. A ten-day quiet period applies only to the manager and co-
manager of a secondary offering.
    NASD Rule 2711(f) contains an exception that permits publication
and distribution of research or a public appearance concerning the
effects of ``significant news or a significant event on the subject
company'' during the quiet period. The SRO staffs have interpreted this
exception to apply only to news or events that have a material impact
on, or cause a material change to, a company's operation, earnings or
financial condition. Another exception to the secondary offering quiet
period permits publication or distribution of research pursuant to SEC
Rule 139 regarding a subject company with ``actively-traded
securities'' as defined in SEC Regulation M.
    The proposed rule changes would make several changes to the quiet
period requirements surrounding public offerings and lock-up
expirations. First, the proposed rule changes would unify the IPO quiet
periods for all underwriters and dealers participating in the offering.
As such, the proposed rule change would amend the rules to apply a 25-
day quiet period to managers, co-managers, underwriters and dealers
that participate in an IPO. NASD believes that the lengthier quiet
period for managers and co-managers was intended to allow other voices
to publicly analyze and value a subject company before managers and co-
managers--those members vested with the greatest interest in seeing the
stock price of the subject company go up--weighed in with their reports
and public appearances. According to NASD, at the time this provision
was enacted, it had been commonplace for managers and co-managers to
initiate coverage with a positive rating on a company they just brought
public, irrespective of whether the stock price had already risen well
beyond the public offering price.
    However, NASD recently has observed more circumstances in which
managers and co-managers have been neutral or even negative with their
initial post-quiet period report based on price appreciation or other
factors. Accordingly, NASD believes that the objectivity safeguards of
the SRO Rules and the certification requirement of SEC Regulation AC
have obviated the need for a longer quiet period for managers and co-
managers than other underwriters and dealers participating in an IPO.
NASD also believes the change would promote more information flow to
investors and consistency in rule application.
    For some of the same reasons, the proposed rule changes would
eliminate the quiet periods following a secondary offering. Coupled
with the protections of SEC Regulation AC and other SRO Rule
provisions, NASD believes that repeal of this provision would advance
the SEC's purpose in its Securities Offering Reform rules \35\ to
increase the flow of information to investors about issuers, without
sacrificing the reliability of the research. Along those lines, the
existing SRO Rules already provide exceptions for research reports on
issuers with ``actively-traded securities'' as defined in SEC
Regulation M.
---------------------------------------------------------------------------