Analyst conflicts of interests: Are the NASD and NYSE rules enough?

Fordham Journal of Corporate & Financial Law, 2003 by Contoudis, Karen

2. Personal Conflicts and the NYSE

Like the NASD, the NYSE imposes restrictions on the trading of the analyst. It has many of the same requirements, including: prohibiting the analyst from receiving shares prior to an IPO if the analyst covers the industry,134 prohibiting purchases and sales for 30 days before a research report and five days after,135 and prohibiting transactions contrary to the analysts recommendation.136 The rule also has many of the same exceptions, including changes in financial circumstances, significant news or events regarding the company and ownership in investment companies and mutual funds.137 However, the NYSE provides two further exceptions:

* A sale within 30 days of employment, when an analyst is new to the broker-dealer, and if the security was purchased prior to employment;138

* A sale within 30 days of a research report if the securities were purchased prior to the broker-dealer initiating its coverage of the company.139

3. Disclosures

Like the rest of the NYSE rule, the proposed disclosure for both research reports and public appearances are almost identical. Both require that the disclosures be made on either the front cover or be mentioned there with a page reference.140 Although the heading for the NYSE's rule states that it is for research reports and scheduled public appearances,141 the text of the rule appears to apply to all public appearances, like the NASD's rule, and not just scheduled appearances.142 Like the NASD, the NYSE rule requires disclosure in the following circumstances: if a broker-dealer owns more than 1% of stock five days before publication,143 if the analyst or household member has a financial interest in the issuer,144 if any other material conflicts exist, and if the analyst is an officer,145 director, or on the advisory board of the issuer.146 Additionally, just like the NASD, the NYSE requires disclosure of compensation to a broker-dealer for investment banking activities within the past year and reasonably expected revenues in the following three months,147 as well as the disclosure of compensation received by an analyst preparing the report related to investment banking revenues.148

Finally, the NYSE follows the NASD's rules requiring a significant amount of investor protection disclosures. These include: definitions of the classifications of recommendations, however, the NYSE specifically says that it must be plain meaning and that a hold cannot mean sell,149 disclosure of percentages of each rating the broker-dealer has and the percent of the total firms from which the broker-dealer received investment banking revenues in the past 12 months,150 valuation methods with risks that would stop the price from reaching the target,151 disclosure if the broker-dealer makes a market in a security,152 and finally the price chart depicting when the broker-dealer had a change in rating.153

IV. COMMENTS ON THE PROPOSED RULES

The proposed rules have made a valiant effort at addressing the conflict issues. Some have complained that the rules have created too much red tape for broker-dealers and analysts.154 These critics feel that the rules inhibit the reporting of timely information by requiring too much involvement from legal and compliance departments.155 Thus, while it appears that these rules were a good start, issues remain.156