 |
Home | Previous Page | |
|
||
 |
|
|
|
||
 |
|
|
|
|
|||||||||||||||
|
|
|||||||||||||||
|
|
November 2, 2004 Ms. Dana G. Fleischman Re: Global Research Settlement Dear Ms. Fleischman: In regard to your letters to Larry E. Bergmann dated: September 10, 2003, September 30, 2003, November 11, 2003, and December 18, 2003, and your letter to Ms. Susan A. Mathews, dated November 25, 2003, and as supplemented by conversations with the staff, this letter responds to your requests for interpretive guidance on behalf of the Settling Firms with respect to issues regarding Addendum A to the Global Research Analyst Settlement.1 The views contained herein represent the views of the staff of the Division of Market Regulation ("Staff"). The Staff consulted with the staff of the Division of Enforcement, as well as with the staff of the other regulators that are parties to the Global Settlement (the "other Regulators").2 These responses are not orders, or holdings of the court overseeing the Global Settlement, nor are they rules, regulations, or statements of the Securities and Exchange Commission ("Commission") or of the other Regulators. Further, neither the Commission nor the other Regulators have approved or disapproved these interpretive answers. Section II.7 of the Addendum provides that Commission staff may provide interpretive guidance with respect to the terms of the Addendum. These responses do not supersede the terms of the Addendum. We note in particular that Section I.10 of the Addendum prohibits all communications between Research and Investment Banking, except for a few expressly permitted communications. These responses also do not relieve any Settling Firm of any applicable legal obligation or of the requirements of the federal securities laws or self-regulatory organization rules. The below responses are based on the facts and circumstances as you have presented them to us. We reserve the right to change these responses if, inter alia, (i) the facts or circumstances as we understand them change; (ii) the facts and circumstances were inaccurately described to us; or (iii) we determine that such action is necessary or appropriate in furtherance of the objectives of the Addendum. RESPONSES TO YOUR QUESTIONS:Issues Related to Education and Information AccessQuestion 1: Can non-equity capital markets (non-"ECM") Investment Banking personnel and Research personnel communicate directly with each other with regard to the preparation of internal-use memoranda and other efforts to educate the sales force? Answer: No. Non-ECM Investment Banking personnel and Research personnel may not communicate with each other regarding the preparation of internal-use memoranda and other efforts to educate the sales force. Question 2: Can non-ECM Investment Banking personnel listen to (in "listen-only" mode) Research personnel efforts to educate the sales force? Answer: Section I.10 of Addendum A prohibits non-ECM Investment Banking personnel and Research personnel from engaging in any communication unless expressly permitted. Section I.10.d. permits only ECM personnel (i.e. the group within Investment Banking whose principal job responsibility is the pricing and structuring of transactions) to participate with Research in efforts to educate the sales force once the firm has received an investment banking mandate. While non-ECM Investment Banking personnel may not participate with Research in efforts to educate the sales force, we believe that it is not inconsistent with the Addendum to permit non-ECM Investment Banking personnel to listen in ("listen-only" mode, not identified as being present), from a remote location. Question 3: Research personnel often have daily calls with the sales force (often called "morning calls", but which can occur at other periods during the trading day), provide to the sales force their daily notes, send "blast" voicemails to the sales force, and/or provide other information regarding particular companies or general industry or market conditions or developments. Such morning calls and other activities may occur both in the context of a particular transaction (i.e., in the context of a publicly announced deal) or in a non-deal context. Can Investment Banking personnel listen (in "listen-only" mode) to these calls and have access to such daily notes and blast voicemails and other information provided to the sales force? Is Investment Banking access to these calls that is not from a remote location still permissible so long as a chaperone is also present? Answer: Section I.10 generally prohibits all communications between Research and Investment Banking unless expressly permitted. Certain of the permitted communications allow Investment Banking to obtain Research views on a variety of matters. For example, Section I.10.a. permits Investment Banking to seek the views of Research regarding, among other things, market or industry trends, conditions or developments. Therefore, we believe that it is not inconsistent with the objectives of Section I.10 to permit Investment Banking personnel to listen in ("listen-only" mode, not identified as being present) on widely disseminated communications to the sales force, such as morning calls, daily notes, and blast voicemails that are in a non-deal context or that relate to a publicly announced deal. Investment Banking may have access to these communications only from a remote location. Question 4: Are company-specific discussions between analysts and investment bankers permissible even if such discussions are not within an overall industry discussion or part of vetting a specific transaction? For example, can a banker call an analyst regarding a company not currently contemplating a transaction in order to get better educated about the company? Answer: Section I.10 of the Addendum does not permit company-specific discussions between analysts and investment bankers if such discussions are not in connection with Investment Banking seeking Research's views on the merits of a proposed transaction, a potential candidate for a transaction, or market or industry trends, conditions or developments. Section I.10 of the Addendum permits Research personnel to respond to inquiries from Investment Banking on these subjects only through Research Management or in the presence of legal or compliance staff. In addition, Section I.10 of Addendum A permits Research personnel, through Research Management or in the presence of legal or compliance staff, to initiate communications with Investment Banking personnel relating to market or industry trends, conditions or developments, provided that such communications are consistent in nature with the types of communications that an analyst might have with investing customers. We note that Section I.10 of the Addendum also provides that any communications between Research and Investment Banking personnel cannot be made for the purpose of having Research personnel identify specific potential investment banking transactions. Question 5: Can ECM and non-ECM Investment Banking personnel listen (in "listen-only" mode, not identified as being present) to Research calls with a group of investors? In a non-deal context, can ECM and non-ECM Investment Banking personnel also access Research calls with investors, so long as, if access is not from a remote location, a chaperone is present? Answer: Neither ECM nor non-ECM Investment Banking personnel may listen in on, or otherwise access, any Research call with any individual investor or group of investors. Question 6: Can Research personnel listen (in "listen-only" mode) to, or view a live Webcast of, an Investment Banking or company-sponsored roadshow or other presentation to investors or the sales force? Answer: Section I.11.a. of the Addendum prohibits Research from participating in company-sponsored or Investment Banking-sponsored road shows relating to a public offering or other investment banking transaction. After the firm has received an investment banking mandate, we believe that it would not be inconsistent with the prohibition of Section I.11.a. to permit Research personnel to listen to ("listen-only" mode, not identified as being present), or view a live Webcast of, a roadshow or other widely attended presentation to investors or the sales force, so long as access is from a remote location (i.e. not at the same address as Investment Banking, investors, or the sales force). If the road show or other widely attended presentation to investors or the sales force is conducted at the firm's offices, Research personnel may listen-in from the same address as Investment Banking, investors, or the sales force, but may not be in the same room as Investment Banking, investors, or the sales force. Issues Related to CoverageQuestion 7: Addendum A permits Investment Banking input in Research decisions regarding coverage of categories, but does not explicitly provide for a means of communication between Investment Banking and Research with regard to such matters.
Answer: (a) Section I.7 permits Investment Banking input into category-by-category coverage decisions. Thus, Investment Banking management and Research Management may communicate with each other regarding category-by-category coverage decisions contemplated in Section I.7 of Addendum A. These communications regarding category-by-category coverage decisions may involve discussions of individual companies to the extent necessary to have a discussion about a category. We note that Section I.7 prohibits Research Management and Investment Banking management from communicating with each other regarding company-specific coverage decisions. (b) Such communications between Investment Banking management and Research Management do not need to be chaperoned. As the term is used in Section I.10.a. of the Addendum and throughout this document, we would expect that "Research Management" would not include Research personnel who cover the particular company, industry, or sector that is the subject of the communication, or who review or edit research reports on the particular company that is the subject of the communication. Question 8: After Research Management has made a decision regarding initiations and terminations of research coverage, can Research Management communicate its coverage plans, as well as the names of analysts assigned to cover particular companies or sectors, to Investment Banking? Answer: Section I.7 of Addendum A prohibits Investment Banking from having input into company-specific coverage decisions. The Staff believes that, once Research has made a final, independent decision regarding its coverage plan, concerns no longer exist regarding Investment Banking influencing Research's coverage decision. Therefore, if Research Management has made a final decision regarding its coverage plan, Research Management may inform Investment Banking (in writing) of its coverage plan (including a list of initiations, terminations, and the names of analysts assigned to cover particular companies). In addition to including information on initiations and terminations, the plan may include information on any final determination not to pick up coverage on a company. Research Management may provide this information to Investment Banking whether or not an inquiry was initiated by Investment Banking. Question 9: (a) Can Investment Banking personnel ask Research Management whether it has made a decision to provide or decline to provide coverage of a particular company and can Research Management respond to such a question? Can Research Management inform Investment Banking personnel of its decision to provide or decline to provide coverage on its own initiative? (b) If the answer to any of these questions is "yes", can Investment Banking inform the company of Research's decision and, if applicable, the name and telephone number of the coverage analyst? Answer: (a) Section I.7 of the Addendum provides that Investment Banking may not have input into company-specific coverage decisions. Permitting Investment Banking to contact Research in order to inquire about company-specific coverage decisions may give rise to Investment Banking communicating its views about the company to Research. Accordingly, Investment Banking may not contact Research Management to ask whether a decision has been made to provide coverage of a particular company. However, Investment Banking may ask Research Management for Research's written coverage plan, including information on initiations, terminations, and any final determination not to pick up coverage on a company and, as discussed above, Research Management may provide it to Investment Banking. (b) The Addendum does not address communications between Investment Banking and companies. Firms should consider the facts and circumstances of a particular situation in determining whether a specific communication is consistent with the terms of the Addendum. Firms must also bear in mind that, under Section II.4.a. of the Addendum, a firm "may not knowingly do indirectly that which it cannot do directly under [the] Addendum." Issues Related to Pitch MeetingsQuestion 10: Can the pitch book or other presentation materials for an offering or other investment banking transaction (including, e.g., in connection with an M&A pitch) include the name, biography, and industry ranking of, and a list of the companies covered by, the analyst that will be assigned to cover the company? In a non-IPO context, can the pitch book or other presentation materials include quotes or summaries of various analysts' views (and/or graphs, charts, and other data compiled by such analysts), including those of an analyst employed by the firm, on the company or the industry? Answer: No. Section I.9 of Addendum A prohibits Research involvement in efforts to solicit investment banking business (i.e. "pitches"). In the context of a solicitation of investment banking business, we believe it would be inconsistent with the objectives of Section I.9 of the Addendum to include any information regarding any research analyst employed by the firm or their views in a pitch book or other presentation materials. Issues Related to Communications Between Research and Investment BankingQuestion 11: Section I.10 of Addendum A requires that certain communications between Research personnel and Investment Banking personnel be chaperoned by internal legal/compliance staff. Section I.2 of Addendum A requires that Research have its own dedicated legal and compliance staff. May communications requiring chaperoning be chaperoned by legal or compliance staff not dedicated to Research? Answer: Addendum A permits certain communications to occur between Research and Investment Banking so long as they are effected through Research Management or are made in the presence of internal legal or compliance staff (a "chaperone"). Trained internal legal or compliance personnel that are dedicated to the Research department may perform chaperoning. We believe that it would not be inconsistent with the Addendum if legal or compliance personnel within the firm (such as control room personnel), properly trained specifically regarding Research and Investment Banking conflicts and the terms of the Addendum, act as chaperones. However, legal or compliance personnel that are primarily engaged in supporting the firm's investment banking department may not perform chaperoning. Question 12: May Investment Banking personnel and Research personnel participate in un-chaperoned communications directly with each other solely for the purpose of scheduling a call for which chaperoning is required? Answer: The Staff would not recommend that the Commission take enforcement action if: (i) Research administrative or clerical personnel and Investment Banking administrative or clerical personnel engage in un-chaperoned communications directly with each other in which the only information exchanged is that necessary in order to schedule a call for which chaperoning is required; or (ii) if professional Research personnel communicate directly with Investment Banking administrative or clerical personnel, or professional Investment Banking personnel communicate directly with Research administrative or clerical personnel, without a chaperone, in order to schedule a call for which chaperoning is required in which the only information exchanged is that necessary to schedule a call for which chaperoning is required. Question 13: After the vetting process has been initiated by Investment Banking, may Research communicate to Investment Banking their views regarding the merits of a proposed transaction or candidate for a transaction as such views continue to evolve or develop over time and without specific additional prompting by Investment Banking? Answer: Section I.10.a. permits Investment Banking to seek Research's views on, among other things, the merits of a proposed transaction or a potential candidate for a transaction. We believe that it would not be inconsistent with the Addendum if Research continued to communicate its views to Investment Banking on the merits of such proposed transaction or potential candidate for a transaction, without specific additional prompting, so long as such communications are:
Question 14: Addendum A permits Investment Banking to seek, through Research Management or in the presence of internal legal or compliance staff, the views of Research personnel regarding industry trends. In this context, may individual companies be included in the context of an industry discussion? Answer: A discussion of individual companies can be included to the extent necessary to a discussion regarding an industry, so long as such communication is permitted by Section I.10.a of Addendum A, including, among other things:
Question 15: Can Investment Banking and Research personnel communicate with each other with regard to a published research report or the impact of a company event on a company covered by Research (such as, for example, an earnings release)? Answer: Communications between Investment Banking and Research regarding a published research report on a company covered by Research or the impact of a company event are permitted by Section I.10 only if such communication is in connection with Investment Banking seeking Research's views on the merits of a proposed transaction, a potential candidate for a transaction, or market or industry trends, conditions or developments (See also Question #14 above). Such communications must:
Section I.10 of the Addendum permits Research personnel to respond to inquiries from Investment Banking on these subjects only through Research management or in the presence of legal or compliance staff. In addition, Section I.10 of Addendum A permits Research personnel, through Research Management or in the presence of legal or compliance staff, to initiate communications with Investment Banking personnel relating to market or industry trends, conditions or developments, provided that such communications are consistent in nature with the types of communications that an analyst might have with investing customers and not made for the purpose of having the analyst identify a specific potential transaction. Question 16: Analysts often make their detailed models on covered companies available to investing customers or the sales force (e.g., through general mailing lists or website postings). Can Investment Banking request and obtain this information from the analyst through Research Management or in a chaperoned communication with the analyst? Answer: We believe that it is not inconsistent with the Addendum for Investment Banking to have access to information that has been widely disseminated by Research to investing customers or the sales force. Therefore, so long as the models have been widely disseminated (including, e.g., via website posting) to investing customers or the sales force, Investment Banking can independently obtain such models, so long as Investment Banking does not communicate with Research in obtaining the models or in any other way not permitted by the Addendum. Settling Firms must maintain records sufficient to show that such models have been widely disseminated to investing customers or the sales force. Issues Related to Requests by Investment Banking ClientsQuestion 17: An Investment Banking client, or potential Investment Banking client, may request to see (or to get access via the internet to) previously published reports of the firm on the company or on other companies within the same sector or industry. Since the company can get the published reports from other sources (though it may be more inconvenient for them to do so), can Investment Banking provide or arrange for Research (or another department in the firm) to provide such previously published reports to the company? Answer: At the request of a company, Investment Banking can provide, or arrange for the firm's operations department (or other department outside of Research) to provide, such previously published research reports on the requesting company or other companies. Question 18: If a company asks Investment Banking to arrange a meeting between the company and the analyst who will be assigned to cover the company, and Investment Banking tells the company that the company must call Research Management or the analyst directly to arrange such a meeting, can Investment Banking give the analyst a "heads up" and tell the analyst that the company may call? Answer: Permitting Investment Banking to contact an analyst to give notice of a potential call from an issuer may give rise to Investment Banking communicating its views about the company to the analyst. Investment Banking may not contact an analyst to give notice of a potential call from an issuer. Question 19: If a company requests a meeting with an analyst, can the analyst attend the meeting and respond to questions posed by the company, including, for example, questions regarding the analyst's views as to pricing and valuation? Answer: The Addendum does not generally address Research communications with issuers. However, Section I.9 of the Addendum prohibits Research from having any communication with companies for the purpose of soliciting investment banking business. Investment Banking personnel must not be present during, or participate in, any communications between Research and an issuer. Issues Related to the Notice Requirement, Confirmations, and Account StatementsQuestion 20: Must a Settling Firm that acted as the "prime broker" for a customer comply with the periodic account statement disclosure requirements if it did not act as the sole executing broker for all transactions reflected on an account statement? Answer: Prime brokerage is a service developed by full-service broker-dealers to facilitate the clearance and settlement of securities trades for substantial retail and institutional investors who are active market participants. See Letter re: Prime Broker Committee Request (Jan. 25, 1994). Prime brokerage involves three distinct parties: the prime broker, the executing broker, and the customer. The prime broker is a registered broker-dealer that clears and finances the customer trades executed by one or more other registered broker-dealers ("executing broker") at the request of the customer. Each of the executing brokers receives a letter from the prime broker agreeing to clear and carry each trade placed by the customer with the executing broker where the customer directs delivery of money or securities to be made to or by the prime broker. Section III.1.i. of the Addendum requires that Settling Firms disclose in periodic account statements the ratings, if any, contained in the firm's own research reports and in the Independent Research made available by the firm on the Common Stock of Covered Companies. It is our view that, given the characteristics of prime brokerage customers (i.e. active market participants with substantial account holdings using multiple executing brokers), if a Settling Firm is a prime broker as contemplated by the above referenced letter, the Settling Firm need not comply with the periodic account statement disclosure requirement with respect to such transactions. Question 21: If a firm engages in communications only with an investment adviser regarding orders submitted on behalf of a discretionary account client of the adviser, but the firm sends the related confirmations and account statements directly to the beneficial owner of the account, who is considered the firm's "customer" for purposes of the notice, confirmation, and account statement disclosure requirements? Answer: As discussed above, Section III.1. of Addendum A requires that Settling Firms provide notice of the availability of Independent Research in connection with certain solicited orders, and requires that Settling Firms disclose in confirmations and periodic account statements the ratings contained in the firm's own research reports and in Independent Research. Since the adviser, and not the beneficial owner, exercised the discretion with respect to the solicited transaction, the investment adviser is the Settling Firm's customer for purposes of the notice, confirmation, and account statement disclosure requirements. Question 22: Are indications of interest submitted electronically via Autex, Bloomberg, FIX, or similar third party or proprietary electronic protocols, subject to the notice requirement, trade confirmation ratings disclosure, and periodic account statement disclosure requirements? Answer: Section III.1. of Addendum A requires that Settling Firms provide notice of the availability of Independent Research in connection with certain solicited orders, and requires that Settling Firms disclose in confirmations and periodic account statements the ratings contained in the firm's own research reports and in Independent Research. The Staff notes that institutional market participants are the primarily users of such third party electronic systems. Indications of interest are not orders and therefore would not in themselves trigger the disclosure requirements. Indications of interest transmitted by third party or proprietary electronic systems may result in orders from customers. However, in light of the logistics of the operation of these systems and the difficulty of identifying orders that result from electronically transmitted indications of interest, indications of interest transmitted electronically through a third party or proprietary electronic system are not subject to the Notice Requirement. Positions in the Common Stock of Covered Companies reflected on periodic account statements, including positions resulting from electronically transmitted indications of interest, are subject to the periodic account statement disclosure requirements of Section III.1.i. and k. of the Addendum. Question 23: Since trade confirmations may, at the customer's direction, be sent to the prime broker instead of the customer, may firms acting as executing brokers, instead of including ratings on the confirmation, provide an annual notice to the customer stating that the customer can receive current ratings information by visiting the website location(s) specified in the notice? Answer: As discussed above, prime brokerage is a system developed by full-service firms to facilitate the clearance and settlement of securities trades for substantial retail and institutional investors who are active market participants. In the context of the prime brokerage relationships contemplated by the prime broker letter, and where the customer directs that all confirmations be sent only to their prime broker, firms acting as executing brokers may, instead of including ratings on the confirmation, provide an annual notice to such customers stating that customers can obtain current ratings information by visiting the website location(s) specified in the annual notice; provided that doing so would not violate Section 5 of the Securities Act of 1933 or the other provisions of the federal securities laws or the rules and regulations thereunder.3 Question 24: Are ratings disclosures required on periodic account statements provided to customers who trade on a DVP basis with respect to any "open fail" or "yet to settle" transactions shown on such statements? Answer: We understand "open fails" to refer to trades for which the scheduled settlement date has passed, but for which settlement has not occurred (i.e., "failed trades'"). We also understand "yet to settle" trades to refer to trades that have been executed, but for which the scheduled settlement date has not arrived (i.e., "pending trades"). Unless an exemption from the Notice Requirement of Section III.1.c. applies, these customers would receive disclosure of ratings as required by Sections III.1.d through i, either on the trade confirmation, or on a website (provided that doing so would not violate Section 5 of the Securities Act of 1933 or the other provisions of the federal securities laws or the rules and regulations thereunder4). Therefore, we believe that it is not inconsistent with the Addendum not to include ratings disclosures on periodic account statements that are provided to customers who trade on a DVP basis with respect to "failed trades" or "pending trades." Question 25: Section I.1.a. of the Addendum defines the term "firm" to include affiliates. Does this require that all affiliates of the Settling Firms (other than exempt investment adviser affiliates) post on their websites analyst performance data (see Section II.2 of the Addendum) and a notice of the availability of Independent Research (see Section III.1.k. of the Addendum)? Answer: The analyst performance data disclosure requirements of Section II.2 of the Addendum and the notice of the availability of Independent Research disclosure requirements of Section III.1.k. of the Addendum must be posted on a Settling Firm's affiliate's website (provided that doing so would not violate Section 5 of the Securities Act of 1933 or the other provisions of the federal securities laws or the rules and regulations thereunder5) only if such affiliate prepares, distributes, or makes available its own research to customers in the United States, or the affiliate distributes or makes available a Settling Firm's research to customers in the United States. Issues Related to Participation in ConferencesQuestion 26: Can both Research and Investment Banking personnel participate (i.e., attend, appear on panels, or ask questions during general or "break-out" sessions) in widely-attended conferences without a chaperone also being present? Answer: Section I.10.e. of the Addendum permits Research to attend or participate in a "widely-attended conference" attended by Investment Banking personnel or in which Investment Banking personnel participate, provided that Research personnel do not participate in activities otherwise prohibited therein. Research and Investment Banking personnel may also attend or participate in "widely-attended" portions of such conferences. Although no chaperone is necessary, we note that these conferences should not be used as a means for Research to market Investment Banking services. We also note that Section I.10.g of the Addendum provides that communications between Research and Investment Banking personnel that are not related to Investment Banking or Research activities may take place without restriction. Under no circumstances may Research and Investment Banking engage in communications prohibited under Section I.10 of Addendum A. Question 27: In connection with a firm-sponsored conference, can Research and Investment Banking communicate with each other regarding the selection of speakers, the attendee invitation list, general conference logistics, and arranging for Investment Banking personnel to appear on a panel at a Research conference and vice-versa? Answer: We believe that it is not inconsistent with Section I.10.e. of the Addendum if Research and Investment Banking communicate with each other regarding the planning of a widely-attended firm-sponsored conference with regard to general conference logistics, selection of speakers, and arrangements for Investment Banking personnel to appear on a panel at a Research-hosted conference (and vice-versa), provided that the final agenda is set by the department hosting the conference and that such communications:
Question 28: Can both Research and Investment Banking personnel participate in social and athletic events organized in connection with a conference? Answer: Section I.10.e. of Addendum A permits Research to attend or participate in a "widely-attended conference" attended by Investment Banking personnel or in which Investment Banking personnel participate, provided that Research personnel do not participate in activities otherwise prohibited in Addendum A. Research and Investment Banking may participate in social or athletic events open to large groups of conference participants, but Research and Investment Banking personnel may not arrange or influence seating (or athletic pairings, foursomes, or similar arrangements) in order to place particular corporate clients and bankers or analysts together, and Research and Investment Banking may not participate together in groupings where corporate clients or potential corporate clients also participate. Research and Investment Banking also may not participate jointly in limited invitation small group socials or athletic events organized with corporate clients (or prospective clients) in connection with a conference. Issues Related to ApplicabilityQuestion 29: Once a foreign company is determined to have a "principal equity trading market" in the United States, do the provisions of Sections I and II of Addendum A continue to apply to research reports prepared in respect of such company even if it is subsequently determined that the company no longer has a principal trading market in the United States? Answer: Section II.3 of Addendum A applies the restrictions and requirements set forth in Sections I and II to research reports prepared by the firm that relate to non-U.S. companies for which a U.S. market is the "principal equity trading market," as defined in Section II.3.c. If a non-U.S. company ceases to have a principal trading market in the United States for at least one full calendar quarter, the provisions of Sections I and II of Addendum A would cease to apply in respect of research reports regarding such company until such time as the United States was re-established as the principal trading market (in which event, such provisions of Addendum A would apply from the second calendar quarter following such event). ADDITIONAL ISSUESResearch Analyst CompensationSubject to all the conditions and restrictions set forth in Addendum A, analysts may be compensated for vetting Investment Banking transactions. As you pointed out in your February 10, 2004 memorandum to SEC Staff, Section I.5 of the Addendum does not prohibit firms from taking vetting into account in determining analyst compensation, provided that, among other things, (i) a research analyst's compensation may not be based directly or indirectly on Investment Banking revenues or results; (ii) Investment Banking has no input into professional Research personnel compensation decisions; (iii) a significant portion of the lead analyst's compensation must be based on quantifiable measures of quality and accuracy of research and analysis; (iv) the criteria to be used for compensation decisions will be determined by Research management and the firm's senior management (not including Investment Banking) and set forth in writing in advance; and (v) Research management must document the basis for each compensation decision as described in Section I.5.f. Thus, we would not expect that the number of favorable opinions an analyst issues would affect his or her compensation. We note that Section I.10.a. of the Addendum permits Research personnel to provide Investment Banking personnel, through Research Management or in the presence of internal legal or compliance staff, with views about the merits of a proposed transaction or a potential candidate for a transaction, if such dialogue is initially prompted by Investment Banking personnel through Research Management or in the presence of internal legal or compliance staff. Sections I.10.b. and c. also permit Research personnel to engage in certain additional activities with respect to transactions. Therefore, consistent with the conditions and restrictions of the Addendum, we believe that Research personnel may be compensated for such permissible professional activities. Definition of "Covered Company"In addition, you asked that the Staff clarify that a firm need only look to the immediately preceding calendar quarter in initially determining whether a non-U.S. issuer is a "Covered Company" in cases where coverage of the company is initiated after July 27, 2004. Section III 1.a (ii) of the Addendum sets forth the requirements for determining whether a non-U.S. company for which a U.S. market is not the principal equity trading market falls under the Addendum's definition of "Covered Company." The Addendum states that a non-U.S. company for which a U.S. market is not the principal equity trading market shall only be considered a Covered Company if: (a) in the calendar quarter ended March 31, 2004, or in any subsequent calendar quarter during the period that the firm's obligations to procure and make available Independent Research under Section III are effective, the publicly reported, average daily dollar volume of U.S. trading in such company's Common Stock (measured by multiplying the publicly reported, average daily share volume of U.S. trading during the quarter by the closing price per share of the Common Stock on the last day of the quarter), exceeded $2.5 million, and (b) the outstanding total public float of the Common Stock as of the last day of such calendar quarter exceeded $150 million, or, if the data necessary to calculate the outstanding total public float is not readily available, the market capitalization of the Common Stock as of the last day of such calendar quarter exceeded $150 million. With respect to a company on which coverage is initiated after the firm's obligations to procure and make available Independent Research under Section III are effective, the firm must look to the immediately preceding calendar quarter prior to such initiation in determining whether, as of the time of initiation, the company falls under the Addendum's definition of "Covered Company." From that point onward, the firm must determine whether the non-U.S. company falls under the Addendum's definition of "Covered Company" on a quarterly basis. Ratings Disclosure on a "Qualifying Website"You requested clarification regarding the twelve months of Independent Research ratings and Settling Firms' ratings disclosures that would be required on a "Qualifying Website." The Addendum permits that, in certain contexts, the disclosure of ratings information may be made on a Qualifying Website instead of on a confirmation or periodic account statement. Such website must, among other things, display the ratings contained in each research report over the past twelve months. This twelve-month history will build-up over the course of the initial twelve months after the firm's obligations to procure and make available Independent Research under Section III are effective, and adjust on a rolling basis thereafter. Therefore, we would expect that on December 31, 2004, the ratings information displayed on the Qualifying Website must cover the period from July 27, 2004 through December 31, 2004. Should you have any additional questions regarding this matter, please do not hesitate to contact the undersigned, Racquel Russell, or Brad Owens at (202) 942-0772. Very truly yours, James A. Brigagliano Endnotes
|
| Home | Previous Page | Modified: 11/02/2004 |