FINRA Provides Guidance on Prohibition Against Offering Favorable Research to Induce Investment Banking Business (Notice)

FINRA RN 11-41

September 12, 2011

FINRA published a regulatory notice regarding NASD Rule 2711's prohibition on offering favorable research as consideration for the receipt of business or compensation. In particular, FINRA states that it is concerned that firms may be "suggesting" to potential deal participants that positive research coverage may be an condition to selection as an underwriter or selling group member. FINRA states that it views such statements as attempts to create an expectation that a firm chosen to participate in an offering will maintain favorable research on an issuer's stock, and that even "tacit acquiescence" to such suggestions would violate Rule 2711. FINRA states that firms that choose to participate in offerings where a "suggestion" has been made that positive research is a condition should "expressly repudiate to the issuer any expectation with respect to the content of research coverage and document such repudiation." FINRA also requires heightened supervision and oversight in such circumstances.

For more information about this document, you may contact one of the following Cadwalader attorney: Steven Lofchie.

Cross References

NASD Rule 2711

NASD NTM 07-04 (Interpreting 2711)

Lofchie's Guide to Broker-Dealer Regulation: Chapter 7, Research