FINRA Fines 10 Firms for Research Analyst Violations
Commentary by Steven Lofchie
FINRA announced that it fined 10 firms for allowing their equity research analysts to solicit investment banking business, and for offering favorable research coverage in connection with the planned initial public offering of Toys "R" Us in 2010.
According to FINRA, in April 2010, Toys "R" Us and its private equity owners invited 10 firms to compete for a role in Toys "R" Us planned IPO. FINRA found that each of the 10 firms used its equity research analyst as part of its solicitation for a role in the IPO, and implicitly or explicitly offered favorable research coverage in return for a role in the IPO. Additionally, six of the firms had inadequate supervisory procedures related to research analyst participation in investment banking pitches.
In settling this matter, the 10 firms neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
See: FINRA News Release.
Commentary
This settlement highlights the importance of robust compliance procedures governing the interaction between research analysts and investment banking personnel, particularly during the "solicitation period," in which an issuer determines which firms to include in the underwriting syndicate. The FINRA settlement agreements contain some useful insights into how FINRA interprets the applicable provisions of Rule 2711 and include the following:
Prohibition on participation by research analysts in solicitation of investment banking business (NASD Rule 2711(c)(4)): A research analyst may not attend meetings with an issuer to discuss the analyst's views on the issuer or comparable companies as part of the underwriter selection process, even if investment bankers are not present during such meetings. However, an analyst may communicate with an issuer as part of the analyst's due diligence efforts to obtain information about the issuer.
Prohibition on offering favorable research to obtain investment banking business (NASD Rule 2711(e)): Where an issuer indicates that it will consider an analyst's views as part of the underwriter selection process, a broker-dealer may not communicate its analyst's positive views of the issuer to the issuer, even if those views are held honestly. Similarly, a broker-dealer may not provide an issuer with a single valuation from both investment banking and research personnel, nor may a broker-dealer comply with requests that their research analysts "stand by" valuations provided by their investment bankers.
Research Supervisory Procedures (NASD Rule 2711(i)): In addition to the substantive violations, FINRA sanctioned certain firms for inadequate written policies and procedures. Thus, firms should consider whether their existing compliance procedures adequately address interactions between investment banking and research personnel, particularly during investment banking "solicitation periods."