2058 Federal Register / Vol. 72, No. 10 / Wednesday, January 17, 2007 / Notices 

3See Form 19b–4 dated November 6, 2006 

(‘‘Amendment No. 1’’). Amendment No. 1 replaced 

the original filing in its entirety. 

4See Securities Exchange Act Release No. 54801 

(November 21, 2006), 71 FR 68870 (SR–NYSE–

2006–80). 

5Trading in Gold Shares has been offered on the 

Exchange since 2004. 

6 In approving this rule change, the Commission 

notes that it has considered the proposed rule’s 

impact on efficiency, competition, and capital 

formation. See 15 U.S.C. 78c(f). 

7 15 U.S.C. 78f(b)(5). 

8 15 U.S.C. 78s(b)(2). 

9 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3NYSE Amendment No. 1 makes minor revisions 

to the original filing. 

4NASD Amendment No. 1 makes minor revisions 

to the original filing. 

trading at 8:20 a.m. On November 6, 

2006, the Exchange filed Amendment 

No. 1.3 The proposed rule change, as 

amended, was published for comment 

in the Federal Register on November 28, 

2006.4 The Commission received no 

comments on the proposal. This order 

approves the proposed rule change, as 

modified by Amendment No. 1. 

II. Description of the Proposal 

The Exchange proposed to amend 

NYSE Rule 1300 (Gold Shares) and 

NYSE Rule 51 (Hours for Business) to 

allow Gold Shares to open for trading at 

8:20 a.m.5 Gold Shares represent units 

of fractional undivided interest in and 

ownership of the streetTRACKS Gold 

Trust (the ‘‘Trust’’). The Trust holds 

gold bullion and the investment 

objective of the Trust is to reflect the 

performance of the price of gold bullion, 

less the Trust’s expenses. 

Except for the new opening time, 

trading in Gold Shares will operate as it 

does today. The current assigned 

specialist will continue as the assigned 

specialist and the stock will continue to 

trade at its current post and panel. All 

Exchange systems will be operative 

beginning at 8:20 a.m. and throughout 

the trading day including those systems 

that provide audit trail information. The 

Exchange surveillances that currently 

operate during market hours will be in 

place to coincide with the 8:20 a.m. 

opening. Further, either a Floor 

Governor or two Floor Officials will be 

available upon the 8:20 a.m. opening. 

All Exchange Rules will apply upon the 

open at 8:20 a.m. and throughout the 

trading day. 

The Exchange represented that the 

updated spot price of gold and the 

Intraday Indicative Value (‘‘IIV’’) for 

Gold Shares would be available at 8:20 

a.m. on the Trust’s Web site 

(www.streettracksgoldshares.com). The 

IIV is calculated by the Trust’s Sponsor, 

World Trust Gold Services, LLC. The 

Exchange’s Web site (http:// 

www.nyse.com) provides a link to the 

Trust’s Web site. The spot price of gold 

and the IIV on the Trust’s Web site are 

subject to a 5 to 10 second delay. 

III. Discussion and Commission 

Findings 

After careful consideration, the 

Commission finds that the proposed 

rule change, as amended, is consistent 

with the requirements of the Act and the 

rules and regulations thereunder 

applicable to a national securities 

exchange.6 In particular, the 

Commission finds that the proposed 

rule change is consistent with Section 

6(b)(5) of the Act,7 which requires that 

an exchange have rules designed, among 

other things, to promote just and 

equitable principles of trade, to remove 

impediments to and perfect the 

mechanism of a free and open market 

and a national market system, and, in 

general, to protect investors and the 

public interest. 

The Exchange stated that it proposes 

to amend its Rules 1300 and 51 to allow 

the opening of Gold Shares for trading 

at 8:20 a.m. in order to remain 

competitive and in light of the fact that 

interest in commodity-based securities 

has increased. An 8:20 a.m. opening 

would coincide with the opening of 

COMEX trading in gold futures and 

gold options and thus permit trading in 

Gold Shares to start at the same time as 

other gold-based instruments. The 

Commission believes that an 8:20 a.m. 

opening would give customers the 

opportunity to trade an equity product 

based on the price of gold from the time 

that gold futures and options on gold 

futures begin trading on the COMEX

and would, therefore, provide the 

Exchange customers with better 

opportunities for exercising their 

investment choices. 

IV. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,8 that the 

proposed rule change (SR–NYSE–2006–

80), as modified by Amendment No. 1, 

be, and it hereby is, approved. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.9

Nancy M. Morris, 

Secretary. 

[FR Doc. E7–535 Filed 1–16–07; 8:45 am] 

BILLING CODE 8011–01–P 

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

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

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 antiretaliation prohibitions to all employees 

of a member organization, not just 

investment banking. 

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Federal Register / Vol. 72, No. 10 / Wednesday, January 17, 2007 / Notices 2059 

5http://www.nasd.com/web/groups/rules_regs/ 

documents/rules_regs/nasdw_015803.pdf 6The 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. 

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 nonresearch personnel; and restrictions on 

personal trading by research analysts. 

Below is the text of the proposed rule 

changes.6 Proposed new language is 

italicized; proposed deletions are in 

[brackets]. 

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 comstockstill on PROD1PC61 with NOTICES

2060 Federal Register / Vol. 72, No. 10 / Wednesday, January 17, 2007 / Notices 

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 bankingsecurities related services, and nonsecurities services.); 

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Federal Register / Vol. 72, No. 10 / Wednesday, January 17, 2007 / Notices 2061 

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, noninvestment 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. 

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2062 Federal Register / Vol. 72, No. 10 / Wednesday, January 17, 2007 / Notices 

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, noninvestment 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 organizationmaintained 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 

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Federal Register / Vol. 72, No. 10 / Wednesday, January 17, 2007 / Notices 2063 

(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 

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2064 Federal Register / Vol. 72, No. 10 / Wednesday, January 17, 2007 / Notices 

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 

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Federal Register / Vol. 72, No. 10 / Wednesday, January 17, 2007 / Notices 2065 

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, noninvestment 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. 

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2066 Federal Register / Vol. 72, No. 10 / Wednesday, January 17, 2007 / Notices 

(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 nonmstockstill on PROD1PC61 with NOTICES

Federal Register / Vol. 72, No. 10 / Wednesday, January 17, 2007 / Notices 2067 

7See NYSE Information Memos 02–26 and 04–10 

and NASD Notices to Members 02–39 (July 2002) 

and 04–18 (March 2004). 

8See 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). 

9See 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). 

10See Section 15D(a) of the Act, 15 U.S.C. 78o–

6. 

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 membermaintained 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. 

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

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 SarbanesOxley 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. 

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 

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2068 Federal Register / Vol. 72, No. 10 / Wednesday, January 17, 2007 / Notices 

11See 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). 

12See 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). 

13See 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. 

14 In August 2004, two additional firms settled 

with regulators under the same terms as the April 

2003 Global Settlement. 

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

16 17 CFR 230.482. 

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

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

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. 

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. 

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.’’

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 

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Federal Register / Vol. 72, No. 10 / Wednesday, January 17, 2007 / Notices 2069 

17An 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). 

18 17 CFR 230.134. 

19See Section 15D of the Act. 

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 openend investment companies that are not 

listed or traded on an exchange. 

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. 

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 NonResearch 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. 

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 nonresearch 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 nonresearch 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 nonresearch 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 

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2070 Federal Register / Vol. 72, No. 10 / Wednesday, January 17, 2007 / Notices 

20 17 CFR 230.139. 

21 17 CFR 242.101. 

22See Securities Act Release No. 8400 and 

Securities Exchange Act Release No. 49424 (March 

16, 2004), 69 FR 15594 (March 25, 2004). 

23According 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. 

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

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 lockedup 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 preapproved 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. 

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: 

• 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 

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Federal Register / Vol. 72, No. 10 / Wednesday, January 17, 2007 / Notices 2071 

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 nonconflicts 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 

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2072 Federal Register / Vol. 72, No. 10 / Wednesday, January 17, 2007 / Notices 

24See Securities Exchange Act Release No. 53382 

(February 27, 2006), 71 FR 11251 (March 6, 2006) 

(order approving SR–NYSE–2005–77). 

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

26See NASD Notices to Members 02–39 (July 

2002) and 04–18 (March 2004). 

27See 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). 

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

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. 

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. 

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 

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Federal Register / Vol. 72, No. 10 / Wednesday, January 17, 2007 / Notices 2073 

28See 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). 

29See Section 15D of the Act, 15 U.S.C. 78o-6. 

30See 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). 

31See 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). 

32See 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. 

33See 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. 

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. 

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. 

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. 

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 

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2074 Federal Register / Vol. 72, No. 10 / Wednesday, January 17, 2007 / Notices 

34An 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). 

recommendations in the SRO report. A 

discussion of the proposed rule changes 

is set out below. 

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. 

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 NonResearch 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 nonresearch 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 

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Federal Register / Vol. 72, No. 10 / Wednesday, January 17, 2007 / Notices 2075 

35See Securities Act Release No. 8591 (July 19, 

2005), 70 FR 44722 (August 3, 2005). 

36NASD believes that practical limitations inhibit 

effective administration of the provision. Most 

notably, NASD rules do not require lock-up 

agreements, and NASD often has no jurisdiction 

over parties to them, including the subject company 

and its non-member shareholders. NASD therefore 

cannot always be the arbiter of whether certain facts 

constitute, for example, a waiver or termination of 

a lock-up—a significant impediment to our ability 

to enforce this provision. 

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 tenday 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 comanagers—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. 

Second, the proposed rule changes 

would eliminate the quiet periods 

around the expiration, waiver or 

termination of a lock-up agreement 

provided, as discussed below, that 

members provide an additional 

certification, similar to Regulation AC, 

to having a bona fide reason for issuing 

research during such periods. According 

to NASD, the quiet periods surrounding 

lock-up releases are intended to prevent 

abusive ‘‘booster shot’’ reports by 

members to raise the stock price of a 

company just before previously lockedup shares become freely saleable into 

the market by a company or its major 

shareholders. 

While NASD remains concerned that 

these periods pose heightened concerns 

about biased research, the changes to 

internal structure of investment banks 

and the other safeguards imposed by the 

current rules appear to have addressed 

these concerns and obviate the need for 

a quiet period that inhibits the flow of 

information to the marketplace. NASD 

has observed, for example, that negative 

information about a subject company is 

sometimes released by that company 

during the quiet periods, but the quiet 

periods prevent some members from 

providing analysis of this negative 

information to investors in a timely 

fashion. NASD believes that elimination 

of the quiet periods around lock-ups 

will permit such information to flow to 

investors without sacrificing the overall 

objectivity of the research.36

NASD Rule 2711(f) would continue to 

require a reasonable basis for any 

recommendation or price target and the 

valuation method used to determine a 

price target, while SEC Regulation AC 

requires certification that any such 

recommendation or price target is 

genuinely held. Accordingly, NASD 

believes that an effective alternative to 

the quiet periods would be to require 

that members provide an additional 

certification, similar to Regulation AC, 

to having a bona fide reason for issuing 

research within 15 days before and after 

a lock-up expiration and was not 

otherwise issued for any reason 

pertaining to conditioning the market 

price of the security that was the subject 

of the research report. NASD would set 

forth the language of the certification in 

a Notice to Members upon approval of 

the proposed rule change. 

In the Joint Report, NYSE 

recommends an alternative proposal to 

reduce the duration of the quiet periods 

and expand the exception for research 

concerning the effects of significant 

news or a significant event on the 

subject company to include earnings 

related announcements. NASD believes 

its proposal is a more viable means to 

ensure timely information flow to 

investors than such an alternative 

approach. As the SROs have previously 

noted in their March 2004 joint 

interpretive memorandum, earnings 

announcements do not generally fall 

within the exception because ‘‘an 

earnings announcement itself generally 

is not a causal event or news item that 

materially affects a company’s 

operations, earnings or financial 

condition.’’ NASD believes that a carveout for earnings related announcements 

could lead to lock-up expirations timed 

to coincide with such announcements—

many of which are scheduled 

regularly—thereby essentially negating 

the quiet period altogether. NASD 

believes that this is problematic because 

the significant news exception applies 

not only to quiet periods around lockup expirations, but also to the quiet 

periods after an IPO and the blackout 

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2076 Federal Register / Vol. 72, No. 10 / Wednesday, January 17, 2007 / Notices 

37NASD Rule 2711(a)(7) defines the term 

‘‘research analyst account’’ to include any account 

in which a research analyst or member of the 

analyst’s household has a financial interest, or over 

which the analyst has discretion or control, other 

than an investment company registered under the 

Investment Company Act of 1940. The proposed 

rule change would clarify that this definition is 

intended to except from the definition those 

registered investment companies that are managed 

by a research analyst or member of the research 

analyst’s household, provided that the research 

analyst or household member has no financial 

interest in such investment other than a 

performance or management fee. See infra page 46. 

The term does not include a ‘‘blind trust’’ account 

that is controlled by a person other than the 

research analyst or household member and neither 

the analyst nor any household member knows of 

the account’s investments or investment 

transactions. 

periods during which analysts are 

prohibited from trading in securities 

they cover. 

Restrictions on Personal Trading by 

Research Analysts 

NASD Rule 2711(g) generally restricts 

the trading of securities by ‘‘research 

analyst accounts.’’ 37 Specifically, the 

rule prohibits any research analyst 

account from: 

• 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 30 days before and 

ending five 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. 

NASD Rule 2711(g) includes certain 

limited exceptions to these trading 

restrictions. 

The proposal would make two 

principal changes to the personal 

trading restrictions. First, the proposed 

rule changes would revise the 

exceptions to the personal trading 

restrictions for investment funds in 

paragraph (g)(5). Under the proposed 

rule changes, the personal trading 

restrictions would not apply to 

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. 

NASD believes that this change would 

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. 

According to NASD, 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. NASD understands that NYSE 

is proposing to retain the 20% asset 

diversification threshold to be eligible 

for the exception. NASD seeks comment 

on whether to maintain that separate 

requirement. 

Second, the proposed rule changes 

would create an exemption for firms 

that voluntarily choose to prohibit their 

analysts from owning shares of the 

companies they cover. The exemption 

would provide a means for analysts at 

such firms to divest their holdings 

without violating the blackout period 

and trading against recommendation 

prohibitions. 

The exemption would allow such a 

firm to adopt policies that permit 

research analysts to divest their 

holdings in an orderly and controlled 

way with the oversight of the firm’s 

legal and compliance personnel. The 

SROs permitted firms to allow their 

analysts to divest their holdings in the 

same manner when the rule first became 

effective by delaying for a certain time 

period implementation of the personal 

trading restrictions for firms that wished 

to ban ownership. With the 

recommended change, NASD Rule 

2711(g) would allow firms that adopt 

ownership bans to implement the same 

divestiture procedures regardless of 

when they adopted such a policy. 

Disclosure Requirements 

NASD Rule 2711(h) imposes a 

number of disclosure requirements on 

member research reports and research 

analyst public appearances in which the 

analyst makes a recommendation or 

offers an opinion concerning an equity 

security. NASD Rule 2711(h) requires 

specific disclosures of conflicts of 

interest, including where the member 

firm, the research analyst or a member 

of the analyst’s household has a 

financial interest in the subject 

company’s securities or the member or 

its affiliates have received compensation 

from the subject company. NASD Rule 

2711(h) also requires a number of other 

disclosures in research reports that are 

not directly related to conflicts of 

interest with the subject company, 

including the meanings of ratings used 

in the member’s rating system, the 

distribution of buy, hold, and sell 

ratings assigned by the member, 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. 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. 

According to NASD, these required 

disclosures promote transparency and 

provide important information to enable 

investors to assess the value of the 

research in making their investment 

decision. However, NASD believes that 

it would be equally effective and useful 

for investors to know immediately 

whether the member firm 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. 

To that end, the proposed rule 

changes would amend the rules 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. 

Members could still opt to make all of 

the disclosures in the report itself; 

however, NASD believes that a Webbased disclosure system would be at 

least as effective and would minimize 

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]. 

The proposed rule changes would 

define ‘‘conflict of interest’’ to include 

any of the circumstances that currently 

require disclosure under NASD Rule 

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Federal Register / Vol. 72, No. 10 / Wednesday, January 17, 2007 / Notices 2077 

38 15 U.S.C. 78o–3(b)(6). 

2711(h), including if the research 

analyst or member of the research 

analyst’s household has a financial 

interest in the subject company; if the 

member owns 1% or more of any class 

of common equity securities of the 

subject company; receipt by the member 

of investment banking and other 

compensation from the subject company 

or the intention to seek investment 

banking compensation; if the member 

makes a market in the subject 

company’s securities; 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; and 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. 

The proposed amendment would still 

require that Web-based disclosure 

concern actual conflicts of interest, 

rather than the possibility of such 

conflicts. A general ‘‘health warning’’

that conflicts of interest ‘‘may or may 

not’’ exist are neither useful nor 

effective. 

NASD specifically 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. 

NASD believes that those disclosures do 

not lend themselves easily to the terse 

material conflict warning that would 

appear on the cover of the report. 

Accordingly, NASD believes that they 

should be readily available to investors 

in the report itself. 

Prohibition on Retaliation Against 

Research Analysts 

NASD Rule 2711(j) currently prohibits 

any member and any employee of a 

member who is involved with the 

member’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’s current or prospective 

investment banking relationship with a 

subject company. 

Under no circumstances is retaliation 

appropriate against a research analyst 

who expresses his or her truly held 

beliefs about a subject company. As 

such, the proposed rule changes would 

amend this provision to extend the 

retaliation prohibition to all employees, 

not just those involved in investment 

banking activities. 

Other Changes 

The proposed rule changes also 

would make certain other changes. First, 

the proposed rule change would amend 

the definition of ‘‘research analyst 

account’’ in NASD Rule 2711(a)(7) to 

clarify that it 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 NASD Rule 2711(c)(5)(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 also apply to 

communications with internal sales 

personnel. NASD believes such change 

would make the provision consistent 

with respect to a research analyst’s 

ability to educate investors and sales 

personnel about an investment banking 

services transaction. 

Finally, the proposed rule changes 

would clarify that the annual attestation 

required by NASD Rule 2711(i) must be 

filed with NASD’s Member Regulation 

Department. NASD notes that the 

Member Regulation Department has 

developed a form, available on the 

NASD Web site, that may be used to 

make the attestation electronically. 

NASD will announce the effective 

date of the proposed rule changes in a 

Notice to Members to be published no 

later than 60 days following 

Commission approval. 

4. NASD’s Statutory Basis 

NASD believes that the proposed rule 

changes are consistent with the 

provisions of Section 15A(b)(6) of the 

Act,38 which requires, among other 

things, that NASD rules be designed to 

prevent fraudulent and manipulative 

acts and practices, to promote just and 

equitable principles of trade, and, in 

general, to protect investors and the 

public interest. NASD believes that the 

proposed rule changes are consistent 

with the provisions of the Act because 

it promotes both objective research and 

increased information flow to investors 

and does so in an efficient and effective 

manner. 

B. Self-Regulatory Organizations’

Statements on Burden on Competition 

The NYSE and NASD do not believe 

that the proposed rule changes will 

result in any burden on competition that 

is not necessary or appropriate in 

furtherance of the purposes of the Act. 

C. Self-Regulatory Organizations’

Statements on Comments on the 

Proposed Rule Changes Received From 

Members, Participants, or Others 

Written comments were neither 

solicited nor received. 

III. Date of Effectiveness of the 

Proposed Rule Changes and Timing for 

Commission Action 

Within 35 days of the date of 

publication of this notice in the Federal 

Register or within such longer period (i) 

as the Commission may designate up to 

90 days of such date if it finds such 

longer period to be appropriate and 

publishes its reasons for so finding or 

(ii) as to which the self-regulatory 

organization consents, the Commission 

will: 

(A) By order approve such proposed 

rule changes, or 

(B) Institute proceedings to determine 

whether the proposed rule changes 

should be disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing, 

including whether the proposed rule 

changes are consistent with the Act and 

whether there are any differences 

between the NYSE and NASD proposals 

that present compliance or interpretive 

issues. 

We solicit comment as to how the 

proposals to relocate disclosures to a 

member firm’s Web site would affect the 

utility of this information to investors. 

Please also provide comment on 

whether relocating disclosures to a 

member firm’s Web site would provide 

a substantial cost benefit to firms. 

Comments may be submitted by any 

of the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Numbers SR–NYSE–2006–78 and/or 

SR–NASD–2006–113 on the subject 

line. 

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2078 Federal Register / Vol. 72, No. 10 / Wednesday, January 17, 2007 / Notices 

39 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3 In Amendment No. 1, the Exchange modified 

the scope of its proposal to exempt appeals of 

decisions of the Nominating, Elections and 

Governance Committee from the proposed fee. 

Amendment No. 1 replaced the original filing in its 

entirety. 

4 15 U.S.C. 78s(b)(3)(A)(ii). 

5 17 CFR 240.19b–4(f)(2). 

6See Exchange By-Law Article X, Section 10–1 

for the list of Standing Committees of the Exchange. 

7Telephone conversation between Leah Mesfin, 

Special Counsel, Division of Market Regulation, 

Commission, and Angela Dunn, Director and 

Counsel, Phlx, on December 21, 2006. 

Paper Comments 

• Send paper comments in triplicate 

to Nancy M. Morris, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Numbers SR–NYSE–2006–78 and/or 

SR–NASD–2006–113. The file numbers 

should be included on the subject line 

if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

changes that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule changes between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for inspection and copying in 

the Commission’s Public Reference 

Room. Copies of such filings also will be 

available for inspection and copying at 

the principal office of the NYSE and 

NASD. All comments received will be 

posted without change; the Commission 

does not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Numbers SR–NYSE–2006–78 and/or 

SR–NASD–2006–113 and should be 

submitted on or before March 5, 2007. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.39

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E7–548 Filed 1–16–07; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–55071; File No. SR–Phlx–

2006–84] 

Self-Regulatory Organizations; 

Philadelphia Stock Exchange, Inc.; 

Notice of Filing and Immediate 

Effectiveness of Proposed Rule 

Change and Amendment No. 1 Thereto 

To Adopt an Appeal Fee 

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 December 

8, 2006, the Philadelphia Stock 

Exchange, Inc. (‘‘Phlx’’ or ‘‘Exchange’’) 

filed with the Securities and Exchange 

Commission (‘‘Commission’’) the 

proposed rule change as described in 

Items I, II and III below, which Items 

have been substantially prepared by the 

Exchange. On December 20, 2006, the 

Exchange filed Amendment No. 1 to the 

proposed rule change.3 The Exchange 

has designated this proposal as one 

establishing or changing a due, fee, or 

other charge imposed by a selfregulatory organization pursuant to 

Section 19(b)(3)(A)(ii) of the Act 4 and 

Rule 19b–4(f)(2) thereunder,5 which 

renders the proposal effective upon 

filing with the Commission. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change, as modified by Amendment No. 

1, from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to adopt a 

$250.00 appeal fee for Appeals to the 

Board of Governors from decisions of 

Standing Committees 6 (‘‘Appeal Fee’’). 

An appeal from a decision of the 

Business Conduct Committee, the 

Hearing Officer, or a Hearing Panel, 

pursuant to Exchange Rule 960.9 and 

By-Law Article XI, Section 11–3, as well 

as an appeal from a decision of the 

Nominating, Elections and Governance 

Committee, pursuant to By-Law Article 

XI, Section 11–1, will not be subject to 

the Appeal Fee.7 The Appeal Fee, which 

will be paid by appellant at the time of 

filing an appeal, will be refunded to the 

appellant in the event the Board of 

Governors overturns the decision of the 

Standing Committee. 

This fee became effective January 1, 

2007. The text of the proposed rule 

change is available at the Commission’s 

Public Reference Room, the Exchange’s 

Web site at http://www.phlx.com/ 

exchange/rulefilings/2006/SR–2006–

84.pdf, and at the Exchange. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

Exchange included statements 

concerning the purpose of, and basis for, 

the proposed rule change and discussed 

any comments it received on the 

proposed rule change. The text of these 

statements may be examined at the 

places specified in Item IV below. The 

Exchange has prepared summaries, set 

forth in Sections A, B, and C below, of 

the most significant aspects of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

The Exchange represents that the 

purpose of the proposed rule change is 

to reduce the number of frivolous 

appeals by assessing a fee for all appeals 

that are upheld. Currently, three 

Governors hear appeals from decisions 

of Standing Committees, with the 

exception of an appeal from the 

Nominating, Elections and Governance 

Committee, which is heard by a majority 

of Governors who are not then 

candidates for office. The appeal may 

require several hours of time from each 

Governor. The Exchange believes that 

the appeal process is subject to abuse by 

members, participants, member 

organizations and participant 

organizations who incur no downside to 

filing repeated appeals, whether valid or 

otherwise. The Exchange believes that, 

currently, the ease with which an 

appeal can be filed and receive a 

‘‘second look’’ at no cost creates a 

potential for abuse. This fee will become 

effective January 1, 2007. 

An appeal from a decision of the 

Business Conduct Committee, the 

Hearing Officer or a Hearing Panel, 

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