SECURITIES 

RESEARCH

Additional Actions 

Could Improve 

Regulatory Oversight 

of Analyst Conflicts of 

Interest

Report to Congressional Committees

January 2012

GAO-12-209

United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-12-209, a report to 

congressional committees

January 2012

SECURITIES RESEARCH

Additional Actions Could Improve Regulatory 

Oversight of Analyst Conflicts of Interest

Why GAO Did This Study

In 2003 and 2004, the Securities and 

Exchange Commission (SEC), selfregulatory organizations (SRO), and 

others settled with 12 broker-dealers to 

address conflicts of interest between 

the firms’ research and investment 

banking personnel. The regulators 

alleged that the firms allowed their 

investment bankers to pressure equity 

research analysts in ways that could 

cause them to issue misleading 

research to the harm of investors. 

Under the Global Research Analyst 

Settlement (Global Settlement), the 

firms had to undertake reforms 

designed to sever links between 

research and investment banking. The 

SROs also adopted equity research 

rules to address analyst conflicts 

across the industry, but these rules 

were not as stringent in some areas as 

the Global Settlement. The DoddFrank Wall Street Reform and 

Consumer Protection Act required 

GAO to study these issues. This report 

discusses (1) what is known about the 

effectiveness of the regulatory actions 

taken to address analyst conflicts and 

(2) what further actions, if any, could 

be taken to address analyst conflicts.

GAO reviewed empirical studies and 

SEC and SRO rules, examination 

findings, and enforcement actions. 

GAO interviewed SEC and Financial 

Industry Regulatory Authority (FINRA) 

staff, and market participants and 

observers.

What GAO Recommends

GAO recommends that SEC formally 

assess and document whether any of 

the Global Settlement’s remaining 

terms should be codified. SEC agreed 

with the recommendation.

What GAO Found

Existing research and stakeholder views suggest that the Global Settlement and 

other regulatory actions have helped to address conflicts faced by equity 

research analysts. The results of the empirical studies that GAO reviewed 

generally suggest that the Global Settlement and equity research rules adopted 

by the SROs were associated with improvements in analysts’ stock 

recommendations. FINRA officials and SEC staff told GAO that the regulatory 

reforms have been effective, citing minor deficiencies in their examinations and 

the limited number of enforcement actions involving conflicts between research 

and investment banking as evidence of the reforms’ effectiveness. Independent 

monitors, which were required as part of the Global Settlement, also found that 

the 12 firms generally were complying with the Global Settlement. Finally, brokerdealers, institutional investors, and others told GAO that the regulatory actions 

have helped insulate equity research from investment banking influence, 

although some noted that not all conflicts can be eliminated and certain

restrictions can be circumvented.

Although SEC and FINRA have been taking regulatory action to further address 

conflicts faced by research analysts, additional action is warranted. FINRA has 

been working to finalize a rule proposal designed to broaden the obligations of 

firms to identify and manage equity analyst conflicts and better balance the goals 

of helping ensure objective and reliable research with minimizing regulatory costs 

and burdens. FINRA also has been working to finalize another rule proposal that 

would address conflicts faced by debt research analysts. The current SRO 

research rules do not cover debt research analysts, although these analysts face 

conflicts of interests similar to those faced by their equity analyst counterparts. In 

the absence of an SRO debt research rule, the SROs have relied on antifraud 

statutes and SRO rules requiring ethical conduct. They also have encouraged 

firms—with limited success—to comply voluntarily with industry-developed 

principles designed to address debt analyst conflicts. FINRA plans to package its 

two rule proposals together and submit them to SEC in the first half of 2012. In 

contrast, SEC and FINRA have not proposed codifying the Global Settlement’s 

remaining terms. At the request of the broker-dealers, a court modified the Global 

Settlement in 2010 and eliminated settlement terms where, for the most part,

comparable SRO rules existed. Nonetheless, some of the Global Settlement’s 

terms that serve to protect investors have not been codified. As a result, the 

Global Settlement firms continue to be subject to the requirements of the Global 

Settlement and the SRO research analyst rules, while other firms that provide the 

same services are subject only to the SRO research analyst rules. As a result, 

investors may not be provided the same level of protection. GAO has previously 

reported that a regulatory framework should ensure that market participants 

receive consistent and useful information as well as consistent protections for 

similar financial products and services. SEC staff told GAO that they periodically 

have discussed and analyzed the Global Settlement terms but have not formally 

assessed and documented whether any of the Global Settlement’s remaining 

terms should be codified. By not formally assessing whether codifying any of the 

Global Settlement’s remaining terms provides an effective way of furthering 

investor protection, SEC may be missing an opportunity to provide the same 

level of protection for all investors.

View GAO-12-209. For more information, 

contact A. Nicole Clowers at (202) 512-8678

or clowersa@gao.gov.
Page i GAO-12-209 Securities Research

Letter 1

Background 4

Data and Stakeholders’ Views Suggest That Regulatory Actions 

Have Helped Address Conflicts Faced by Equity Analysts 10

Regulators Have Opportunities to Enhance Investor Protection and 

Streamline or Harmonize Oversight 26

Conclusions 41

Recommendation for Executive Action 42

Agency Comments and Our Evaluation 42

Appendix I Objectives, Scope, and Methodology 43

Appendix II Original and Modified Global Settlement Addendum Compared with 

NASD Rule 2711 46

Appendix III Comments from the Securities and Exchange Commission 61

Appendix IV GAO Contact and Staff Acknowledgments 63

Bibliography 64

Table

Table 1: Sections I and II of the Global Settlement’s Addendum and 

Modified Addendum, and a Crosswalk between the Global 

Settlement’s Addendum to NASD Rule 2711 47

Figures

Figure 1: FINRA Cycle Examinations That Included Reviews for 

Compliance with SRO Research Analyst Rules and 

Number of Deficiencies, 2005 through 2010 19

Contents
Page ii GAO-12-209 Securities Research

Figure 2: FINRA Cycle Examinations That Included Reviews for 

Compliance with the Global Settlement and Number of 

Deficiencies, 2005 through 2010 20

Figure 3: Violations Involving Research and Investment Banking 

Conflicts That Led to FINRA Enforcement Actions, 2005 

through 2010 23

Figure 4: Significant Developments in Oversight of Research 

Analyst Conflicts, Including the Global Settlement and 

SRO Research Analyst Rules, 2001 through 2011 32

Figure 5: FINRA Cycle Examinations That Included Reviews of 

Fixed-Income Research and Number of Deficiencies, 2005 

through 2010 38

Abbreviations

BMA The Bond Market Association

FINRA Financial Industry Regulatory Authority

Global Settlement Global Research Analyst Settlement

NASD National Association of Securities Dealers

NASAA North American Securities Administrators 

Association

NYSE New York Stock Exchange

SEC Securities and Exchange Commission

SRO self-regulatory organizations

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

copyrighted images or other material, permission from the copyright holder may be 

necessary if you wish to reproduce this material separately.
Page 1 GAO-12-209 Securities Research

United States Government Accountability Office

Washington, DC 20548

January 12, 2012

The Honorable Tim Johnson

Chairman

The Honorable Richard C. Shelby

Ranking Member

Committee on Banking, Housing and Urban Affairs

United States Senate

The Honorable Spencer Bachus

Chairman

The Honorable Barney Frank

Ranking Member

Committee on Financial Services

House of Representatives

In 2003, federal and state authorities reached a landmark settlement with 

10 of the nation’s top broker-dealers1 to address conflicts of interest 

between their equity research analysts and investment bankers—

resulting in more than $1.4 billion in penalties and other payments.2

 1

In 2004, the federal and state authorities commenced enforcement actions against 2 

other broker-dealers involving analyst conflicts, and the firms settled substantively under 

the same terms as the other 10 firms.

In the 

enforcement actions leading to the Global Research Analyst Settlement 

(Global Settlement), the Securities and Exchange Commission (SEC) and 

other authorities alleged that the firms allowed their investment bankers to 

pressure equity research analysts in ways that could and, in some cases, 

did cause them to issue misleading or false research to the potential harm 

of investors. For example, investment bankers at certain firms could 

influence the amount of compensation received by equity analysts, 

potentially enabling them to pressure the analysts into improperly 

promoting the stocks of companies whose investment banking business 

the firms were seeking to attract. To resolve the allegations of 

2

Conflict of interest often describes a situation in which a fiduciary who, contrary to the 

obligation and duty to act for the benefit of a designated individual, exploits the 

relationship for personal benefit. We are defining a conflict of interest more generally in 

this report as a situation in which financial or other personal considerations reasonably 

could interfere with the independence of an analyst’s securities research or 

recommendations. However, it is important to note that the existence of a potential conflict 

of interest does not necessarily mean that research analysts or their research is biased.
Page 2 GAO-12-209 Securities Research

misconduct, the broker-dealers agreed under the Global Settlement to 

implement a number of structural reforms intended to sever links between 

equity research and investment banking, thereby insulating analysts from 

investment banking influence or pressure.

Prior to the Global Settlement, the National Association of Securities 

Dealers (NASD) and New York Stock Exchange (NYSE)—the principal 

self-regulatory organizations (SRO) in the securities industry at the time—

had adopted rules specifically to address analyst conflicts at their member 

firms.3 They later amended their rules to include additional requirements 

that were similar to some of the Global Settlement’s reforms. Although the 

NASD and NYSE rules generally apply across the industry—not just to 

the broker-dealers subject to the Global Settlement (Global Settlement 

firms), the rules are less stringent than the Global Settlement’s reforms in 

some areas and more stringent in other areas.4

Section 919A of the Dodd-Frank Wall Street Reform and Consumer 

Protection Act requires us to identify and examine potential conflicts of 

interest between investment banking and both equity and fixed-income 

(debt) research staff in the same firm.

In that regard, some 

market observers have raised concerns that the current lack of 

industrywide rules mirroring the Global Settlement’s reforms creates 

regulatory inconsistencies: for example, investors could be provided with 

different levels of protection, depending on whether the securities 

research was produced by a Global Settlement firm or other firm.

5

 3

An SRO is an entity responsible for regulating its members by adopting and enforcing 

rules that govern its members’ business conduct. In 2007, NASD and NYSE’s member 

regulation, enforcement, and arbitration functions merged to form the Financial Industry 

Regulatory Authority, the primary securities industry SRO responsible for overseeing 

broker-dealers.

This report examines (1) the 

effectiveness of the regulatory actions taken to address research analyst 

4

The Global Settlement includes provisions requiring the firms to reform their practices in 

many areas where investment bankers can influence or pressure research analysts. As 

described in appendix II, many of these provisions have been incorporated into the SRO

rules. However, the SRO rules also cover areas where research and investment banking 

can intersect but which are not covered under the Global Settlement. These include an 

anti-retaliation provision, a prohibition on the promise of favorable research, quiet periods, 

personal trading restrictions, specific disclosure requirements, and restrictions on 

communication with a subject company regarding a research report.

5

Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 

919A, 124 Stat. 1376, 1837-1838 (2010).
Page 3 GAO-12-209 Securities Research

conflicts of interest, and (2) additional actions regulators could take to 

further address research analyst conflicts.

To understand the nature of research analyst conflicts and identify 

regulatory actions to address them, we reviewed academic, GAO, and 

other studies; enforcement actions taken by SEC and state attorneys 

general beginning in the early 2000s; existing and proposed SEC and 

SRO rules and other releases; and Global Settlement documents. To help 

evaluate the effectiveness of regulatory actions taken to address research 

analyst conflicts, we reviewed and analyzed studies that empirically 

examined the effects of the regulatory reforms on analyst research and 

recommendations. We limited our review to studies issued after January 

1, 2005, because of the time frames in which the regulatory reforms were 

adopted. We also analyzed data on relevant broker-dealer examinations 

and investigations conducted by the Financial Industry Regulatory 

Authority (FINRA) between 2005 and 2010, SEC and FINRA enforcement 

actions that involved conflicts between research and investment banking 

and were taken between 2005 and 2010, and independent monitor 

reports that assessed the Global Settlement firms’ compliance with the 

Global Settlement.6

 6

FINRA is an SRO. It is involved in various aspects of the securities business, including 

registering and educating industry participants, examining securities firms, writing rules, 

enforcing those rules and the federal securities laws, informing and educating the 

investing public, providing trade reporting and other industry utilities, and administering a 

dispute resolution forum for investors and registered firms.

We assessed the reliability of the examination and 

investigation data obtained from FINRA and found the data sufficiently 

reliable for our purposes. To gain insights on the effectiveness of the 

regulatory actions taken to address analyst conflict and to identify 

additional actions that could be taken to address such conflicts, we 

interviewed officials from SEC, FINRA, and the North American Securities 

Administrators Association (NASAA), including officials from five of its 

member state securities commissions. We also interviewed academics 

and representatives from broker-dealers, institutional investors, 

independent research firms, and associations representing such entities 

and retail investors. Our report focuses on potential conflicts between a 

broker-dealer’s research analysts and investment bankers and is not a 

comprehensive review of potential conflicts that could arise from other 

sources. Appendix I contains more information on our scope and 

methodology, and we provide a list of studies included in our literature 

review at the end of the report.
Page 4 GAO-12-209 Securities Research

We conducted this performance audit from September 2010 to January 

2012 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.

Broker-dealers may provide a range of financial services to clients, 

including corporations, financial institutions, governments, and 

individuals. A full-service broker-dealer (or a related subsidiary or affiliate) 

may employ (1) investment bankers to assist clients with raising capital 

through underwritings and private placements of equity and debt 

securities and by offering advisory services on mergers, acquisitions, and 

restructurings; (2) investment advisers who provide investment advisory 

and financial planning services to clients; (3) brokers who facilitate client 

transactions in fixed-income, equity, currency, and commodity products; 

and (4) securities research analysts who provide equity and fixed-income 

research services.

Securities research analysts play an important role in providing investors 

with information that may affect their investment decisions. Analysts 

typically research the current and prospective financial condition of 

publicly traded companies in the particular industry or sector of the 

economy in which they specialize. They then make recommendations 

(e.g., buy, sell, or hold) about investing in the securities issued by the 

companies the analysts cover in their research.7

 7

Although research analysts usually summarize their research reports with a brief 

recommendation, firms use their own rating system. For example, one firm’s rating system 

may consist of buy, outperform, neutral, underperform, and avoid recommendations, and 

another firm’s rating system may consist of strong buy, buy, hold, and sell 

recommendations.

To develop judgments 

about the future prospects of a company and its securities, analysts may 

evaluate the company’s expected earnings, revenue, and cash flow; 

operating and financial strengths and weaknesses; long-term viability; 

and dividend potential.

Background

Broker-Dealers May 

Provide a Range of 

Services, Including 

Research for Investors
Page 5 GAO-12-209 Securities Research

Analysts often specialize in equity or fixed-income (debt) securities 

research.8 Sell-side analysts typically work for full-service broker-dealers 

and make recommendations on the securities they cover through their 

research. In contrast, buy-side analysts typically work for institutional 

money managers, such as mutual funds, hedge funds, or investment 

advisers, which purchase securities for their own accounts. Finally, 

independent analysts typically are not associated with firms that 

underwrite the securities they cover in their research.

The securities industry generally is regulated under a combination of selfregulation (subject to oversight by SEC) and direct oversight by SEC. 

Securities industry SROs primarily are responsible for establishing the 

standards under which their members conduct business; monitoring the 

way that business is conducted through regularly scheduled compliance 

examinations; bringing disciplinary or enforcement actions against their 

members for violating applicable federal statutes, SEC rules, and their 

own rules; and referring potential violations of nonmembers to SEC.9 In 

2007, NASD and NYSE’s member regulation, enforcement, and 

arbitration functions merged to form FINRA, the primary securities 

industry SRO responsible for overseeing broker-dealers.10

 8

Although equity and fixed-income securities analysts serve similar functions, the nature 

of the markets and role of the analysts can differ. For example, some market participants 

have noted that prices of debt securities are relatively less sensitive to the views of 

research analysts than the prices of equity securities. For example, see the Bond Market 

Association, Guiding Principles to Promote the Integrity of Fixed-Income Research: A 

Global Approach to Managing Potential Conflicts of Interest (May 2004).

As of 

November 2011, FINRA’s membership included nearly 4,500 brokerdealers. According to FINRA, as of November 2010, approximately 220 

firms conduct both investment banking and research. SEC’s oversight of 

FINRA includes inspecting its operations and reviewing and approving its 

rule proposals. SEC also directly regulates broker-dealers by conducting 

9

As part of their statutory responsibilities for regulating their members, SROs examine 

their members to ensure compliance with SRO rules and federal securities laws. SROs 

also can take enforcement or other disciplinary actions against their members for 

violations of SRO rules and federal securities laws.

10FINRA has been developing a consolidated rulebook that will consist solely of FINRA 

rules. Until the completion of this process, the FINRA rulebook will include NASD rules, 

NYSE rules, and FINRA rules. While the NASD rules generally apply to all FINRA 

members, the NYSE rules apply only to those members of FINRA that also are members 

of NYSE.

Oversight of Securities 

Broker-Dealers and the 

Global Settlement
Page 6 GAO-12-209 Securities Research

examinations; taking disciplinary actions against broker-dealers; and 

interpreting, implementing, or changing its existing regulations.

A series of actions involving various federal and state entities culminated 

in the Global Settlement. SEC reviewed industry practices and conducted 

targeted examinations regarding analyst conflicts in 1999 and reported 

the preliminary findings of the examinations to Congress in 2001. In April 

2002, the New York Attorney General’s office announced an enforcement 

action against a broker-dealer based on evidence that analysts were 

pressured to issue positive stock recommendations to please investment 

banking clients. Soon after, state regulators, SROs, NASAA, and SEC 

formed a joint task force to investigate the undue influence of investment 

banking interests on securities research at broker-dealers. Analyst 

conflicts allegedly found by the investigations included the following 

examples.

• Research analysts supported investment banking by pitching 

business to prospective clients and marketing investment banking 

deals to institutional customers through road shows.11

• Equity research analysts’ compensation was determined partly by the 

degree to which they assisted investment banking or their contribution 

to investment banking revenue.

• Investment bankers evaluated research analysts’ performance, 

influencing research analysts’ compensation.

• Investment bankers implicitly promised their potential clients favorable 

research, with analysts participating in the sales presentations.

• Investment bankers influenced whether analysts would start or 

continue research coverage on existing or potential investment 

banking clients.

Based on evidence compiled in their investigations, the joint task force 

members determined the conditions of a settlement to resolve the 

allegations of misconduct. In April 2003, 10 broker-dealers agreed to the 

Global Settlement, concluding the joint investigation. In 2004, 

 11A road show is a series of presentations made to potential investors in conjunction with 

the marketing of an upcoming underwriting.
Page 7 GAO-12-209 Securities Research

enforcement actions were commenced against two other broker-dealers 

involving analyst conflicts, and the firms settled substantively under the 

same terms as the Global Settlement.

Under the Global Settlement, the firms were required to reform their 

structures and practices to insulate equity analysts from investment 

banking pressures. A three-part addendum to the Global Settlement 

constitutes its operative portions (see app. II for a complete description 

for the separation of research and investment banking, and the 

disclosure/transparency and other issues sections).12

• physically separate research and investment banking departments;

Section I of the 

addendum set forth the structural reforms designed to separate equity 

research from investment banking. For example, the firms had to

• not base research analysts’ compensation, directly or indirectly, on 

investment banking revenues or input from investment banking 

personnel;

• prohibit investment bankers from having a role in company-specific 

coverage decisions;

• prohibit research analysts from participating in efforts to solicit 

investment banking business; and

• create and enforce firewalls restricting interaction between investment 

banking and research personnel, except in specifically designated 

circumstances.

Section II of the addendum includes disclosure requirements that serve to 

inform investors about potential analyst conflicts and the performance of 

analysts’ recommendations. It also includes a provision that allows any 

Global Settlement term to be superseded by an SEC or SRO rule that 

expressly purports to do so. With regards to any term that was not 

superseded in this way within 5 years from the entry of the final judgment 

of the Global Settlement, the firms could move to amend or modify any 

term (other than the terms relating to independent research), subject to 

court approval, unless SEC believed that such amendment or 

 12Appendix II does not include a discussion of the independent, third-party research 

section because the section is no longer in effect.
Page 8 GAO-12-209 Securities Research

modification was not in the public interest. Section III required the Global 

Settlement firms to provide customers with independent research.13

Firms also had to make various payments under the Global Settlement—

totaling more than $1.4 billion. Specifically, each firm had to pay civil 

penalties and disgorgements, in part to establish distribution funds to 

recompense harmed investors, and other monies to create investor 

education funds and provide customers with independent research.14

Views about what harm, if any, analyst conflicts cause investors vary. 

SEC and FINRA have asserted that analyst conflicts can harm investors. 

For instance, because of a conflict, an analyst could issue a misleading 

recommendation on which investors rely and suffer a loss. In a 2003 

report, the International Organization of Securities Commissions similarly 

noted that the conflicts faced by sell-side analysts can result in biased 

research that harms investors and undermine the fairness, efficiency, and 

transparency of markets.15

 13This obligation expired for most of the Global Settlement firms in July 2009.

Also, some investors claimed in lawsuits that 

biased analyst recommendations artificially inflated market prices of the 

covered stocks. In turn, they claimed that they bought stocks or held onto 

stocks that they otherwise would have sold based on the biased 

recommendations and suffered losses when the stocks returned to their 

true value. Finally, some academics have suggested that institutional 

investors may be able to trade strategically to take advantage of 

14A penalty is a monetary payment from a securities law violator that SEC obtains 

pursuant to statutory authority. A penalty fundamentally is a punitive measure, but 

penalties occasionally can be used to compensate harmed investors. A disgorgement is 

the repayment of illegally gained profits (or avoided losses) for distribution to harmed 

investors whenever feasible.

15International Organization of Securities Commissions, Report on Analyst Conflicts of 

Interest, A Report of the Technical Committee of the International Organization of 

Securities Commissions (September 2003). Sell-side research analysts typically work for 

full-service broker-dealers and make recommendations on the securities they cover.

Analyst Conflicts and 

Investor Harm
Page 9 GAO-12-209 Securities Research

misinformed individual investors that naively follow biased analyst 

recommendations.16

In contrast to such views, some economists and others have questioned 

whether biased analyst recommendations, such as overly optimistic 

recommendations, can lead to investor harm. For example, one 

economist has argued that SEC enforcement actions against the Global 

Settlement firms did not establish a clear connection between the analyst 

conflicts and losses suffered by investors.17 In support of his argument, 

he noted that in private litigation against one of the firms involving analyst 

conflicts, the judge found that the plaintiff’s attorneys were not able to 

craft an argument to show that investor losses could be attributed to the 

allegedly conflicted research reports issued by a broker-dealer. In 

addition, some evidence from empirical studies indicates that market 

prices anticipate and incorporate analysts’ biases, suggesting that biased 

analyst recommendations do not artificially inflate stock prices to the harm 

of investors.18

 16See, for example, Gus De Franco, Hai Lu, and Florin P. Vasvari, “Wealth Transfer 

Effects of Analysts’ Misleading Behavior,” Journal of Accounting Research, vol. 45 (2007). 

The study examined the economic consequences of the trading behavior of individuals 

and institutions over the period in which the equity analysts at the Global Settlement firms 

allegedly issued biased recommendations. It found statistical evidence suggesting that the 

recommendations issued by analysts led to a systematic wealth transfer from individual 

investors to institutional investors.

17Erik Sirri, “Investment Banks, Scope, and Unavoidable Conflicts of Interest,” Economic 

Review, Federal Reserve Bank of Atlanta, Fourth Quarter 2004.

18For example, see Oya Altınkılıç and Robert S. Hansen, “On the Information Role of 

Stock Recommendation Revisions,” Journal of Accounting and Economics, vol. 48 (2009); 

Hamid Mehran, René M. Stulz, “The Economics of Conflicts of Interest in Financial 

Institutions,” Journal of Financial Economics, vol. 85 (2007); Erik Sirri, “Investment Banks, 

Scope, and Unavoidable Conflicts of Interest,” Federal Reserve of Atlantic Economic 

Review, 4th Quarter (2004).
Page 10 GAO-12-209 Securities Research

We reviewed empirical studies, analyzed examination and enforcement 

action data, and interviewed market participants and observers to assess 

the extent to which regulatory actions have addressed equity analysts’

conflicts of interest. In addition to the Global Settlement, regulatory 

actions taken to address conflicts faced primarily by equity research 

analysts include the following SEC, NASD, and NYSE rules issued 

between 2002 and 2005:

• In May 2002, SEC approved NASD and NYSE proposals to address 

analyst conflicts. NYSE’s proposal amended NYSE Rule 472, and 

NASD’s proposal established NASD Rule 2711.19

• In February 2003, SEC adopted Regulation Analyst Certification, 

which requires, among other things, equity and fixed-income analysts 

to certify that the views expressed in their research reports accurately 

reflect their personal views and disclose whether they received 

compensation or other payments in connection with their views.

These rules (SRO 

research analyst rules) were substantively similar and designed to 

restore public confidence in the validity of research and the veracity of 

equity research analysts, who were expected to function as unbiased 

intermediaries between securities issuers and investors. The SRO 

research analyst rules require clear, comprehensive, and prominent 

disclosure of conflicts in research reports and public appearances by 

equity analysts. The rules also implement basic reforms to separate 

research from investment banking. These include prohibiting 

investment banking personnel from supervising analysts or approving 

research reports, members from offering favorable research to induce 

investment banking business, and analysts from receiving 

compensation based on specific investment banking transactions.

• In July 2003, SEC approved amendments to the SRO research 

analyst rules.20

 19NYSE also proposed amendments to NYSE Rule 351 to require members to submit, on 

an annual basis, a written attestation that they have established and implemented written 

procedures reasonably designed to comply with NYSE Rule 472. SEC approved the 

amendment.

The rule amendments were designed to further 

promote analyst objectivity and transparency of conflicts in research 

20As part of these amendments, SEC approved SRO rules that put in place registration 

and qualification requirements for research analysts. The rules were intended to ensure 

that research analysts possess a certain competency level to perform their jobs effectively 

and in accordance with applicable rules and regulations.

Data and 

Stakeholders’ Views 

Suggest That 

Regulatory Actions 

Have Helped Address 

Conflicts Faced by 

Equity Analysts
Page 11 GAO-12-209 Securities Research

reports and implement changes mandated by the Sarbanes-Oxley Act 

of 2002. This act required SEC or SROs to adopt rules “reasonably 

designed to address conflicts of interest that can arise when securities 

analysts recommend equity securities in research reports and public 

appearances.” The act also set forth specific rules to be promulgated, 

some of which were not already in the SRO research rules, including 

the prohibition on research analysts participating in investment 

banking pitches. Accordingly, NASD and NYSE amended their rules. 

The amendments require disclosure of a client relationship and 

noninvestment banking compensation a firm receives from a covered 

company and prohibit retaliation against research analysts for 

publishing unfavorable research on an investment banking client.

• In April 2005, SEC approved an amendment to the SRO research 

analyst rules to prohibit research analysts from participating in road 

shows and other matters, which are similar in certain aspects to the 

Global Settlement’s terms.

While the SRO research analyst rules generally apply to all brokerdealers, they are less stringent than the Global Settlement’s terms in 

some respects and more stringent in other respects (as discussed in 

detail in the following section and in app. II).

Numerous academic studies empirically examined the effects of the 

regulatory reforms—namely NASD Rule 2711, NYSE Rule 472, and the 

Global Settlement—on various aspects of recommendations and 

research issued by research analysts. We reviewed 10 of these studies.21

 21Although the breadth of research on research analyst conflicts is extensive, we focused 

our review of the literature on academic studies that empirically examined the effects of 

the regulatory reforms on recommendations and research issued by sell-side securities 

analysts. We included both published papers and working papers but limited our review to 

studies issued after January 1, 2005.

Because the vast majority of the outstanding recommendations in mid2000 were buy recommendations (in contrast to hold or sell), some 

market observers believed that sell-side equity analysts were issuing 

overly optimistic or positive recommendations to help their firms attract or 

retain investment banking business. Six of the 10 studies in our review 

examined whether the reforms made sell-side analyst recommendations 

less optimistic, and these and the other studies also examined other 

Research Suggests 

Regulatory Reforms Were 

Associated with 

Improvements in Analyst 

Recommendations, but 

Other Effects Were Mixed
Page 12 GAO-12-209 Securities Research

effects of the reforms.22

Five of the six studies examining changes in the distribution or relative 

optimism of recommendations issued by analysts found that sell-side 

analysts were issuing fewer positive recommendations, more negative 

recommendations after the regulatory reforms, or both.

The studies generally found evidence that 

indicated the stock recommendations of sell-side analysts became less 

optimistic after the regulatory reforms, suggesting the reforms have 

helped to address analyst conflicts. In addition, some of these studies 

examined other effects, such as whether one or more of the reforms 

made analyst recommendations more informative for investors, increased 

the profitability of recommendations, or increased the accuracy of analyst 

earnings forecasts. However, these results generally were mixed.

23

• Buy recommendations of analysts at investment banks and brokers 

increased substantially from 1996 to 2000, with the ratio of buy-to-sell 

recommendations reaching 35 to 1 at one point.

While the 

studies commonly inferred from the empirical evidence that the regulatory 

reforms helped to make recommendations less optimistic, they 

recognized that other factors could have played a role. Key findings of 

these studies include the following:

24

 22As noted previously, sell-side research analysts typically work for full-service brokerdealers and make recommendations on the securities they cover. The studies we 

reviewed generally focus on sell-side research analysts but may use affiliated analysts or 

other terms to refer to them and may draw distinctions between them.

From mid-2000 to 

June 2003, the percentage of buy recommendations declined steadily, 

with the ratio declining to 3 to 1. The buy recommendations issued by 

the Global Settlement analysts declined more sharply than the buy 

recommendations issued by other analysts after the adoption of 

NASD Rule 2711.

23Leslie Boni, “Analyzing the Analysts after the Global Settlement,” working paper, 

University of New Mexico (Sept. 28, 2005). The author classified recommendations made 

by the Global Settlement analysts as “high” (strongest recommendation), “medium” 

(middle), and “low” (least strongly recommended) and found that the analyst 

recommendations were more optimistic after the Global Settlement. However, these 

results do not attempt to control for differences in analyst characteristics and other factors 

that might influence recommendations.

24Brad Barber, M. Reuven Lehavy, Maureen McNichols, and Brett Trueman, “Buys, Holds, 

and Sells: The Distribution of Investment Banks’ Stock Ratings and the Implications for the 

Profitability of Analysts’ Recommendations,” Journal of Accounting and Economics, vol. 

41 (2006). The study focuses on analysts at investment banks and brokerage firms, with a 

sample period from January 1996 through June 2003.

Empirical Results Indicate 

Relationship between the 

Reforms and Less Optimistic 

Analyst Recommendations
Page 13 GAO-12-209 Securities Research

• Analysts affiliated with firms engaging in investment banking issued 

fewer strong buy recommendations after the regulatory reforms and 

fewer strong buy recommendations than independent analysts after 

the adoption of NASD Rule 2711, NYSE Rule 472, and the Global 

Settlement.25

• Settlement bank analysts issued, on average, less-optimistic 

recommendations relative to the other types of analysts after the 

adoption of NASD Rule 2711 and NYSE Rule 472, as well as the 

Global Settlement.26

• After the adoption of NASD Rule 2711 and NYSE Rule 472, and the 

Global Settlement, analysts at the Global Settlement firms and the 

next 10 largest brokerage houses started to issue more neutral and 

pessimistic recommendations and fewer optimistic 

recommendations.

More specifically, these analysts issued not only 

fewer favorable recommendations but also more unfavorable 

recommendations than the other analysts for the same stocks.

27

 25Jonathan E. Clarke, Ajay Khorana, Ajay Patel, and P. Raghavendra Rau, 

“Independents’ Day? Analyst Behavior Surrounding the Global Settlement,” Annals of 

Finance, vol. 7, no. 4 (2009). The study focuses on (1) independent analysts whose 

employers were never classified as a lead or comanager on any equity deal or advised 

either the target or acquirer in an acquisition at any point in its sample period, (2) affiliated 

analysts whose employers advised a firm at any point during 2004-2007, and (3) 

unaffiliated analysts. The sample period was from November 2000 through December 

2007.

In addition, the Global Settlement analysts 

started to issue pessimistic recommendations much more often than 

analysts at the other brokerage houses.

26Yuyan Guan, Hai Lu, and M.H. Franco Wong, “Conflict-of-Interest Reforms and 

Investment Bank Analysts’ Research Biases,” Journal of Accounting, Auditing & Finance 

(2011). The study focuses on analysts at investment banks, syndicate firms, brokerage 

firms, and research firms. The sample period (from January 1998 through December 

2007) was divided into three subperiods: (1) from January 1998 through December 2001, 

the prereform period; (2) from January 2002 through December 2003, the transition 

period; and (3) from January 2004 through December 2007, the postreform period.

27Leonardo Madureira, “Conflicts of Interest, Regulations and Stock Recommendations,” 

working paper, University of Pennsylvania (2004). The study focuses on analysts at the 10 

Global Settlement firms and the next 10 largest brokerage houses. Its sample period was 

from July 1995 through December 2003.
Page 14 GAO-12-209 Securities Research

Two studies found evidence indicating that the influence of conflicts of 

interest on analyst recommendations weakened after the regulatory 

reforms.

• Before the adoption of the regulatory reforms, analysts affiliated with 

brokers that recently underwrote securities were more likely to make 

buy recommendations for those securities than unaffiliated analysts.28

• Before the adoption of NASD Rule 2711, sell-side analysts’

recommendations were positively related to two variables—a 

company’s net external financing and the underwriting business 

provided by analysts’ employers—which were intended to capture 

factors that could lead sell-side analysts to issue overly optimistic 

recommendations to attract new or retain existing investment banking 

business.

The bias largely disappeared after the reforms. At the same time, 

affiliated analysts were less likely than unaffiliated analysts to issue 

hold or sell recommendations after the regulatory reforms.

29

Two studies found that the relationship between analyst 

recommendations and valuation estimates strengthened after the 

regulatory reforms, indicating that the reforms improved analyst 

independence. The studies examined the relationship between the 

recommendations and earnings forecasts of sell-side analysts and 

expected these two variables to be positively correlated. Underlying the 

analysis is the assumption that analysts use their earnings forecasts to 

After the rule adoption, the positive relationship continued 

but became weaker—suggesting that the influence of conflicts on 

analyst recommendations had weakened.

 28Ohad Kadan, Leonardo Madureira, Rong Wang, and Tzachi Zach, “Conflicts of Interest 

and Stock Recommendations: The Effects of the Global Settlement and Related 

Regulations,” The Review of Financial Studies, vol. 22, no. 10 (2009). The study focuses 

on analysts at brokers and covers two periods: (1) from November 2000 through August 

2002, the preregulatory reform period, and (2) from September 2002 through December 

2004, the postregulatory reform period.

29Chih-Ying Chen and Peter F. Chen, “NASD Rule 2711 and Changes in Analysts’ 

Independence in Making Stock Recommendations,” The Accounting Review, vol. 84, no. 4 

(2009). The study focuses on sell-side analysts and has a sample period from 1994 

through 2005.

Empirical Results Suggest 

Relationship between the 

Reforms and Weakened 

Influence of Conflicts on 

Analyst Recommendations

Empirical Results Suggest 

Association between the 

Reforms and Increased Analyst 

Independence
Page 15 GAO-12-209 Securities Research

estimate stock values and then compare their valuation estimates to the 

current stock prices to arrive at their buy, hold, or sell recommendations.30

• The consensus recommendations of sell-side analysts were 

negatively related to stock valuation estimates based on earnings 

forecasts before the adoption of SEC Regulation Full Disclosure. 

However, the relationship became less negative after the adoption of 

the regulation and turned positive after the adoption of NASD Rule 

2711, NYSE Rule 472, and the Global Settlement.31

• The relationship between sell-side analysts’ stock recommendations 

and valuation estimates based on earnings forecasts became 

significantly stronger after the adoption of NASD Rule 2711.32

Most of the studies we reviewed also examined other effects of the 

regulatory reforms. However, the empirical results generally were mixed 

on whether the regulatory reforms increased the profitability of analysts’

recommendations, made analysts’ recommendations more informative for 

investors, or increased the accuracy of analysts’ earnings forecasts. That 

is, some studies arrived at different conclusions about the effectiveness of 

the regulatory reforms on factors other than analyst independence and 

objectivity.

 30The studies further assume that their valuation models are the same models used by 

analysts and that these models do not vary across the firms. See Mark T. Bradshaw, 

“Analyst Information Processing, Financial Regulation, and Academic Research,” The 

Accounting Review, vol. 84, no. 4 (2009).

31Ran Barniv, Ole-Kristian Hope, Mark J. Myring, and Wayne B. Thomas, “Do Analysts 

Practice What They Preach and Should Investors Listen? Effects of Recent Regulations,” 

The Accounting Review, vol. 84, no. 4 (2009). The study focuses on sell-side analysts. Its 

sample period was from January 1993 through May 2005, divided into four subperiods 

corresponding to periods before and after the adoption of SRO research analyst rules and 

SEC Regulation Full Disclosure, effective October 2000. The SEC regulation prohibits 

issuers from selectively disclosing material nonpublic information to certain people—often, 

research analysts or institutional investors—before disclosing the same information to the 

public.

32Chen and Chen, “NASD Rule 2711 and Changes in Analysts’ Independence in Making 

Stock Recommendations.”

Empirical Results on Other 

Effects of the Regulatory 

Reforms Were Mixed
Page 16 GAO-12-209 Securities Research

• Three studies examined whether the regulatory reforms improved the 

profitability of analyst recommendations.33 The results of one of the 

studies suggested that NASD Rule 2711 enhanced the investment 

value of sell-side analyst recommendations, but the results of the 

other studies generally did not.34

• Four studies examined whether investors found analyst 

recommendations to be more informative after the regulatory reforms. 

Three studies found evidence indicating that investors viewed 

changes in recommendations made by sell-side analysts to be less or 

equally informative after the reforms.35 One study found that after the 

adoption of NASD Rule 2711 the market reacted more strongly to buy 

and sell recommendations made by sell-side analysts.36

• Two studies examined the effect of the regulatory reforms on the 

accuracy of analyst earnings forecasts. One study found that the 

earnings forecasts of investment bank analysts became less accurate, 

on average, in comparison with the forecasts of other types of 

analysts after the regulatory reforms.37

 33The general question of whether analysts’ stock recommendations have investment 

value has been studied extensively. Some studies suggest that investors can earn positive 

risk-adjusted returns by following stock recommendations, but other studies suggest that 

revisions of analysts’ recommendation generally do not provide new information. For 

example, Lily H. Fang, and Ayako Yasuda, “Are Stars’ Opinions Worth More? The 

Relation between Analyst Reputation and Recommendation Values,” working paper 

(2010).

The other study found that the 

34See Chen and Chen, “NASD Rule 2711 and Changes in Analysts’ Independence in 

Making Stock Recommendations”; Guan et al., “Conflict-of-Interest Reforms and 

Investment Bank Analysts’ Research Biases”; and Boni, “Analyzing the Analysts after the 

Global Settlement.”

35Clarke et al., “Independents’ Day? Analyst Behavior Surrounding the Global Settlement”; 

Boni, “Analyzing the Analysts after the Global Settlement”; and Kadan et al., “Conflicts of 

Interest and Stock Recommendations: The Effects of the Global Settlement and Related 

Regulations.”

36Michael T. Cliff, “Do Affiliated Analysts Mean What They Say?” Financial Management, 

vol. 36, issue 4 (2007). The study focuses on two groups of analysts: (1) analysts at 

brokers that served as lead or joint-lead for a firm’s securities issuance and (2) analysts at 

firms that do not perform a material amount of underwriting. Its sample period was 

between 1992 and 2005.

37Guan et al., “Conflict-of-Interest Reforms and Investment Bank Analysts’ Research 

Biases.”
Page 17 GAO-12-209 Securities Research

analyst forecasts overestimated actual earnings before the Global 

Settlement, but the bias declined after the Global Settlement.38

The SROs reviewed the effectiveness of the research analyst rules 

shortly after their adoption and concluded that the reforms were generally 

effective. At SEC’s request, NASD and NYSE staff jointly conducted a 

review of the operation and effectiveness of their research analyst rules 

and submitted their report to SEC in December 2005.39

In addition, FINRA officials and SEC staff told us that they view the 

regulatory reforms as effective—citing their examination findings and the 

limited number of enforcement actions involving conflicts between 

research and investment banking as evidence of the reforms’

effectiveness. According to FINRA officials, FINRA examines its member 

broker-dealers on a cyclical basis. The officials said that the scope of 

each examination is based on a risk-assessment of the firm. In that 

regard, although FINRA has developed examination modules to assess 

broker-dealer compliance with the SRO research analyst rules and the 

Global Settlement, examiners may not cover these areas in every 

examination. In addition, FINRA officials and SEC staff told us that they 

can bring enforcement actions against broker-dealers for violations of rule 

or statute. Examination findings and enforcement actions provide useful 

information on the extent to which firms have been complying with the 

As part of their 

study, NASD and NYSE staff reviewed examinations of their members for 

compliance with the research analyst rules, enforcement actions taken 

against members for violations of the rules, and academic studies and 

media reports and commentary. The NASD and NYSE staff concluded 

that the SRO research analyst rules were effective in helping to restore 

integrity to analyst research by minimizing the influences of investment 

banking and promoting transparency of other potential conflicts of 

interest. They also noted that evidence suggested that investors were 

benefiting from more balanced and accurate research to aid their 

investment decisions.

 38Armen Hovakimian and Ekkachai Saenyasiri, “Conflicts of Interest and Analyst Behavior: 

Evidence from Recent Changes in Regulation,” Financial Analysts Journal, vol. 66, no. 4 

(2010). The study focuses on sell-side analysts, and its sample period was from 1996 

through 2006.

39NASD and NYSE, Joint Report by NASD and the NYSE on the Operation and 

Effectiveness of the Research Analyst Conflict of Interest Rules (2005).

SEC and SROs Generally 

View the Regulatory 

Reforms as Effective in 

Addressing Equity Analyst 

Conflicts
Page 18 GAO-12-209 Securities Research

research analyst rules and the Global Settlement and, in conjunction with 

the empirical studies and other evidence, an indication of the 

effectiveness of those regulatory actions.

Although FINRA found deficiencies in a high percentage of its 

examinations, the nature of the findings generally were minor, according 

to FINRA’s data, and indicated that broker-dealers largely have been 

complying with the SRO research analyst rules. From 2005 through 2010, 

FINRA conducted 791 cycle broker-dealer examinations that covered 

compliance with the SRO research analyst rules, according to data 

provided by FINRA.40

 40Some of these examinations were conducted by NASD or NYSE Regulation before they 

merged to form FINRA.

Of the 791 examinations that included a review of 

general research, 309 (39 percent) found some rule-related deficiencies. 

As shown in figure 1, the number of examinations covering the SRO 

research analyst rules declined steadily each year, from a high of 221 in 

2005 to a low of 65 in 2010. While the number of examinations declined 

over this period, so did the number with deficiencies, from 79 in 2005 to 

23 in 2010. The nature of the exceptions found in the examinations 

generally included technical disclosure or supervisory deficiencies. 

Matters considered for formal action included instances of noncompliance 

with the requirements to separate research and banking or to disclose 

relevant information about potential or actual conflicts. For example, 

some firms failed to implement firewalls to properly separate investment 

banking from research, and some failed to disclose that they were to 

receive or already had received investment banking compensation from a 

company covered by their research analysts. FINRA referred 38 of the 

309 examinations with deficiencies to its Enforcement Department for 

formal disciplinary action. While some referrals involved firms that failed 

to properly separate research from investment banking, most involved 

matters other than conflicts between research and investment banking, 

such as analysts engaging in personal trading against their 

recommendations.

FINRA Examination Findings
Page 19 GAO-12-209 Securities Research

Figure 1: FINRA Cycle Examinations That Included Reviews for Compliance with 

SRO Research Analyst Rules and Number of Deficiencies, 2005 through 2010

Similarly, FINRA’s examination findings indicate that the Global 

Settlement firms generally have complied with the Global Settlement. 

From 2005 through 2010, FINRA conducted 36 cycle examinations of the 

Global Settlement firms that covered their compliance with the Global 

Settlement, according to data provided by FINRA (see fig. 2). While some 

Global Settlement firms were examined more often than others, each was 

examined at least once during this period for compliance with the Global 

Settlement’s terms.41

 41Specifically, two of the Global Settlement firms were examined five times, three were 

examined four times, two were examined three times, three were examined twice, and two 

were examined once for compliance with the Global Settlement’s terms.

Eight of the 36 Global Settlement examinations 

found deficiencies. Five of the deficiencies involved disclosure violations, 

such as failing to reference the specific page number on which investors 

could locate disclosure information. The remaining three deficiencies 

involved violations of the Global Settlement’s structural reforms. For 
Page 20 GAO-12-209 Securities Research

example, one firm failed to ensure that its oversight committee reviewed 

research reports for changes in ratings or price targets before publication, 

while another firm disclosed to examiners that its communications firewall 

failed to block electronic communications between its research and 

investment banking staff for nearly 9 months. According to FINRA 

officials, none of the deficiencies in the examinations resulted in a referral 

for formal disciplinary action, although the matter involving problems with 

one firm’s communications firewall still is under review.

Figure 2: FINRA Cycle Examinations That Included Reviews for Compliance with 

the Global Settlement and Number of Deficiencies, 2005 through 2010

During the same time frame, FINRA also initiated numerous cause 

examinations involving the SRO research analyst rules, but most did not 

involve conflicts between research and investment banking.42

 42In addition to its cycle examinations, FINRA officials said they conduct cause 

examinations based on a tip, complaint, prior examination finding, or other reason.

In 2010, 

FINRA initiated two cause examinations to examine whether the broker-
Page 21 GAO-12-209 Securities Research

dealers were permitting their investment banking staff to improperly 

influence their research analysts’ recommendations. According to FINRA 

officials the two examinations are ongoing.

According to SEC staff, their broker-dealer examination findings indicate 

that the regulatory reforms have been effective in addressing analyst 

conflicts.43 SEC staff said that they do not have an examination module 

specifically designed to cover the SRO research analyst rules or the 

Global Settlement but have reviewed whether broker-dealers were 

complying with such requirements in some of their examinations of 

broker-dealers examined by FINRA.44 Based on their review of brokerdealer examination reports dating to 2005, SEC staff told us that they 

identified a few examinations that found deficiencies related to the SRO 

research analyst rules.45

In addition to their findings from broker-dealer examinations, FINRA 

officials and SEC staff said that the limited number of enforcement 

actions involving conflicts between equity research and investment 

banking suggests that the regulatory reforms have been effective. From 

2005 through 2010, FINRA took 10 enforcement actions against brokerdealers for violations of NASD Rule 2711 that involved conflicts between 

research and investment banking. Five of the enforcement actions were 

taken against Global Settlement firms and largely involved failures to 

According to the staff, these deficiencies 

included broker-dealers failing to disclose analyst conflicts in their 

research reports and failing to comply with requirements that restrict an 

analyst’s public appearance.

 43SEC directly assesses broker-dealer compliance with the federal securities laws through 

examinations, such as cause and risk-targeted examinations. If examiners identify 

compliance findings during broker-dealer examinations, they may assess the quality of 

any recent FINRA examinations of the broker-dealer and provide oversight comments to 

FINRA.

44SEC also may conduct other types of examinations of broker-dealers, such as cause or 

risk-targeted examinations.

45The SEC staff’s review may not have captured all of the examinations that covered 

conflicts between research and investment banking. SEC staff told us that the agency’s

examination database does not have an electronic search capability that can be used to 

identify which examinations included a review of which specific SRO rules. According to 

SEC staff, the agency has been developing a new examination database with improved 

search capabilities and currently is testing the system.

FINRA and SEC Enforcement 

Actions
Page 22 GAO-12-209 Securities Research

adequately comply with disclosure requirements (see fig. 3).46

 46A total of seven enforcement actions were taken against Global Settlement firms during 

the period. In addition to the five actions involving conflicts between research and 

investment banking, the remaining two actions involved failure to disclose the availability 

of independent third-party research per the requirements of the Global Settlement.

The other 

five enforcement actions were taken against nonGlobal Settlement firms:

three for allowing investment banking personnel to influence analyst 

compensation and two for failing to comply with requirements to disclose 

the firm’s compensation for investment banking services. In each 

instance, the firm was required to sign an Acceptance, Waiver, and 

Consent, a settlement wherein the broker-dealer consents, without 

admitting or denying the findings, to the entry of the findings and to the 

imposition of sanctions. In addition, FINRA censured the firms for their 

misconduct and imposed monetary fines.
Page 23 GAO-12-209 Securities Research

Figure 3: Violations Involving Research and Investment Banking Conflicts That Led to FINRA Enforcement Actions, 2005 

through 2010

SEC also has taken enforcement actions involving conflicts between 

research and investment banking. Specifically, SEC took a total of three 

such actions from 2005 through 2010. In 2005, SEC brought a settled 

action against two research supervisors for their failure to reasonably 

supervise an equity research analyst who published fraudulent research. 

The case focused on the adequacy of supervision of a research analyst, 

who was subject to a prior enforcement action that alleged the analyst 

produced biased research to support the firm’s investment banking 

business. In 2007, SEC issued a cease and desist order against a firm for 

employing business practices that linked research and investment 

banking, creating incentives for its analysts to support the firm’s 

investment banking business. In 2010, SEC issued a cease and desist 

order against a firm for failing to establish and enforce policies and 

procedures to prevent the misuse of material, nonpublic information. The 

firm engaged in securities research and was the parent of an investment 

advisory subsidiary that shared the same chief compliance officer. In its 

order, SEC alleged that the firm failed to prevent its investment advisory 

subsidiary from misusing material research information, such as the 
Page 24 GAO-12-209 Securities Research

initiation of research coverage or changes in price targets, produced by 

its research department.

Additionally, under the Global Settlement, each of the 12 broker-dealers 

had to (1) hire an independent monitor to assess whether the firm had 

developed adequate policies and procedures to ensure compliance with 

the Global Settlement and (2) certify compliance with the Global 

Settlement within 5 years of the date of the entry of the final judgment. 

Each independent monitor generally completed and filed their reports 

between October 2003 and February 2006.

Based on our review of the independent monitor reports, all the monitors 

generally concluded that each firm had implemented effective policies 

and procedures to comply with the Global Settlement. To conduct their 

reviews, the monitors typically examined each firm’s policies and 

procedures, reviewed supporting documents to verify the implementation 

and effectiveness of the policies and procedures, made observations, 

conducted inspections (for example, of physical separation of research 

and investment banking), and interviewed the firm’s management and 

staff. Although the independent monitors concluded that each firm was in 

compliance with the Global Settlement, all of them included 

recommendations in their reports. The recommendations generally were 

intended to clarify or enhance a firm’s compliance policies and 

procedures or improve a firm’s ability to track and monitor its compliance. 

According to SEC staff, all the Global Settlement firms certified that they 

were in compliance with the Global Settlement by August 2008.

According to SEC staff, on a number of occasions, the Global Settlement 

firms self-reported instances of noncompliance with the Global Settlement 

to SEC staff. These reported instances largely concerned technical 

failures to provide disclosures regarding the availability of independent 

research or ratings on customer account statements and confirmations. 

Upon receiving these reports, SEC staff typically notified the other 

regulators involved in the Global Settlement, discussed the violations and 

remedial measures with the reporting firm, and asked that the firm write to 

inform the court of the matter.

Most market participants and observers we interviewed told us that the 

regulatory reforms have been effective in mitigating analyst conflicts but 

provided different reasons why. Examples cited by market participants 

and observers as to why the structural reforms have been effective 

include the following:

Independent Monitors 

Generally Found the BrokerDealers in Compliance with the 

Global Settlement

While Market Participants 

and Others Generally View 

the Reforms as Effective, 

Some Noted Conflicts 

Could Not Be Completely 

Addressed or Eliminated
Page 25 GAO-12-209 Securities Research

• Research analysts are shielded from investment banking influence, 

according to officials from broker-dealers, an independent research 

firm, and institutional money managers;

• Securities research is more independent but not necessarily better, 

according to officials from an institutional money manager; and

• The regulatory reforms provide a compliance structure that requires 

broker-dealers to manage their analyst conflicts, according to state 

securities regulators.

In addition to the structural reforms, market participants and observers 

said that the disclosure requirements have been effective in addressing 

analyst conflicts, in part because investors are more aware of potential 

analyst conflicts, according to officials from broker-dealers, a consumer 

interest group, and independent research firms. Furthermore, officials 

from the consumer interest group said that the media attention 

surrounding the investigations that led to the Global Settlement helped to 

raise investors’ awareness of analyst conflicts.

Despite generally viewing the regulatory reforms as effective, some 

market participants and observers told us that the reforms do not 

completely eliminate research analysts’ conflicts. For example, according 

to an academic, the SRO research analyst rules and the Global 

Settlement prohibit sell-side analysts from being compensated based on 

their investment banking contributions, but their pay may be based on 

their firm’s overall profitability—of which investment banking can be a 

major source. As a result, sell-side analysts face inherent conflicts 

because they know that negative ratings can harm their firm’s investment 

banking business and, in turn, their personal compensation, according to 

state securities regulators, institutional investors, academics, and others

with whom we spoke. Officials from a consumer interest group told us that 

this inherent conflict can be eliminated by prohibiting firms from engaging 

in both investment banking and research. In addition, although the Global 

Settlement requires the firms to physically separate research and 

investment banking staff, this prophylactic measure can be circumvented, 

according to officials from an investor advocacy group and a consumer 

interest group. For example, officials from the investor advocacy group 

said analysts and investment bankers could talk outside of the firm. In 

their reports, two independent monitors recognized the limitations of the 

reform but their reports suggest that physical separation reinforced the 

idea that analysts and investment bankers were not supposed to talk with 

each other.
Page 26 GAO-12-209 Securities Research

Although SEC and FINRA have taken regulatory actions to address 

conflicts of interest faced by securities research analysts, additional 

opportunities exist to adopt or revise rules to enhance investor protection 

and streamline or harmonize oversight.

FINRA plans to finalize an equity analyst rule that includes longstanding 

internal recommendations intended to enhance investor protections, 

increase information flow to investors, and reduce regulatory burden, 

according to FINRA officials. In a December 2005 report, NASD and 

NYSE staff made recommendations to amend the SRO research analyst 

rules, but the recommendations have yet to be implemented. As part of its 

2005 request that the SROs review the effectiveness of their research 

rules, SEC asked NASD and NYSE to make any recommendations for 

rule changes or additions. To address this request, NASD and NYSE staff 

conducted a section-by-section review of the rules, which included 

assessing whether the rules were accomplishing their purpose, 

comparing the rules to the Global Settlement, considering gaps in 

coverage, and reviewing industry questions and comments about the 

rules. As discussed in the following paragraphs, the SRO staff 

recommended revising their rules to prohibit a practice that was not 

permitted under the Global Settlement’s terms. In general, the staff 

recommended several rules changes that were intended to improve rule 

effectiveness by striking a better balance between trying to ensure 

objective and reliable research and permitting the flow of information to 

investors and minimizing costs and burdens to firms. Specifically, the 

recommendations included:

• changing the definition of “research analyst,” “research report,” and 

other terms used in the rule, to codify exceptions set forth in previous 

interpretive material and to align with SEC Regulation Analyst 

Certification and the Global Settlement;

• eliminating a provision that permitted investment banking personnel to 

review research before publication (to verify factual information), 

because SRO staff believed that such a review raised concerns about 

the objectivity of the research and noted that such a review was not 

permitted under the Global Settlement’s terms;

Regulators Have 

Opportunities to 

Enhance Investor 

Protection and 

Streamline or 

Harmonize Oversight

FINRA Plans to Finalize 

Equity Analyst Rules 

Intended to Enhance 

Investor Protections and 

Reduce Regulatory Burden
Page 27 GAO-12-209 Securities Research

• amending the disclosure rules to provide more effective disclosure by 

allowing, in lieu of disclosure in the research report itself, a prominent 

warning on the cover of research reports that conflicts exist and 

information about how investors could obtain more details about those 

conflicts of interest on the firm’s website, because staff were 

concerned that the volume of disclosures in the reports could obscure 

their overall message; and

• amending the provision that prohibited investment banking personnel 

from retaliating against research analysts as a result of unfavorable 

research to include all of a firm’s employees.

Similar to the concerns raised by the SRO staff about the conflict 

disclosures, various market participants and observers we interviewed 

questioned the effectiveness of or raised concerns about the burden of 

the conflict disclosures. For example, some broker-dealers told us that 

that the volume and complexity of the disclosures have made the 

information less useful for investors. Also, officials from three associations 

representing investors and an institutional investor said the disclosures 

are important but do not convey sufficient information for investors to fully 

understand the nature and magnitude of analyst conflicts. Broker-dealers 

further noted that their need to continually collect a wide range of data to 

track analyst conflicts is costly and burdensome.

In 2008, FINRA issued a proposal to consolidate the NASD and NYSE 

research analyst rules in a new FINRA rule and move to a more 

principles-based regulatory approach in this area.47 The proposal 

included most of the recommendations made by the NASD and NYSE 

staff in their December 2005 report.48

 47FINRA, Research Analysts and Research Reports, Regulatory Notice 08-55 (October 

2008).

Additionally, FINRA’s proposed 

consolidated rule would broaden the obligations of its member brokerdealers to identify and manage analyst conflicts. Specifically, it included a 

provision to require FINRA members to establish, maintain, and enforce 

48In a December 2005, NASD and NYSE staff recommended a number of changes to the 

SRO research analyst rules. NASD and NYSE filed proposals with SEC in September 

2006 to amend their research analyst rules and implement the recommendations. FINRA’s 

2008 proposal would supersede the NASD and NYSE proposals and omitted the 

recommendation to allow for Web-based conflict disclosures, because SEC interpreted 

the Sarbanes-Oxley Act as requiring that such disclosures be made only in the research 

reports.
Page 28 GAO-12-209 Securities Research

policies and procedures reasonably designed to identify and effectively 

manage conflicts related to the preparation, content, and distribution of 

research reports and public appearances by equity analysts. The 

proposal also specified that the policies and procedures must address 

information barriers and other safeguards to insulate research analysts 

from pressure by investment banking personnel. The proposal largely 

maintained the same disclosures, including a provision that would require 

a member to disclose in any research report all conflicts that reasonably 

could be expected to influence the objectivity of the report and that are 

known or should have been known on the date of the report’s publication 

or distribution. FINRA received five comment letters on its proposal. The 

comments (which were from a venture capital association, a securities 

industry association, a securities firm, a law office, and an individual) 

generally supported the proposal but expressed concerns, including that 

some terms were too broadly defined and, thus, would make compliance 

difficult.

FINRA has not yet finalized its 2008 proposal designed to consolidate the 

SRO research analyst rules and implement recommendations made by 

NASD and NYSE staff in 2005. According to FINRA officials, FINRA has 

delayed finalizing the proposal until it finalizes a proposal to address 

conflicts of interest faced by fixed-income (debt) research analysts. SEC 

staff and FINRA officials told us that SEC encouraged FINRA to consider

adopting a rule to address conflicts of interest faced by fixed-income 

research analysts. As discussed later in the report, FINRA recently issued 

a concept release for a fixed-income research rule. According to FINRA 

officials, their tentative plan is to seek comment on a regulatory notice on 

a revised debt research proposal and then package the final debt and 
Page 29 GAO-12-209 Securities Research

equity research rule proposals together and submit a single proposed 

consolidated research analyst rule to SEC in the first half of 2012.49

Although the Global Settlement has been in place since 2003 and 

includes a provision that allows for it to be modified or superseded, SEC 

and FINRA have not proposed codifying the Global Settlement’s 

remaining terms. The Global Settlement provided that if SEC adopts a 

rule or approves an SRO rule with the stated intent to supersede any of 

the Global Settlement’s terms, then that term would be superseded. The 

Global Settlement also originally provided that SEC would agree, subject 

to court approval, to modify any term in Section I or II of the addendum 

that had not been superseded within 5 years of the entry date of the 

Global Settlement, unless SEC determined the modification would not be 

in the public interest.

While NASD and NYSE adopted research analyst rules that are similar to 

many of the Global Settlement’s terms (see app. II for a comparison of 

the Global Settlement and SRO research analyst rules), they did not 

expressly state that their rules superseded the terms.50

 49FINRA’s Board of Governors must approve a proposed rule for filing with SEC. When 

FINRA files a proposal with SEC for notice and comment, SEC staff must review the 

proposal to determine whether the proposed rule change is consistent with the Securities 

and Exchange Act of 1934 and the rules and regulations thereunder. In response to 

comments or questions from SEC staff, FINRA may seek to modify or supplement its 

proposal with additional descriptive text or legal analysis. SEC then publishes the 

proposed rule in the Federal Register for public comment. Depending on the comments 

received, FINRA may respond to the questions and concerns raised by the commenters. 

For proposals subject to SEC approval before they may take effect, SEC would publish an 

approval order or disapproval order in the Federal Register. If approved, FINRA may 

announce the approval in a regulatory notice. For proposals that are immediately effective 

by operation of law, no further SEC action is necessary for the rule to take effect. 

However, SEC may suspend an immediately effective proposal within 60 days of the filing 

thereof, in which case it would institute proceedings to determine whether to approve or 

disapprove the proposal.

In 2009, the 

Global Settlement firms, with SEC’s agreement, submitted a request to a 

50For example, in 2005, NASD and NYSE proposed amending their research analyst rules 

to prohibit research analysts from participating in road shows relating to investment 

banking services transactions. The SROs noted that the proposed rule changes were 

similar in certain aspects to the Global Settlement’s provisions. They stated that the 

proposed rule changes were not proposed for the purpose of conforming to the Global 

Settlement or addressing differences between the Global Settlement and SRO rules. 

Rather, the SROs believed that the proposed rules were appropriate in that they would 

facilitate the goal of more objective and reliable research.

SEC and FINRA Have Not 

Formally Assessed and 

Documented Whether Any 

of the Global Settlement’s 

Remaining Terms Should 

Be Codified
Page 30 GAO-12-209 Securities Research

federal district court to modify the Global Settlement’s addendum. In their 

request, the firms stated that the addendum should be terminated in its 

entirety, and they, like other broker-dealers, should be subject only to the 

SEC and SRO research analyst rules. However, the firms noted in their 

request that SEC indicated that certain provisions should be retained in 

the public interest. Consequently, the firms did not ask the court to 

terminate in full Sections I and II, but instead to modify the majority of the 

terms in Section I and a disclosure requirement in Section II.51

On March 15, 2010, the federal district court approved all but one of the 

requested changes.

The 

broker-dealers primarily justified their requested changes based upon the 

existence of the SRO research analyst rules that addressed the same 

concerns and provided comparable protections.

52

• investment banking cannot have input into the research budget,

The court declined to allow research and 

investment banking personnel to communicate with each other—outside 

the presence of internal legal or compliance staff—about market or 

industry trends, conditions, or developments, provided that such 

communications were consistent in nature with communications that an 

analyst might have with investing customers. The court noted that the 

change was counterintuitive and would undermine the separation 

between research and investment banking. Under the modified Global 

Settlement approved by the court, terms that remain in place include:

• research analysts and investment banking must be physically 

separated,

• investment banking cannot have input into company-specific coverage 

decisions,

• research oversight committees must ensure the integrity and 

independence of equity research,

• investment banking personnel and research analysts cannot 

communicate about the merits of a proposed transaction or a potential 

 51As previously noted, Section III expired in July 2009 and therefore was not discussed in 

the Letter Motion request to amend the Final Judgment, which was filed in August 2009.

52See appendix II for a description of the March 15, 2010, modifications to the Global 

Settlement.
Page 31 GAO-12-209 Securities Research

candidate for a transaction unless a chaperone from the firm’s legal or 

compliance department is present,

• research analysts and investment bankers cannot communicate for 

the purpose of having research personnel identify specific potential 

investment banking transactions, and

• research analysts must be able to express their views to a 

commitment committee about a proposed investment banking 

transaction outside the presence of investment bankers working on 

the deal.53

While the court maintained these terms in the modified Global Settlement, 

the court’s March 15, 2010, order provided that the parties expected SEC 

would agree to further modification of the Global Settlement’s terms at the 

earlier of March 15, 2011, or the effective date of the consolidated 

research rule proposed by FINRA in October 2008 (if such rules 

addressed the Global Settlement’s remaining terms), unless SEC 

believes such amendment or modification would not be in the public 

interest. Any such amendment or modification would be subject to court 

approval. To date, the Global Settlement firms have not requested any 

further modification of the settlement. See figure 4 for a summary of 

events relating to the Global Settlement and SRO research analyst rules.

 53A commitment committee generally reviews and approves all proposed securities 

offerings to investment banking clients to determine whether the broker-dealer will act as 

lead underwriter or otherwise participate in the offering.
Page 32 GAO-12-209 Securities Research

Figure 4: Significant Developments in Oversight of Research Analyst Conflicts, Including the Global Settlement and SRO 

Research Analyst Rules, 2001 through 2011

Certain SEC staff and FINRA officials have different views about whether 

the remaining Global Settlement’s terms should be codified. According to 

SEC staff, the reference to FINRA’s consolidated rule proposal was 

included in the modified Global Settlement because of the possibility that 

FINRA would amend its rule proposal to include the remaining terms. 

According to FINRA officials, FINRA does not plan to state that its 

consolidated rule, when finalized, would supersede the Global 

Settlement. FINRA officials said the Global Settlement serves to address 

bad behavior in which the Global Settlement firms allegedly engaged; 

thus, some of the Global Settlement’s terms are more stringent than the 

SRO research analyst rules and should not apply to firms that did not 

engage in such behavior. FINRA officials said that the decision to modify 
Page 33 GAO-12-209 Securities Research

or terminate the Global Settlement should not be done through a FINRA 

rulemaking; rather, it should be determined by the court based on 

whether the remedial actions required under the Global Settlement have 

reached their finality. SEC staff told us that any rulemaking to codify the 

provisions of the Global Settlement would be most appropriate as SRO 

rules. SEC staff continue to work with FINRA to achieve this goal.

According to FINRA officials, they have carefully considered the 

appropriateness and impact of codifying the Global Settlement’s 

remaining terms. They are concerned that some of the remaining terms 

are potentially costly and burdensome and would affect unfairly those 

firms that were not alleged to have engaged in wrongful conduct, 

particularly some small firms that provide both research and investment 

banking services. As discussed, NASD and NYSE staff conducted a 

section-by-section review of the research analyst rules in 2005, which 

included comparing the rules to the Global Settlement’s terms, and 

recommended codifying one of the terms not already in the rules. For 

FINRA’s consolidated equity rule proposal, FINRA officials told us that 

they recently analyzed and discussed the Global Settlement’s remaining 

terms with SEC staff and conveyed to the SEC staff their position on 

which ones should be codified.54

According to SEC staff, it is incumbent on the Global Settlement firms to 

initiate action to repeal or modify any of the Global Settlement’s terms (as 

provided in the modified Global Settlement), and none of the firms have 

contacted SEC to discuss further modifications since 2009. The staff said 

that if the firms requested that the Global Settlement be modified, SEC 

would have to find that the modifications were counter to the public 

interest for SEC to oppose the request. Moreover, SEC staff said that the 

According to the FINRA officials, their 

analysis considered the investor protection benefits of adopting the 

Global Settlement’s remaining terms and the costs and burdens that such 

action would impose on non-Global Settlement firms. The officials told us 

that their analysis largely was done through internal discussions and was 

not documented.

 54Although FINRA does not anticipate that its consolidated rule would supersede the 

Global Settlement, FINRA officials told us that they are considering modifying FINRA’s 

proposed consolidated research rule to include two of the remaining Global Settlement’s 

terms: (1) express restrictions on investment banking input into research coverage 

decisions and (2) restrictions on communications between research and investment 

banking when conducting due diligence on an investment banking mandate.
Page 34 GAO-12-209 Securities Research

Global Settlement firms continue to be subject to the Global Settlement, 

because the related enforcement actions found them to be allegedly 

engaged in a litany of misconduct. They told us that the Global Settlement 

was not intended to create a competitive disadvantage for the Global 

Settlement firms, but rather to address their conduct. At the same time, 

the SEC staff said that the Global Settlement’s terms provide useful 

protections that could benefit all investors if applied more broadly. 

According to SEC staff, the Global Settlement firms account for the vast 

majority of the U.S. investment banking business, and other brokerdealers have opted to comply voluntarily with the Global Settlement. As a 

result, SEC staff said that the majority of research produced by brokerdealers also engaged in investment banking is, in effect, affording 

investors the protections provided under the Global Settlement’s terms.

Although SEC staff and FINRA officials periodically have discussed and 

analyzed the Global Settlement’s terms, they have not formally 

determined and documented the benefits and costs of adopting rules 

based on the Global Settlement’s remaining terms. Such analysis would 

serve to determine and make transparent whether the benefits of such 

action would likely justify the costs. However, as long as the Global 

Settlement remains in effect, the Global Settlement firms continue to be 

subject to the requirements of the Global Settlement and the SRO 

research analyst rules, while other firms that provide the same services 

are subject only to the SRO research analyst rules. As a result, investors 

may not be provided the same level of protection. We have previously 

reported that a regulatory framework should include investor protection as 

part of its mission to ensure that market participants receive consistent, 

useful information, as well as consistent legal protections for similar 

financial products and services.55 To the extent that any of the Global 

Settlement’s remaining terms provide a cost-effective way of furthering 

investor protection, by not formally assessing their codification SEC may 

be missing an opportunity to provide consistent investor protection.

 55To help Congress and others evaluate proposals for financial regulatory reform, we 

developed a framework comprised of nine characteristics that a regulatory regime should 

reflect. See GAO, Financial Regulation: A Framework for Crafting and Assessing 

Proposals to Modernize the Outdated U.S. Financial Regulatory System, GAO-09-216 

(Washington, D.C.: Jan. 8, 2009).
Page 35 GAO-12-209 Securities Research

FINRA has been drafting a rule to address longstanding concerns about 

conflicts of interest that fixed-income analysts face.56 Although fixedincome research analysts, like equity research analysts, face conflicts of 

interest, fixed-income research conflicts were not addressed in the SRO 

research analyst rules. For instance, Enron Corporation’s (Enron) 

bankruptcy in the early 2000s drew attention to the harm that could result 

from fixed-income analysts’ conflicts. In particular, a sell-side fixedincome analyst assigned to cover Enron’s debt securities testified in 2001 

that she perceived pressure from her superiors not to issue negative 

public comments on Enron because of Enron’s importance as an 

investment banking client of the broker-dealer.57

In the absence of specific SRO research analyst rules covering fixedincome research conflicts, NASD and NYSE generally relied on antifraud 

statutes and SRO rules prohibiting fraud and requiring ethical conduct 

and a comprehensive supervisory scheme to oversee a firm’s securities 

business. In addition, NASD and NYSE encouraged firms to consider 

adopting industry-developed principles to address such conflicts. In 2004, 

to promote the integrity of fixed-income research, the Bond Market 

Association (BMA), an industry association, issued voluntary, principlebased guidelines designed to help firms manage potential conflicts faced 

by fixed-income analysts.

When NASD and NYSE 

initially adopted their research analyst rules in 2002, the rules did not 

cover fixed-income analysts. And neither the Global Settlement nor the 

research-related provisions of the Sarbanes-Oxley Act (which resulted in 

subsequent amendments to the SRO research analyst rules in 2004) 

apply to fixed-income research. However, in 2003, SEC adopted 

Regulation Analyst Certification to require both equity and fixed-income 

analysts to certify that the views expressed in their research reports 

accurately reflected their personal views and disclose whether they 

received compensation or other payments in connection with their views.

58

 56FINRA, Debt Research Reports: FINRA Requests Comment on Concept Proposal to 

Identify and Manage Conflicts Involving the Preparation and Distribution of Debt Research 

Reports, Regulatory Notice 11-11 (March 2011).

At the time, BMA did not support the adoption 

57Final Report of Neal Batson, Ct.-Appointed Examiner, App. F (Role of CSFB and Its 

Affiliates) to Final Report of Neal Batson, Ct.-Appointed Examiner at n. 101, In re Enron 

Corp., et al., No. 01-16034 (AJG) (Bankr. S.D.N.Y., November 24, 2003).

58The Bond Market Association, Guiding Principles to Promote the Integrity of FixedIncome Research: A Global Approach to Managing Potential Conflicts of Interest.

FINRA Has Been Drafting 

a Rule to Address Conflicts 

of Interest Faced by FixedIncome Research Analysts
Page 36 GAO-12-209 Securities Research

of SRO rules designed to address fixed-income conflicts. The industry 

maintained that the nature and intensity of the conflicts fixed-income 

analysts faced differed from those equity analysts faced. For example, 

industry participants held that prices of debt securities were relatively less 

sensitive to the views of research analysts, credit rating agencies played 

an important role in the debt markets by providing investors with 

independent information, and users of fixed-income research typically 

were sophisticated investors presumed to be less in need of protection. In 

a December 2005 report on the effectiveness of the SRO research 

analyst rules, NASD and NYSE staff concluded that it was not appropriate 

at the time to amend the rules to cover fixed-income analysts or codify 

BMA’s guiding principles. Instead, staff noted that the SROs were 

monitoring the extent to which firms adopted the BMA principles and 

would consider rulemaking after assessing the effectiveness of voluntary 

compliance with the principles. NASD and NYSE staff further noted that 

the existing antifraud statutes and SRO rules could cover any egregious 

conduct involving fixed-income research.59

To encourage adoption of the BMA principles or other policies and 

procedures to manage debt research conflicts, the SROs issued guidance 

and conducted examinations that included a review of issues relating to 

fixed-income analyst conflicts. In July 2006, NASD and NYSE issued joint 

interpretive guidance on fixed-income research to prompt better 

management of fixed-income-research conflicts.60

 59See, for example, NASD Rule 2110’s requirement that members “observe high 

standards of commercial honor and just and equitable principles of trade” and similar 

obligations under NYSE Rules 401 and 476(a)(6). These rules have been consolidated 

into FINRA Rule 2010.

The SROs developed 

the guidance based on their examinations of how some firms addressed 

conflicts faced by fixed-income analysts. Through their examinations, the 

SROs found many instances in which firms had failed to adhere to BMA’s 

principles. The examinations also found several instances in which firms 

failed to establish, maintain, and enforce written supervisory procedures 

in the fixed-income research area—a fundamental obligation under the 

SRO rules—or comply with SEC’s Regulation Analyst Certification. In 

considering whether to engage in more definitive rulemaking, the SROs 

stated in their guidance that they would continue to monitor the extent to 

which firms adopted and adhered to BMA principles or other supervisory 

60NASD, Research Analysts and Research Reports: NASD and NYSE Joint Interpretive 

Guidance on Fixed Income Research, Notice to Members 06-36 (July 2006).
Page 37 GAO-12-209 Securities Research

systems reasonably designed to achieve compliance with applicable SRO 

rules and securities laws and regulations. According to FINRA officials, 

the joint interpretative guidance served as a “warning shot” to the firms.

Following NASD and NYSE’s 2006 interpretive guidance, FINRA 

continued to examine its member firms for compliance with the BMA 

principles and find instances of noncompliance. Based partly on BMA’s 

guiding principles, FINRA developed an examination module to assess 

whether a firm’s fixed-income research supervisory procedures, policies, 

and processes promote the integrity of fixed-income research and 

address potential conflicts of interest. According to FINRA officials, 

FINRA has included a review of fixed-income research in some of its 

cycle examinations. As shown in figure 5, between 2005 and 2010, 

FINRA (or its predecessors) conducted 55 cycle examinations that 

covered fixed-income research and found related deficiencies in 11 

examinations. The deficiencies generally involved inadequate supervisory 

procedures for managing fixed-income analyst conflicts or inadequate 

disclosures of such conflicts. Although none of the examinations resulted 

in a formal disciplinary action, one examination found that the firm lacked 

procedures not only to prohibit staff from directly or indirectly offering 

favorable fixed-income research coverage to issuers but also to prevent 

nonresearch staff from attempting to coerce fixed-income analysts to alter 

their views on the content of a research report. Finally, the examinations 

included eight Global Settlement firms; deficiencies were found in one of 

these eight firms.
Page 38 GAO-12-209 Securities Research

Figure 5: FINRA Cycle Examinations That Included Reviews of Fixed-Income 

Research and Number of Deficiencies, 2005 through 2010

In March 2011, FINRA issued a regulatory notice to explore and obtain 

public comment on the concept of adopting a rule to address conflicts of 

interest faced by fixed-income analysts. In its release, FINRA noted that it 

long had been monitoring broker-dealers’ management of conflicts of 

interest in fixed-income research and that it was an appropriate time to 

engage in rulemaking to address such conflicts because, among other 

things, FINRA staff had observed increased retail investment risk in 

complex debt securities, such as auction rate securities.61

 61Auction rate securities are municipal and corporate bonds, as well as preferred stocks, 

with interest rates or dividend yields that are periodically reset through auctions, typically 

every 7, 14, 28, or 35 days. The alleged misconduct did not involve conflicts between 

research and investment banking but between research and sales and trading.

Specifically, the 

staff noted that the allegations of misconduct in the sale of auction rate 

securities illustrated this risk and provided a concrete example that 

potential conflicts of interest in the publication and distribution of debt 

research existed just as they did for equity research. FINRA officials told 
Page 39 GAO-12-209 Securities Research

us that SEC staff also encouraged FINRA to adopt a rule to address 

fixed-income analyst conflicts.

According to FINRA officials, the primary purpose of the fixed-income 

research rule is to protect retail investors. To that end, the majority of the 

existing structural safeguards and disclosures in NASD’s research analyst 

rule would apply to retail debt research. Similarly, the disclosures 

applicable to equity research largely should apply to debt research and 

would include the disclosure of personal and firm financial interests and 

the receipt of compensation for investment banking services from 

companies covered by fixed-income analysts. However, the scope of the 

safeguards would be expanded to cover conflicts between debt research 

and sales and trading personnel. Specifically, a firm’s sales and trading 

staff would be prohibited from attempting to influence a fixed-income 

analyst’s opinion or views for the purpose of benefiting the trading 

position of the firm—which allegedly occurred in certain firms engaged in 

auction rate securities—or a customer or class of customers. For 

example, in 2008, a state securities regulator alleged that a broker-dealer 

permitted its sales and trading managers to unduly influence and 

pressure its fixed-income research department. The managers did not 

agree with the tone or context of a published research report and 

allegedly insisted that the report be retracted and replaced with a more 

sales-friendly report.

FINRA officials told us they faced challenges in balancing the benefits of 

the rule in providing protections for retail investors with the cost and 

burden of the rule for institutional investors. According to the officials, 

institutional investors use the analytics, not the recommendations, 

generated by fixed-income analysts and do not want rules that would 

restrict the flow of timely information. Moreover, institutional investors 

trading debt securities generally tend to interact with broker-dealers more 

as counterparties than customers and are aware of potential conflicts 

faced by fixed-income analysts. FINRA’s concept proposal exempts fixedincome research that is disseminated solely to institutional investors from 

some of the structural safeguards and most of the disclosures that would 

be applicable to retail debt research. Firms operating under the 

exemption would have to clearly distinguish such research from research 

disseminated to retail investors. The proposal noted that not all 

institutional investors are necessarily alike; therefore, institutional 

investors would be allowed to opt out of the exemption and be treated like 

retail investors.
Page 40 GAO-12-209 Securities Research

Another challenge in developing a fixed-income research rule is 

separating fixed-income research from sales and trading, according to 

FINRA. FINRA officials told us that it was easier to describe the conflicts 

between fixed-income research and sales and trading than to craft 

communication firewalls to separate the two departments. The officials 

said that broker-dealers maintain that sales and trading should not be 

wholly prohibited from communicating with research, because sales and 

trading staff need information from research regarding the 

creditworthiness of an issuer and other information reasonably related to 

the price or performance of a debt security. In turn, debt analysts need 

information from sales and trading to help, among other things, determine 

the coverage universe and to assess current prices, spreads, and liquidity 

of debt securities.

Most market participants and observers we interviewed generally 

supported the adoption of a FINRA rule to address conflicts faced by 

fixed-income research analysts. Stakeholders cited the lack of 

transparency in the fixed-income markets as the primary reason for the 

need for a fixed-income research rule. Some said that investors lack 

sufficient information about the securities in which they sought to invest, 

because no regulations require broker-dealers to disclose potential 

conflicts. Similarly, FINRA received six comment letters about the concept 

proposal, all of which generally supported FINRA’s efforts to develop the 

proposal.62

As previously discussed, FINRA officials told us that they plan to submit a 

proposed fixed-income rule to FINRA’s Board of Governors for its review 

and approval in December 2011. The officials said that FINRA then 

However, all of the letters expressed concerns, including that 

the communication restrictions were unclear and could limit fixed-income 

analysts’ ability to support sales and trading.

 62The six letters were from a broker-dealer industry association, a broker-dealer 

compliance consulting firm, two public investor arbitration groups, and four full service 

broker-dealers. Comments from the public investor arbitration groups and investment 

banking firms were each represented by two separate letters. Four of the letters noted that 

the institutional investor exemption creates the potential for (1) retail investors to 

mistakenly obtain research without the appropriate disclosures, (2) reduction in retail 

investors’ access to research, (3) increased costs and burden for firms to identify which 

clients have opted out of the disclosure requirements, (4) firms to relax efforts to disclose 

any conflicts to institutional investors because of the assumption that they were 

sophisticated investors; or (5) conflict and fraud. In addition, two letters noted that the 

communication restrictions were unclear and could limit the ability of fixed-income 

analysts’ to support the sales and trading departments.
Page 41 GAO-12-209 Securities Research

tentatively plans to file the proposed rule, assuming its board approves it, 

with SEC in the first half of 2012. While antifraud statutes and existing 

SRO rules serve to protect investors from abuse arising from fixedincome analyst conflicts, SEC and FINRA staff, as well as most market 

participants and observers we interviewed, acknowledged that additional 

rulemaking is needed to protect investors, particularly retail investors. In 

that regard, until FINRA adopts a fixed-income research rule, investors 

continue to face a potential risk.

Since the early 2000s, SEC and the SROs have taken and continue to 

take a variety of actions to address conflicting interests between research 

analysts and investment bankers and, in turn, protect investors. Principal 

actions include Regulation Analyst Certification, the SRO research 

analyst rules, and the Global Settlement—which include similar structural 

requirements designed to separate research from investment banking 

and thereby insulate research analysts from investment banking pressure 

and influence. The Global Settlement imposes, in some areas, more 

stringent requirements on the Global Settlement firms than the SRO rules 

impose on other broker-dealers engaged in research and investment 

banking, because the Global Settlement resulted from enforcement 

actions involving analyst conflicts. Nonetheless, the structural 

requirements in the SRO rules and the Global Settlement were 

developed, in part, based on similar findings and generally seek to 

achieve the same fundamental objective—to enhance the integrity and 

independence of securities research. But unlike the SRO rules, the Global 

Settlement was not intended to be permanent.

By establishing, in effect, separate but different requirements for 

addressing analyst conflicts, the SRO research analyst rules and the 

Global Settlement raise the question of whether any of the Global 

Settlement’s remaining terms need to be adopted as SEC or SRO rules to 

better protect investors. While SEC staff and FINRA officials have 

discussed this issue, they have not reached a consensus or formally 

determined and documented whether any of the Global Settlement’s 

remaining terms should be codified. Through some of its more stringent 

requirements, the Global Settlement potentially affords greater 

protections to investors in some areas than the SRO rules but imposes 

greater burdens on broker-dealers. Whether these burdens are 

appropriate in comparison to the greater protections of the requirements 

has yet to be determined and documented. However, an analysis as to 

whether the Global Settlement’s remaining terms should be codified 

would provide SEC with a basis for reconciling the differences between 

Conclusions
Page 42 GAO-12-209 Securities Research

the SRO rules and the Global Settlement. To the extent that any of the 

Global Settlement’s remaining terms provide an effective way of 

furthering investor protection, by not assessing their codification SEC may 

be missing an opportunity to provide consistent investor protection.

To help ensure that investors consistently are protected from potential 

conflicts of interest between research analysts and investment bankers 

employed by the same broker-dealers, the Chairman of SEC should 

direct the appropriate divisions or offices to formally assess and 

document in a recommendation whether any of the Global Settlement’s 

remaining terms should be codified.

We provided a copy of this draft report to SEC and FINRA for their review 

and comment. In its comment letter, which is reprinted in appendix III, 

SEC generally agreed with our findings and recommendation. SEC staff 

noted that the agency has been working to promote the objectivity and 

independence of securities research analysts. They agreed that the 

appropriate SEC staff should assess whether any of the remaining Global 

Settlement provisions should be codified and applied to the entire 

industry. SEC and FINRA also provided technical comments that we 

have incorporated as appropriate.

We are sending copies of this report to SEC, FINRA, interested 

congressional committees and members, and others. The report also is 

available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact 

me at (202) 512-8678 or clowersa@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this report. GAO staff who made major contributions to 

this report are listed in appendix IV.

A. Nicole Clowers

Director,

Financial Markets and Community Investment Issues

Recommendation for 

Executive Action

Agency Comments 

and Our Evaluation
Appendix I: Objectives, Scope, and 

Methodology

Page 43 GAO-12-209 Securities Research

Section 919A of the Dodd-Frank Wall Street Reform and Consumer 

Protection Act requires us to identify and examine potential conflicts of 

interest between investment banking and research staff in the same firm.1

To understand the nature of research analyst conflicts and identify 

regulatory actions taken to address them, we reviewed financial journal 

articles as well as industry, GAO, and other studies; a congressional 

hearing that included testimonies by the Securities and Exchange 

Commission (SEC), National Association of Securities Dealers (NASD), 

and North American Securities Administrators Association (NASAA); SEC 

and state attorney general enforcement actions taken against brokerdealers involving analyst conflicts; SEC and SRO proposed and final 

rules and related releases; and Global Research Analyst Settlement 

(Global Settlement) documents, including the addendum and independent 

monitor reports. To help evaluate the effectiveness of the regulatory 

actions taken to address research analyst conflicts, we reviewed and 

analyzed academic studies that empirically examined the effects of the 

regulatory reforms—SEC and SRO research analyst rules and the Global 

Settlement—on analyst research and recommendations. We limited our 

review to studies issued after January 1, 2005, because of the time 

frames in which the regulatory reforms were adopted. (See the end of the 

report for a bibliography listing the studies included in our review.) We 

included published and working papers in our review.

To address this mandate, we examined (1) what is known about the 

effectiveness of the regulatory actions taken to address research analyst 

conflicts of interest and (2) what additional actions, if any, could 

regulators take to further address research analyst conflicts.

2

 1

Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub.L. No. 111-203, 124 

Stat. 1837-1838 (July 21, 2010).

Although we found 

these studies to be sufficiently reliable for the purposes of our report, 

attributing effect to any particular regulatory reform is difficult. Therefore, 

we interpret the literature more broadly as gauging the effect of the 

2

Note that working papers are subject to revision, and some include additional limitations 

in areas on which we do not report.

Appendix I: Objectives, Scope, and 

Methodology
Appendix I: Objectives, Scope, and 

Methodology

Page 44 GAO-12-209 Securities Research

collective reforms and do not believe the evidence can be used to 

selectively attribute causality to any specific reform.3

To evaluate the effectiveness of the regulatory reforms, we also reviewed 

data provided by the Financial Industry Regulatory Association (FINRA) 

from its electronic system used to track the lifecycle of FINRA’s regulatory 

matters, including examinations and investigations. Specifically, FINRA 

provided us with data on examinations and investigations that were 

conducted between 2005 and 2010; covered its member broker-dealers; 

and a review of research practices and compliance with the Global 

Settlement, NASD 2711, or New York Stock Exchange (NYSE) Rule 472. 

To assess the reliability of the data that we used to help support one of 

our findings, we reviewed relevant documentation about the system’s 

operation and administration and interviewed knowledgeable FINRA 

officials about the system and integrity of the data. Based upon our 

review, we found the data sufficiently reliable for our purposes. In 

addition, we discussed with SEC staff the nature and findings of their 

broker-dealer examinations conducted between 2005 and 2010 and 

involving conflicts between research analysts and investment bankers.4

To gain insights on the effectiveness of the regulatory actions taken to 

address analyst conflicts and to identify additional actions that could be 

taken to address such conflicts, we interviewed officials from SEC, 

FINRA, and NASAA, including its members from the state securities 

commissions of Florida, Illinois, Washington state, Texas, and 

Connecticut. NASAA officials identified these states as appropriate to 

We also reviewed enforcement actions taken by SEC between 2005 and 

2010 involving conflicts between research analyst and investment 

bankers, and reports prepared by independent, or third-party, monitors 

that assessed the settlement firms’ compliance with the Global 

Settlement.

 3

The inclusion of a particular finding for a given study does not imply we found other 

portions of the study to be equally reliable. Given the difficulty in disentangling the effect of 

the regulatory reforms from other important causal forces and computing estimates of 

fundamental value, as well as other limitations, the findings should be interpreted with 

some caution.

4

SEC staff told us that the agency’s examination database does not have an electronic 

search capability that can be used to identify which broker-dealer examinations included a 

review of which specific SRO rules. According to SEC staff, the agency is currently 

developing a new examination database with improved search capabilities and plans for 

the system to be online as early as 2012.
Appendix I: Objectives, Scope, and 

Methodology

Page 45 GAO-12-209 Securities Research

contact because of their involvement in the investigations that led to the 

Global Settlement. We also interviewed representatives from 20 brokerdealers, including 10 of the settlement broker-dealers, and their industry 

association, the Securities Industry and Financial Markets Association. 

With the Securities Industry and Financial Markets Association’s logistical 

assistance, we interviewed 1 broker-dealer separately and the other 19

broker-dealers in two separate groups. In addition, we spoke with four law 

or economics professors; two money managers; four independent 

research firms; a securities research consultant; and various 

organizations representing retail investors, institutional investors, or other 

investment professionals, including AARP, the American Association of 

Individual Investors, the American Federation of Labor and Congress of 

Industrial Organizations, the Association of Institutional Investors, the 

CFA institute, the Consumer Federation of America, the Investment 

Company Institute, the National Association of Shareholder and 

Consumer Attorneys, and the National Investor Relations Institute. 

Finally, we contacted several state attorney general offices and the 

National Association of Attorneys General to gain their perspectives; 

however, these organizations either declined to participate because the 

staff involved in the Global Settlement or related investigations no longer 

worked there or they deferred to officials from their state securities 

commissions.

To identify additional actions that regulators could take to further address 

research analyst conflicts, we also reviewed SRO concept proposals, 

proposed rules, and related comment letters and Global Settlement 

documents, including the settlement firms’ 2009 request to modify the 

Global Settlement’s addendum and the federal court’s 2010 order 

approving modifications to the addendum. In addition, we reviewed recent 

enforcement actions involving fixed-income research conflicts; academic, 

industry, and GAO reports; and commentaries from market observers.

We conducted this performance audit from September 2010 to January 

2012 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.
Appendix II: Original and Modified Global 

Settlement Addendum Compared with NASD 

Rule 2711

Page 46 GAO-12-209 Securities Research

In April 2003, the SEC, National Association of Securities Dealers, New 

York Stock Exchange, North American Securities Administrators 

Association, the New York Attorney General and other state authorities 

announced that the enforcement actions against 10 of the largest brokerdealers had been completed and the terms of the agreement had been 

finalized (the Global Settlement). The Global Settlement relates to 

charges that the firms had engaged in acts and practices that created or 

maintained inappropriate influence by investment banking personnel over 

equity research analysts, which created conflicts of interest that were not 

adequately managed or disclosed. The Global Settlement was approved

by the U.S. District Court for the Southern District of New York on 

October 31, 2003.1 In August 2009, the Global Settlement firms submitted 

a motion proposing certain modifications for the court’s consideration and 

SEC did not oppose this motion. In March 2010, the court entered an 

order approving all but one of the requested modifications. The order 

provided that the parties expected SEC would agree to further 

modification of the Global Settlement’s terms at the earlier of March 15, 

2011, or the effective date of the consolidated research rule proposed by 

FINRA in October 2008 (if such rules addressed the Global Settlement’s 

remaining terms), unless SEC believes such amendment or modification 

would not be in the public interest. Any such amendment or modification 

would be subject to court approval. To date, the Global Settlement firms 

have not requested any further modification of the settlement.

 1

The Global Settlement firms and Regulators subsequently agreed to amend certain 

provisions of the Global Settlement, which amendments were approved by the district 

court on September 24, 2004.

Appendix II: Original and Modified Global 

Settlement Addendum Compared with NASD 

Rule 2711
Appendix II: Original and Modified Global 

Settlement Addendum Compared with NASD 

Rule 2711

Page 47 GAO-12-209 Securities Research

Table 1: Sections I and II of the Global Settlement’s Addendum and Modified Addendum, and a Crosswalk between the Global 

Settlement’s Addendum to NASD Rule 2711

Topic Section Original provision

Modified provision 

following the 

2010 Order

Alternative SRO provision 

provided for judicial 

considerationa

Section I of the addendum: structural reforms

Reporting lines I.1b Researchc and Investment Bankingd will 

be separate units with entirely separate 

reporting lines within the firm. 

Removed entire 

provision.

NASD 2711(b)(1). No research 

analyst may be subject to the 

supervision or control of any 

employee of the firm’s investment 

banking department.

Legal/

compliance

I.2 Research will have its own dedicated legal 

and compliance staff, who may be part of 

the firm’s overall compliance/legal 

infrastructure.

Removed entire 

provision.

No similar requirement.e

Budget I.3 

Budget 

Allocation

The Research budget and allocation of 

Research expenses will be determined by 

the firm’s senior management without 

input from Investment Banking and without 

regard to specific revenues or results 

derived from Investment Banking.

Unchanged. No similar requirement.

I.3 

Budget 

Review

Annually, the Audit Committee of the firm’s 

holding/parent company will review the 

budgeting and expense allocation process 

with respect to Research to ensure 

compliance with the Global Settlement 

requirements. 

Removed provision. No similar requirement.f

Physical 

Separation

I.4 Research and Investment Banking will be 

physically separated in a way designed to 

prevent intentional and unintentional flow 

of information between the two groups.

Unchanged. No similar requirement considered 

by the court.
Appendix II: Original and Modified Global 

Settlement Addendum Compared with NASD 

Rule 2711

Page 48 GAO-12-209 Securities Research

Topic Section Original provision

Modified provision 

following the 

2010 Order

Alternative SRO provision 

provided for judicial 

considerationa

Compensation I.5 Professional Research personnel 

compensation must be determined 

exclusively by Research management and 

the firm’s senior management—excluding 

Investment Banking personnel—using set 

principals including: (i) Investment 

Banking has no input; (ii) compensation 

will not be based directly or indirectly on 

Investment Banking revenue, but may 

relate to the revenues or results of the 

entire firm; (iii) compensation must be 

significantly based on a lead analyst’s 

accuracy of research and analysis, in part 

relying on evaluations by the firm’s 

investing customers and the firm’s sales 

personnel, and rankings in independent 

surveys; and (iv) other criteria. All criteria 

must be set in advance in writing. 

Compensation decisions must be 

documented for: (i) anyone who, in the last 

12 months, has been required to certify a 

research report; and (ii) generally, anyone 

who is a member of Research 

management. 

Removed entire 

provision.

NASD 2711(b)(1.) No person 

engaged in investment banking 

activities may have influence or 

control over the compensatory 

evaluation of a research analyst.

NASD 2711(d). (1) No bonus, salary 

or other form of compensation may 

be paid to a research analyst that is 

based on a specific investment 

banking services transaction. (2) 

Compensation of a research analyst 

primarily responsible for the 

preparation of the substance of a 

research report must be reviewed 

and approved at least annually by a 

committee that reports to the board 

of directors, or if none, to a senior 

executive officer. The committee 

may not have representation from 

the firm’s investment banking

department. The committee must 

consider factors including: (i) the 

research analyst’s individual 

performance including productivity 

and quality; (ii) the correlation 

between the analyst’s 

recommendations and stock price 

performance; and (iii) overall ratings 

received from clients, sales force, 

and peers independent of the 

investment banking department. The 

committee may not consider as a 

factor the analyst’s contributions to 

the firm’s investment banking 

business. The basis for the decision 

must be documented and an 

attestation must certify that the 

committee reviewed and approved 

the compensation and documented 

the basis.

NASD 2711(i). The firm must adopt 

and implement a written supervisory 

procedure reasonably designed to 

ensure that the firm and its 

employees comply with NASD 

2711(d)(2) and a senior officer must 

attest by April 1 annually that the 

firm has adopted and implemented 

the procedures.
Appendix II: Original and Modified Global 

Settlement Addendum Compared with NASD 

Rule 2711

Page 49 GAO-12-209 Securities Research

Topic Section Original provision

Modified provision 

following the 

2010 Order

Alternative SRO provision 

provided for judicial 

considerationa

Evaluation I.6 Investment Banking personnel may not do 

or provide input on Research personnel 

evaluations.

Removed entire 

provision.

NASD 2711(b)(1) and NASD 

2711(d)(2), as described under I.5.

Coverage I.7 Investment Banking will have no input into 

company-specific coverage decisions and 

investment banking revenues or potential 

revenues will not be taken into account in 

making company-specific coverage 

decisions. The requirement does not apply 

to category-by-category coverage 

decisions. 

Unchanged. No similar requirement.

Termination of 

coverage

I.8 When a decision is made to terminate 

coverage of a particular company in the 

firm’s research reports, the firm will make 

available a final research report on the 

company using the means of 

dissemination equivalent to those 

ordinarily used. The final report must be 

comparable to prior reports unless it is 

impracticable for the firm. The final report 

must disclose the firm’s termination of 

coverage and rationale for the decision.

No final report is required for a company 

when the firm’s prior coverage was limited 

to quantitative or technical research 

reports. 

Removed entire 

provision. 

NASD 2711(f)(5). A firm must give 

notice if it terminates its research 

coverage of a subject company. The 

firm must make available a final 

research report using the means of 

dissemination equal to those it 

ordinarily uses for research on the 

company. The report must be 

comparable in scope and detail to 

prior research reports and include a 

final recommendation or rating, 

unless it is impracticable for the firm 

to produce a comparable report. If it 

is impracticable to produce a final 

recommendation or rating, the final 

research report must disclose the 

firm’s rationale for the decision to 

terminate coverage. 

Prohibition on 

soliciting 

investment 

banking 

business 

I.9 Research is prohibited from participating 

in efforts to solicit investment banking 

business. Research may not, among other 

things, participate in any “pitches” for 

investment banking business to 

prospective investment banking clients, or 

have communications with companies for 

the purpose of soliciting investment 

banking business.

Removed entire 

provision. 

NASD 2711(c)(4). No research 

analyst may participate in efforts to 

solicit investment banking business. 

No research analyst may, among 

other things, participate in any 

“pitches” for investment banking 

business to prospective investment 

banking clients, or have other 

communications with companies for 

the purpose of soliciting investment 

banking business. 

Firewalls 

between 

Research and 

Investment 

Banking

I.10 To reduce the potential for conflicts of 

interest or the appearance of conflicts of 

interest, the firm must create and enforce 

firewalls between Research and 

Investment Banking reasonably designed 

to prohibit all communications between the 

two except as in I.10(a) through I.10(g).
Appendix II: Original and Modified Global 

Settlement Addendum Compared with NASD 

Rule 2711

Page 50 GAO-12-209 Securities Research

Topic Section Original provision

Modified provision 

following the 

2010 Order

Alternative SRO provision 

provided for judicial 

considerationa

I.10(a) Investment Banking personnel may seek, 

through Research management or in the 

presence of internal legal or compliance 

staff, the views of Research personnel 

about the merits of a proposed 

transaction, a potential candidate for a 

transaction, or market or industry trends, 

conditions or developments. Research 

personnel may respond to such inquiries 

through Research management or an 

appropriate designee or in the presence of 

internal legal or compliance staff. 

Research personnel, through Research 

management, designee or in the presence 

of internal legal or compliance staff, may 

initiate communications with Investment 

Banking personnel relating to market or 

industry trends, conditions or 

developments, provided the 

communications are consistent in nature 

with the types an analyst might have with 

investing customers. Any communication 

between Research and Investment 

Banking personnel must not be made for 

the purpose of having Research personnel 

identify specific potential investment 

banking transactions. 

Unchanged.g No similar requirement considered 

by the court.

I.10(b) In response to a request by a commitment 

or similar committee (or subgroup), 

Research personnel may communicate 

their views about a proposed transaction 

or potential candidate for a transaction to 

the committee or subgroup in connection 

with the review of the transaction or 

candidate by the committee. Investment 

Banking personnel working on the 

proposed transaction may participate with 

the Research personnel in these 

discussions. But, the Research personnel 

also must have an opportunity to express 

their views to the committee or subgroup 

outside the presence of the Investment 

Banking personnel. 

Unchanged. No similar requirement.
Appendix II: Original and Modified Global 

Settlement Addendum Compared with NASD 

Rule 2711

Page 51 GAO-12-209 Securities Research

Topic Section Original provision

Modified provision 

following the 

2010 Order

Alternative SRO provision 

provided for judicial 

considerationa

I.10(c) Research personnel may assist the firm in 

confirming the adequacy of disclosure in 

offerings or other disclosure documents 

for a transaction based on the analysts’ 

communications with the company and 

other vetting conducted outside the 

presence of Investment Banking 

personnel. However, to the extent 

communicated to Investment Banking 

personnel, the communications must only 

be made in the presence of underwriters’ 

or other counsel on the transaction or 

internal legal or compliance staff.

Modified.

The modified language 

states that Research 

personnel may assist 

the firm in confirming 

the adequacy of 

disclosure in offering or 

other disclosure 

documents for a 

transaction based on 

the analysts’ 

communications with 

the company and other 

third parties (including, 

e.g., suppliers, 

customers, 

accountants, vendors, 

and regulatory 

authorities). However, 

(i) there are restrictions 

on the 

communication’s 

purpose and those 

who may be present 

and (ii) to the extent 

such communications 

are later 

communicated by 

Research personnel to 

Investment Banking 

personnel, the 

communication must 

only be made in the 

presence of internal 

legal or compliance 

staff, or underwriters or 

other counsel on the 

transaction who are 

knowledgeable 

regarding Research 

and Investment 

Banking conflicts and 

Addendum A.

No similar requirement.
Appendix II: Original and Modified Global 

Settlement Addendum Compared with NASD 

Rule 2711

Page 52 GAO-12-209 Securities Research

Topic Section Original provision

Modified provision 

following the 

2010 Order

Alternative SRO provision 

provided for judicial 

considerationa

I.10(d) After the firm receives an Investment 

Banking mandate or in connection with a 

block bid or similar transaction, Research 

personnel may: (i) communicate views on 

pricing and structuring of the transaction to 

the firm’s equity capital market group 

personnel; (ii) provide equity capital 

markets group information obtained from 

investing customers relevant to pricing 

and structuring of the transaction; (iii) 

participate with the equity capital markets 

group, or independently, in efforts to 

educate the firm’s sales force regarding 

transactions (including assisting in 

preparation of internal-use memos), 

provided that Research personnel may not 

appear jointly with management of the 

issuer or Investment Banking personnel, 

with some exclusions, and provided that 

(1) oral communications by Research 

personnel must have a reasonable basis; 

(2) oral communication to a group of ten or 

more of the sales force must be “fair and 

balanced”h and made in the presence of 

internal legal or compliance personnel; (3) 

all internal-use memos regarding the 

transaction that are identified as being the 

views of Research personnel must comply 

with the fair and balanced standard; (4) 

internal research memos distributed to a 

group of ten or more of the firm’s sales 

force must be reviewed in advance by 

internal legal or compliance personnel; (5) 

a written log of all oral communications 

under (2) must be maintained; and (6) all 

written logs and internal Research memos 

described in (4) must be retained.

Modified.

The provision becomes 

effective also in the 

case of investment 

banking transactions 

other than initial public 

offerings and in 

connection with, 

among those previous, 

a competitive 

secondary follow-on 

offering where the 

issuer or selling 

shareholder has 

contacted the firm to 

request that the firm 

submit a transaction 

proposal.

In Section (iii)(2), the 

requirement for all oral 

communication to a 

group of ten or more of 

the firm’s sales force to 

be made in the 

presence of internal 

legal or compliance 

personnel has been 

removed.

Sections (iii)(4)-(6) 

were removed.

NASD 2711(c)(7). Any written or 

oral communication by a research 

analyst with a current or prospective 

customer or internal personnel 

related to an investment banking 

services transaction must be fair, 

balanced and not misleading, taking 

into consideration the overall context 

in which the communication is 

made. 

I.10(e) Research personnel may attend and 

participate in a widely-attended 

conference attended by Investment 

Banking personnel or in which Investment 

Banking personnel participate, as long as 

Research personnel do not participate in 

activities otherwise prohibited.

Modified.

Research personnel 

may also attend an 

“other widely attended 

event,” not just a 

“conference.”

No similar requirement.
Appendix II: Original and Modified Global 

Settlement Addendum Compared with NASD 

Rule 2711

Page 53 GAO-12-209 Securities Research

Topic Section Original provision

Modified provision 

following the 

2010 Order

Alternative SRO provision 

provided for judicial 

considerationa

I.10(f) Research and Investment Banking 

personnel may attend or participate in 

widely attended firm or regional meetings 

at which matters of general firm interest 

are discussed. Research and Investment 

Banking management may attend 

meetings or sit on firm management risk 

or compliance committees at which 

matters of general firm interest are 

discussed. Research and Investment 

Banking personnel may communicate with 

each other with respect to legal or 

compliance issues provided that internal 

legal or compliance staff is present. 

Unchanged. No similar requirement.

I.10(g) Research and Investment Banking 

personnel may communicate without 

restrictions on issues not related to 

investment banking or research activities.

Unchanged. No similar requirement.
Appendix II: Original and Modified Global 

Settlement Addendum Compared with NASD 

Rule 2711

Page 54 GAO-12-209 Securities Research

Topic Section Original provision

Modified provision 

following the 

2010 Order

Alternative SRO provision 

provided for judicial 

considerationa

Additional 

restrictions on 

activities by 

Research and 

Investment 

Banking 

personnel 

I.11 (a) Research personnel are prohibited 

from participating in company or 

Investment Banking sponsored road 

shows related to a public offering or other 

investment banking transaction.

(b) Investment Banking personnel are 

prohibited from directing Research 

personnel to engage in marketing or 

selling efforts to investors with respect to 

an investment banking transaction.

(c) After the firm receives an investment 

banking mandate relating to a public 

offering of securities, Research personnel 

may communicate with investors 

regarding the offering provided that 

Research personnel may not appear 

jointly with management of the issuer or 

Investment Banking personnel in the 

communications, and also: (1) oral 

communication by Research personnel 

with investors regarding the offering in 

which a recommendation or views (even if 

not labeled as such) is expressed by the 

Research personnel regarding the offering 

must have a reasonable basis; (2) oral 

communication to a group of 10 or more 

investors regarding the offering must 

comply with fair and balanced standards; 

(3) all oral communication to a group of 10 

or more investors must be in the presence 

of internal legal or compliance personnel; 

(4) a written log of all oral communications 

in (2) must be maintained; and (5) all 

written logs must be retained. 

Modified.

Sections (a) and (b) 

were removed.

Sections (c)(3)-(5) 

were removed. 

NASD 2711(c)(5). A research 

analyst is prohibited directly or 

indirectly from participating in a road 

show related to an investment 

banking services transaction and 

engaging in any communication with 

a current or prospective customer in 

the presence of investment banking 

department personnel or company 

management about an investment 

banking services transaction.

NASD 2711(c)(6). Investment 

banking department personnel are 

prohibited from directly or indirectly 

directing a research analyst to 

engage in sales or marketing efforts 

related to an investment banking 

services transaction and directing a 

research analyst to engage in any 

communication with a current or 

prospective customer about an 

investment banking services 

transaction. 

Oversight I.12 An oversight/monitoring committee(s), 

which will be comprised of representatives 

of Research management and may 

includes others (but not Investment

Banking personnel), will be created to: (a) 

reviews all changes in rating, and material 

changes in price targets contained in the 

firm’s research reports; (b) conduct 

periodic reviews of research reports to 

determine whether changes in ratings or 

price targets should be considered; and 

(c) monitor the overall quality and 

accuracy of the firm’s research reports. 

The reviews are not required for 

quantitative or technical research reports. 

Unchanged. No similar requirement.
Appendix II: Original and Modified Global 

Settlement Addendum Compared with NASD 

Rule 2711

Page 55 GAO-12-209 Securities Research

Topic Section Original provision

Modified provision 

following the 

2010 Order

Alternative SRO provision 

provided for judicial 

considerationa

Section II of the Addendum: disclosure reforms

Disclosures II.1 Firms must disclose prominently on the 

first page of any research report and any 

summary or listing of recommendations or 

ratings contained in previously-issued 

research reports, in type no smaller than 

the type used for the text of the report or 

summary or listing, that:

(a) “[Firm] does and seeks to do business 

with companies covered in its research 

reports. As a result, investors should be 

aware that the firm may have conflicts of 

interest that could affect the objectivity of 

this report.”

(b) With respect to Covered Companies as 

to which the firm is required to make 

available Independent Research: 

“Customers of [firm] in the United States 

can received independent, third-party 

research on the company or companies 

covered in this report, at no cost to them, 

where such research is available. 

Customers can access this independent 

research at [website address/hyperlink] or 

can call [toll-free number] to request a 

copy of the research.”

(c) “Investors should consider this report 

as only a single factor in making their 

investment decision.”

Unchanged, but the 

requirement to provide 

independent research 

has expired so the 

disclosure required by 

II.1(b) is not applicable 

at this time.

No similar requirement considered 

by the court.
Appendix II: Original and Modified Global 

Settlement Addendum Compared with NASD 

Rule 2711

Page 56 GAO-12-209 Securities Research

Topic Section Original provision

Modified provision 

following the 

2010 Order

Alternative SRO provision 

provided for judicial 

considerationa

Transparency 

of analysts’ 

performance

II.2 The firm must make publicly available no 

later than 90 days after the end of each 

quarter specific information, if included in 

any research report prepared and 

furnished by the firm during the prior 

quarter: company, names of analysts 

responsible for certification of the report 

pursuant to Regulation Analyst 

Certification, date of report, rating, price 

target, period within which the price target 

is to be achieved, earning per share 

forecast for the current and next quarter 

and current full year, and 

definition/explanation of ratings used by 

the firm.

Removed entire 

provision. 

NASD 2711(h)(4). If a research 

report contains a rating, the firm 

must define in the research report 

the meaning of each rating used by 

the firm in its rating system. The 

definition must be consistent with its 

plain meaning.

NASD 2711(h)(5). A firm must 

disclose in each research report the 

percentage of all securities that the 

firm assigned a “buy,” “hold/neutral,” 

or “sell” rating. In each report, the 

firm must disclose the percentage of 

subject companies within each of 

the three categories for whom the 

firm has provided investment 

banking services within the prior 12 

months. The information disclosed 

must be current as of the end of the 

most recent calendar quarter and 

reflect the distribution of the most 

recent ratings issued by the firm for 

all subject companies, unless the 

recent rating was issued more than 

12 months ago. But the requirement 

does not apply to any research 

report without a rating.

NASD 2711(h)(6). If a research 

report contained a rating or a price 

target and the firm has assigned a 

rating or price target to the subject 

company’s securities rating for at 

least 1 year, the research report 

must include a line graph of the 

security’s daily closing price for the 

period that the firm has assigned 

any rating or price target or for a 3-

year period, whichever is shorter.

NASD 2711(h)(7). If a research 

report contains a price target, the 

firm must disclose in the 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. 
Appendix II: Original and Modified Global 

Settlement Addendum Compared with NASD 

Rule 2711

Page 57 GAO-12-209 Securities Research

Topic Section Original provision

Modified provision 

following the 

2010 Order

Alternative SRO provision 

provided for judicial 

considerationa

Applicability II.3 Generally, Sections I and II will only apply 

to a research report this is both: (i) 

prepared by the firm; and (ii) that relates to 

either (a) a U.S. company,ior (b) a nonU.S. company for which a U.S. market is 

the principal equity trading market.j

But the 

restrictions and requirements do not apply 

to Research activities relating to a nonU.S. company until the second calendar 

quarter following the calendar quarter in 

which the U.S. market became the 

principal equity trading market for the 

company.

Additionally, Section I.7 will apply to any

research report that has been furnished by 

the firm to investors in the U.S., but not 

prepared by the firm, but only to the extent 

that the report relates to either (a) a U.S. 

company or (b) a non-U.S. company from 

which a U.S. market is the principal equity 

trading market.

Also, Section II.1 will apply to any 

research report that has been furnished by 

the firm to investors in the U.S., but not 

prepared by the firm, including a report 

that relates to a non-U.S. company for 

which a U.S. market is not the principal 

equity trading market, but only to the 

extent that the report has been furnished 

under the firm’s name, has been prepared 

for the exclusive or sole use of the firm or 

its customers, or has been customized in 

any material respect for the firm or its

customers. 

Unchanged. No similar requirement.

General II.4 A firm may not knowingly do indirectly 

what it cannot do directly.

The firm will adopt and implement policies 

and procedures reasonably designed to 

ensure that its associated persons cannot 

and do not seek to influence the content of 

a research report or activities of Research 

personnel for the purpose of obtaining or 

retaining investment banking business. 

Firm procedures will instruct firm 

personnel to immediately report to the 

firm’s legal or compliance staff any 

attempt to influence the contents of a 

research report or activities of Research 

personnel for such a purpose.

Unchanged. No similar requirement considered 

by the court.
Appendix II: Original and Modified Global 

Settlement Addendum Compared with NASD 

Rule 2711

Page 58 GAO-12-209 Securities Research

Topic Section Original provision

Modified provision 

following the 

2010 Order

Alternative SRO provision 

provided for judicial 

considerationa

Timing II.5 Provisions will generally be effective within 

120 days, with some effective within 60 

days and others effective within 270 days 

of the entry of the final judgment. 

Unchanged. No similar requirement.

Review of 

implementation

II.6 At their own expense, the firms retained 

an Independent Monitor acceptable to the 

staff of the SEC, NYSE, NASD, the 

President of NASAA and the New York 

Attorney General’s Office to conduct a 

review to provide reasonable assurance of 

the implementation and effectiveness of 

the firm’s policies and procedures 

designed to achieve compliance with the 

requirements. The review started 18 

months after the entry of the final 

judgment.k The monitors were to produce 

a report including recommendations to 

achieve compliance with the requirements 

and prohibitions. The report must be 

produced to the agencies no later than 24 

months after the final judgment. The firm 

could comment on the report prior to 

submission. The firm must adopt all 

recommendations, unless, after 

demonstration of undue burden, the 

agencies determine it is not necessary.

The Independent Monitor is restricted from 

certain other employment opportunities for 

3 years from the end of the engagement. 

Unchanged. No similar requirement.
Appendix II: Original and Modified Global 

Settlement Addendum Compared with NASD 

Rule 2711

Page 59 GAO-12-209 Securities Research

Topic Section Original provision

Modified provision 

following the 

2010 Order

Alternative SRO provision 

provided for judicial 

considerationa

Superseding 

rules and 

amendments

II.7 If the SEC adopts a rule or approves an 

SRO rule or interpretation with the stated 

intent to supersede any of the settlement 

provisions, the SEC or SRO rule or 

interpretation will govern and the 

settlement will be superseded. 

Amendments are permitted with 

appropriate court and agency permissions. 

With respect to Sections I and II that have 

not been superseded within 5 years of the 

final judgment, it is the expectation of all 

parties that the SEC would agree to an 

amendment or modification of terms, 

subject to court approval, unless the SEC 

believes they would not be in the public 

interest. 

Modified.

In addition to the 

original language, 

additional language 

was added that in the 

event of provisions 

remaining after the five 

year period, then upon 

the earlier of (i) 1 year 

following the court 

approval; or (ii) the 

effective date of new 

research rules 

proposed by FINRA 

(08-55), if such rules 

address the remaining 

provisions of the 

modified Addendum A, 

it is the expectation of 

the parties that the 

SEC would agree to a 

further amendment or 

modification of the 

agreement, subject to 

court approval, unless 

the SEC believes the 

amendment or 

modification is not in 

the public interest. 

No similar requirement.

Other 

obligations and 

requirements 

II.8 Except as otherwise specified, the 

requirements and prohibitions of the 

agreement must not relieve the firm of any 

other applicable legal obligation or 

requirement.

Unchanged. No similar requirement.

Source: GAO analysis of court documents.

a

On August 3, 2009, the Defendants made parties to Addendum A of SEC v. Bear, Stearns & Co (03 

Civ. 2937) and its associated cases (the “Case”), filed a letter brief requesting amendments and 

modifications to the Addendum A (the “Letter Brief”). The Defendants provided detailed rational for 

each request including citing the pertinent NASD or FINRA rule which the Defendants proposed was 

applicable to the same topic. On March 15, 2010, Judge William H. Pauley III “revised Addendum A 

as proposed by the parties ...” except for a requested change in Section I.10(a) which was declined.

See SEC v. Bear, Stearns & Co. Order.

b

Section I.1 includes a definition section which was not altered by the 2010 Order revising Addendum 

A. The definitions will not be discussed within this chart except where pertinent to explain another 

requirement.

c

”Research” means all firm personnel engaged principally in the preparation or publication of research 

reports, including firm personnel who are directly or indirectly supervised by such persons and those 

who directly or indirectly supervise such persons, up to and including research management. 

Addendum A at Section I.1(d).
Appendix II: Original and Modified Global 

Settlement Addendum Compared with NASD 

Rule 2711

Page 60 GAO-12-209 Securities Research

d

”Investment banking” means all firm personnel engaged principally in investment banking activities, 

including the solicitation of issuers and structuring of public offering and other investment banking 

transactions. It also includes all firm personnel who are directly or indirectly supervised by such 

persons and all personnel who directly or indirectly supervise such persons, up to and including 

Investment Banking management. Addendum A at Section I.1(c).

e

The Case Letter Brief stated that the firms “now have legal and compliance personnel who are 

experienced in monitoring compliance with the Addendum.” SEC v. Bear, Stearns & Co. Letter Brief 

at p. 5.

f

The Case Letter Brief stated that the parties to the settlement have “agreed that it would be 

consistent with the public interest to eliminate the annual Audit Committee review requirement ....” 

SEC v. Bear, Stearns & Co. Letter Brief at p. 5.

g

The Case Letter Brief requested changes to Section I.10(a) to provide that “research personnel and 

investment banking personnel may communicate with each other, outside the presence of the internal 

legal or compliance staff, regarding market or industry trends, conditions or development, provided 

that such communications are consistent in nature with the types of communications that an analyst 

might have with investing customers.” SEC v. Bear, Stearns & Co. Letter Brief (Aug. 3, 2009) at p. 5.

However, the court determined that the proposed modification “would be inconsistent with the final 

judgment and contrary to the public interest” and therefore, denied the request. SEC v. Bear, Stearns 

& Co. Order (Mar. 15, 2010) at p. 2.

h

”Fair and balanced” as defined in NASD Rule 2210(d)(1).

i

A “U.S. company” means any company incorporated in the United States or whose headquarters is in 

the U.S. Addendum A at Section II.3(b).

j

The “principal equity trading market” becomes the U.S. market in a quarter when more than 50 

percent of the worldwide trading in the company’s common stock and equivalents takes place in the 

U.S. Addendum A at Section II.3(c).

k

The “final judgment” is the date of the entry of judgment in the SEC’s action against the Defendants.

The court entered final judgments against the defendant investment banks in all but two cases 

(against Deutsche Bank Securities Inc. and Thomas Weisel Partners LLC) on October 31, 2003. The 

court entered final judgment against the remaining two on September 27, 2004.
Appendix III: Comments from the Securities 

and Exchange Commission

Page 61 GAO-12-209 Securities Research

Appendix III: Comments from the Securities 

and Exchange Commission
Appendix III: Comments from the Securities 

and Exchange Commission

Page 62 GAO-12-209 Securities Research
Appendix IV: GAO Contact and Staff 

Acknowledgments

Page 63 GAO-12-209 Securities Research

A. Nicole Clowers, (202) 512-8678 or clowersa@gao.gov

In addition to the contact named above, Richard Tsuhara, Assistant 

Director; Rachel DeMarcus; Lawrance Evans Jr.; Tiffani Humble; Jim 

Lager; Marc W. Molino; Angela Pun; Barbara Roesmann; Jessica 

Sandler; and Cynthia Saunders made key contributions to this report. 

Appendix IV: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments
Bibliography

Page 64 GAO-12-209 Securities Research

Barber, Brad, M. Reuven Lehavy, Maureen McNichols, and Brett 

Trueman. “Buys, Holds, and Sells: The Distribution of Investment Banks’

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Barniv, Ran, Ole-Kristian Hope, Mark J. Myring, and Wayne B. Thomas. 

“Do Analysts Practice What They Preach and Should Investors Listen? 

Effects of Recent Regulations.” The Accounting Review, vol. 84, no. 4 

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Boni, Leslie. Analyzing the Analysts after the Global Settlement, working 

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Chen, Chih-Ying and Peter F. Chen. “NASD Rule 2711 and Changes in 

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Clarke, Jonathan E., Ajay Khorana, Ajay Patel, and P. Raghavendra Rau. 

“Independents’ Day? Analyst Behavior Surrounding the Global 

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Guan, Yuyan, Hai Lu, and M.H. Franco Wong. “Conflict-of-Interest 

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