Document ID: SEC-2006-1374-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange LLC et al.
Posted Date: 2006-10-24T04:00Z

[Federal Register: October 24, 2006 (Volume 71, Number 205)]
[Notices]               
[Page 62331-62338]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24oc06-97]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54616; File Nos. SR-NYSE-2006-77; SR-NASD-2006-112]

 
Self-Regulatory Organizations; New York Stock Exchange LLC and 
the National Association of Securities Dealers, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Changes Relating to NYSE 
Rule 472 and NASD Rule 2711

October 17, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 27, 2006, the New York Stock Exchange LLC (``NYSE'' or the 
``Exchange'') and the National Association of Securities Dealers, Inc. 
(``NASD'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule changes as described in Items I, 
II, and III below, which Items have been prepared by the respective 
self-regulatory organizations. The NYSE and NASD (the ``SROs'') have 
filed the proposed rule changes as constituting a stated policy, 
practice, or interpretation with respect to the meaning, 
administration, or enforcement of existing rules pursuant to Section 
19(b)(3)(A) of the Act \3 \and Rule 19b-4(f)(1) thereunder,\4\ which 
renders them effective upon filing with the Commission. The Commission 
is publishing this notice to solicit comments on the proposed rule 
changes from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(1).
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I. Self-Regulatory Organizations' Statements of the Terms of Substance 
of the Proposed Rule Changes

    The Exchange proposes to amend NYSE Rule 472 to codify the 
Exchange's existing interpretive guidance relating to certain 
provisions of the rule and to make certain non-substantive, technical 
changes to the rule's text. The text of the proposed rule change is 
available on NYSE's Web site, http://www.nyse.com, at the NYSE's Office 

of the Secretary, and at the Commission's Public Reference Room.
    NASD is proposing to amend NASD Rule 2711 to codify NASD's existing 
interpretive guidance relating to certain provisions of the rule and to 
make several non-substantive, technical changes to clarify the rule's 
intended meaning. The text of the proposed rule change is attached as 
Exhibit 5 to the NASD's rule filing.

II. Self-Regulatory Organizations' Statements of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

    In their filings with the Commission, the NYSE and NASD included 
statements concerning the purpose of and basis for the proposed rule 
changes and discussed any comments they received on the proposed rule 
changes. The text of these statements may be examined at the places 
specified in Item IV below. The NYSE and NASD have prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

A. Self-Regulatory Organizations' Statements of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

(1) NYSE's Purpose
Background
    NYSE Rule 472 is, in significant part, intended to improve the 
objectivity of research by requiring that investors be provided with 
conflict disclosures as well as other useful and reliable information 
with which to make investment decisions. Specifically, NYSE Rule 472 
restricts the interaction between research departments and investment 
banking personnel; requires disclosure of financial interests in 
covered companies by the analyst and

[[Page 62332]]

the firm; requires disclosure of existing and potential investment 
banking relationships with subject companies; imposes quiet periods for 
issuance of research reports; restricts personal trading by analysts; 
requires disclosure of information that helps investors track the 
correlation between an analyst's rating and the stock's price 
movements; requires that a compensation committee, without investment 
banking representation, review and approve compensation of research 
analysts; prohibits research analysts from participating in the 
solicitation of investment banking business; and prohibits research 
analysts from participating in road shows related to investment banking 
transactions.
    Since the 2002 amendments to NYSE Rule 472,\5\ the Exchange has 
jointly published with NASD two memoranda that provide interpretive 
guidance to member organizations on a number of issues relating to NYSE 
Rule 472 and NASD's corresponding Rule 2711.\6\ Further, on December 
21, 2005, the Exchange and the NASD submitted to the Commission a joint 
report on the operation and effectiveness of their respective rules 
relating to research analyst conflicts of interest (the ``SRO 
Report''). Among the recommendations included in the SRO Report is that 
certain interpretations set forth in the two joint memoranda be 
codified as rule text. Accordingly, the Exchange is herein proposing 
amendments to NYSE Rule 472 consistent with these recommendations.\7\
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    \5\ See Securities Exchange Act Release No. 45908 (May 10, 
2002), 67 FR 34968 (May 16, 2002) (order approving SR-NYSE-2002-09).
    \6\ See NYSE Information Memo 02-26 (June 26, 2002) and NYSE 
Information Memo 04-10 (March 9, 2004).
    \7\ The SRO Report also recommended a number of substantive rule 
changes that extend beyond codifying existing interpretations of the 
provisions of NYSE Rule 472. As such, those changes are not included 
in this proposed rule change, which will take effect upon filing 
with the Commission pursuant to Section 19(b)(3)(A)(i) of the Act. 
Contemporaneously herewith, the Exchange filed a separate proposed 
rule change to implement those additional proposed amendments to 
NYSE Rule 472, SR-NYSE-2006-78.
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    Specifically, the Exchange is proposing to amend NYSE Rule 472 to 
reflect the interpretive guidance relating to (1) The definition of the 
term ``public appearance,'' (2) the definition of the term ``research 
report,'' (3) the definition of the term ``investment banking 
services,'' (4) the definition of the term ``household member,'' (5) 
the definition of the term ``equity security,'' (6) certain disclosure 
requirements, (7) compendium reports and (8) third-party research. In 
addition, the Exchange is proposing non-substantive, technical changes 
to NYSE Rule 472 where necessary to clarify the rule's intended 
meaning.
Definition of ``Public Appearance''
    NYSE Rule 472.50 currently defines ``public appearance'' as any 
participation in a seminar, forum (including an interactive electronic 
forum), radio, television or print media interview, or other public 
speaking activity, or the writing of a print media article, in which a 
research analyst makes a recommendation or offers an opinion concerning 
an equity security.
    The proposed rule change codifies existing interpretive guidance to 
NYSE Rule 472 which will:
    (1) Include ``conference calls'' in the definition of ``public 
appearance.'' \8\
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    \8\ See NYSE Information Memo 02-26.
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    (2) Provide that a conference call, seminar, forum (including an 
interactive electronic forum) or other public speaking activity in 
which a research analyst makes a recommendation or offers an opinion 
concerning an equity security constitutes a public appearance only if 
presented before fifteen (15) or more persons (the ``15-person 
standard'').\9\ If a member organization can reasonably ascertain at a 
public speaking activity before fifteen (15) or more persons that those 
persons represent less than fifteen (15) separate investors, then it 
will not constitute a public appearance. The NYSE believes the 15-
person standard is consistent with the proposed rule change to amend 
the definition of ``research report'' in NYSE Rule 472 (discussed 
below) and SEC Regulation Analyst Certification (``Regulation 
AC'').\10\
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    \9\ See NYSE Information Memo 04-10.
    \10\ 17 CFR 242.500 et seq.
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    (3) Clarify that any conference call, seminar, forum (including an 
interactive electronic forum) or other public speaking activity in 
which a research analyst makes a recommendation or offers an opinion 
concerning an equity security before one or more representatives of the 
media constitutes a public appearance. Thus, a public speaking activity 
attended by at least one (1) representative of the media is a ``public 
appearance'' even if there are only three (3) other persons in 
attendance. The NYSE believes this interpretation is consistent with 
the current definition of ``public appearance'' which expressly 
includes radio, television and print media interviews because the media 
are a conduit to the public.
    (4) Exclude from the definition of ``public appearance'' password-
protected Webcasts, conference calls and similar events with fifteen 
(15) or more existing customers (either individuals or entities), 
provided that:
    (a) The event participants have previously received the most 
current research report or other documentation pertaining to the equity 
security in question that includes the disclosures required by NYSE 
Rule 472; and
    (b) The research analyst appearing at the event corrects or updates 
during the public appearance any disclosures that are inaccurate, 
misleading or no longer applicable.\11\
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    \11\ See NYSE Information Memo 04-10.
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Definition of ``Research Report''
    NYSE Rule 472.10(2) currently defines the term ``research report'' 
as a written or electronic communication which includes an analysis of 
equity securities of individual companies or industries, and provides 
information reasonably sufficient upon which to base an investment 
decision.
    The proposed rule change would exclude from the definition of 
``research report'' the following communications: (1) Reports 
discussing broad-based indices, such as the Russell 2000 or S&P 500 
index; (2) reports commenting on economic, political or market 
conditions; (3) technical analysis concerning the demand and supply for 
a sector, index or industry based on trading volume and price; (4) 
statistical summaries of multiple companies' financial data, including 
listings of current ratings; (5) reports that recommend increasing or 
decreasing holdings in particular industries or sectors; and (6) 
notices of ratings or price target changes, provided that the member 
organization simultaneously directs the readers of the notice to the 
most recent research report on the subject company that includes all 
current applicable disclosures required by NYSE Rule 472 and that such 
research report does not contain materially misleading disclosure, 
including disclosures that are outdated or no longer applicable.\12\
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    \12\ The NYSE believes that these exclusions essentially 
parallel those contained in SEC Regulation AC and the terms of the 
Research Analyst Global Settlement, an agreement among NASD, NYSE, 
the SEC, the North American Securities Administrators Association 
and twelve of the largest investment banks to resolve allegations 
regarding biased research. (See also NYSE Information Memos 02-26 
and 04-10).
    The Exchange notes that the proposed rule language to codify 
these interpretations may not be identical to that in the joint 
memoranda. The changes reflect, in part, the fact that the 
definition of ``research report'' was subsequently amended and no 
longer requires a recommendation. Also, in some instances, the 
Exchange has chosen language more appropriate for rule text. To the 
extent there are discrepancies, unless otherwise noted, the 
substance of the existing interpretations is not intended to be 
different than those set forth in the joint memoranda.

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[[Page 62333]]

    The proposed rule change would codify an additional exclusion from 
the definition of ``research report'' for the following communications, 
even if they include an analysis of an individual security and 
information reasonably sufficient upon which to base an investment 
decision: (1) Any communication distributed to fewer than fifteen (15) 
persons; (2) periodic reports or other communications prepared for 
investment company shareholders or discretionary investment account 
clients that discuss individual securities in the context of a fund's 
or an account's past performance or the basis for previously made 
discretionary investment decisions; and (3) internal communications 
that are not given to customers. Thus, NYSE believes that, for example, 
a manager's discussion of fund performance in a mutual fund shareholder 
report would not constitute a research report.\13\
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    \13\ The NYSE believes that these exclusions parallel those 
contained in SEC Regulation AC. (See NYSE Information Memo 04-10).
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    Additionally, the proposed rule change would codify an 
interpretation that communications that constitute statutory 
prospectuses that are filed as part of the registration statement are 
not considered ``research reports,'' even if they otherwise satisfy the 
definitional elements. The NYSE believes this exemption recognizes that 
prospectuses serve different purposes than research reports and, thus, 
are subject to a separate comprehensive regulatory scheme.
Definition of ``Investment Banking Services''
    Under current NYSE Rule 472.20, the term ``investment banking 
services'' includes acting as an underwriter in an offering for the 
issuer; acting as a financial adviser in a merger or acquisition; 
providing venture capital, equity lines of credit, PIPEs, or similar 
investments; or serving as a placement agent for the issuer.
    The proposed rule change would codify existing interpretive 
guidance that the definition of ``investment banking services'' also 
includes acting as a member of a selling group in a securities 
underwriting.\14\
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    \14\ See NYSE Information Memo 02-26.
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Definition of ``Household Member''
    Exchange Rule 472.40 currently defines the term ``household 
member'' to include any individual whose principal residence is the 
same as the research analyst's principal residence.
    The proposed rule change would codify that the definition of 
``household member'' does not include an unrelated person who shares 
the same residence as a research analyst provided that the research 
analyst and unrelated person are financially independent of one 
another. Thus, according to the NYSE, for example, an analyst's 
roommate or apartment mate, who is financially independent of the 
analyst, would not be considered a ``household member'' for purposes of 
the restrictions on personal trading and disclosure requirements in 
NYSE Rule 472.\15\
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    \15\ See NYSE Information Memo 02-26.
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Definition of ``Equity Security''
    Currently, ``equity security'' is not defined in NYSE Rule 472. The 
proposed rule change would add ``equity security'' as a defined term in 
paragraph 472.140 and would codify existing interpretive guidance that, 
for purposes of this rule, the term has the meaning ascribed to it in 
Section 3(a)(11) \16\ of the Securities Exchange Act of 1934.\17\
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    \16\ 15 U.S.C. 78c(a)(11).
    \17\ See NYSE Information Memo 02-26 and 04-10.
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Disclosure Requirements
    NYSE Rule 472(k) sets forth a number of disclosure requirements for 
research reports and for public appearances by research analysts. In 
addition to disclosures relating to conflicts, this provision requires 
that a member organization disclose the meanings of ratings used in the 
member organization's rating system, the distribution of buy, hold, and 
sell ratings assigned by the member organization, and a price chart 
that plots the assignment or changes of the analyst's ratings and price 
targets for the subject company against the movement of the subject 
company's stock price over time. NYSE Rule 472.70 supplements this 
provision stating that the ratings disclosures be current as of the end 
of the most recent calendar quarter (or the second most recent calendar 
quarter if the publication date is less than fifteen (15) calendar days 
after the most recent calendar quarter).
    The NYSE believes the proposed rule change to amend NYSE Rule 472 
would clarify the existing requirement that the ratings distribution in 
a research report should reflect the current distribution of the most 
recent ratings that the member organization has issued for all subject 
companies, within the previous twelve (12) months.\18\
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    \18\ See NYSE Information Memo 04-10.
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    In addition, the proposed rule change would amend NYSE Rule 
472(k)(1)(i)h to clarify that a price chart is required only if a 
research report contains either a rating or a price target, and the 
member organization has assigned a rating or price target to the 
subject company for at least one (1) year.\19\
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    \19\ See NYSE Information Memo 02-26.
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    The proposed rule change would also make certain non-substantive, 
technical changes to the disclosure requirements of NYSE Rule 472 in 
order to clarify that such disclosures are required only in certain 
research reports. Specifically, the proposed rule change would amend 
NYSE Rule 472 to clarify that: (1) A research report must disclose the 
meanings of ratings used in the member organization's ratings system 
only if the report contains a rating of the subject company's stock; 
(2) a research report must disclose the member organization's ratings 
distribution information only if the report contains a rating; and (3) 
a research report must disclose valuation methods used in determining 
price targets only if the report contains a price target.
Compendium Reports
    NYSE Rule 472(k)(1)(iii)d provides that when a member organization 
distributes a research report covering six or more companies, for 
purposes of the rule's disclosure requirements, such report may direct 
the reader in a clear manner to the applicable current disclosures in 
written or electronic format.
    The proposed rule change would codify the existing interpretation 
that an electronic compendium report--a research report covering six 
(6) or more subject companies--may include a hyperlink to the required 
disclosures. A paper-based compendium report must provide either a 
toll-free number to call or a postal address to write for the required 
disclosures and may also include a Web address of the member 
organization where the disclosures can be found.\20\
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    \20\ See NYSE Information Memo 02-26.
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Third-Party Research
    First, the proposed rule change would add new paragraph (k)(4) 
(``Third-Party Research Reports'') to NYSE Rule 472 to codify existing 
interpretative guidance that when a member organization distributes 
research produced by another member organization, a non-member 
organization affiliate (e.g., a foreign broker-dealer or an investment 
adviser) or an independent third party, the member organization must 
disclose: (1) The member organization's and its affiliate's ownership 
of the subject company's securities, pursuant to NYSE

[[Page 62334]]

Rule 472(k)(1)(i)c; (2) the member organization's and its affiliate's 
investment banking relationships with the subject company, pursuant to 
NYSE Rule 472(k)(1)(i)a; (3) the member organization's market making 
activities in the subject company's securities, pursuant to NYSE Rule 
472(k)(1)(i)b; and (4) any other actual, material conflict of interest 
of the analyst or member organization, pursuant to NYSE Rule 
472(k)(1)(iii)d (the ``third-party disclosures'').\21\ Where a member 
organization distributes another member organization's research report, 
the distributing member organization must include the third-party 
disclosures as they pertain to the distributing member organization's 
relationship to the subject company, whereas the member organization 
whose report is being distributed is subject to all disclosure 
requirements under NYSE Rule 472.\22\
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    \21\ See NYSE Information Memos 02-26 and 04-10.
    \22\ See NYSE Information Memos 02-26 and 04-10.
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    Second, the proposed rule change clarifies that the third-party 
disclosures noted above shall not apply to research prepared by an 
independent third-party that the member organization makes available to 
its customers either upon request or through a member organization-
maintained Web site. However, according to the NYSE, a member 
organization that makes a non-member organization affiliate's research 
report available to its customers upon request or through its Web site 
must include the third-party disclosures.
    Third, the amendments set forth the review and approval 
requirements for third-party research distributed by a member 
organization. The amended rule provides that a supervisory analyst 
qualified under NYSE Rule 344 must approve, pursuant to NYSE Rule 
472(a)(2), by signature or initial, any third-party research 
distributed by a member organization. In addition, a supervisory 
analyst or qualified person designated pursuant to NYSE Rule 342(b)(1) 
(e.g., a person who has taken and passed the Series 9/10, or another 
examination acceptable to the Exchange which demonstrates competency 
relevant to assigned responsibilities, including the Series 24 if taken 
and passed after July 1, 2001) must review third-party research 
distributed by a member organization to determine that the third-party 
disclosures are complete and accurate, and that the content of the 
research report is consistent with all applicable standards regarding 
communications with the public.
    The joint interpretive memoranda indicate that distribution of 
independent third-party research through a soft-dollar arrangement is 
not encompassed by the disclosure requirements. The proposed rule 
change would supersede this interpretation. Thus, when a member 
organization distributes independent third-party research through a 
soft-dollar arrangement, the third-party disclosure requirements would 
apply, unless another exception is available (e.g., where such research 
is provided upon customer request or furnished directly by the research 
provider to the customer).\23\
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    \23\ A ``soft-dollar'' arrangement involves an agreement whereby 
a money manager receives research or brokerage services from a 
broker-dealer in exchange for brokerage commissions from 
transactions for clients' accounts. In furnishing research, the 
broker-dealer may produce it in-house or obtain it from a third-
party.
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Other Changes
    In addition, changes are proposed to delete the term ``member'' as 
used in NYSE Rule 472 to reflect the recent reorganization of the 
Exchange.\24\
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    \24\ See Securities Exchange Act Release No. 53382 (February 27, 
2006), 71 FR 11251 (March 6, 2006) (order approving SR-NYSE-2005-
77).
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    The Exchange has filed the proposed rule change for immediate 
effectiveness. The effective date and the implementation date will be 
the date of the filing.
(2) NYSE's Statutory Basis
    The statutory basis for the proposed rule change is Section 6(b)(5) 
\25\ of the Act which requires, among other things, that the rules of 
the Exchange are designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to 
perfect the mechanism of a free and open market and national market 
system, and in general to protect investors and the public interest. 
The Exchange believes that the proposed rule change will enhance the 
clarity and consistency of the research analyst rules, thereby 
facilitating the goals of reducing conflicts of interest and fraudulent 
and manipulative practices, and providing investors with more 
objective, reliable information upon which to base investment 
decisions.
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    \25\ 15 U.S.C. 78f(b)(5).
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(3) NASD's Purpose
    NASD Rule 2711 (Research Analysts and Research Reports) is intended 
to improve the objectivity of research and provide investors with 
important conflicts disclosures and other useful and reliable 
information with which to make investment decisions. Generally, NASD 
Rule 2711 restricts the relationship between research and investment 
banking; requires disclosure of financial interests in covered 
companies by the analyst and the firm; requires disclosure of existing 
and potential investment banking relationships with subject companies; 
imposes quiet periods for issuance of research reports; restricts 
personal trading by analysts; requires disclosure of information that 
helps investors track the correlation between an analyst's rating and 
the stock's price movements; requires that a compensation committee, 
without investment banking representation, review and approve 
compensation of research analysts; prohibits research analysts from 
participating in the solicitation of investment banking business; and 
prohibits research analysts from participating in road shows related to 
investment banking transactions.
    Since adoption of the rule in 2002,\26\ NASD has jointly published 
with the New York Stock Exchange (``NYSE'') two memoranda that provide 
interpretive guidance to members on a number of issues relating to the 
rule. See NASD Notice to Members 02-39 (July 2002) and NASD Notice to 
Members 04-18 (March 2004). On December 21, 2005, NASD and the NYSE 
submitted to the Commission a joint report on the operation and 
effectiveness of the SRO rules relating to research analyst conflicts 
of interest (the ``SRO Report''). In connection with that report, NASD 
staff performed a detailed review of NASD Rule 2711 and recommended 
various rule changes, among them, codifying certain existing 
interpretations.\27\
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    \26\ See Securities Exchange Act Release No. 45908 (May 10, 
2002), 67 FR 34968 (May 16, 2002) (order approving SR-NASD-2002-
021).
    \27\ The SRO Report also recommended a number of substantive 
rule changes that extend beyond codifying existing interpretations 
of the provisions of Rule 2711. Those changes are not included in 
this proposed rule change, but are the subject of a separate 
proposed rule change SR-NASD-2006-113, which has been filed 
contemporaneously herewith.
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    The proposed rule change would make express in NASD Rule 2711 a 
number of existing interpretations, most of which have previously been 
set forth in the two joint interpretive memoranda. Specifically, NASD 
is

[[Page 62335]]

proposing to amend NASD Rule 2711 to make express in the rule language 
the interpretive guidance contained in Notice to Members 02-39 and 
Notice to Members 04-18 relating to (1) the definition of ``equity 
security,'' (2) the definition of ``investment banking services,'' (3) 
the definition of ``member of a research analyst's household,'' (4) the 
definition of ``public appearance,'' (5) the definition of ``research 
report,'' (6) certain disclosure requirements, (7) compendium reports 
and (8) third-party research. In addition, NASD is proposing non-
substantive, technical changes to NASD Rule 2711 where necessary to 
clarify the rule's intended meaning.
Definition of ``Equity Security''
    Currently, ``equity security'' is not defined in NASD Rule 2711. 
The proposed rule change would add ``equity security'' as a defined 
term in paragraph (a)(1) and would codify existing interpretive 
guidance that for purposes of this rule, the term has the meaning 
ascribed to it in Section 3(a)(11) of the Securities Exchange Act of 
1934, 15 U.S.C. 78c(a)(11). See Notice to Members 02-39.
Definition of ``Investment Banking Services''
    NASD Rule 2711(a)(2) defines ``investment banking services'' to 
include, without limitation, acting as an underwriter in an offering 
for the issuer; acting as a financial adviser in a merger or 
acquisition; providing venture capital, equity lines of credit, PIPEs 
or similar investments; or serving as placement agent for the issuer.
    The proposed rule change would renumber paragraph (a)(2) as 
paragraph (a)(3) in light of the rule change discussed above and would 
codify an existing interpretation that the definition of ``investment 
banking services'' also includes acting as a member of a selling group 
in a securities underwriting. See Notice to Members 02-39. 
Additionally, the proposed rule change would make a technical change to 
clarify that the acronym PIPE stands for ``private investment, public 
equity transactions.''
Definition of ``Member of a Research Analyst's Household''
    NASD Rule 2711(a)(3) defines a ``member of a research analyst's 
household'' as any individual whose principal residence is the same as 
the research analyst's principal residence.
    The proposed rule change would renumber paragraph (a)(3) as 
paragraph (a)(4) in light of the rule change discussed above and would 
codify an existing interpretation that excludes from this definition 
any unrelated person who shares the same residence as a research 
analyst provided that the research analyst and unrelated person are 
financially independent of one another. Thus, according to NASD, for 
example, an analyst's roommate or apartment-mate, who is financially 
independent of the analyst, would not be considered a member of the 
analyst's household for purposes of the restrictions on personal 
trading and disclosure requirements in NASD Rule 2711. See Notice to 
Members 02-39.
Definition of ``Public Appearance''
    NASD Rule 2711(a)(4) defines ``public appearance'' as any 
participation in a seminar, forum (including an interactive electronic 
forum), radio, television or print media interview, or other public 
speaking activity, or the writing of a print media article, in which a 
research analyst makes a recommendation or offers an opinion concerning 
an equity security.
    The proposed rule change would renumber paragraph (a)(4) as 
paragraph (a)(5) in light of the rule change discussed above and would 
codify several existing interpretations relating to the definition of 
``public appearance.'' First, NASD proposes to include conference calls 
in the definition. See Notice to Members 02-39.
    Second, NASD proposes to amend the definition to expressly provide 
that only a conference call, seminar, forum (including an interactive 
electronic forum) or other public speaking activity before 15 or more 
persons constitutes a ``public appearance.'' NASD believes this 15-
person standard is consistent with SEC Regulation Analyst Certification 
(``Regulation AC'') and the proposed amendment to the definition of 
``research report'' under NASD Rule 2711 (discussed below). See Notice 
to Members 04-18. As set forth in Notice to Members 04-18, the 15-
person standard applies to separate investors. Thus, according to NASD, 
where a research analyst can ascertain at a public speaking activity 
before 15 or more individuals that those individuals represent fewer 
than 15 separate investors, then such activity would not constitute a 
``public appearance.''
    Third, the proposed rule change would amend the definition to 
provide that any conference call, seminar, forum or other public 
speaking activity before one or more representatives of the media 
constitutes a ``public appearance'' if the research analyst makes a 
recommendation or offers an opinion concerning an equity security. See 
Notice to Members 04-18. Thus, according to NASD, even if there are 
only five persons in attendance at a public speaking activity, if one 
of those persons is a representative of the media, the event will be a 
``public appearance.'' NASD believes this interpretation is consistent 
with the current definition, which expressly includes radio, television 
and print media interviews because the media are a conduit to the 
public.
    Finally, NASD proposes to exclude from the definition password-
protected Webcasts, conference calls and similar events with 15 or more 
existing customers (either individuals or entities), provided that the 
event participants have previously received the most current research 
report or other documentation that includes the disclosures required by 
NASD Rule 2711 and the research analyst appearing at the event corrects 
or updates during the public appearance any disclosures that are 
inaccurate, misleading or no longer applicable. See Notice to Members 
04-18.
Definition of ``Research Report''
    NASD Rule 2711(a)(8) defines ``research report'' as a written or 
electronic communication that includes an analysis of equity securities 
of individual companies or industries, and that provides information 
reasonably sufficient upon which to base an investment decision.
    The proposed rule change would renumber paragraph (a)(8) as 
paragraph (a)(9) in light of the rule change discussed above and would 
codify an existing interpretation that communications that are limited 
to the following do not meet the definition of ``research report'': (1) 
Discussions of broad-based indices, such as the Russell 2000 or S&P 500 
index; (2) commentaries on economic, political or market conditions; 
(3) technical analyses concerning the demand and supply for a sector, 
index or industry based on trading volume and price; (4) statistical 
summaries of multiple companies' financial data, including listings of 
current ratings; (5) recommendations regarding increasing or decreasing 
holdings in particular industries or sectors; and (6) notices of 
ratings or price target changes, provided that the member 
simultaneously directs the readers of the notice to the most recent 
research report on the subject company that includes all current 
applicable disclosures required by NASD Rule 2711 and that such 
research report does not contain materially misleading disclosure, 
including disclosures that are outdated or no

[[Page 62336]]

longer applicable. See Notice to Members 02-39.\28\
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    \28\ NASD believes that these exclusions essentially parallel 
those contained in SEC Regulation AC and the terms of the so-called 
``Global Settlement,'' an agreement among NASD, NYSE, the SEC, the 
North American Securities Administrators Association and ten of the 
largest investment banks to resolve allegations regarding biased 
research.
    NASD notes that the proposed rule language to codify these 
interpretations is not identical to that in the joint memoranda. The 
changes reflect, in part, the fact that the definition of ``research 
report'' was subsequently amended and no longer requires a 
recommendation. Also, in some instances, NASD has chosen language 
more appropriate for rule text. In any event, unless otherwise 
noted, the substance of the existing interpretations are not 
intended to be different than those set forth in the joint 
memoranda.
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    In addition, the proposed rule change would codify three exclusions 
from the definition of ``research report'' for certain communications, 
even if they include an analysis of an individual equity security and 
information reasonably sufficient upon which to base an investment 
decision. First, NASD proposes to exclude any communication distributed 
to fewer than 15 persons. See Notice to Members 04-18.\29\ This 
exclusion supersedes the interpretive guidance provided in Notice to 
Members 02-39 that an analysis prepared by a registered representative 
for a specific customer's account would not be considered a research 
report. Second, NASD proposes to exclude periodic reports or other 
communications prepared for investment company shareholders or 
discretionary investment account clients that discuss individual 
securities in the context of a fund's or an account's past performance 
or the basis for previously made discretionary investment decisions. 
Thus, NASD believes that, for example, a manager's discussion of fund 
performance in a mutual fund shareholder report would not constitute a 
research report. See Notice to Members 04-18.\30\ Third, NASD proposes 
to exclude from the definition internal communications that are not 
given to current or prospective customers. See Notice to Members 02-
39.\31\
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    \29\ NASD believes that this exclusion parallels SEC Regulation 
AC.
    \30\ NASD believes that this exclusion parallels SEC Regulation 
AC.
    \31\ NASD believes that this exclusion parallels SEC Regulation 
AC.
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    Additionally, the proposed rule change would codify an 
interpretation that communications that constitute statutory 
prospectuses that are filed as part of the registration statement are 
not considered ``research reports,'' even if they meet the definitional 
elements. NASD believes prospectuses serve different purposes than 
research reports and are subject to a separate comprehensive regulatory 
scheme.
    NASD is also proposing a non-substantive, technical change to the 
definition of ``research report'' to clarify that written 
communications include electronic communications. NASD believes that 
this change would be consistent with the definition of ``research 
report'' in SEC Regulation AC.
Disclosure Requirements
    NASD Rule 2711(h) sets forth a number of disclosure requirements 
for research reports and public appearances by research analysts. In 
addition to disclosures relating to conflicts, this provision requires 
that a member disclose the meanings of ratings used in the member's 
rating system, the distribution of buy, hold, and sell ratings assigned 
by the member, and a price chart that plots the assignment or changes 
of the analyst's ratings and price targets for the subject company 
against the movement of the subject company's stock price over time.
    The proposed rule change would amend NASD Rule 2711(h)(5) to codify 
the existing interpretation that the ratings distribution should 
reflect the current distribution of the most recent ratings that the 
member has issued for all subject companies, unless the most recent 
rating was issued more than 12 months ago. See Notice to Members 04-18. 
In addition, the proposed rule change would amend NASD Rule 2711(h)(6) 
to clarify that a price chart is required if a research report contains 
either a rating or a price target; however, a member is not required to 
provide a price chart if the research report does not include a rating 
or price target. See Notice to Members 04-18.
    The proposed rule change would also make certain non-substantive, 
technical changes to the disclosure requirements of NASD Rule 2711(h) 
in order to clarify that such disclosures are required only in certain 
research reports. Specifically, NASD proposes to amend: (1) NASD Rule 
2711(h)(4) to clarify that a research report must disclose the meanings 
of ratings used in the member's ratings system only if the report 
contains a rating of the subject company's stock; (2) NASD Rule 
2711(h)(5) to clarify that a research report must disclose the member's 
ratings distribution information only if the report contains a rating; 
and (3) NASD Rule 2711(h)(7) to clarify that a research report must 
disclose valuation methods used in determining price targets only if 
the report contains a price target.
Compendium Reports
    NASD Rule 2711(h)(11) provides that when a member distributes a 
research report covering six or more companies, for purposes of the 
rule's disclosure requirements, such report may direct the reader in a 
clear manner as to where the reader may obtain the applicable current 
disclosures in written or electronic format.
    The proposed rule change would codify the existing interpretation 
that an electronic compendium report--a research report covering six or 
more subject companies--may include a hyperlink to the required 
disclosures. A paper-based compendium report must provide either a 
toll-free number to call or a postal address to write for the required 
disclosures and may also include a Web address of the member where the 
disclosures can be found. See Notice to Members 02-39.
Third-Party Research
    The proposed rule change would add new paragraph (h)(13) to NASD 
Rule 2711 to codify the existing interpretive guidance relating to 
members' disclosure obligations in the context of distributing third-
party research. Proposed new paragraph (h)(13)(A) would make express 
the existing interpretation that when a member distributes research 
produced by another member, a non-member affiliate (e.g., a foreign 
broker-dealer or an investment adviser) or an independent third party, 
the member must disclose (1) The member's and its affiliate's ownership 
of the subject company's securities, pursuant to NASD Rule 
2711(h)(1)(B); (2) the member's and its affiliate's investment banking 
relationships with the subject company, pursuant to NASD Rule 
2711(h)(2)(A)(ii); (3) the member's market making activities in the 
subject company's securities, pursuant to NASD Rule 2711(h)(8); and (4) 
any other actual, material conflict of interest of the analyst or 
member, pursuant to NASD Rule 2711(h)(1)(C) (the ``third-party 
disclosures''). Thus, according to NASD, when a member distributes 
another member's research report, the distributing member must include 
the third-party disclosures as pertains to the distributing member's 
relationship to the subject company, while the member whose report is 
being distributed must comply with all of the disclosure requirements 
under NASD Rule 2711. See Notice to Members 02-39 and Notice to Members 
4-18.\32\
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    \32\ New paragraph (h)(13) and existing paragraphs (h)(1)(C), 
(h)(2)(A)(ii) and (h)(8) of NASD Rule 2711 will be renumbered 
pursuant to related rule filing SR-NASD-2006-113, discussed herein 
at note 27.

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[[Page 62337]]

    The joint interpretive memoranda indicate that distribution of 
independent third-party research through a soft-dollar arrangement is 
not encompassed by the disclosure requirements. According to NASD, the 
proposed rule change would supersede this interpretation. Thus, NASD 
believes that when a member distributes independent third-party 
research through a soft-dollar arrangement, the third-party disclosure 
requirements would apply, unless another exception is available (e.g., 
where such research is provided upon customer request).
    The proposed rule change would codify the existing interpretation 
that a member is not required to make the third-party disclosures when 
the member makes independent third-party research reports available to 
its customers upon request or through a member-maintained Web site. See 
Notice to Members 02-39 and Notice to Members 04-18. However, a member 
that makes a non-member affiliate's research report available to its 
customers upon request or through its Web site must include the third-
party disclosures. See Notice to Members 04-18.
    Finally, NASD believes that consistent with the requirements of 
NASD Rule 2210(b)(1), the proposed rule change would clarify that a 
registered principal must approve by signature or initial any third-
party research distributed by a member. This requirement may be met by 
the signature or initial of a supervisory analyst approved pursuant to 
Rule 344 of the New York Stock Exchange (i.e., a Series 16 Supervisory 
Analyst). All third-party research distributed by a member must be 
reviewed by the designated principal (or Series 16 Supervisory Analyst, 
as the case may be) to determine that the applicable disclosures 
required by NASD Rule 2711 are complete and accurate, and the content 
of the research report is consistent with all applicable standards 
regarding communications with the public.
    With respect to research reports prepared by a member, NASD reminds 
members that the content of the research report must be approved by an 
individual who has passed either (1) the Series 24 and the Series 87 or 
(2) the Series 16. If the member elects to have a Series 16 approve the 
content of research, then a Series 24 principal who has also passed 
either the Series 87 or the Series 16 must supervise the conduct of 
both the Series 16 Supervisory Analyst and the research analyst. See 
NASD Rule 1022(a)(5) and NASD Notice to Members 04-81 (November 2004). 
Similar to the approach set forth above regarding the approval of 
third-party research, NASD will permit any registered principal or a 
Series 16 Supervisory Analyst to supervise for compliance with the 
disclosure provisions (only) of NASD Rule 2711. According to NASD, all 
other content of the research report must continue to be approved by an 
individual who has passed either the Series 24 and the Series 87, or 
the Series 16. NASD reminds members that in accordance with NASD Rule 
3010 (Supervision), all personnel reviewing both member and third-party 
research must be qualified by virtue of experience and training to 
carry out such review.
    NASD has filed the proposed rule change for immediate 
effectiveness. The effective date and the implementation date will be 
the date of filing, September 27, 2006.
(4) NASD's Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\33\ which requires, among 
other things, that NASD rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. NASD believes that the proposed rule change will 
enhance the clarity and consistency of the research analyst rules, 
thereby facilitating the goals of reducing conflicts of interest and 
fraudulent and manipulative practices, and providing investors with 
more objective, reliable information upon which to base investment 
decisions.
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    \33\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organizations' Statements on Burden on Competition

    The NYSE and NASD do not believe that the proposed rule changes 
will result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organizations' Statements on Comments on the 
Proposed Rule Changes Received From Members, Participants, or Others

    The NYSE and NASD have neither solicited nor received written 
comments.

III. Date of Effectiveness of the Proposed Rule Changes and Timing for 
Commission Action

    The foregoing rule changes have become effective pursuant to 
Section 19(b)(3)(A) of the Act \34\ and paragraph (f)(1) of Rule 19b-4 
thereunder,\35\ in that the proposed rule changes constitute a stated 
policy, practice or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule. At any time within 
60 days of the filing of the proposed rule changes, the Commission may 
summarily abrogate such rule changes if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act.
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    \34\ 15 U.S.C. 78s(b)(3)(A).
    \35\ 17 CFR 240.19b4-4(f)(1).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
changes are consistent with the Act. Comments may be submitted by any 
of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Numbers SR-NYSE-2006-77 and/or SR-NASD-2006-112 on the subject 
line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Numbers SR-NYSE-2006-77 and/or SR-
NASD-2006-112. These file numbers should be included on the subject 
line if e-mail is used. To help the Commission process and review your 
comments more efficiently, please use only one method. The Commission 
will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent 

amendments, all written statements with respect to the proposed rule 
changes that are filed with the Commission, and all written 
communications relating to the proposed rule changes between the 
Commission and any person, other than those that may be withheld from 
the

[[Page 62338]]

public in accordance with the provisions of 5 U.S.C. 552, will be 
available for inspection and copying in the Commission's Public 
Reference Room, 100 F Street, NE., Washington, DC 20549. Copies of such 
filing also will be available for inspection and copying at the 
principal offices of the NYSE and NASD. All comments received will be 
posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to the File Numbers SR-NYSE-2006-77 and/or SR-NASD-2006-
112 and should be submitted on or before November 14, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6-17744 Filed 10-23-06; 8:45 am]

BILLING CODE 8011-01-P