by Cydney Posner

Last week, FINRA released seven new FAQs related to the research conflict of interest rules.  In essence, FINRA analyzes the types of facts and circumstances that might be decisive in determining whether certain conduct or communications are prohibited under the conflict-of-interest rules. According to FINRA, the risks related to analyst communications vary depending on the stage of the IPO process: (1) a pre-IPO period; (2) a solicitation period (which begins when the issuer makes known that it intends to proceed with an IPO and ends when there is a bona fide awarding of the underwriting mandates); and (3) a post-mandate period. However, FINRA emphasizes that these periods are guideposts and not absolute markers.Below are summaries of the FAQs: 

  • NASD Rules 2711(c)(4) and 2711(e) do not prohibit a research analyst from meeting with an issuer while the issuer is engaged in the underwriter selection process for an offering, but communications between issuers and research analysts during this period can involve significant risk. Rule 2711(c)(4) prohibits research analysts from participating in “pitches” or other efforts to attract prospective investment banking clients.  (However, a research analyst can attend a pitch for an IPO of an Emerging Growth Company (EGC), that is attended by other investment banking personnel so long as the analyst doesn’t “solicit” business or engage in other prohibited conduct.)  Under Rule 2711(e), “no member may directly or indirectly offer favorable research, a specific rating or a specific price target, or threaten to change research, a rating or a price target, to a company as consideration or inducement for the receipt of business or compensation.” The tricky part, of course, is determining whether any particular communication violates these rules, and that “will depend on the context and content of the communication,” particularly, the stage of the process. Communications during a solicitation period, “other than bona fide vetting or due diligence communications by the member,… carry significantly elevated risk. In general, FINRA believes that positive statements to an issuer by a research analyst during a solicitation period carry a high risk of constituting an impermissible promise of favorable research.” On the other hand, vetting and due diligence communications are generally designed to gather information about the issuer in furtherance of the analyst’s research function and, as  a result, depending on the facts and circumstances, they carry lower risk, when managed carefully, than where a research analyst shares his or her views or valuations with an issuer.

Regardless of whether a meeting or communication is initiated by the issuer or analyst, communications that ask for the analyst’s views are particularly fraught during the solicitation period. But that risk can also vary depending on the context: industry views shared at a previously scheduled conference during a solicitation period (even with the issuer in attendance) are different from analyst views shared once an issuer overtly or tacitly indicates that underwriter selection will be based on the valuation or other views of the analyst, which “would carry unmanageable risk.”

 FINRA observes that “an ostensible pre-IPO period” could potentially carry solicitation period risks where the context and content of a request for information from an analyst by an issuer provide indicia that the issuer has already determined to proceed with an IPO. In that case, “the analyst should consult with legal and compliance personnel to make a reasonable determination whether a solicitation period has begun before complying with the information request. With respect to the end of a solicitation period, to the extent an issuer determines the deal participants on a rolling basis, a solicitation period would end for a particular firm when it is informed that it has been awarded a role in the offering or has been rejected for a role.”

Risks may be lower for follow-on offerings. “For example, where an analyst already covers an issuer and has no reason to know that the issuer intends to conduct a follow-on offering, FINRA believes a firm could effectively manage the risk of violating the rules by maintaining effective information barriers to prevent the analyst from learning of the intended offering and by limiting the analyst’s post-IPO communications with the issuer to ordinary course communications for the benefit of the firm’s research customers. Where a firm has existing coverage and there is a post-IPO market valuation of the issuer, FINRA would not expect an analyst, in the ordinary course of discharging his or her research function, to share with the issuer a valuation or conclusions not contained in a published research report.”

  • In a pre-IPO period, restrictions on research analyst communications may be less rigidly applied. In that period, research analysts are still prohibited from participating in efforts to solicit investment banking business and promising favorable research; however, FINRA believes “the risk of violating these provisions in connection with communications for purposes other than vetting or due diligence during a pre-IPO period can be effectively managed by a firm’s policies and procedures and could include, for example, discussions regarding the issuer’s competitors, the IPO market and an issuer’s readiness for an offering.” However, the pre-IPO period does not itself provide a safe harbor; answering questions from an issuer regarding valuation or “positioning” is risky and could be an indication that the issuer has decided to proceed with an IPO. The firm should have policies and procedures to address these circumstances, including consultation with legal and compliance personnel.
  • In the post-mandate period, risks are again lower, and “FINRA believes policies and procedures can effectively manage the risk of violating NASD Rule 2711(c)(4) and (e) in a post-mandate period and that it would generally be appropriate for an analyst to communicate with the issuer his or her views about valuation, pricing and structuring of the transaction, even if the valuation or pricing assessment is positive.” So long as “the issuer has made a bona fide award of the underwriting mandates, FINRA believes the risks associated with subsequent communications between an analyst and issuer can be effectively managed,” even if the specific roles and economics for each firm have not been fully resolved. However, there is no safe harbor, and firms “must consider the context and issuer expectations in evaluating the permissibility of communications with the issuer. A firm’s policies and procedures should address circumstances that could give rise to impermissible promises of favorable research, such as where the issuer suggests the final roles or economics will be based on the highest valuation given by a firm’s research analyst.”
  • It may be permissible for investment bankers to consult with a research analyst about valuation or other views during the solicitation period, subject to requirements of the Global Settlement and the firm’s policies and procedures to insulate research analysts from investment banking pressure. However, the bankers must take care not to convey to the issuer that a valuation is in whole or in part that of the research analyst.  If the issuer requests a valuation or conveys a “tacit understanding” or “improper expectation” that the valuation of the bankers and research analyst will be aligned or that any valuation presented will reflect the analyst’s views, consistent with Regulatory Notice 11-41, “a firm that wishes to continue to compete for a role in the offering must repudiate the overture and explain that any valuation provided represents the bankers’ views only and that the firm cannot make any representations about the views of the research analyst,” documenting the repudiation. In addition, “any communications between investment bankers and research analysts during a solicitation period regarding valuation or the research analyst’s views present heightened risks that investment bankers will influence the research’s analyst’s views, and must be managed carefully.”
  • With regard to an IPO for an EGC, the JOBS Act permits research analysts to participate in any communication with the management of an EGC concerning an IPO that is also attended by any other associated person of a broker-dealer. SEC staff guidance “interprets this provision as ‘primarily reflecting a Congressional intent to allow analysts to participate in emerging growth company management presentations with sales force personnel so that the issuer’s management would not need to make separate and duplicative presentations to analysts at a time when senior management resources are limited.’” FINRA interprets this guidance narrowly as allowing “only specific and narrow examples of permissible communications by a research analyst while in attendance at an EGC IPO pitch meeting or in other meetings during a solicitation period….” Although analysts may attend pitch meetings, according to the SEC, they are not permitted to “engage in otherwise prohibited conduct in such meetings,” such as soliciting investment banking business. Accordingly, FINRA does not view this SEC guidance to be inconsistent with FINRA’s guidance in the first bullet above or to create “a safe harbor for sharing a research analyst’s views and valuations with an issuer during the underwriter selection process for either an EGC or non-EGC IPO or to change the risk management guidance set forth in Question 1 above, other than to allow attendance by a research analyst at a pitch meeting for an EGC IPO.”



  • Even during the solicitation period, it “would not be inconsistent with NASD Rule 2711(c)(4) and (e)” for investment bankers to provide an issuer with its previously published research reports upon request by the issuer, “provided that the request is made to the investment bankers and not the research analyst, is unsolicited, and the research reports have been previously published and generally made available to investing clients of the firm. If an investment banker were to provide only its selection of reports or to comment on the reports, these actions would carry an elevated risk of being viewed as impermissible conduct.”


  • Although FINRA rules apply only to FINRA members, FINRA members acting as issuers or advisors to an issuer should “be respectful of the regulatory obligations of other members participating, or competing to participate, in an offering. Depending on the particular facts and circumstances, FINRA believes it could be inconsistent with just and equitable principles of trade for a member acting in those capacities to request, induce or pressure another member to engage in conduct that, if acquiesced to, would result in a violation of Rule 2711.”



Posted by Cydney Posner