On October 11, 2012, the SEC approved proposed amendments to NASD Rule 2711 relating to conduct by research analysts and research reports that may affect certain public companies. The approved changes were proposed by FINRA to conform Rule 2711 to provisions of the Jumpstart Our Business Startups Act (the “JOBS Act”), enacted in April of this year1. The amended Rule applies only to “emerging growth companies,” which include issuers with annual gross revenues of less than $1 billion during their most recently completed fiscal year that did not sell common equity pursuant to an effective registration statement before December 8, 2011. The changes to Rule 2711 relate to the areas of (i) research analyst participation communications and (ii) quiet periods during which research reports may not be published or distributed.
Research Analyst Participation and Communications. Prior to the recent amendments, Rule 2711 prohibited research analysts from participating “in any efforts to solicit investment banking business,” including communications with issuer management. The amended Rule permits research analysts to attend meetings, including “pitch” meeting with issuers considering an initial public offerings, with other investment bank personnel and the issuer’s management. The analysts participation at such meetings should generally be limited to outlining their research program, the factors that they would consider in his or her analysis and to answer specific questions from management. Analysts may not attend meetings at which investors or potential investors are present.
Quiet Periods. Prior to the recent amendments, research analysts affiliated with an investment bank acting as manager or co-manager of a public securities offering were prohibited from publishing or distributing research material on an issuer for a period of (i) 15 days before and after the expiration, termination or waiver of a “lock-up” agreement entered into in connection with a public offering, (ii) 40 days following the completion of an initial public offer, and (iii) 10 days following the completion of a follow-on offering. Under amended Rule 2711, these “quiet periods” are no longer applicable to emerging growth companies, although they do remain applicable to all other issuers. The elimination of these prohibitions should result in a change in market practices regarding lock-up agreements entered into in connection with emerging growth company IPOs and follow-on equity offerings so that underwriters will no longer require lock-up periods to be extended in order to permit the publication of research reports.
The effective date of the Rule amendments relating to quiet periods for secondary offerings and after the expiration, termination or waiver of a lock-up agreement is October 11, 2012, and the effective date for all other amendments is retroactive to April 5, 2012. The SEC also notes that the Rule amendments do not alter the global settlement entered into in 2003 between the SEC and certain large investment banks relating to research analysts conflicts of interest. Finally, as previously noted, the amendments discussed above will not affect companies that do not qualify as emerging growth companies, which will include any company that completed its initial public offering prior to December 2011.
If you have any questions concerning this bulletin, please contact your Seward & Kissel LLP Capital Markets Group attorney.
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1 The SEC also approved corresponding amendments to New York Stock Exchange Rule 472, governing NYSE listed companies.
