November 12, 2008

FINRA Proposes Changes to Research Analyst Quiet Periods

The Financial Industry Regulatory Authority (“FINRA”) has proposed and is requesting comment on Proposed Research Registration and Conflict of Interest Rules (Regulatory Notice 08-55), which would liberalize existing rules restricting the issuance of analyst research around initial public offerings and secondary offerings. The proposed rules would benefit IPO issuers in particular by making research coverage available more quickly; easing restrictions on research coverage around lock-up expirations, waivers and terminations; providing greater flexibility to waive or modify lock-ups; and making negotiation of lock-ups easier.

Most significantly, the proposed rules would shorten, and in some cases eliminate, the existing “quiet periods” during which a member firm must not publish or otherwise distribute research reports, and research analysts must not make public appearances relating to the issuer if the firm has participated as an underwriter or dealer in the offering. The proposed rules would replace existing NASD and NYSE rules governing research analysts and research reports, and would supersede proposed changes to those rules previously filed with the SEC.

Specifically, the proposed rules would impose a significantly shorter 10-day quiet period for all underwriters and dealers participating in an initial public offering. There would be no quiet period after secondary offerings and the quiet periods before and after the expiration, waiver or termination of a lock-up agreement would be eliminated. The 25-day prospectus delivery requirement of the Securities Act, however, may result in underwriters self-imposing a 25-day quiet period in connection with initial public offerings. Similarly, underwriters and issuers may need to consider whether research issued shortly after a secondary offering could result in prospectus liability.

Under current NASD Rule 2711, there is a 40-day quiet period following an initial public offering for lead underwriters and a 25-day quiet period for other participating underwriters and dealers. There is also a 10-day quiet period following secondary offerings. The existing Rule also imposes a 15-day quiet period before and after the expiration, waiver or termination of a lock-up agreement.

FINRA is proposing the changes to the quiet periods based on a belief that research issued during such periods potentially offers valuable market information, and the other provisions of the research rules and SEC regulations provide sufficient protection that such research will honestly reflect the analyst’s beliefs and be free from other conflicts that would undermine the value or integrity of research issued during these periods. The elimination of the quiet periods around lock-up expirations, waivers and terminations should provide greater flexibility to waive or modify lock-ups and make negotiating lock-ups easier since the timing of lock-up expirations, waivers or terminations would no longer be affected by the timing of the company’s earnings release and related analyst research. As a result, the proposed rules should obviate the need for so-called “bungee” provisions in lock-up agreements. These provisions automatically extend lock-up periods that would otherwise expire around the time of a company’s earnings release, but also create uncertainty as to exactly when a particular lock-up will expire.

Goodwin Procter has submitted a comment letter to FINRA on behalf of the National Venture Capital Association in support of the proposed rules. Comments must be received by FINRA by November 14, 2008, and may be submitted by either of the following methods:

  • emailing comments to; or
  • mailing comments in hard copy to:

Marcia E. Asquith
Office of the Corporate Secretary
1735 K Street, NW
Washington, DC 20006-1506

Before becoming effective, the proposed rules must be authorized for filing with the SEC by the FINRA Board of Governors, and then must be approved by the SEC, following publication for public comment in the Federal Register.