Alert September 04, 2012

SEC Staff Issues Answers to Frequently Asked Questions on Effect of JOBS Act On Activities by Research Analysts

On August 22, 2012, the SEC’s Division of Trading and Markets issued a set of answers to frequently asked questions (“FAQs”) concerning the application of Section 105 of the Jumpstart Our Business Startups Act (“JOBS Act”) to emerging growth companies in the context of (1) research analyst communications, (2) quiet periods for research reports around offerings and the termination of lock-up periods, and (3) prospectus delivery pursuant to Rule 15c2-8 under the Securities Exchange Act of 1934 during the period following the filing of a registration statement by an emerging growth company that is testing the waters.  The FAQs also cover additional related issues.

Continued Applicability of Global Settlement

In 2003 and 2004, twelve investment banks entered into uniform agreements to settle enforcement actions brought by the SEC, self-regulatory organizations and state securities regulators relating to conflicts of interest between the firms’ research and investment banking functions.  These agreements, referred to as the Global Settlement, include undertakings that govern the activities of the firms where conflicts between the research and investment banking functions were thought to occur.  Over the years, the undertakings (contained in “Addendum A” to the settlements) have been amended by the court at the request of the parties.  In its response to Question 2 of the FAQs, the SEC confirmed that the JOBS Act does not amend or modify the Global Settlement.  Any amendment or modification would have to be approved by the court.  However, the SEC noted that the Global Settlement does provide that a provision of the Global Settlement can be modified or removed if the SEC adopts a rule (or approves an SRO rule) “with the stated intent to supersede” that provision.

Communications Between Research Analysts and Other Firm Personnel

Section 105(b) of the JOBS Act amended Section 15D of the Securities Exchange Act of 1934 to insert a new subsection (c) providing that neither the SEC nor any national securities association (i.e., FINRA) may adopt or maintain any rule or regulation in connection with an initial public offering of the common equity of an emerging growth company (1) restricting, based on functional role, which associated persons of a broker-dealer may arrange for communications between a securities analyst and a potential investor or (2) restricting a securities analyst from participating in any communications with the management of an emerging growth company that is also attended by any other associated person of the broker-dealer whose function is other than as a securities analyst.

In its response to Question 10, the SEC provided the following guidance with respect to Section 105(d):Prospectus Delivery Under Rule 15c2-8(e)

As noted above, clause (2) of amended Section 15D(c) now provides that SEC and SRO rules may not prohibit analysts from attending meetings with company management in the presence of investment banking personnel in connection with the IPO of an emerging growth company.  In the response to Question 4 of the FAQs, the SEC made clear that the restrictions of the Global Settlement continue to apply.  Those restrictions are quite strict.  For example, in its letter to Cleary Gottlieb dated November 2, 2004, providing guidance on the Global Settlement, the SEC noted that, even if a company asks a firm’s investment banking department to arrange a meeting with a research analyst of the firm or give the research analyst a “heads up” that the company intends to call, the Global Settlement would prohibit the investment banking department from making such a call to the research analyst (Question 18 of the 11/2/04 letter).  In the current FAQs the SEC did, however, state that firms not subject to the Global Settlement may permit research analysts and investment banking personnel to attend meetings with company management, provided that the firm’s personnel do not otherwise violate the intent of the research analysts rules.  This would happen if, for example, investment banking personnel at the meeting attempted to influence the research analyst’s views or recommendations.

The SEC made clear that Section 105(b)(2) of the JOBS Act does not affect the provisions in NASD Rule 2711(c)(5)(A) and (B) and NYSE Rule 472(b)(6)(i)(a) that prohibit analysts from participating in roadshows or otherwise engaging in communications with investors about an investment banking transaction in the presence of investment bankers or the company’s management (Question 5).

Quiet Periods on Publication or Distribution of Research Reports

Section 105(d) of the JOBS Act provides that neither the SEC nor FINRA may adopt or maintain any rule or regulation prohibiting a broker-dealer from publishing or distributing any research report or making a public appearance with respect to the securities of an emerging growth company either:

  1. within any prescribed period of time following the initial public offering date of the company or
  2. within any prescribed period of time prior to the expiration date of any agreement between the broker‑dealer and the company or its shareholders that restricts or prohibits the sale of securities held by the company or its shareholders after the initial public offering date.
  • Although the JOBS Act does not specifically address the publication or distribution of research before the waiver or termination of a lock-up agreement, the SEC considers that the Act should be read to permit the publication and distribution of research during those periods, as well as before the expiration of a lock-up agreement.
  • The SEC believes that the policies underlying Section 105(d) apply as well to the publication or distribution of research after expiration, termination or waiver of lock-up agreements, and to quiet periods after a secondary offering of an emerging growth company’s securities.  The SEC understands that FINRA is considering filing a proposal to eliminate the remaining quiet periods imposed by NASD Rules 2711(f)(1), (2) and (4) and NYSE Rules 472(f)(1) through (4) with regard to an emerging growth company and its securities.

Section 105(c) of the JOBS Act allows emerging growth companies to continue to “test the waters” after a registration statement has been filed under the Securities Act.  However, Rule 15c2-8(e) states that it is a deceptive act or practice for a broker-dealer to participate in a distribution of securities with respect to which a registration statement has been filed unless the broker-dealer takes reasonable steps to make a copy of the preliminary prospectus available to each of the broker-dealer’s associated persons who are expected, prior to the effective date, to solicit customers’ orders for such securities before sales efforts by such associated persons.  In response to Question 1, the SEC stated that underwriters taking non-binding indications of interest from customers would not be “soliciting customers’ orders” within the meaning of Rule 15c2-8(e).  The SEC further noted that submitting a confidential draft registration for staff review in accordance with Rule 106(a) of the JOBS Act does not constitute a “filing” of a registration for purposes of Rule 15c2-8(e).

Other Guidance

The SEC provided the following additional guidance:

  • The SEC considers that Sections 105(b) and (d) of the JOBS Act were intended to apply to NYSE Rule 472 to the same extent as to NASD Rule 2711.  (Question 6)
  • The SEC does not consider the JOBS Act to affect the application of the SRO rules with respect to: the supervision, compensation or evaluation of analysts (Question 7), the prohibition on pre-publication review of research reports by non-research personnel or an emerging growth company (Question 8), or the prohibition on promises of favorable research in exchange for the business of, or compensation from, an emerging growth company.  (Question 9)
  • The JOBS Act does not affect the analysis of the types of communications that constitute a research report for purposes of SEC Regulation AC (Question 11) and does not affect Regulation AC in any other respect.  (Question 12)
  • The JOBS Act does not impact any of the requirements under NASD Rule 2210 relating to communications with the public.  (Question 13)  NASD Rule 2210 and its interpretive memorandums will be replaced by new FINRA Rules 2210 and 2212-2216 in February 2013.