FINRA filed a proposal (the “Proposal”) to amend NASD Rule 2711 and NYSE Rule 472 (“Research Analyst Rules”) to make changes mandated by the Jumpstart Our Business Startups Act (“JOBS Act”) with respect to emerging growth companies as defined in Section 3(a)(80) of the Securities Exchange Act of 1934 (“Exchange Act”). Certain of the proposed changes, which would be retroactive to April 5, 2012, would apply to a provision on communications between research analysts and subject companies and provisions relating to the quiet periods around certain events. FINRA also proposed related changes to other quiet period provisions based on SEC guidance that the additional changes are consistent with Congressional intent; these related changes would become effective upon SEC approval.
Emergency Growth Companies Under the JOBS Act
The JOBS Act creates special rules governing registration with the SEC, auditing standards and related matters for companies that are emerging growth companies, as defined in Section 3(a)(80), at the time of their initial public offerings and for a period of time, up to five years, thereafter. One of the elements of the emerging growth companies definition is that the company had annual gross revenues of less than $1 billion (an amount subject to periodic adjustment for inflation) during its most recently completed fiscal year. The JOBS Act added a subsection (c) to Section 15D of the Exchange Act (applicable to research analysts) limiting the application of FINRA and SEC rules as they affect research reports concerning emerging growth companies. The Proposal is intended to conform FINRA rules to the requirements of Section 15D(c) and to make certain other changes consistent with Congressional intent.
Changes Mandated by the JOBS Act
Participation in Pitch Meetings. NASD Rule 2711(c)(4), part of the rules on communications with subject companies, prohibits a research analyst from participating in efforts to solicit investment banking business, including participating in pitches for investment banking business to prospective investment banking clients. Retroactive to April 5, 2012, NASD Rule 2711(c)(4) would be amended to provide that it “shall not prevent a research analyst from attending a pitch meeting in connection with an initial public offering of an Emerging Growth Company that is also attended by investment banking personnel; provided, however, that a research analyst may not engage in otherwise prohibited conduct in such meetings, including efforts to solicit investment banking business.”
Quiet Period Changes. Rule 2711(f) imposes quiet periods around public offerings and other events involving subject companies during which certain member firms may not publish research about those companies. FINRA proposes to amend Rule 2711(f), retroactive to April 5, 2012, to provide that the following provisions of 2711(f) will no longer be applicable with respect to emerging growth companies:
- (f)(1)(A) – imposing a quiet period on a manager or co-manager of an IPO for 40 calendar days following the date of offering;
- (f)(2) – imposing a quiet period on other participants in an IPO for 25 calendar days following the date of the offering; and
- (f)(4) – imposing a 15-day quiet period on a manager or co-manager of a public offering before the expiration, termination or waiver of a lock-up agreement entered into in connection with the offering.
Other Quiet Period Changes
FINRA proposes to amend Rule 2711(f), effective upon SEC approval, to provide that the following provisions of 2711(f) will no longer be applicable with respect to emerging growth companies:
- (f)(1)(B) – imposing a quiet period on a manager or co-manager of a secondary offering for ten calendar days following the offering; and
- (f)(4) – imposing a 15-day quiet period on a manager or co-manager of a public offering after the expiration, termination or waiver of a lock-up agreement.
Equivalent changes are proposed for NYSE Rule 472, which continues to apply to NYSE member firms.
Public Comments Solicited
Comments are due 21 days after publication of the rule filing in the Federal Register.