SEC Regulation Mandates Analyst Certification
April 8, 2003
The recently enacted Regulation AC requires that brokers, dealers and certain persons associated with a broker or dealer (or “covered persons”) include in research reports certifications by the research analyst that the views expressed in the report accurately reflect his or her personal views, and disclose whether or not the analyst received compensation or other payments in connection with his or her specific recommendations or views. Regulation AC also requires that broker-dealers obtain periodic certifications by research analysts in connection with the analyst’s public appearances. The effective date for compliance is April 14, 2003.
The definition of “covered persons” includes investment advisers that do not meet certain independence criteria. For example, an analyst does not meet such independence criteria if a broker-dealer does not have information and structural separation from an investment adviser or if a broker-dealer’s investment banking department can pressure an investment adviser to comment favorably in a research report or public appearance about a client or prospective client. Specifically excluded from the definition of “covered persons” are
* Investment advisers that are not eligible for registration with the Securities and Exchange Commission (the “SEC”) under the Investment Advisers Act of 1940 because they have less than $25,000,000 under management;
* Investment advisers that are not required to be registered with the SEC as brokers or dealers.
* Associated persons [1] of a broker or dealer that do not have any officer or employee in common with the broker or dealer who can influence the activities of research analysts or the content of research reports; and
* Associated persons of a broker or dealer that maintains and enforces written policies and procedures reasonably designed to prevent the broker or dealer, its controlling persons, officers, and employees from influencing the activities of research analysts and the content of research reports prepared by the associated persons.
Specifically, Regulation AC requires that broker-dealers and “covered persons” include in their research reports:
* A statement by the research analyst certifying that the views expressed in the research report accurately reflect such research analyst’s personal views about the subject securities or issuers; and
* A statement by the research analyst certifying (a) that no part of his or her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report; or (b) that part or all of his or her compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in the research report. If the analyst did receive such related compensation, the statement must disclose the source, amount, and purpose of the compensation, and that such compensation may influence the recommendation in the research report.
Additionally, under Regulation AC, a broker-dealer who publishes, circulates, or provides a research report prepared by a research analyst it or a covered person employs would be required to make a record related to public appearances by research analysts. The record, which must be made within thirty days after each calendar quarter in which the research analyst made the public appearance, must include:
* A written statement by the research analyst certifying that the views expressed in each public appearance accurately reflected such research analyst’s personal views about the subject securities or issuers; and
* A written statement by the research analyst certifying that no part of such research analyst’s compensation was, is, or will be directly or indirectly related to any specific recommendations or views expressed in any public appearance.
If the broker or dealer does not obtain a statement by the research analyst in accordance with the immediately preceding paragraph, the broker or dealer must,
* Promptly notify in writing its examining authority (for example, the National Association of Securities Dealers), that the research analyst did not provide the certifications specified in the immediately preceding paragraph; and
* For 120 days following the notification, disclose in any research report prepared by the research analyst and published, circulated, or provided to a U.S. person in the United States that the research analyst did not provide the certifications specified in the immediately preceding paragraph.
In SEC Release No. 33-8193, 34-47384, issued on February 20, 2003, the SEC indicates that certain “research reports” will be exempt from the requirements of Regulation AC. These exemptions include: (i) an analysis prepared for a specific person or a limited group of fewer than fifteen (15) persons and (ii) periodic reports or other communications prepared for investment company shareholders or discretionary investment account clients discussing past performance or the basis for previously made discretionary investment decisions.
Although investment advisers that are not associated with a broker-dealer will not be subject to Regulation AC, all investment advisers and securities analysts should familiarize themselves with Regulation if for no other reason than to know what is expected of others in connection with their reviews of third party research products.
[1] Rule 3a4-1(c)(2) of the General Rules and Regulations under the Securities Exchange Act of 1934 defines an “associated person of a broker or dealer” as “any partner, officer, director, or branch manager of such broker or dealer (or any person occupying a similar status or performing similar functions), any person directly or indirectly controlling, controlled by, or under common control with such broker or dealer, or any employee of such broker or dealer, except that any person associated with a broker or dealer whose functions are solely clerical or ministerial and any person who is required under the laws of any state to register as a broker or dealer in that state solely because such person is an issuer of securities or associated person of an issuer of securities shall not be included in the meaning of such term for purposes of this rule.”
For additional information on this topic, you may contact Howard A. Neuman or Carol Spawn Desmond.