SEC Adopts Final Rule Relating to Analyst Certification


In an effort to promote the integrity of research reports and investor confidence in those reports, on February 20, 2003, the SEC adopted final rules relating to certification of broker-dealer research reports. (Release Nos. 33-8193 and 34-47384). New Regulation Analyst Certification ("Regulation AC") requires research analysts to certify in research reports for which they are responsible that the views expressed in the report accurately reflect the analyst's personal views and to disclose whether or not the analyst received compensation or other payments in connection with his or her specific recommendations or views. Broker-dealers are also required to obtain periodic certifications by research analysts in connection with the analyst's public appearances and to make, keep and maintain records of these certifications and disclosures. In addition, broker-dealers must also provide certain notifications to any person with whom that broker or dealer is associated who publishes, circulates or provides research reports.

Who Must Certify

The analyst or analysts primarily responsible for the preparation of the content of a research report must comply with the certification requirements, regardless of whether or not the firm removes the names of all analysts from the report. Junior analysts involved in the preparation of the research report, but not primarily responsible for its content, are not required to provide the Regulation AC certification.

The Certifications

Research Reports. Pursuant to Section 501 of Regulation AC, a broker or dealer or covered person that publishes, circulates, or provides a research report prepared by a research analyst to a U.S. person in the United States must include in that research report a clear and prominent certification by the research analyst that:

  • the views expressed accurately reflect the analyst's personal views about any and all of the subject securities or issuers; and
  • no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in the report.

If the analyst is unable to make this certification because his or her compensation was, is, or will be tied to the views expressed in the report then the analyst must include a statement so stating, identifying the source, amount and purpose of such compensation and stating that the compensation could influence the recommendations or views expressed in the research report. Any distribution by a broker-dealer or covered person of a non-exempt research report that does not contain the required statements will be in violation of Regulation AC.

Public Appearances. Pursuant to Section 502 of Regulation AC, a broker or dealer or covered person who publishes, circulates, or provides a research report prepared by a research analyst employed by the broker-dealer or covered person to a U.S. person in the United States must, within 30 days after any calendar quarter in which the research analyst made a public appearance, establish a record containing a statement by the research analyst that:

  • all views expressed by the analyst in all public appearances during the quarter accurately reflected the analyst's personal views; and
  • no part of his or her compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst in such public appearances.

If the analyst does not provide the certification, the broker-dealer must provide readers of the research reports it distributes, as well as the broker-dealer's designated examining authority, with notice, in plain English, that the analyst did not provide the certifications. The broker-dealer must retain its record of certifications, or lack thereof, for at least three years.

Exclusions

Third-Party Preparation. A research report distributed by a broker-dealer but prepared by a third-party research analyst whose employer satisfies certain independence criteria need not contain the Regulation AC certification.

News Media. Regulation. AC does not apply to a publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation who is not registered or required to be registered with the SEC as a broker, dealer or investment advisor.

Certain Investment Advisors. An investment advisor who is prohibited under Section 203A of the Investment Advisors Act of 1940 from registering with the SEC as an investment advisor and who is not otherwise registered or required to be registered as a broker-dealer is not a covered person under Regulation AC.

Certain Foreign Individuals. A foreign individual located outside of the United States who prepares a research report concerning a foreign security and provides the report to a U.S. person in accordance with certain rules and who is not associated with a broker or dealer is also exempt from Regulation AC.

Liability

Regulation AC does not alter any other existing obligations or impose new liability on research analysts or broker-dealers under the federal securities laws, but rather is intended to complement other rules governing conflicts of interest disclosure by research analysts, including NYSE Rule 472, NASD Rule 2711 and the anti-fraud provisions of the federal securities law.