FINRA published an interesting regulatory notice for research analysts and underwriters. Industry professionals have long well been aware that Chinese Walls between the investment banking and research functions are mandatory. Specifically, investment banks cannot offer to provide favourable research report for an issuer client in order to secure business to act as an underwriter. However in its recent regulatory notice, the regulator voices concern about the underwriters’ acquiescence to prospective clients’ insinuated requests to providing favourable research reports on their firms.
On the second page of this regulatory notice, FINRA noted that the CEO of an issuer was expressing dissatisfaction about research reports of firms previously served as underwriters of the issuer publicly. In the interview, the CEO stated that these firms would “stand a chance” if “they articulate better” on the research reports. In the notice, FINRA alerted underwriter members to be prudent in not acquiescing to overtures as such acts would potentially constitute violation of NASD rule 2711. FINRA stressed that they will scrutinize reports to check for compliance and that underwriters are responsible for expressly repudiating issuers with regards to research content coverage. It also asks underwriters to heighten oversight between communications between issuer and underwriters, and among investment banking and research divisions.
Though the notice concerns the established concept of “Chinese Wall”, it alerts firms about the danger of “acquiescence”. It is often the issuers who extend such an invitation to underwriters for favourable research reports. “Acquiescence” can expose underwriters to the risks of violations. It also accentuates the fact that the ultimate liability lay on the underwriters and they should commit their utmost in supervision.
The regulatory notice (11-41) is attached here.
The rule 2711 is attached here.