On August 22, 2012, the Division of Trading and Markets of the Securities and Exchange Commission (the “SEC Staff”) issued a set of Frequently Asked Questions and guidance related to Section 105 of the Jumpstart Our Business Startups Act (“JOBS Act”). In particular, these FAQs and the guidance address issues raised by Sections 105(b), (c) and (d) of the JOBS Act related to permitted communications by broker-dealer research analysts with prospective investment banking clients, prospective investors, and with investment bankers and also related to research practices more generally.
Section 105 of the JOBS Act addresses rules of the SEC and also of a “national securities association.” There is currently only one national securities association: FINRA. However, both FINRA and the NYSE adopted rules that address the communications targeted in the JOBS Act (the “SRO Rules”), and (until FINRA finalizes the harmonization of its rulebook), the NYSE research rule continues in effect. In the FAQs, the SEC Staff states its view that the provisions of the JOBS Act and related FAQs apply equally to all SRO Rules. The SEC Staff further states that the JOBS Act does not override any sections of the SRO Rules or of the SEC’s own Regulation AC, other than those sections of the SRO Rules expressly eliminated or eliminated in the FAQs. The FAQs also state that the JOBS Act does not override the continuing applicability of the provisions of the Global Settlement entered into in 2003 and 2004 that addresses conflicts of interest between firms’ research and investment banking functions, to the 12 broker-dealers that are party to settlement.
SRO Rules and the JOBS Act — How Have the Rules Changed?
Section 105(b) of the JOBS Act prohibits any rule or regulation in connection with an IPO of common equity securities of an “emerging growth company” that restricts the associated persons of a broker-dealer from arranging for communications between an analyst and a potential investor. This section of the JOBS Act also prohibits any rule that restricts an analyst from participating in any communications with the management of an emerging growth company that is attended by an analyst and any other associated person of a broker-dealer or member of a national securities association.
After affirming that any firm subject to the Global Settlement remains restricted by any applicable terms of the settlement, the SEC Staff provides guidance on numerous questions raised by the JOBS Act. At most points, the SEC Staff is cautious, finding ways to construe the JOBS Act as consistent with, but not significantly expanding, permissible communications by research analysts. As described below, in some areas, however, the guidance reflects that the SEC Staff acknowledges that the JOBS Act has substantially changed the scope of what is permissible.
First, the SEC Staff states its view that the provision in Section 105(b) permitting persons other than analysts to “arrange” communications between analysts and investors is not inherently inconsistent with the current SRO Rules. The SEC Staff differentiates, however, between “arranging,” the term used in the JOBS Act, and joint participation in, such meetings. The SEC Staff states that this section of the JOBS Act permits investment bankers and others to provide research analysts with the names of clients whom an analyst “in his or her own discretion and with appropriate controls” may contact. The SEC Staff expresses the view that this section does not permit investment banking personnel and research analysts to participate in conversations with current or prospective customers together. In addition, the SEC Staff cautions that other provisions of the SRO Rules are not changed with regard to the nature of communications (they must be fair, balanced and not misleading taking into consideration the overall context in which they are made) and that the requirements of the Global Settlement will continue to limit the permitted activities for impacted firms.
Since enactment, there has been confusion about whether the JOBS Act negates the SRO rules prohibiting research analysts’ participation in road shows and other communications about an investment banking services transaction with current and prospective customers in the presence of investment banking personnel and/or issuer management. Although Section 105(b)(2) does permit meetings between an emerging growth company’s management, research analysts and investment banking personnel, described below, communications that include customers are not expressly addressed. Based on congressional silence, the SEC Staff expresses the view that the JOBS Act does not override the SRO rules currently prohibiting such communications. Readers should note, however, that the SEC Staff takes a different approach to congressional silence in connection with quiet periods, as discussed below.
The SEC Staff further clarifies that it does not consider the provisions in Section 105(b) permitting research analysts to participate in communications with management of an emerging growth company concerning an IPO also attended by other associated persons of a broker-dealer as significantly altering the landscape or permitting research analysts’ behavior to change. Rather, the SEC Staff states that this section of the JOBS Act is intended primarily to permit research analysts and a firm’s sales force to attend meetings with management jointly so that management does not need to make duplicate presentations. The SEC Staff does concede that the JOBS Act negates the provisions of the SRO Rules that prohibited research analysts from attending meetings with issuer management that are attended by investment banking personnel, in connection with an IPO, including pitch meetings. Although research analysts and investment bankers can attend meetings together, the SEC Staff warns that the JOBS Act does not modify any of the SRO Rule provisions regarding prohibited conduct. In particular, the SEC Staff emphasizes that research analysts cannot engage in activities that would constitute “solicitation” of investment banking business. Therefore, an analyst cannot change his or her research in an effort to obtain investment banking business, cannot allow an expectation of favorable research coverage if the analyst’s firm is chosen to underwrite the IPO, cannot provide research that is inconsistent with the analyst’s personal views, and cannot engage in sales or marketing efforts related to an investment banking transaction. The SEC Staff also reiterates that the JOBS Act does not override the stricter limitations imposed on the Global Settlement firms requiring separation of investment bankers and research analysts. The SEC Staff also reminds firms and analysts of the antifraud provisions and of all other provisions regarding conflicts of interest, all of which remain in full effect.
Quiet Periods and the JOBS Act
Section 105(d) of the JOBS Act expressly prohibits the imposition of a quiet period prior to the expiration of a lock-up period. Although the JOBS Act does not address quiet periods prior to the termination or waiver of a lock-up period, the SRO Rules do. In contrast to the approach taken to Congress’ silence regarding joint meetings attended by customers described above, where the SEC Staff views Congress’ silence as a statement that there is no room for flexibility, the SEC Staff looks at Congress’ silence regarding quiet periods as intent to address all quiet periods imposed by the SRO rules on research prior to the end of a lock up period. Therefore, the SEC Staff interprets Section 105(d)(2) broadly to override all quiet periods in the SRO Rules prior to the end of a lock up period. The SEC Staff further states that the policies underlying Section 105(d)(2) apply equally to the quiet periods currently imposed after the expiration, waiver or termination of a lock-up period, and also after a secondary offering. The JOBS Act does not address these quiet periods, however. Rather, the SEC Staff states that it anticipates that FINRA will file amendments to the SRO Rules that would eliminate quiet periods both after lock-up periods and after secondary offerings with regard to emerging growth companies.
Pre-IPO Communications by Research Analysts (Testing the Waters)
The SEC Staff discusses in the FAQs those activities that it views permissible for a broker-dealer’s associated persons, including but not limited to research analysts, consistent with Section 105(c) of the JOBS Act. In particular, concerns have been raised about the limitations of Rule 15c2-8(e), which prohibits solicitation of customers’ orders without provision of a prospectus to each associated person who will solicit customers, once a registration statement has been filed. Section 105(c) of the JOBS Act allows emerging growth companies to continue to “test the waters” after a registration statement has been filed.
The SEC Staff offers several useful views. The SEC Staff clarifies that submission of a confidential draft registration statement does not constitute a “filing” of a registration statement and therefore does not trigger the requirements of Rule 15c2-8. Furthermore, the SEC Staff clarifies that it believes that an underwriter might ask customers about how many shares they may seek to purchase in a potential offering within various price ranges for non-binding indications of interest, including amount of shares the customers might purchase, without asking for commitments. In the SEC Staff’s view, these requests for information “would likely not be soliciting a customer order for purposes of Rule 15c2-8(e).”
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This article was originally published by Bingham McCutchen LLP.