[ by Howard Haykin ]

FINRA has amended FINRA Rule 2711 and Incorporated NYSE Rule 472 to Conform to the JOBS Act, which was signed into law on 4/5/12.  All these changes are effective - retroactively effective to either 4/5/12 (date JOBS Act became law) or 10/11/12 (date SEC issued its approval),  On Thursday, FINRA issued Regulatory Notice 12-49 to announce the SEC's approval and to summarize the changes and issues related to compliance.

Executive Summary.   The SEC approved amendments to NASD Rule 2711 and Incorporated NYSE Rule 472 to conform to the requirements of the Jumpstart Our Business Startups Act (JOBS Act) and make certain additional changes to quiet period restrictions consistent with the policies underlying the JOBS Act.

• Most of the changes to NASD Rule 2711 and Incorporated NYSE Rule 472 are effective retroactively to 4/5/12.
• Changes to rules re: quiet periods after secondary offerings and after the expiration, termination or waiver of a lock-up agreement became effective upon approval by the SEC on 10/11/12.
• Direct questions re: this Notice to:  Philip Shaikun, AVP and Assoc. General Counsel, Office of General Counsel, at (202) 728-8451.

Background & Discussion. The JOBS Act was signed into law on 4/5/12.  Among other things, the JOBS Act prohibits the SEC or any national securities association from adopting or maintaining any rule or regulation in connection with an IPO of an emerging growth company ("EGC") that:

• restricts, based on functional role, which associated persons of a broker, dealer or member of a national securities association, may arrange for communications between an analyst and a potential investor; or
• restricts a securities analyst from participating in any communication with the management of an EGC that is also attended by any  other associated person of a broker, dealer or member of a national securities association whose functional role is other than as securities analyst.

The JOBS Act further prohibits the SEC or any national securities association from adopting or maintaining any rule or regulation that prohibits a broker or dealer from publishing or distributing any research report or making a public appearance, with respect to the securities of an EGC either:

• within any prescribed period of time following the initial public offering date of the EGC; or
• within any prescribed period of time prior to the expiration date of any agreement between the broker, dealer, or member of a national securities association and the EGC or its shareholders that restricts or prohibits the sale of securities held by the EGC or its shareholders after the IPO date.

An FAQs was issued on 8/22/12 by the SEC’s Division of Trading and Markets, providing guidance on these provisions in the form of Frequently Asked Questions (FAQs).   The amendments approved by the SEC conform the applicable provisions of NASD Rule 2711 to the JOBS Act requirements in accordance with the SEC staff guidance.

Arranging and Participating in Communications.   NASD Rule 2711(c)(4)2 prohibits a research analyst from participating “in efforts to solicit investment banking business,” including any “pitches” for investment banking business or other communications with companies for the purpose of soliciting investment banking business.

The SEC staff guidance interprets the JOBS Act to now allow, in connection with an IPO of an EGC, research analysts to attend meetings with issuer management that are also attended by investment banking personnel, including pitch meetings, but not “engage in otherwise prohibited conduct in such meetings,” including “efforts to solicit investment banking business.”

The guidance further explains that a research analyst that attends a pitch meeting “could, for example, introduce themselves, outline their research program and the types of factors that the analyst would consider in his or her analysis of a company, and ask follow-up questions to better understand a factual statement made by the emerging growth company’s management.”  Accordingly, the amendments create an exception to NASD Rule 2711(c)(4) to reflect this guidance.

The SEC staff guidance states that under the JOBS Act, an associated person of a broker-dealer, including investment banking personnel, may arrange communications between research analysts and investors in connection with an IPO of an EGC.

• e.g. -  the guidance states that an investment banker could forward a list of clients to a research analyst “that the analyst could, at his or her own discretion and with appropriate controls, contact.”
• The guidance acknowledges that FINRA does not have a rule that directly prohibits this activity and further states that such activity, without more, would not constitute conduct by investment banking personnel to directly or indirectly direct a research analyst to engage in sales or marketing efforts related to an investment banking services transaction, in violation of NASD Rule 2711(c)(6).
• As such, this JOBS Act provision required no conforming rule change.

Quiet Periods. The JOBS Act expressly permits publication of research and public appearances any time after the IPO of an EGC or prior to the expiration of any lock up agreement. While the JOBS Act refers only to the “expiration” of a lock-up agreement, the guidance states that Congress intended for the JOBS Act provisions to apply equally to the period before a “waiver” or “termination” of a lock-up agreement. Thus, in accordance ith SEC staff guidance on this JOBS Act provision, the rule change amends NASD Rule 2711 to eliminate the following quiet periods with respect to an IPO of an EGC:

• NASD Rule 2711(f)(1)(A), which imposes a 40-day quiet period after an IPO on a member that acts as a manager or co-manager of such IPO;
• NASD Rule 2711(f)(2), which imposes a 25-day quiet period after an IPO on a member that participates as an underwriter or dealer (other than manager or co-manager) of such an IPO;
• NASD Rule 2711(f)(4) with respect to the 15-day quiet period applicable to IPO managers and co-managers prior to the expiration, waiver or termination of a lock-up agreement, or any other agreement that such member has entered into with a subject company or its shareholders that restricts or prohibits the sale of securities held by the subject company or its shareholders after the completion of an IPO.

The SEC staff guidance notes that the JOBS Act makes no reference to quiet periods after a secondary offering or during a period of time after expiration of a lock-up agreement.   Accordingly, the guidance concludes that NASD Rule 2711(f)(1)(B), which imposes a 10-day quiet period on managers and co-managers following a secondary offering and the remaining portion of NASD Rule 2711(f)(4) relating to quiet periods after the expiration, termination or waiver of a lock up agreement, remain fully in effect. 

Nonetheless, the guidance expresses the SEC staff’s belief that the policies underlying the JOBS Act are equally applicable to quiet periods during these other times. FINRA agreed that elimination of those quiet periods would advance the policy objectives of the JOBS Act and therefore NASD Rules 2711(f)(1)(B) and (f)(4) have been amended, accordingly.

For further details, go to:  [RegNote 12-49, November 2012].