The Financial Industry Regulatory Authority voted to require debt analysts to disclose the same conflict-of-interest information they make known to equity investors.
The board of directors of the industry-funded regulatory group approved the measure today, which was first proposed in February 2012, according to a notice on its website. Debt research intended for institutional investors, who are viewed as more sophisticated users of the market, received some exemptions from the new rules. The Securities and Exchange Commission must approve the measure before it goes into effect.
Ten of the world’s largest banks agreed in 2003 to pay $1.4 billion to settle charges that they misled equity investors with biased research tailored to win investment banking business. Later that year, Merrill Lynch & Co., Goldman Sachs Group Inc., Morgan Stanley, and Credit Suisse Group AG won dismissal of lawsuits accusing them of deceptive research.
The rules seek to prohibit analysts’ communication with trading desks so that research isn’t used to influence buying or selling by the firm and to restrict traders from trying to influence analyst opinions, according to the Finra draft rule text. They also include required disclosures by analysts on whether they or their family members own the debt security being discussed when they appear in public to speak about their work.
Exemptions were provided for analysts working for firms that engage in limited investment banking activity or that don’t trade with their own money above a certain threshold, Finra said. The disclosures are also limited for debt research distributed exclusively to institutional investors who are capable of “evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies,” the draft text said.