Statement on the Global Research Analyst Settlement

Today, the Commission took an important step toward eliminating outdated and costly requirements on firms and improving the availability of equity research in our markets by agreeing to amend the Global Research Analyst Settlement (the "Global Research Settlement").[1]

The history behind the Global Research Settlement dates back to the dot-com bubble of the late-1990s that eventually burst. During that time, concerns were raised about the role played by sell-side investment research. Specifically, investment bankers were alleged to have influenced research analysts, biasing their work product to attract investment banking business based on favorable company reports. The SEC, the then-NASD (now FINRA), the NYSE, the North American Securities Administrators Association, and the New York State Attorney General settled with 12 major broker-dealer firms for failing to manage conflicts of interest between their research analysts and investment bankers.[2]

The Global Research Settlement was the result. It required these broker-dealers to wall off research analysts from investment banking by undertaking several prescriptive measures. Being a product of an enforcement action, however, these undertakings never went through a notice-and-comment rulemaking process. The very terms of the settlement itself contemplated that future rulemakings in this area would follow, and that the Commission should reevaluate its application over time.

Since 2004, the regulatory framework in this area has developed dramatically. The SEC adopted Regulation AC, which generally requires research analysts to certify the truthfulness of the views they express in research reports and public appearances, and to disclose whether they have received any compensation related to the specific recommendations or views expressed in those reports and appearances.[3] Additionally, in 2015, FINRA adopted Rule 2241, which sought to address the same conflicts of interest targeted by the Global Research Settlement, but in a more principles-based manner.

It's worth noting that additional regulation has come from outside the United States. Following the actions of regulators in the European Union and United Kingdom, U.S. broker-dealers that sell research to E.U. and U.K. asset managers are now subject to myriad, and sometimes conflicting, regulations.[4]

It's not a coincidence that since 2004, there has been a lot less research out of Wall Street, particularly for small and medium-sized companies. The result has been a chilling effect on research coverage in precisely the segments-emerging growth and smaller public companies-where investors most need high-quality analysis. In 2017, the U.S. Department of the Treasury recommended that the SEC conduct a holistic review of the Global Research Settlement and the research analyst rules to determine which provisions should be retained, amended, or removed, with the objective of harmonizing a single set of rules for all financial institutions.[5]

Today, the Commission moved toward more thoughtfully regulating some of the most important providers of sell-side equity research. It seems hard to argue that the requirements of the Global Research Settlement still hold their relevance. FINRA Rule 2241 now provides a robust framework for managing research analyst conflicts, disclosures, and supervision, but does so through a principles-based SRO rule that can be updated through notice-and-comment and interpreted consistently across member firms. These are not weaker protections; rather, they are conflict-mitigation tools that are targeted, transparent, and aligned with how research is actually produced, paid for, and consumed. The Commission's action will lower compliance friction, promote more consistent interpretations, and, ultimately, expand the availability of research coverage that helps investors make better decisions.

In short, this is the kind of good government reform that will better serve investors, issuers, and the integrity of our U.S. capital markets.