Investment Banking and Research
This chapter covers the underwriting of new issues, the rules for public offerings, the separation of research from banking, and the special rules that protect the integrity of both functions.
Underwriting and the Securities Act of 1933
New public offerings must be registered with the SEC under the Securities Act of 1933 unless an exemption applies. During the cooling-off period only a preliminary prospectus (red herring) may circulate, and no sales may be finalized. Underwriting can be firm commitment, in which the syndicate buys the issue and bears the risk, or best efforts, in which underwriters act only as agents. Exemptions include Regulation D private placements and Regulation A offerings.
Rules Governing Distributions
FINRA Rule 5110 (the Corporate Financing Rule) requires that underwriting terms and arrangements be filed and that compensation be fair and not unreasonable. Rule 5130 restricts the sale of new equity IPO shares to restricted persons, such as industry insiders, to prevent them from taking advantage of public offerings. Regulation M restricts issuers, underwriters, and other participants from bidding for or buying a security during its distribution to prevent artificial price support.
Research Analyst Independence
FINRA Rule 2241 separates research from investment banking to protect analyst objectivity. Investment banking cannot supervise analysts or control their compensation for specific deals, analysts may not offer favorable research to win banking business, and reports must disclose conflicts of interest. Quiet periods restrict a firm that participated in an offering from publishing research on that issuer for a set time after the offering.