Question 1

Why are there two different 'quiet periods' around an IPO?

Accepted Answer

The phrase 'quiet period' refers to two separate restrictions that arise at different points in an IPO and come from different bodies of law. The first is the issuer's pre-effective quiet period under Section 5 of the Securities Act of 1933, which limits offering-related communications before the registration statement is effective. The second is the research quiet period under FINRA Rule 2241, which restricts when a FINRA member that took part in an IPO may publish research about the issuer after the offering. Investor.gov describes the issuer quiet period as running, at a minimum, from the time a company files its registration statement until SEC staff declare it effective; failing to comply with the restrictions on making 'offers' during that window is referred to as 'gun-jumping,' and the SEC and courts construe 'offer' broadly to include communications that might generate public interest in an issuer or its securities. That Section 5 quiet period is addressed on the IPO Center's S-1 Filing and Waiting-Period Communications pages. The FINRA research quiet period is a separate, self-regulatory-organization restriction that operates after the offering under FINRA Rule 2241 and applies to research about the subject company rather than to the issuer's offering communications.

Question 2

What is FINRA Rule 2241, and what conflicts does it address?

Accepted Answer

FINRA Rule 2241 ('Research Analysts and Research Reports') governs equity research produced by FINRA member broker-dealers. It requires each member to establish, maintain, and enforce written policies and procedures reasonably designed to identify and effectively manage conflicts of interest related to the preparation, content, and distribution of research reports, public appearances by research analysts, and the interaction between research analysts and persons outside the research department, including investment banking personnel and the subject companies. The rule defines a 'research report,' in general, as a written (including electronic) communication that includes an analysis of equity securities of individual companies or industries and provides information reasonably sufficient upon which to base an investment decision, and a 'research analyst' as an associated person primarily responsible for the substance of a research report. Rule 2241 was adopted to replace the former NASD Rule 2711 and the corresponding Incorporated NYSE rules; FINRA announced its adoption in Regulatory Notice 15-30. The rule's conflict-management obligations run alongside the SEC's Regulation Analyst Certification (Regulation AC) and the antifraud provisions of the federal securities laws.

Question 3

What is the research quiet period after an IPO under Rule 2241?

Accepted Answer

Under FINRA Rule 2241(b)(2)(I), a member that has participated as an underwriter or dealer in an initial public offering must not publish or otherwise distribute a research report on the subject company, and its research analysts must not make a public appearance concerning that company, for a minimum of 10 days following the date of the IPO. The IPO quiet period reaches broadly: it applies to any member that participated as an underwriter or dealer in the offering, not only to the managing underwriters. It runs for a minimum of 10 days measured from the IPO date, so a member's own policies may set a longer period. The restriction is one element of the broader set of conflict-management requirements the rule imposes; it addresses the concern that research issued immediately after an offering by a firm that helped distribute the securities may be influenced by the firm's underwriting interest rather than by independent analysis. FINRA rule text is copyrighted self-regulatory-organization material; the requirement is described here in summary form, and the numeric period is stated as a fact drawn from the rule.

Question 4

Does the research quiet period also apply after a secondary offering?

Accepted Answer

Yes. FINRA Rule 2241(b)(2)(I) also imposes a quiet period of a minimum of 3 days following the date of a secondary offering, but only for a member that acted as a manager or co-manager of that offering. The secondary-offering quiet period is narrower than the IPO quiet period in two ways: it lasts a minimum of 3 days rather than 10, and it binds only members that served as manager or co-manager, rather than every participating underwriter or dealer. As with the IPO quiet period, the restriction covers both publishing or distributing research reports on the subject company and public appearances by the member's research analysts concerning that company during the period.

Question 5

How do the current quiet periods compare with the prior NASD rule?

Accepted Answer

The Rule 2241 quiet periods are shorter than those under the predecessor rule. FINRA Regulatory Notice 15-30 states that Rule 2241 reduced the former 40-day and 25-day IPO quiet periods to a minimum of 10 days, and reduced the former 10-day secondary-offering quiet period to a minimum of 3 days. The quiet-period provisions of Rule 2241 became effective September 25, 2015, with the remaining provisions effective December 24, 2015. Under the former NASD Rule 2711, the IPO quiet period was 40 days for a member acting as manager or co-manager and 25 days for other members that participated as underwriters or dealers, and the secondary-offering quiet period was 10 days for managers and co-managers. Rule 2241 consolidated the IPO restriction into a single minimum of 10 days for any participating underwriter or dealer and shortened the secondary-offering restriction to a minimum of 3 days for managers and co-managers. FINRA adopted Rule 2241 following SEC approval of the proposed rule change, as described in Regulatory Notice 15-30.

Question 6

What structural separation does Rule 2241 require between research and investment banking?

Accepted Answer

Rule 2241(b) requires members to insulate research analysts from investment banking. Its policies-and-procedures requirements include establishing information barriers or other institutional safeguards reasonably designed to ensure that research analysts are insulated from review, pressure, or oversight by persons engaged in investment banking services activities, prohibiting prepublication review or approval of research reports by investment banking personnel, and prohibiting investment banking personnel from supervising or controlling research analysts. The rule's conflict-management provisions also restrict investment banking personnel from influencing which companies research covers, prohibit retaliation or the threat of retaliation against a research analyst for an unfavorable research report or public appearance, and restrict the ability of the subject company, investment banking, and other non-research personnel to review a research report before publication (with a limited exception permitting a factual-accuracy review under specified conditions). These requirements build on the separation of research from investment banking that regulators required after the conflicts identified in the 2003 Global Research Analyst Settlement. FINRA rule text is copyrighted; the requirements are summarized here rather than reproduced.

Question 7

How are research analysts' compensation and budget insulated from banking?

Accepted Answer

Rule 2241(b) requires members to prohibit compensation to a research analyst that is based upon a specific investment banking services transaction, and to limit determination of the research department's budget to senior management, excluding persons engaged in investment banking services activities from that determination. The rule permits consideration of a research analyst's compensation to reflect the analyst's contribution to the member's overall investment banking business, but not any specific banking transaction, and it requires that a committee reporting to a member's board or a senior executive officer review and approve the compensation of research analysts (a review that must consider stated factors and may not consider an analyst's contributions to the member's investment banking business). By separating budget and compensation decisions from individual banking deals, the rule reinforces the structural separation and quiet-period requirements described above.

Question 8

What did the JOBS Act change for research about emerging growth companies?

Accepted Answer

Section 105(a) of the JOBS Act amended Section 2(a)(3) of the Securities Act of 1933 so that the publication or distribution by a broker or dealer of a research report about an emerging growth company (EGC) that is the subject of a proposed public offering of the company's common equity — under a registration statement the issuer proposes to file, has filed, or that is effective — is not deemed, for purposes of the 'prospectus' definition in Section 2(a)(10) and the offer restriction in Section 5(c), to constitute an offer for sale or offer to sell a security, even if the broker or dealer is participating or will participate in the registered offering. For that provision, Section 2(a)(3) defines 'research report' broadly, as a written, electronic, or oral communication that includes information, opinions, or recommendations with respect to securities of an issuer or an analysis of a security or an issuer, whether or not it provides information reasonably sufficient upon which to base an investment decision. The practical effect is that a participating firm's research about an EGC in registration is not treated as a prohibited 'offer' under the Securities Act, removing a gun-jumping concern that would otherwise arise for research published around the offering. This carve-out is specific to emerging growth companies; the general Section 5 framework continues to apply to issuers that are not EGCs.

Question 9

Do the FINRA research quiet periods apply to an emerging growth company IPO?

Accepted Answer

No. Section 105(d) of the JOBS Act provides that neither the SEC nor any national securities association registered under Section 15A of the Securities Exchange Act of 1934 (FINRA is the registered national securities association) may adopt or maintain any rule or regulation prohibiting a broker, dealer, or member from publishing or distributing a research report, or making a public appearance, about the securities of an emerging growth company within any prescribed period following the IPO date, or within any prescribed period before the expiration of a lock-up agreement. As a result, the Rule 2241 quiet periods do not apply following the IPO or secondary offering of an emerging growth company. Section 105(d) reaches both the timing restriction that would otherwise apply following the IPO date and the timing restriction formerly imposed around the expiration of lock-up agreements (the latter historically described as the 'booster shot' restriction). FINRA Regulatory Notice 15-30 states that the quiet periods in Rule 2241 do not apply following the IPO or secondary offering of an emerging growth company, consistent with the JOBS Act. As a result, the Rule 2241 quiet periods do not bind the underwriters of an emerging growth company's IPO or secondary offering, while they continue to apply to IPOs and secondary offerings of issuers that are not emerging growth companies.

Question 10

May analysts and bankers interact around an emerging growth company offering?

Accepted Answer

Section 105(b) of the JOBS Act amended Section 15D of the Securities Exchange Act of 1934 to bar the SEC and any registered national securities association, in connection with an IPO of the common equity of an emerging growth company, from adopting or maintaining any rule or regulation that (1) restricts, based on functional role, which associated persons of a broker, dealer, or member may arrange for communications between a securities analyst and a potential investor, or (2) restricts a securities analyst from participating in communications with the management of an emerging growth company that is also attended by any other associated person whose functional role is other than as a securities analyst. In its Frequently Asked Questions on the JOBS Act, the SEC's Division of Trading and Markets summarizes Section 105(b) as prohibiting the Commission or a national securities association from restricting, based on functional role, which associated persons may arrange communications between an analyst and a potential investor, and from restricting an analyst from participating in communications with EGC management attended by non-analyst personnel. The SEC staff note that these FAQs are not rules, regulations, or statements of the Commission. These provisions relax, for EGC offerings, certain restrictions on analyst interaction with investment banking and with management that would otherwise apply.

Question 11

When can an underwriter's analysts begin publishing research after an IPO?

Accepted Answer

For an IPO of an issuer that is not an emerging growth company, a FINRA member that participated as an underwriter or dealer must observe the Rule 2241(b)(2)(I) quiet period — a minimum of 10 days following the IPO date — before publishing or distributing a research report on the subject company or having its analysts make a public appearance about it. For an IPO of an emerging growth company, the JOBS Act removes that timing restriction, so no FINRA quiet period bars research about the company after the offering. The timing rules govern only when research may be published; they do not authorize the content of any research, which remains subject to the conflict-management, disclosure, and antifraud requirements of Rule 2241, SEC Regulation AC, and the federal securities laws. Whether or not a quiet period applies, a member's research on any issuer must comply with those requirements, and a member may adopt policies that impose a longer waiting period than the rule's minimum.

Question 12

What was the Global Research Analyst Settlement of 2003?

Accepted Answer

The Global Research Analyst Settlement was a set of enforcement actions announced on April 28, 2003 by the SEC, the New York Attorney General, the North American Securities Administrators Association, NASD, the New York Stock Exchange, and state regulators, resolving allegations that investment banking interests had exerted undue influence over securities research at major brokerage firms. Ten firms agreed to payments totaling roughly $1.4 billion and to structural reforms separating research from investment banking. Per the SEC's April 28, 2003 press release (2003-54), the ten firms were to pay $875 million in penalties and disgorgement ($487.5 million in penalties and $387.5 million in disgorgement), $432.5 million to fund independent research, and $80 million to fund investor education, and were required to separate their research and investment banking departments, change how research is reviewed and supervised, and make independent research available to investors. In its later JOBS Act FAQs, the SEC staff note that the Commission, SROs, and other regulators instituted settled enforcement actions against 12 broker-dealers in 2003 and 2004 to address these conflicts, and that the JOBS Act does not amend or modify the Global Settlement. The structural separations that FINRA Rule 2241 now requires reflect the reforms this settlement introduced.

Quiet period	Who is restricted	Trigger and duration	Source
Issuer quiet period (Securities Act Section 5)	The issuer and persons acting on its behalf, and offering participants — as to 'offers' of the securities	Runs at a minimum from the filing of the registration statement until SEC staff declare it effective; non-compliant offers are 'gun-jumping'	Securities Act §5; SEC / Investor.gov (Quiet Period) · source
Research quiet period — IPO (FINRA Rule 2241)	A FINRA member that participated as an underwriter or dealer in the IPO	A minimum of 10 days following the IPO date — no research report on, or analyst public appearance about, the subject company	FINRA Rule 2241(b)(2)(I) · source
Research quiet period — secondary offering (FINRA Rule 2241)	A FINRA member that acted as a manager or co-manager of the secondary offering	A minimum of 3 days following the secondary offering date — no research report on, or analyst public appearance about, the subject company	FINRA Rule 2241(b)(2)(I) · source
JOBS Act EGC carve-out	The SEC and FINRA — barred from imposing research timing restrictions for emerging growth companies (so the Rule 2241 quiet periods do not apply)	No prescribed period may be imposed following an EGC's IPO date or before a lock-up agreement's expiration	JOBS Act §105(a) and §105(d), Pub. L. 112-106 · source

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