The Southern District of New York (“SDNY”) recently agreed to modify the Global Research Equity Settlement (“Global Settlement”) paving the way for chaperoned research analyst and investment banking participation in joint due diligence sessions under certain circumstances. Joint due diligence sessions not only reduce the burden on the issuer and other diligence participants of participating in multiple duplicative sessions but can also lead to a more robust and informed dialogue. We expect investment banks will promptly change their procedures to take advantage of this new flexibility.
In 2003, a number of the major banking firms entered into the Global Settlement with the SEC, state securities regulators, NASD, and NYSE in response to allegations that their investment banking interests had undue influence on securities research. Earlier this week the SDNY agreed to modify certain provisions of the settlement as requested by the settling firms. While many of the modifications merely eliminated provisions that were duplicative of comparable restrictions still imposed by the FINRA or NYSE rules, some of the modifications allow for greater flexibility in communications between research and banking personnel.
Most significantly, investment banking and research analysts may now participate in joint due diligence sessions with the issuer or third parties but only if the joint session:
- takes place after the receipt by the firm of an investment banking mandate, or
- in the case of an investment banking transaction other than an IPO, is in connection with a block bid, or with a competitive secondary or follow-on offering or similar transaction in which:
- the issuer or selling shareholder has contacted the firm to request that the firm submit a transaction proposal and
- the firm’s legal or compliance staff reasonably believes that the firm will not have a meaningful opportunity to conduct separate due diligence communications with the relevant parties prior to the award of a mandate for the transaction.
In addition, legal or compliance personnel or other counsel must chaperone the joint sessions and any subsequent discussions between research and investment banking personnel about the joint sessions. We expect many firms will have underwriters’ counsel play this role.
See a copy of the SDNY Order containing the amended Global Settlement undertakings.