In a May 7, 2010 speech at SIMFA Compliance & Legal Division’s Annual Seminar, Rick Ketchum, the Chairman and CEO of FINRA, said we can expect FINRA to “move forward with a [fixed income research] proposal this year.” While there have been sweeping changes to the rules governing equity research in recent years, the changes (including the Global Settlement) do not apply to fixed income research because of the significant differences in how fixed income and equity analysts operate.
In May 2004, the Bond Market Association (BMA, which later merged with the Securities Industry Association to form SIMFA) issued “Guiding Principles to Promote the Integrity of Fixed Income Research” (pdf), which was designed to help firms manage potential conflicts of interest that may arise in the context of fixed income research. However, the NASD and the NYSE (which have since merged to form FINRA), stated in a joint report issued in December 2005 (“Joint Report by NASD and the NYSE On the Operation and Effectiveness of the Research Analyst Conflict of Interest Rules” (pdf)) that they did not believe it was appropriate at that time to codify the BMA’s Guiding Principles or to extend the rules governing equity research to fixed income research. Rather, NASD and NYSE said they would monitor firms’ voluntary acceptance of the Guiding Principles and would consider further rulemaking after assessing the effectiveness of voluntary compliance.
In his speech, Ketchum stated: “While the BMA principles have served the industry well, we have seen through our examination process that they have not been universally adopted and, of course, they didn’t address the interaction of analysts and the trading desks. This is a perfect area for the industry to work with us to identify the best practices that have been implemented to address the obvious conflicts that exist in this area.” FINRA has clearly signaled that fixed income analysts can expect a proposal for “dramatic regulatory changes” this year.
In July 2006, NASD and NYSE jointly issued Notice to Members 06-36, in which they reported on the findings of their review of some firms to asses how they addressed conflict of interest with respect to fixed income research. NASD and NYSE stated that they had found many instances in which firms had failed to adhere to the Guidling Principles, as well as several instances where firms failed to establish, maintain and enforce written supervisory procedures in the fixed income research area.
It is unclear why four years later, FINRA believes a rule proposal for fixed income research is now necessary. To his credit, Rick Ketchum stated during his SIFMA speach as well as in his speach at a FINRA Fixed Income Conference on March 9, 2010, that FINRA would be working with the industry to fully understand the fixed income market and the role of research analysts before they act.