FINRA recently announced that it has fined 10 firms a total of $43.5 million for permitting their equity research analysts to solicit investment banking business and for offering favorable research coverage in connection with the 2010 planned initial public offering of Toys”R”Us.
The firms and their respective fines are:
- Barclays Capital Inc. – $5 million
- Citigroup Global Markets Inc. – $ 5million
- Credit Suisse Securities (USA), LLC – $5 million
- Goldman, Sachs & Co. – $5 million
- JP Morgan Securities LLC – $5 million
- Deutsche Bank Securities Inc. – $4 million
- Merrill Lynch, Pierce, Fenner & Smith Inc. – $4 million
- Morgan Stanley & Co., LLC – $4 million
- Wells Fargo Securities, LLC – $4 million
- Needham & Company LLC – $2.5 million
FINRA also found Barclays, Citigroup, Credit Suisse, Goldman Sachs, JP Morgan and Needham had inadequate supervisory procedures related to research analyst participation in investment banking pitches.
“FINRA’s research analyst conflict of interest rules make clear that firms may not use research analysts or the promise of offering favorable research to win investment banking business. Each of these firms used their analyst to solicit investment banking business from Toys”R”Us and offered favorable research. This settlement affirms our commitment to policing the boundaries between research and investment banking to ensure that research is not improperly influenced,” said Susan Axelrod, FINRA Executive Vice President, Regulatory Operations, in a statement released by FINRA.
In April 2010, Toys”R”Us and its private equity owners invited the firms to compete for participation in Toys”R”Us’ intended IPO. FINRA found that each firm used its equity research analyst as part of its solicitation. In particular, Toys”R”Us asked equity research analysts from each firm to make separate presentations to Toys”R”Us’ management and sponsors to ensure that the analysts’ views on key issues, including valuation factors, were consistent with those of the firm’s investment bankers. Each firm understood that the performance of their analysts at the presentations would be a critical factor in determining the firm’s possible participation in an IPO. FINRA found that each of the firms implicitly or explicitly, either at these meetings or in follow-up communications, offered favorable research coverage in exchange for a role in underwriting the IPO.
“The firms’ rush to assure the issuer and its sponsors that research was in synch with the pitch being made by their investment bankers caused them to overstep the prohibitions against analyst solicitation and the promise of favorable research. Today’s actions reaffirm the importance of these prohibitions to maintaining the integrity of the research function against whatever pressures may exist to monetize the reputation and work product of the analysts,” said Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, in a statement released by FINRA.
Toys”R”Us and its sponsors offered each of the 10 firms various roles in the IPO but ultimately decided against an IPO. In settling this matter, the firms neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
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