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Global Research Analyst Settlement Proving Unsettling for Issuers

Mark L. Johnson and Gregory M. Woods, Wilmer Cutler Pickering Hale and Dorr LLP (Boston office)


The much publicized "global research analyst settlement" is reshaping the ways brokerage firms conduct business, with significant consequences for companies contemplating initial public offerings. Changes are being undertaken not only by the firms subject to the global settlement, but also by most other brokerage firms as industry best practices. Based on our initial experience, we offer the following guidance:

Cultivate independent relationships with analysts.

The global settlement limits interactions between research analysts and investment bankers in order to avoid inappropriate influence by banking personnel over research decisions. The settlement, for example, prohibits an analyst's "participation" in efforts to solicit investment banking business.

Expect to meet with research personnel separately from bankers.

Analysts will no longer join bankers in "dog and pony shows." Some brokerage firms are banning all joint conference calls and meetings among analysts, bankers and issuers, including early-stage companies. Prior to engaging a brokerage firm for an IPO, you should expect that the firm's analyst will focus on conducting due diligence and discussing your business and industry, but will avoid discussing a potential offering.

Obtain commitment from research management to initiate coverage.

Research management will now make all company-specific coverage decisions, with little or no input from bankers. You may wish to contact research management directly to request a commitment to initiate coverage, subject to analyst diligence. Although such a commitment is permitted, neither research management nor any individual analyst may undertake to issue a favorable rating for your stock.

Prepare for duplicative due diligence.

Analysts will perform a diligence review in order to screen your financing for their investor clients and to assist their firms' commitment committees. They are likely to conduct their diligence review without the involvement of investment banking and then provide feedback to bankers in the presence of a "chaperone"-typically a member of the brokerage firm's legal or compliance staff. As a result, background presentations and analyst diligence calls may need to be made outside the presence of bankers.

Finalize the managing underwriter group early.

Analysts may no longer "piggyback" on diligence procedures completed by bankers. You should engage all of your co-managers sufficiently early in the process to give their analysts time to complete their diligence efforts without delaying the offering timetable.

Understand analysts' role in preparing and marketing IPOs.

Analysts' ability to participate in the selling of securities has been significantly circumscribed.

Expect less help from analysts in drafting.

In the past, drafting sessions provided a company with an opportunity to benefit from an analyst's views of the company's industry and business. Under the global settlement, an analyst may assist in "confirming the adequacy" of disclosure, but may not comment on the prospectus in the presence of bankers unless a "chaperone" is present. Uncertainty about this process, as well as general caution about interactions between analysts and bankers, seems to have chilled analyst participation in drafting sessions to date.

Prepare your road show presentation without help from analysts.

Previously, analysts played a key role in helping companies prepare road show presentations. Now, analysts may not review or comment on draft road show slides or attend road show presentations or "dry runs" of those presentations.

Outperform on the road show.

The global settlement has eliminated the ability of banking to direct analysts to initiate contacts with prospective investors. Road show presentations therefore are likely to play an even more important role in post-settlement offerings. You should work closely with your bankers to ensure that your road show presentation communicates your key messages and value proposition effectively, and with equity capital markets to ensure the presentation reaches an appropriate investor group.

Prepare for the new post-IPO environment.

The global settlement also affects public companies, even when they are not pursuing a financing. Management may no longer be able to meet simultaneously with analysts and bankers, for example, at investor conferences or in social interactions. Because analysts may no longer suggest potential transactions to bankers, a public company will need to regularly update its bankers about the company's business, so that the bankers can help identify market opportunities.