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Addendum A
Undertakings
The firm shall comply with the following undertakings:
1.
Reporting Lines. Research and
Investment Banking will be separate units with entirely separate reporting
lines within the firm – i.e., Research will not report directly or indirectly
to or through Investment Banking. For
these purposes, the head of Research may report to or through a person or
persons to whom the head of Investment Banking also reports, provided that such
person or persons have no direct responsibility for Investment Banking or
investment banking activities.
a.
As used throughout
this Addendum, the term “firm” means the Defendant, Defendant’s successors and
assigns (which, for these purposes, shall include a successor or assign to
Defendant’s investment banking and research operations), and their affiliates,
other than “exempt investment adviser affiliates.”
b.
As used throughout this Addendum, the term "exempt investment
adviser affiliate" means an investment adviser affiliate (including, for
these purposes, a separately identifiable department or division that is
principally engaged in the provision of investment advice to managed accounts
as governed by the Investment Advisers Act of 1940 or investment companies
under the Investment Company Act of 1940) having no officers (or persons
performing similar functions) or employees in common with the firm (which, for
purposes of this Section I.1.b, shall not include the investment adviser
affiliate) who can influence the activities of the firm's Research personnel or
the content of the firm's research reports; provided that the firm (i)
maintains and enforces written policies and procedures reasonably designed to
prevent the firm, any controlling persons, officers (or persons performing
similar functions), or employees of the firm from influencing or seeking to
influence the activities of Research personnel of, or the content of research
reports prepared by, the investment adviser affiliate; (ii) obtains an annual
independent assessment of the operation of such policies and procedures; and
(iii) does not furnish to its customers research reports prepared by the
investment adviser affiliate or otherwise use such investment adviser affiliate
to do indirectly what the firm may not do directly under this Addendum.
c.
As used throughout
this Addendum, the term “Investment Banking” means all firm personnel engaged
principally in investment banking activities, including the solicitation of
issuers and structuring of public offering and other investment banking
transactions. It also includes all firm
personnel who are directly or indirectly supervised by such persons and all
personnel who directly or indirectly supervise such persons, up to and
including Investment Banking management.
d.
As used throughout
this Addendum, the term “Research” means all firm personnel engaged principally
in the preparation and/or publication of research reports, including firm
personnel who are directly or indirectly supervised by such persons and those who
directly or indirectly supervise such persons, up to and including Research
management.
e.
As used throughout
this Addendum, the term “research report” means any written (including
electronic) communication that is furnished by the firm to investors in the
U.S. and that includes an analysis of the common stock, any security
convertible into common stock, or any derivative thereof, including American
Depositary Receipts (collectively, “Securities”), of an issuer or issuers and
provides information reasonably sufficient upon which to base an investment
decision; provided, however, that a “research report” shall not include:
i.
the following
communications, if they do not include (except as specified below) an analysis,
recommendation or rating (e.g., buy/sell/hold, under perform/market
perform/outperform, underweight/market weight/overweight, etc.) of individual
securities or issuers:
1.
reports discussing
broad-based indices, such as the Russell 2000 or S&P 500 index;
2.
reports commenting on
economic, political or market (including trading) conditions;
3.
technical or
quantitative analysis concerning the demand and supply for a sector, index or
industry based on trading volume and price;
4.
reports that recommend
increasing or decreasing holdings in particular industries or sectors or types
of securities; and
5.
statistical summaries
of multiple companies’ financial data and broad-based summaries or listings of
recommendations or ratings contained in previously-issued research reports,
provided that such summaries or listings do not include any analysis of
individual companies; and
ii.
the following
communications, even if they include information reasonably sufficient upon
which to base an investment decision or a recommendation or rating of
individual securities or companies:
1.
an analysis prepared
for a current or prospective investing customer or group of current or
prospective investing customers by a registered salesperson or trader who is
(or group of registered salespersons or traders who are) not principally
engaged in the preparation or publication of research reports; and
2.
periodic reports,
solicitations or other communications prepared for current or prospective investment company shareholders (or similar
beneficial owners of trusts and limited partnerships) or discretionary
investment account clients, provided that such communications discuss past
performance or the basis for previously made discretionary investment
decisions.
f.
As used throughout
this Addendum, the term “technical research report” means any written (including
electronic) communication that is furnished by the firm to investors in the
U.S. and that includes an analysis of the Securities of an issuer or issuers,
that is based solely on prices and trading volume and not on the issuer's
financial information, business prospects, or contact with issuer management,
and that provides information reasonably sufficient upon which to base an
investment decision.
g.
As used throughout
this Addendum, the term “quantitative research report” means any written
(including electronic) communication that is furnished by the firm to investors
in the U.S. and that includes an analysis of the Securities of an issuer or
issuers, that relies solely on the systematic application of statistical
or numerical techniques to publicly available data, that does not include a
qualitative assessment of an issuer's business prospects or contact with issuer
management, and that provides information reasonably sufficient upon which to
base an investment decision.
h.
As used throughout
this Addendum, the term “Institutional Customer” means an entity other than a
natural person having at least $10 million invested in securities in the
aggregate in its portfolio and/or under management.
i.
As used throughout
this Addendum the term “Small Institutional Customer” means an entity other
than a natural person having less than $10 million and more than $1 million
invested in securities in the aggregate in its portfolio and/or under
management.
2. Legal/Compliance. Research will have its own dedicated legal
and
compliance staff, who may
be a part of the firm’s overall compliance/legal infrastructure.
3. Budget. For the firm’s first fiscal year following
the entry of the Final Judgment in the SEC’s action against Defendant (“Final
Judgment”) and thereafter, Research budget and allocation of Research expenses
will be determined by the firm’s senior management (e.g.,
CEO/Chairman/management committee, other than Investment Banking personnel)
without input from Investment Banking and without regard to specific revenues
or results derived from Investment Banking, though revenues and results of the
firm as a whole may be considered in determining Research budget and allocation
of Research expenses. On an annual basis
thereafter, the Audit Committee of the firm’s holding/parent company (or
comparable independent persons/group without management responsibilities) will
review the budgeting and expense allocation process with respect to Research to
ensure compliance with this requirement.
4. Physical
Separation. Research and Investment
Banking will be physically separated.
Such physical separation will be reasonably designed to prevent the
intentional and unintentional flow of information between Research and
Investment Banking.
5.
Compensation. Compensation of
professional Research personnel will be determined exclusively by Research
management and the firm’s senior management (but not including Investment
Banking personnel) using the following principles:
a.
Investment Banking
will have no input into compensation decisions.
b.
Compensation may not
be based directly or indirectly on Investment Banking revenues or results;
provided, however, that compensation may relate to the revenues or results of
the firm as a whole.
c.
A significant portion
of the compensation of anyone principally engaged in the preparation of
research reports (as defined in this Addendum) that he or she is required to
certify pursuant to the U.S. Securities and Exchange Commission’s Regulation
Analyst Certification (“Regulation AC”) (such person hereinafter a “lead
analyst”) must be based on quantifiable measures of the quality and accuracy of the lead analyst’s
research and analysis, including his or her ratings and price targets, if
any. In assessing quality, the firm may
rely on, among other things, evaluations by the firm’s investing customers,
evaluations by the firm’s sales personnel and rankings in independent
surveys. In assessing accuracy, the firm
may use the actual performance of a company or its equity securities to rank
its own lead analysts’ ratings and price targets, if any, and forecasts, if
any, against those of other firms, as well as against benchmarks such as market
or sector indices.
d.
Other factors that may
be taken into consideration in determining lead analyst compensation include: (i) market capitalization of, and the
potential interest of the firm’s investing clients in research with respect to,
the industry covered by the analyst; (ii) Research management’s assessment of
the analyst’s overall performance of job duties, abilities and leadership;
(iii) the analyst’s seniority and experience; (iv) the analyst’s productivity;
and (v) the market for the hiring and retention of analysts.
e.
The criteria to be
used for compensation decisions will be determined by Research management and
the firm’s senior management (not including Investment Banking) and set forth
in writing in advance.
f.
Research management
will document the basis for each compensation decision made with respect to (i)
anyone who, in the last 12 months, has been required to certify a research
report (as defined in this Addendum) pursuant to Regulation AC; and (ii) anyone
who is a member of Research management (except in the case of senior-most
Research management, in which case the basis for each compensation decision
will be documented by the firm’s senior management).
On an annual basis, the
Compensation Committee of the firm’s holding/parent company (or comparable
independent persons/group without management responsibilities) will review the
compensation process for Research personnel.
Such review will be reasonably designed to ensure that compensation
decisions have been made in a manner that is consistent with these
requirements.
6. Evaluations. Evaluations of Research personnel will not be
done by, nor will there be input from, Investment Banking personnel.
7. Coverage. Investment Banking will have no input into
company-specific coverage decisions
(i.e., whether or not to initiate or terminate coverage of a particular company
in research reports furnished by the firm), and investment banking revenues or
potential revenues will not be taken into account in making company-specific
coverage decisions; provided, however, that this requirement does not apply to
category-by-category coverage decisions (e.g., a given industry sector, all
issuers underwritten by the firm, companies meeting a certain market cap
threshold).
8.
Termination of
Coverage.
When a decision is made to terminate coverage of a particular company in
the firm’s research reports (whether as a result of a company-specific or
category-by-category decision), the firm will make available a final research
report on the company using the means of dissemination equivalent to those
it ordinarily uses; provided, however, that no
final report is required for any company as to which the firm’s prior coverage
has been limited to quantitative or technical research reports. Such report will be comparable to prior
reports, unless it is impracticable for the firm to produce a comparable report
(e.g., if the analyst covering the company and/or sector has left the
firm). In any event, the final research
report must disclose: the firm’s
termination of coverage; and the rationale for the decision to terminate
coverage.
9. Prohibition on
Soliciting Investment Banking Business.
Research is prohibited from participating in efforts to solicit
investment banking business.
Accordingly, Research may not, among other things, participate in any
“pitches” for investment banking business to prospective investment banking clients,
or have other communications with companies for the purpose of soliciting
investment banking business.
10. Firewalls
Between Research and Investment Banking.
So as to reduce further the potential for conflicts of interest or the
appearance of conflicts of interest, the firm must create and enforce firewalls
between Research and Investment Banking reasonably designed to prohibit all
communications between the two except as expressly described below:
a.
Investment Banking
personnel may seek, through Research management (or an appropriate designee
with comparable management or control responsibilities (“Designee”)) or in the
presence of internal legal or compliance staff, the views of Research personnel
about the merits of a proposed transaction, a potential candidate for a
transaction, or market or industry trends, conditions or developments. Research personnel may respond to such
inquiries on these subjects through Research management or its Designee or in
the presence of internal legal or compliance staff. In addition, Research personnel, through
Research management or its Designee or in the presence of internal legal or
compliance staff, may initiate communications with Investment Banking personnel
relating to market or industry trends, conditions or developments, provided
that such communications are consistent in nature with the types of
communications that an analyst might have with investing customers. Any communications between Research and
Investment Banking personnel must not be made for the purpose of having
Research personnel identify specific potential investment banking transactions.
b.
In response to a
request by a commitment or similar committee or subgroup thereof, Research
personnel may communicate their views about a proposed transaction or potential
candidate for a transaction to the committee or subgroup thereof in connection
with the review of such transaction or candidate by the committee. Investment Banking personnel working on the
proposed transaction may participate with the Research personnel in these
discussions with such committee or subgroup.
However, the Research personnel also must have an opportunity to express
their views to the committee or subgroup outside the presence of such Investment
Banking personnel.
c.
Research personnel may
assist the firm in confirming the adequacy of disclosure in offering or other
disclosure documents for a transaction based on the analysts’ communications
with the company and other vetting conducted outside the presence of Investment
Banking personnel, but to the extent communicated to Investment Banking
personnel, such communication shall only be made in the presence of
underwriters’ or other counsel on the transaction or internal legal or
compliance staff.
d.
After the firm receives an investment banking mandate, or in
connection with a block bid or similar transaction,
Research personnel may
(i) Communicate their views on the pricing and
structuring of the transaction to personnel in the firm’s equity capital
markets group, which group’s principal job responsibility is the pricing and
structuring of transactions;
(ii) Provide to personnel in the firm’s equity
capital markets group information obtained from investing customers relevant to
the pricing and structuring of the transaction;
(iii) Participate with
the equity capital markets group, or independently,
in efforts to educate the firm’s sales force regarding the transaction,
including assisting in the preparation of internal-use memoranda (including
presentations in electronic format) and communicating with the firm’s sales
force, provided that Research personnel may not appear jointly with
management of the issuer or Investment Banking personnel other than members of
the equity capital markets group in such communications with the firm’s sales
force, and provided that the following conditions are satisfied:
1)
Such oral
communications by Research personnel with the firm’s sales force personnel
regarding the transaction in which a recommendation or view, whether or not labeled as such, is expressed
by such Research personnel regarding the transaction must
have a reasonable basis;
2)
Such oral
communications to a group of ten or more of the firm’s sales force must be
“fair and balanced”, as such phrase is generally understood under NASD Rule 2210(d)(1)
and after taking into consideration the overall context in which such
communications are made (hereinafter referred to as the “fair and balanced
standard”). In addition, all such oral
communications to a group of ten or more of the firm’s sales force must be made in the
presence of internal legal or
compliance personnel;
3)
All internal-use
memoranda (or portions thereof) regarding such transaction that are identified
as being the views of Research personnel (such memoranda or portions thereof
hereinafter referred to as “internal Research memoranda”) must comply with the
fair and balanced standard;
4)
Internal Research
memoranda that are distributed to a group of ten or more of the firm’s sales
force must be reviewed in advance by internal legal or compliance personnel;
5)
A written log of all
oral communications described in (2) above must be maintained; and
6)
All written logs and
all internal Research memoranda described in (4) above
must be retained for the period required by Rule 17a-4(b)(4).
e. Research personnel may attend or participate
in a widely-attended conference attended by Investment Banking personnel or in
which Investment Banking personnel participate, provided that the Research
personnel do not participate in activities otherwise prohibited herein.
f. Research and Investment Banking personnel may
attend or participate in widely-attended firm or regional meetings at which
matters of general firm interest are discussed.
Research management and Investment Banking management may attend meetings
or sit on firm management, risk or similar committees at which general business
and plans (including those of Investment Banking and Research) and other
matters of general firm interest are discussed.
Research and Investment Banking personnel may communicate with each
other with respect to legal or compliance issues, provided that internal legal
or compliance staff is present.
g. Communications between Research and Investment
Banking personnel that are not related to investment banking or research activities
may take place without restriction.
11. Additional
Restrictions on Activities By Research and Investment Banking Personnel.
a. Research
personnel are prohibited from participating in company- or Investment
Banking-sponsored road shows related to a public offering or other investment
banking transaction.
b. Investment
Banking personnel are prohibited from directing Research personnel to engage in
marketing or selling efforts to investors with respect to an investment banking
transaction.
c. After the firm
receives an investment banking mandate relating to a
public offering of securities, Research personnel may communicate with
investors regarding such offering provided that Research personnel may not
appear jointly with management of the issuer or Investment Banking personnel in
such communications, and provided that the following conditions are satisfied:
1)
Such oral
communications by Research personnel with investors regarding the offering in
which a recommendation or view,
whether or not labeled as such, is expressed by such Research personnel regarding the offering
must have a reasonable basis;
2)
Such oral
communications to a group of ten or more investors regarding such offering must
comply with the fair and balanced standard;
3)
All such oral
communications to a group of ten or more investors must be made in the presence of
internal legal or compliance personnel;
4)
A written log of all
oral communications described in (2) above must be maintained; and
5)
All written logs must
be retained for the period required by Rule 17a-4(b)(4).
12. Oversight. An oversight/monitoring committee or
committees, which will be comprised of representatives of Research management
and may include others (but not personnel from Investment Banking), will be
created to:
a.
review (beforehand,
where practicable) all changes in ratings, if any, and material changes in
price targets, if any, contained in the firm’s research reports;
b.
conduct periodic
reviews of research reports to determine whether changes in ratings or price
targets, if any, should be considered; and
c.
monitor the overall
quality and accuracy of the firm’s research reports;
provided, however, that
Sections I.12.a and I.12.b of this Addendum shall not be required with respect
to quantitative or technical research reports.
II. Disclosure/Transparency and Other Issues
1.
Disclosures.
In addition to other disclosures required by rule, the firm must
disclose prominently on the first page of any research report and any summary
or listing of recommendations or ratings contained in previously-issued
research reports, in type no smaller than the type used for the text of the
report or summary or listing, that:
a. “[Firm] does and
seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a
conflict of interest that could affect the objectivity of this report.”
b. With respect to
Covered Companies as to which the firm is required to make available
Independent Research (as set forth in Section III below): “Customers of [firm] in the United States can
receive independent, third-party research on the company or companies covered
in this report, at no cost to them, where such research is available. Customers can access this independent research
at [website address/hyperlink] or can call [toll-free number] to request a copy
of this research.”
c. “Investors
should consider this report as only a single factor in making their investment
decision.”
2. Transparency of
Analysts’ Performance. The firm will make
publicly available (via its website, in a downloadable format), no later than
90 days after the conclusion of each quarter (beginning with the quarter that
commences on
January 1, 2005), the following information, if such
information is included in any research report (other than any quantitative or
technical research report) prepared and furnished by the firm during the prior
quarter: subject company, name(s) of
analyst(s) responsible for certification of the report pursuant to Regulation AC,
date of report, rating, price target, period within which the price target is
to be achieved, earnings per share forecast(s) for the current quarter, the
next quarter and the current full year, indicating the period(s) for which such
forecast(s) are applicable (e.g., 3Q03, FY04, etc.), and definition/explanation
of ratings used by the firm.
3. Applicability. Except as specified in the second and third
sentences of this Section II.3, the restrictions and requirements set forth in
Section I [Separation of Research and Investment Banking] and Section II
[Disclosure/Transparency and Other Issues] of this Addendum will only apply in
respect of a research report that is both (i) prepared by the firm, and (ii)
that relates to either (A) a U.S. company, or (B) a non-U.S. company for which
a U.S. market is the principal equity trading market; provided, however, that
such restrictions and requirements do not apply to Research activities relating
to a non-U.S. company until the second calendar quarter following the calendar
quarter in which the U.S. market became the principal equity trading market for
such company. Notwithstanding the
foregoing, Section I.7 [Coverage] of this Addendum will also apply to any
research report (other than the Independent Research made available by the firm
pursuant to Section III [Independent, Third-Party Research] of this Addendum)
that has been furnished by the firm
to investors in the U.S., but not prepared by the firm, but only to the extent
that the report relates to either (A) a U.S. company, or (B) a non-U.S. company
for which a U.S. market is the principal equity trading market. Also notwithstanding the foregoing, Section
II.1 [Disclosures] of this Addendum will also apply to any research report
(other than the Independent Research made available by the firm pursuant to
Section III of this Addendum) that has been furnished
by the firm to investors in the U.S., but not prepared by the firm, including a
report that relates to a non-U.S. company for which a U.S. market is not the
principal equity trading market, but only to the extent that the report has
been furnished under the firm’s name, has been prepared for the exclusive or
sole use of the firm or its customers, or has been customized in any material
respect for the firm or its customers.
a.
For purposes of this Section II.3, the firm will be deemed
to have furnished a research report to investors in the
b.
For purposes of this Section II.3, a “
c.
For purposes of this Section II.3, the calendar quarter in
which a non-U.S. company’s “principal equity trading market” becomes the U.S.
market is a quarter when more than 50% of worldwide trading in the company’s
common stock and equivalents (such as ordinary shares or common stock or
ordinary shares represented by American Depositary Receipts) takes place in the
U.S. Trading volume shall be measured by
publicly reported share volume.
4.
General.
a. The firm may not
knowingly do indirectly that which it cannot do directly under this Addendum.
b. The firm will
adopt and implement policies and procedures reasonably designed to ensure that
its associated persons (including but not limited to the firm’s Investment
Banking personnel) cannot and do not seek to influence the contents of a
research report or the activities of Research personnel for purposes of
obtaining or retaining investment banking business. The firm will adopt and implement procedures
instructing firm personnel to report immediately to a member of the firm’s
legal or compliance staff any attempt to influence the contents of a research
report or the activities of Research personnel for such a purpose.
5. Timing. Unless otherwise specified, the restrictions
and requirements of this Addendum will be effective within 30
days of the entry of the Final Judgment, except that Section III [Independent,
Third-Party Research] of this Addendum will be effective within 180 days of the entry of the Final Judgment.
6. Review of
implementation.
a.
The firm will retain, at its own expense, an Independent
Monitor acceptable to the Staff of the SEC, the NYSE, the NASD, the President
of NASAA, and the New York Attorney General’s Office to conduct a review to
provide reasonable assurance of the implementation and effectiveness of the
firm’s policies and procedures designed to achieve compliance with the terms of
this Addendum. This review will begin on April 30, 2005. The Independent
Monitor will produce a written report of its review, its findings as to the
implementation and effectiveness of the firm’s policies and procedures, and its
recommendations of other policies or procedures (or amendments to existing
policies or procedures) as are necessary and appropriate to achieve compliance
with the requirements and prohibitions of this Addendum. The report will be produced to the firm and
the Staff of the SEC, the NYSE and the NASD within 30 days from the completion
of the review, but no later than October 31, 2005. (The SEC Staff shall make the
report available to the President of NASAA and the New York Attorney General’s
Office upon request.) The Independent
Monitor shall have the option to seek an extension of time by making a written
request to the Staff of the SEC.
b.
The firm will have a reasonable opportunity to comment on
the Independent Monitor’s review and proposed report prior to its submission,
including a reasonable opportunity to comment on any and all recommendations,
and to seek confidential treatment of such information and recommendations set
forth therein to the extent that the report concerns proprietary commercial and
financial information of the firm. This
report will be subject to the protections from disclosure set forth in the
rules of the SEC, including the protections from disclosure set forth in 5
U.S.C. § 552(b)(8) and 17 C.F.R. § 200.80(b)(8), and will not constitute a
record, report, statement or data compilation of a public office or agency
under Rule 803(8) of the Federal Rules of Evidence.
c.
The firm will adopt all recommendations contained in the
written report of the Independent Monitor; provided, however, that as to any
recommendation that the firm believes is unduly burdensome or impractical, the
firm may demonstrate why the recommended policy or procedure is, under the
circumstances, unreasonable, impractical and/or not designed to yield benefits
commensurate with its cost, or the firm may suggest an alternative policy or
procedure designed to achieve the same objective, and submit such explanation
and/or alternative policy or procedure in writing to the Independent Monitor
and to the Staff of the SEC. The firm
and the Independent Monitor shall then attempt in good faith to reach agreement
as to any policy or procedure as to which there is any dispute and the
Independent Monitor shall reasonably evaluate any alternative policy or
procedure proposed by the firm. If an
agreement on any issue is not reached, the firm will abide by the
determinations of the Staff of the SEC (which shall be made after allowing the
firm and the Independent Monitor to present arguments in support of their
positions), and adopt those recommendations the Staff of the SEC deems
appropriate.
d.
The firm will cooperate fully with the Independent Monitor
in this review, including making such non-privileged information and documents
available, as the Independent Monitor may reasonably request, and by permitting
and requiring the firm’s employees and agents to supply such non-privileged
information and documents as the Independent Monitor may reasonably request.
e.
To ensure the independence of the Independent Monitor, the
firm (i) shall not have the authority to terminate the Independent Monitor
without the prior written approval of the SEC staff; and (ii) shall compensate
the Independent Monitor, and persons engaged to assist the Independent Monitor,
for services rendered pursuant to this Order at their reasonable and customary
rates.
f.
For the period of engagement and for a period of three
years from completion of the engagement, the Independent Monitor shall not
enter into any employment, consultant, attorney-client, auditing or other
professional relationship with the firm, or any of its present or former
affiliates, directors, officers, employees, or agents acting in their capacity
as such. Any entity with which the
Independent Monitor is affiliated or of which he/she is a member, and any
person engaged to assist the Independent Monitor in performance of his/her
duties under this Order shall not, without prior written consent of the Staff
of the SEC, enter into any employment, consultant, attorney-client, auditing or
other professional relationship with the firm, or any of its present or former
affiliates, directors, officers, employees, or agents acting in their capacity
as such for the period of the engagement and for a period of three years after
the engagement.
g.
On October 31, 2008, the firm shall certify
to the Staff of the SEC, the NYSE, the NASD, the President of NASAA, and the
New York Attorney General’s Office, that the firm has complied in all material
respects with the requirements and prohibitions set forth in this Addendum or,
in the event of material non-compliance, will describe such material
non-compliance.
7. Superseding
Rules and Amendments. In the event that
the SEC adopts a rule or approves an SRO rule or interpretation with the stated
intent to supersede any of the provisions of this settlement, the SEC or SRO
rule or interpretation will govern with respect to that provision of the
settlement and such provision will be superseded. In addition, each of the SEC, NYSE, the NASD,
the New York Attorney General’s Office and any State that incorporates this
Addendum (or equivalent document) into its settlement of related proceedings
against the Defendant agrees that the SEC Staff may provide interpretive
guidance with respect to the terms of the settlement as requested by the firm
and that, subject to Court approval, the SEC and the firm may agree to amend or
modify any term of the settlement, in each case, without any further action or
involvement by any other regulator in any related proceeding. With respect to any term in Section I or II
of this Addendum that has not been superseded (as set forth above) on or before
October 1, 2008, it is the expectation of Defendant, the SEC, NYSE, NASD, New
York Attorney General’s Office and the States that the SEC would agree to an
amendment or modification of such term, subject to Court approval, unless the
SEC believes such amendment or modification would not be in the public
interest.
8. Other
Obligations and Requirements.
Except as otherwise specified, the requirements and prohibitions of this
Addendum shall not relieve the firm of any other applicable legal obligation or
requirement.
III. Independent, Third-Party Research
1.
Obligation to Make
Available. Each year, for the period ending five years
after the effective date of this Section III (as set forth in Section II.5
[Timing] of this Addendum), the firm will be required to contract with no fewer
than three independent providers of research (“Independent Research Providers”)
at a time in order to procure and make available Independent Research (as
defined below) to the firm’s customers in the U.S. as set forth below. The firm may satisfy this requirement by
contracting with a consolidator that provides access to the Independent
Research of at least three Independent Research Providers. There is, however, no requirement that there
be at least three Independent Research Providers for the Common Stock of each
Covered Company (as those terms are defined below):
a.
For common stock and equivalents
(such as ordinary shares or common stock or ordinary shares represented by American Depositary Receipts) listed on a U.S. national securities
exchange or quoted in Nasdaq (such securities hereinafter, collectively,
“Common Stock”) and covered in the firm’s research reports (other than those
limited to quantitative or technical research reports) (an issuer of such
covered Common Stock hereinafter called a “Covered Company”), the firm, through
an Independent Consultant (as discussed below) will use its reasonable efforts
to procure, and shall make available to its customers in the U.S., Independent
Research on such Covered Company’s Common Stock. (If the Independent Research Providers drop
coverage or do not timely pick up coverage of the Common Stock of a Covered
Company, the firm will not be in violation of any of the requirements in this
Section III, and may continue to disseminate its own research reports on the
Common Stock of the Covered Company without making available any Independent
Research on the Common Stock of the Covered Company, if the firm takes
reasonable steps to request that the Independent Consultant procure such coverage
promptly.)
i.
For purposes of this
Section III, the firm’s research reports include research reports that have not
been prepared by the firm, but only to the extent that such reports have been
furnished under the firm’s name, have been prepared for the exclusive or sole
use of the firm or its customers, or have been customized in any material
respect for the firm or its customers.
ii.
A non-U.S. company
for which a U.S. market is not the principal equity trading market shall only
be considered a Covered Company if, in the calendar quarter ended March 31,
2004, or in any subsequent calendar quarter during the period that the firm’s obligations to procure and make available Independent
Research under this Section III are effective, the publicly reported, average
daily dollar volume of U.S. trading in such company’s Common Stock (measured by
multiplying the publicly reported, average daily share volume of U.S. trading
during the quarter by the closing price per share of the Common Stock on the
last day of the quarter), exceeded $2.5 million, and (b) the outstanding total
public float of the Common Stock as of the last day of such calendar quarter
exceeded $150 million, or, if the data necessary to calculate the outstanding
total public float is not readily available, the market capitalization of the Common
Stock as of the last day of such calendar quarter exceeded $150 million. Further, the firm’s obligation to procure and
make available Independent Research with respect to such company shall become
effective at the later of: (a) 90 days
after the end of the calendar quarter in which the company met the foregoing
trading and public float tests; or (b) the effective date of this Section III.
b.
For purposes of this
Section III, Independent Research means (i) a research report (other than
technical research reports) prepared by an unaffiliated person or entity, or
(ii) a statistical or other survey or analysis of research reports (including
ratings and price targets) issued by a broad range of persons and entities,
including persons and entities having no association with investment banking
activities, which survey or analysis has been prepared by an unaffiliated
person or entity.
c.
The firm will adopt
policies and procedures reasonably designed to ensure that, in connection with
any solicited order for a customer in the U.S. relating to the Common Stock of
a Covered Company, and if Independent Research on the Covered Company’s Common
Stock is available, the registered representative will have informed the customer,
during the solicitation, that the customer can receive Independent Research on
the Covered Company’s Common Stock at no cost to the customer (the “Notice
Requirement”).
d.
Notwithstanding the
foregoing, the Notice Requirement will not apply to (i) the solicitation of an
Institutional Customer unless such Institutional Customer, after due notice and
opportunity, has advised the firm that it wishes to have the Notice Requirement
apply to it (“Participating Institutional Customer”). Any Institutional Customer who has not so
advised the firm is hereinafter referred to as a “Non-Participating
Institutional Customer”; (ii) orders as to which discretion was exercised by
the firm, pursuant to a written discretionary account agreement or written
grant of trading authorization; or (iii) a solicitation by an entity affiliated
with the Defendant if such entity does not furnish to its customers research
reports under the firm’s name, prepared by the firm or for the
exclusive or sole use of the firm or its customers, or research reports that
have been customized in any material respect for the firm or its customers.
e.
For the purposes of the notice, confirmation, and account
statement disclosure requirements with respect to orders as to which discretion was exercised by an investment adviser pursuant to a
written discretionary account agreement or written grant of trading
authorization, the firm must treat the
investment adviser as (regardless
of whether the investment adviser is an institutional entity or a natural person): (i) a natural person, if such adviser has $1 million dollars
or less invested in securities in the
aggregate in its portfolio and/or under management; (ii) a Small
Institutional Customer if such investment adviser has less than $10 million and
more than $1 million invested in securities in the aggregate in its portfolio
and/or under management; and (iii) an Institutional Customer if such investment
adviser has at least $10 million invested in securities in the aggregate in its
portfolio and/or under management.
Notwithstanding the foregoing, nothing precludes the firm from
providing disclosure in addition to the foregoing required minimum.
f.
With respect to a Participating Institutional Customer, the
firm may satisfy the Notice Requirement by providing the Participating Institutional Customer with,
instead of notice at the time of each solicited order, annual written notice of
the availability of Independent Research
on Covered Companies’ Common Stock.
g. With respect to a Small
Institutional Customer, the firm may satisfy the Notice Requirement by
providing the Small Institutional Customer with, instead of notice at the time of each solicited order, annual written notice of the availability of Independent
Research on Covered Companies’ Common Stock, if such Small Institutional
Customer advised the firm that it wishes to receive such annual written notice
instead of receiving notice at the time of each solicited order.
h.
Each trade confirmation sent by the Defendant to a customer with respect
to an order as to which the Notice Requirement applies will set forth (or will be accompanied by a separate statement, which
shall be considered part of the confirmation, that will set forth), as of the
time the trade confirmation is generated, the ratings, if any, contained in the
firm’s own research reports and in Independent Research procured for the firm
with respect to the Common Stock of the Covered Company that is the subject of
the order (the “Trade Confirmation Disclosure Requirement”).
Notwithstanding the foregoing,
the Defendant may provide a Small Institutional Customer with, instead of
trade-by-trade ratings information on each confirmation, annual written notice
of the website(s) where Independent Research ratings information and the firm’s
ratings information can be found, if such Small Institutional Customer has
advised the Defendant that it wishes to receive such annual written notice
instead of trade-by-trade ratings information on each confirmation. With respect to the Common Stock of a Covered
Company, the website(s) shall make available separate lists setting forth (with
respect to each of the firm’s research reports and each Independent Research
report of each Independent Research Provider) the date of each research report
issued by the firm and each IRP, respectively, the name of the issuer covered
in such report, and the rating contained therein (if any) over the preceding
twelve months (“Qualifying Website(s)”).
If customers of the firm
(other than Institutional or Small Institutional Customers) have access to the
Qualifying Website(s), the Qualifying Website(s) must also provide access, via
hyperlink, to the full text of each Independent Research report (regarding the
Common Stock of a Covered Company) of each Independent Research Provider over
the preceding twelve months.
With respect to a Participating Institutional
Customer, the
Defendant may satisfy the Trade
Confirmation Disclosure Requirement by providing the Participating Institutional
Customer with, instead of trade-by-trade ratings information on each
confirmation,
annual written notice of the
Qualifying Website(s) where Independent Research ratings information and the
firm’s ratings information can be found.
i.
Each periodic account statement sent by the Defendant to a
customer in the U.S. that reflects a position in the Common Stock of a Covered
Company will set forth (or will be accompanied by a separate statement, which
shall be considered part of the periodic account statement, that will set
forth), as of the end of the period covered by the statement, the ratings, if
any, contained in the firm’s own research reports and in the Independent
Research made available by the firm on the Common Stock of each such Covered
Company (“Periodic Account Statement Disclosure Requirement”); provided,
however, that this requirement will not apply to Non- Participating
Institutional Customers or discretionary accounts, and provided further that,
with respect to Participating Institutional Customers, the Defendant may satisfy the Periodic Account Statement Disclosure
Requirement by providing Participating
Institutional Customers with, instead of ratings information in periodic
account statements, annual written notice of the Qualifying Website(s) where
Independent Research ratings information and the firm’s ratings information can
be found.
Notwithstanding the
foregoing, the Defendant may satisfy the Periodic Account Statement Disclosure
Requirement by providing a Small
Institutional Customer with, instead of ratings information in periodic account
statements, annual written notice of the Qualifying Website(s) where
Independent Research ratings information and the firm’s ratings information can
be found, if such Small Institutional Customer has advised the Defendant that
it wishes to receive such annual written notice instead of ratings information in
periodic account statements.
j.
The Independent Research rating(s) disclosed on trade
confirmations and periodic account statements as set forth in Section III.1(h)
and (i) above shall be chosen by the Independent Consultant. If only one
rating is disclosed by Defendant with respect to a particular Covered Company,
it cannot be a consensus rating.
k.
Notice of the availability of Independent Research on
Covered Companies’ Common Stock will also be included prominently in the
periodic account statements of the Defendant’s customers in the
l.
The firm will make the
Independent Research available to its customers in the U.S. using, for each
customer, the means of dissemination equivalent to those it uses to provide the
customer with the firm’s own research reports, unless the firm and customer
agree on another means of dissemination; provided, however, that nothing herein
shall require or authorize the firm to comply with the Notice Requirement or
make available or disseminate Independent Research at a time when doing so
would violate Section 5 of the Securities Act of 1933 or the other provisions
of the federal securities laws or the rules and regulations thereunder. If and to the extent the firm is able to make
available or disseminate its own research reports on the Common Stock of a
Covered Company pursuant to Rule 137, Rule 138(a) or Rule 139(a) under the Securities
Act of 1933 and in reliance on Regulation M under the Securities Exchange Act
of 1934, then the firm is also authorized and required to make available or
disseminate Independent Research on the Common Stock of such Covered Company
(even if the Independent Research does not meet the requirements of such
Rule). Notwithstanding this Section
III.1.l, if the firm determines, because of legal, compliance or similar
concerns, not to furnish or make available its own research reports on the
Common Stock of a Covered Company for a limited period of time, it shall not be
required to make available the Independent Research on such Covered Company for
such period of time.
m. If, during the
period that the firm’s obligations to procure and make
available Independent Research under this Section III are effective, the firm
terminates coverage of the Common Stock of a
Covered Company, the firm, through its Independent Consultant, will make
reasonable efforts to continue to procure and make available Independent
Research on the Common Stock of such company for a period of at least 18 months
after termination of coverage (subject to expiration of the firm’s obligations
under this Section III).
n.
The firm will not be responsible or liable for (i) the procurement decisions of
the Independent Consultant (as discussed in Section III.2 [Appointment of
Independent Consultant to Oversee the Procurement of Independent Research] of
this Addendum) with respect to the Independent Research, (ii) the Independent
Research or its content, (iii) customer transactions, to the extent based on
the Independent Research, or (iv) claims arising from or in connection with the
inclusion of Independent Research ratings in the firm’s confirmations and
periodic account statements or on the Qualifying Websites(s), to the extent
such claims are based on those ratings.
The firm will not be required to supervise the production of the
Independent Research procured by the Independent Consultant and will have no
responsibility to comment on the content of the Independent Research. The firm may advise its customers of the
foregoing in its discretion.
o. The Independent Consultant will not be liable
for (i) its procurement decisions, (ii) the Independent Research or its
content, (iii) customer transactions, to the extent based on the Independent
Research, or (iv) claims arising from or in connection with the inclusion of
Independent Research ratings in the firm’s confirmations and periodic account
statements or on the Qualifying Websites(s), to the extent such claims are
based on those ratings, unless the Independent Consultant has carried out such
duties in bad faith or with willful misconduct.
The firm will indemnify the Independent Consultant for any liability
arising from the Independent Consultant’s good-faith performance of its duties
as such.
2.
Appointment of
Independent Consultant to Oversee the Procurement of Independent Research. Within 30 days of the
entry of the Final Judgment, an Independent Consultant acceptable to the SEC
Staff, the NYSE, the NASD, the President of NASAA, the New York Attorney
General and the firm shall be named to oversee the procurement of Independent
Research from Independent Research Providers.
The Independent Consultant will have the final authority (following
consultation with the firm and in accordance with the criteria set forth in
Section III.3 [Selection of Independent Research Providers] of this Addendum)
to procure the Independent Research. The
Independent Consultant will not have had any significant financial relationship
with the firm during the prior three years and may not have any financial
relationship with the firm for three years following his or her work as the
Independent Consultant. The Independent
Consultant’s fee arrangement will be subject to the approval of the Staff of
the SEC, the NYSE, the NASD, the President of NASAA, and the New York Attorney
General’s Office. In the event that an
Independent Consultant must be replaced, the replacement shall be acceptable to
the Staff of the SEC, the NYSE, the NASD, the President of NASAA, the New York
Attorney General’s Office and the firm, and shall be subject to these same
conditions.
3.
Selection of Independent
Research Providers. The Independent Consultant will seek to
procure research reports on the Common Stock of all Covered Companies from
Independent Research Providers.
Independent Research Providers may not perform investment banking
business of any kind and may not provide brokerage services in direct and
significant competition with the firm.
In addition, the Independent Consultant will use the following criteria
in selecting and contracting with Independent Research Providers to provide
Independent Research.
b. the desirability of multiple coverage of certain Covered Companies
(e.g., by size of company, industry sector, companies underwritten by the firm,
etc.);
c. the extent to which the Independent Research Provider has a client
base and revenue stream broad enough to ensure its independence from the firm;
d. the utility of the Independent Research Provider’s Independent
Research to the firm’s customers, including the inclusion of ratings and price
targets in such research and the extent to which the firm’s customers actually
use the research; and with respect to surveys or analyses described above in
Section III.1.b(ii), the extent to which the Independent Research provides
customers with a means of comparing the firm’s research reports to those
published by other persons and entities, including persons and entities having
no association with investment banking activities;
e. the quality and accuracy of
the Independent Research Provider’s past research, including during the term of
the Independent Consultant’s tenure;
f.
the experience,
expertise, reputation and qualifications (including, as appropriate,
registrations) of the Independent Research Provider and its personnel; and
g. the cost of the Independent Research, especially in light of the
five-year period set forth in Section III.1 above for the firm to make
Independent Research available to its investing customers.
4.
Disclosure Language.
Language substantially to the effect set forth below may be used by the
firm and its registered representatives to inform the firm’s customers of the
availability of Independent Research:
“There is also independent, third-party
research available on this company, which you can get at no cost [from our
website/hyperlink] or by calling [toll-free number], or which I can arrange to
send to you if you would like.”
“Independent, third-party research on
certain companies covered by the firm’s research is available to customers of
[firm] in the
5.
Annual Reporting.
The Independent Consultant will report annually to the Staff of the SEC,
the NYSE, the NASD, the President of NASAA, and the New York Attorney General’s
Office on its selection of Independent Research Providers, the Independent
Research it has procured, the cost of the Independent Research it has procured
to date, and the Independent Consultant’s fees and expenses to date.
1. General. The firm will pay a total of $5,000,000,
payable in five equal installments on an annual basis (with the first payment
to be made 90 days after the entry of the Final Judgment), to funds earmarked
for investor education. Of this money, a
total of $2,500,000 shall be paid pursuant to the firm’s agreement with the
SEC, NYSE and NASD. The remainder of the funds earmarked for investor
education, in the amount of $2,500,000, shall be paid to the Investor Education
Fund at the Investor Protection Trust, a Wisconsin charitable trust, pursuant
to agreement with the Board of Directors of NASAA, to be used for the purpose
of investor education as described in Section IV.3.
2. Payments to the Investor Education Fund.
a. As referenced in Section IV.1 above, the firm
shall pay the amount of $2,500,000 in five equal annual installment payments as
designated by the NASAA Board of Directors to the Investor Education Fund (“the
Fund”) to be held as a separate fund by the Investor Protection Trust,
b. The firm shall make the first such installment
payment within ninety (90) days after the entry of the Final Judgment. This payment shall be made by wire transfer
to the Investor Protection Trust at US Bank NA, Milwaukee, WI, ABA #075000022
for credit for the Trust Division Account 112-950-027, for further credit to
the Investor Protection Trust Account Number 000012891800 together with a cover
letter identifying the firm as a defendant in this action and the payment
designated for the Investor Education Fund.
The firm shall simultaneously transmit photocopies of its payment and
letter to the President of NASAA,
c. The firm shall make subsequent installment
payments annually on or before the month and day of the entry of the Final
Judgment. Such payments shall be made
into the Fund at the Investor Protection Trust as described in Section IV.2(b).
3. Purpose of and Limitations on the Use of
the Fund.
a. The Fund (including all installment payments)
shall be used to support programs designed for the purpose of investor
education and research and education with respect to the protection of investors,
and to equip investors with the knowledge and skills necessary to make informed
investment decisions and to increase personal financial literacy. The Investor
Protection Trust, in cooperation with NASAA, shall establish an investor
education plan designed to achieve these purposes.
b. No principal or income from the Fund shall:
(i) inure to the general
fund or treasury of any State;
(ii) be utilized to pay
the routine operating expenses of NASAA; or
(iii)
be utilized to pay the compensation or expenses of state officials or state
employees except such expenses as are necessary to fulfill the purposes of the
Fund.
c. Monies in the Fund may also be used to pay
any taxes on income earned by such Fund.
The firm shall provide the Investor Protection Trust with relevant
information and otherwise cooperate with the Investor Protection Trust in
fulfilling the Fund’s obligations under applicable law.
d. All fees, costs, and expenses incurred by the Investor
Protection Trust in connection with and incidental to the performance of its
duties under this Addendum, including the fees, costs, and expenses of any
persons engaged to assist it and all administrative fees, costs, and expenses
related to the investor education plan shall be paid out of the Fund.