The Financial Industry Regulatory Authority said Thursday that it has fined 10 firms a total of $43.5 million for allowing 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.
FINRA fined the following firms.
- Barclays Capital – $5 million
- Citigroup Global Markets – $ 5 million
- Credit Suisse Securities (USA) – $5 million
- Goldman, Sachs – $5 million
- J.P. Morgan Securities – $5 million
- Deutsche Bank Securities – $4 million
- Merrill Lynch, Pierce, Fenner & Smith – $4 million
- Morgan Stanley – $4 million
- Wells Fargo Securitie – $4 million
- Needham & Co. – $2.5 million
In settling the matter, the 10 firms neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
FINRA also found that six of the 10 firms — Barclays, Citigroup, Credit Suisse, Goldman Sachs, JPMorgan 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,” said Susan Axelrod, FINRA’s executive vice president of Regulatory Operations, in a statement. “Each of these firms used their analyst to solicit investment banking business from Toys R Us and offered favorable research.”
The firms’ “rush to assure the issuer and its sponsors that research was in sync with the pitch being made by their investment bankers caused them to overstep the prohibitions against analyst solicitation and the promise of favorable research,” added Brad Bennett, FINRA’s executive vice president and chief of enforcement, in the statement. “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.”
FINRA explains that in April 2010, Toys R Us and its private equity owners (sponsors) invited the 10 firms to compete for a role in Toys R Us’ planned IPO.
FINRA found that each of the 10 firms used its equity research analyst as part of its solicitation for a role in the IPO. Specifically, Toys “R” Us asked equity research analysts from each of the 10 firms to make separate presentations to Toys “R”Us’ management and sponsors for the purpose of ensuring that the analysts’ views on key issues, including valuation factors, were aligned with the views expressed by the firms’ investment bankers.
“Each firm understood that the performance of their analysts at the presentations would be a key factor in determining whether the firm received an underwriting role in the IPO,” FINRA states.
The presentations took place during the solicitation period on May 5, 2010. As detailed in the settlement documents, each of the firms implicitly or explicitly at these meetings or in follow-up communications offered favorable research coverage in return for a role in the IPO, FINRA says.
For example, FINRA says that “certain analysts voiced a positive outlook on the company and its potential IPO during their May 5 presentations. All of the firms except for Needham provided the valuation to Toys “R” Us and its sponsors, which sought the combined view of research and investment banking on key valuation factors. Throughout the course of the solicitation period, Toys “R” Us made clear to the firms that the purpose of these requests was to vet the analyst’s views to determine their consistency with the valuation provided by its investment bankers.”
FINRA states that Toys “R” Us and its sponsors offered each of the 10 firms various roles in the IPO but it eventually decided not to proceed with the offering.
— Check out BDs’ Comments Lead FINRA to Update Communication, Gift Rules on ThinkAdvisor.