Research Safe Harbors During a Distribution

Research and distribution coexist inside the same firms. Without safe harbors, every research report on an issuer in registration would be a written-offer violation by the broker-dealer publishing it.

Why Research Needs a Safe Harbor

The definition of "offer" in the registration statute sweeps in any communication that may condition the market for the securities. A research report on a company whose IPO is in registration, published by a broker-dealer that is also a syndicate member, would on its face be a written offer outside the prospectus framework.

Three research safe harbors carve out specific categories of research from the offer definition.

Each safe harbor has eligibility conditions. The issuer typically must meet certain reporting or size eligibility (such as being eligible to use a primary shelf registration form, or qualifying as a covered foreign issuer), and industry reports must conform to prior practice.

Exam Tip: Gotchas

• The non-participating safe harbor protects the broker-dealer that is NOT in the syndicate. Participating broker-dealers (managers, co-managers, syndicate members) must rely on one of the other two safe harbors.
• The other-class safe harbor lets the participating firm publish research on a DIFFERENT class of the issuer's securities. The classic case: the firm is underwriting an investment-grade debt offering and continues to publish equity research on the same issuer.

Non-Participating Broker-Dealer Research

The non-participating safe harbor is the broadest. It protects the ordinary-course research that a broker-dealer publishes about a company even when that company is in registration, provided the publishing broker-dealer is not in the underwriting syndicate.

• The broker-dealer is not a manager, co-manager, or selling-group member of the distribution
• The research is published in the ordinary course of the broker-dealer's research function
• The issuer typically must meet reporting or size eligibility conditions

The safe harbor recognizes that research is a continuous activity, not a deal-driven activity. A research analyst who covers a sector cannot stop publishing research every time one of their covered companies files a shelf supplement.

Exam Tip: Gotchas

• The safe harbor turns on syndicate participation, not on whether the broker-dealer has a banking relationship with the issuer. A broker-dealer that has banked the issuer in the past but is not in this distribution can still rely on the non-participating safe harbor.
• The participating-broker-dealer line is the syndicate roster. Manager, co-manager, selling-group member: participating. Everyone else: non-participating.

Other-Class Research

The other-class safe harbor lets a participating broker-dealer publish research on a class of the issuer's securities different from the class being distributed.

• The broker-dealer is participating in the distribution of one class of the issuer's securities
• The research being published covers a different class of the same issuer's securities
• Standard examples: publishing equity research while underwriting fixed income, or publishing convertible-debt research while underwriting common equity

The economic logic: research analysts who cover different asset classes inside the same firm are organizationally separate from the syndicate desk handling a deal in one of those classes. Letting them keep publishing avoids a forced research blackout that would harm investors in the unaffected class.

Exam Tip: Gotchas

• The other-class safe harbor is class-specific, not issuer-specific. Equity research on an issuer whose convertible debt the firm is underwriting fits; equity research on an issuer whose equity the firm is underwriting does not.
• This is one of the three "participating broker-dealer" safe harbors, but it is narrower than the regularly-published safe harbor because it depends on the class distinction.

Regularly Published Research

The regularly-published safe harbor lets a participating broker-dealer publish research on the same class of the issuer's securities, provided the research is part of the broker-dealer's regular publication pattern.

• The broker-dealer is participating in the distribution
• The research is regularly published in the ordinary course of business
• May be issuer-specific or industry-wide
• Industry reports must conform to prior practice and treat covered issuers in a balanced way
• Issuer eligibility conditions apply (similar to the non-participating safe harbor)

This is the broadest of the three participating-broker-dealer safe harbors. A firm with a continuous research practice on a covered name can keep publishing research on that name even while the firm is underwriting an offering of the same class.

Exam Tip: Gotchas

• "Regularly published" is the test, not "objective" or "favorable." A firm that publishes research on the covered name twice a year cannot suddenly initiate coverage at the time of the offering and rely on this safe harbor.
• Industry reports under this safe harbor must conform to prior practice. Suddenly tilting an industry report to highlight the offering issuer takes the report outside the safe harbor.

Think of it this way: the three research safe harbors map to three columns of a 2x3 grid. The columns are "non-participating" and "participating." The rows are "same issuer / different class" and "same issuer / same class." Non-participating broker-dealers can publish on any class. Participating broker-dealers can publish on a different class (other-class safe harbor) or on the same class if they were already regularly publishing (regularly-published safe harbor).

Exam Tip: Gotchas

• Knowing which safe harbor governs a particular research report is testable. The exam will give you the broker-dealer's syndicate role and the class of securities being researched; you map to one of the three safe harbors.
• All three safe harbors require ordinary-course publication. A research report dropped specifically to coincide with an offering is the classic counter-example and falls outside every safe harbor.