Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend FINRA Rule 2242 (Debt Research Analysts and Debt Research Reports), 36628-36632 [2016-13318]

Download as PDF 36628 Federal Register / Vol. 81, No. 109 / Tuesday, June 7, 2016 / Notices disapproved. The 45th day after publication of the notice for this proposed rule change is June 2, 2016. The Commission is extending this 45day time period. The Commission finds it appropriate to designate a longer period within which to take action on the proposed rule change so that it has sufficient time to consider this proposed rule change. Accordingly, the Commission, pursuant to section 19(b)(2) of the Act,6 designates July 15, 2016, as the date by which the Commission shall either approve or disapprove, or institute proceedings to determine whether to disapprove, the proposed rule change (File No. SR–BatsBZX–2016–01). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.7 Brent J. Fields, Secretary. [FR Doc. 2016–13315 Filed 6–6–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–77963; File No. SR–FINRA– 2016–017] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend FINRA Rule 2242 (Debt Research Analysts and Debt Research Reports) asabaliauskas on DSK3SPTVN1PROD with NOTICES June 1, 2016. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on May 24, 2016, Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by FINRA. FINRA has designated the proposed rule change as constituting a ‘‘non-controversial’’ rule change under paragraph (f)(6) of Rule 19b–4 under the Act,3 which renders the proposal effective upon receipt of this filing by the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 6 Id. 7 17 CFR 200.30–3(a)(31). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 17 CFR 240.19b–4(f)(6). 1 15 VerDate Sep<11>2014 19:13 Jun 06, 2016 Jkt 238001 I. Self-Regulatory Organization’s Statement of the Terms of the Substance of the Proposed Rule Change FINRA is proposing to amend FINRA Rule 2242 (Debt Research Analysts and Debt Research Reports) to clarify the application of the rule in four respects: (1) The consent requirement for institutional debt research reports distributed to non-U.S. investors by non-U.S. affiliates of members; (2) the consent requirement for institutional debt research reports distributed to specified persons for informational purposes unrelated to investing in debt securities; (3) the scope of the institutional debt research report exemption when distributing third-party debt research reports to eligible institutional investors; and (4) the disclosure requirements for debt research analysts in public appearances. Below is the text of the proposed rule change. Proposed new language is in italics; proposed deletions are in brackets. * * * * * 2240. CONFLICTS OF INTEREST * * * * * 2242. Debt Research Analysts and Debt Research Reports (a) through (i) No Change. (j) Exemption for Debt Research Reports Provided to Institutional Investors (1) Except as provided in paragraphs (j)(2) and (j)(3) of this Rule, the provisions of this Rule shall not apply to the distribution of a debt research report to: (A) through (B) No Change. (2) Notwithstanding paragraph (j)(1) of this Rule, a member must establish, maintain and enforce written policies and procedures reasonably designed to identify and effectively manage conflicts of interest described in paragraphs (b)(2)(A)(i), (b)(2)(H) (with respect to pressuring), (b)(2)(I), (b)(2)(K), (b)(2)(L), (b)(2)(M), (b)(2)(N) and Supplementary Material .02(a) of this Rule. (3) Notwithstanding paragraph (j)(1) of this Rule, a member that distributes third-party debt research reports to institutional investors pursuant to this exemption must establish, maintain and enforce written policies and procedures reasonably designed to comply with paragraphs (g)(1), (g)(2), (g)(4) and (g)(6) of this Rule. [(3)] (4) Debt research reports provided to institutional investors pursuant to this exemption (‘‘institutional debt research’’) must disclose prominently on the first page that: (A) ‘‘This document is intended for institutional investors and is not subject PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.’’ (B) If applicable, ‘‘The views expressed in this report may differ from the views offered in [Firm’s] debt research reports prepared for retail investors.’’ (C) If applicable, ‘‘This report may not be independent of [Firm’s] proprietary interests. [Firm] trades the securities covered in this report for its own account and on a discretionary basis on behalf of certain clients. Such trading interests may be contrary to the recommendation(s) offered in this report.’’ (5) Notwithstanding paragraph (j)(4) of this Rule, a member that distributes third-party debt research reports to institutional investors pursuant to this exemption must disclose prominently the disclosures required by paragraphs (j)(4)(A) and (j)(4)(C) of this Rule. [(4)] (6) A member must establish, maintain and enforce written policies and procedures reasonably designed to ensure that institutional debt research is made available only to eligible institutional investors. A member may not rely on this exemption with respect to a debt research report that the member has reason to believe will be redistributed to a retail investor. [(5)] (7) This paragraph (j) does not relieve a member of its obligations to comply with the antifraud provisions of the federal securities laws and FINRA rules. (k) No Change. • • • Supplementary Material: ——— .01 through .11 No Change. .12 Distribution of Institutional Debt Research to Non-U.S. Investors. The requirements of paragraphs (j)(1)(A) and (B) of this Rule shall not apply to the distribution of an institutional debt research report by a non-U.S. affiliate of a member to a non-U.S. investor, provided that: (a) The non-U.S. investor is not a customer of the member; (b) The non-U.S. investor is a customer of the non-U.S. affiliate of the member; and (c) The non-U.S. affiliate of the member has a reasonable basis to believe that the customer meets the definition of ‘‘institutional account’’ in Rule 4512(c). .13 Distribution of Institutional Debt Research for Informational Purposes (a) A member may distribute institutional debt research reports to the persons described in paragraph (c) of this Supplementary Material .13 for informational purposes unrelated to E:\FR\FM\07JNN1.SGM 07JNN1 Federal Register / Vol. 81, No. 109 / Tuesday, June 7, 2016 / Notices asabaliauskas on DSK3SPTVN1PROD with NOTICES investing in debt securities, provided that the member does not distribute the reports prior to their publication and the member has disclosed that: (1) The member may provide the recipient debt research reports that were prepared for institutional investors and are not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors; and (2) The institutional debt research reports would be provided only for informational purposes and not for the purpose of making an investment decision related to debt securities. (b) If the person receiving institutional debt research pursuant to this Supplementary Material .13 does not contact the member to request that such institutional debt research not be provided, the member may reasonably conclude that the person has consented to receiving debt institutional research according to the terms of this Supplementary Material .13. (c) Institutional debt research may be distributed for informational purposes unrelated to investing in debt securities pursuant to this Supplementary Material .13 to: (1) Regulators for regulatory purposes; (2) Academics for academic purposes; (3) Issuers for the purpose of enhancing knowledge of their industry and competitors and market and economic factors; and (4) Media organizations for news gathering purposes. .14 Public Appearances by Research Analysts. A member or debt research analyst will not be required to make a disclosure required by paragraph (d) of this Rule where attendance at the public appearance is limited to institutional investors eligible to receive institutional debt research pursuant to paragraph (j) of this Rule. Members must maintain records of public appearances by debt research analysts sufficient to demonstrate that attendance at the public appearance was limited to institutional investors eligible to receive institutional debt research pursuant to paragraph (j) of this Rule. Such records must be maintained for at least three years from the date of the public appearance. * * * * * II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, FINRA included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed VerDate Sep<11>2014 19:13 Jun 06, 2016 Jkt 238001 rule change. The text of these statements may be examined at the places specified in Item IV below. FINRA has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose On November 14, 2014, FINRA filed SR–FINRA–2014–048 to adopt new Rule 2242 to address conflicts of interest relating to the publication and distribution of debt research reports.4 On February 19, 2015, FINRA filed Amendment No. 1 responding to the comments received to the proposal as well as to propose amendments in response to these comments.5 The proposed rule change, as modified by Amendment No. 1 thereto, was approved by the Commission on July 16, 2015.6 Consistent with the proposed rule change, FINRA announced an effective date for Rule 2242 of February 22, 2016 in a Regulatory Notice published on August 26, 2015.7 FINRA subsequently delayed implementation of the Rule until July 16, 2016 to give members additional time to implement the requirements of the Rule, including incorporating some guidance published by FINRA in some Frequently Asked Questions.8 Distribution to Non-U.S. Investors by Non-U.S. Affiliates of Members Rule 2242(j) exempts debt research reports distributed solely to eligible institutional investors from most of the provisions regarding supervision, coverage determinations, budget and compensation determinations, and all of the disclosure requirements applicable to debt research reports distributed to retail investors. Rule 2242(j)(2) sets out the provisions of the Rule to which 4 See Securities Exchange Act Release No. 73623 (November 18, 2014), 79 FR 69905 (November 24, 2014) (Notice of Filing of File No. SR–FINRA– 2014–048). 5 See Securities Exchange Act Release No. 74490 (March 12, 2015), 80 FR 14198 (March 18, 2015) (Notice of Filing of Amendment No. 1 to File No. SR–FINRA–2014–048). 6 See Securities Exchange Act Release No. 75472 (July 16, 2015), 80 FR 43528 (July 22, 2015) (Order Approving File No. SR–FINRA–2014–048). 7 See Regulatory Notice 15–31 (August 2015). 8 See Securities Exchange Act Release No. 77158 (February 17, 2016), 81 FR 9065 (February 23, 2016) (Notice of Filing and Immediate Effectiveness of File No. SR–FINRA–2016–008). See also Securities Exchange Act Release No. 77726 (April 27, 2016), 81 FR 26593 (May 3, 2016) (Notice of Filing and Immediate Effectiveness of File No. SR–FINRA– 2016–013). PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 36629 institutional debt research remains subject, and Rule 2242(j)(3) specifies a ‘‘health warning’’ that must be prominently disclosed on the first page of institutional debt research, alerting recipients that, among other things, the research report is not subject to all of the protections of retail debt research. Rule 2242(j)(1) requires either negative or affirmative written consent for eligible institutional investors to receive institutional debt research pursuant to the exemption. FINRA is proposing to clarify the application of Rule 2242(j) to non-U.S. investors that are customers of a member’s U.S. affiliate but not customers of the member. Specifically, FINRA is proposing to amend Rule 2242 to include Supplementary Material providing that the requirements of paragraphs (j)(1)(A) and (B) of the Rule 9 shall not apply to the distribution of an institutional debt research report by a non-U.S. affiliate of a member to a nonU.S. investor, provided that: (a) The non-U.S. investor is not a customer of the member; (b) the non-U.S. investor is a customer of the non-U.S. affiliate of the member; and (c) the non-U.S. affiliate of the member has a reasonable basis to believe that the customer meets the definition of ‘‘institutional account’’ in Rule 4512(c). A member’s research reports, including globally branded research reports, may be distributed by a non-U.S. affiliate of the member to its non-U.S. customers pursuant to proposed Supplementary Material .12. FINRA drafted the institutional debt research exemption with U.S. customers in mind. FINRA is concerned that, absent the proposed amendment, the exemption may be impractical for some U.S. member firms with global operations. These firms typically have non-U.S. affiliates that distribute the member research to those affiliates’ nonU.S. customers. In many cases, the U.S. member and its non-U.S. affiliates will produce a single globally branded research product, which the non-U.S. 9 Rule 2242(j)(1)(A) allows distribution of institutional debt research via negative written consent to a person who meets the definition of a qualified institutional buyer (QIB) and where, pursuant to FINRA Rule 2111(b): (1) The member or associated person has a reasonable basis to believe that the QIB is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies involving a debt security or debt securities; and (2) the QIB has affirmatively indicated that it is exercising independent judgment in evaluating the member’s recommendations pursuant to FINRA Rule 2111 and such affirmation is broad enough to encompass transactions in debt securities. Rule 2242(j)(1)(B) allows distribution of institutional debt research via affirmative written consent to a person who meets the definition of ‘‘institutional account’’ in FINRA Rule 4512(c). E:\FR\FM\07JNN1.SGM 07JNN1 36630 Federal Register / Vol. 81, No. 109 / Tuesday, June 7, 2016 / Notices asabaliauskas on DSK3SPTVN1PROD with NOTICES affiliates will distribute to their own customers. Rule 2242(j)(4) states that a member may not rely on the institutional debt research exemption with respect to a debt research report that the member has reason to believe will be redistributed to a retail investor. Thus, to the extent these member firms with global research operations cannot obtain the required consents from all non-U.S. customers of their non-U.S. affiliates, they would lose the ability to use the exemption with respect to institutional debt research distributed to their U.S. customers—the intended purpose of the Rule. Alternatively, the non-U.S. affiliates would be required to cut off distribution of such research to non-U.S. customers that could not or would not give the required consent,10 notwithstanding that receipt of the research is permitted and subject to applicable regulations in the home jurisdiction. Under these circumstances, FINRA believes where these customers are not also customers of the U.S. broker-dealers, the regulatory concerns addressed by the consent requirements of the exemption are far more attenuated. Importantly, the proposed rule change would have no investor protection impact on either U.S. institutional investors or non-U.S. customers of the U.S. broker-dealer, as the consent requirements would continue to apply under those circumstances. Moreover, FINRA believes the proposed rule change would have minimal investor protection impact on the non-U.S. institutional investors, as the institutional debt research they would receive would still be subject to all other aspects of Rule 2242(j), including notably the ‘‘health warning’’ that identifies the intended institutional audience and highlights the key conflicts associated with the research report. Distribution to Persons for Informational Purposes The requirements of Rule 2242 are premised on the idea that debt research reports are distributed to investors that may base their investment decisions on the debt research reports or may incorporate elements of the debt research reports into their investment decisions. FINRA is aware that some members make their research reports 10 FINRA understands that firms have had difficulty obtaining consents from non-U.S. entities for several reasons, including the absence of the QIB standard in other jurisdictions and confusion from the customer as to why it must provide affirmative written consent under a U.S.-based rule regime to continue to receive a valued product from the non-U.S. affiliate of which it is a customer. VerDate Sep<11>2014 19:13 Jun 06, 2016 Jkt 238001 available to some persons for specific informational purposes unrelated to investing in debt securities. The institutional exemption in Rule 2242(j) does not currently expressly contemplate distributing institutional debt research reports to these ‘‘noninvestors.’’ FINRA believes that it is appropriate to permit members to distribute institutional debt research reports to these persons, provided that the persons negatively consent to receiving institutional debt research with the understanding that the research is not being provided for investment purposes. The proposed rule change would amend Rule 2242 to include Supplementary Material .13 permitting a member to distribute institutional debt research reports to specified persons for informational purposes unrelated to investing in debt securities, provided that the member does not distribute the reports prior to their publication and the member has disclosed that: (1) The member may provide to institutional investors debt research reports that are not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors; and (2) the debt research reports would be provided only for informational purposes and not for the purpose of making an investment decision related to debt securities. The proposed Supplementary Material would also provide that, if the person receiving institutional debt research does not contact the member to request that such institutional debt research reports not be provided, the member may reasonably conclude that the person has consented to receiving debt institutional research reports according to the terms of the Supplementary Material. The proposed Supplementary Material sets out the circumstances where institutional debt research may be distributed for informational purposes unrelated to investing in debt securities: (1) Regulators for regulatory purposes; (2) academics for academic purposes; (3) issuers for the purpose of enhancing knowledge of their industry and competitors and market and economic factors; and (4) media organizations for news gathering purposes. FINRA believes that permitting the provision of institutional debt research to these persons for the specified informational purposes serves the public interest without investor protection implications. PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 Distribution of Third-Party Debt Research Reports to Institutional Investors FINRA previously stated that the institutional exemption in Rule 2242(j) applies to the content and disclosure requirements for third-party debt research reports.11 FINRA is proposing to amend Rule 2242 to clarify the requirements applicable to the distribution of third-party debt research reports pursuant to the institutional debt research exemption. The proposed rule change would amend Rule 2242 to clarify that a member that distributes third-party debt research reports to institutional investors pursuant to the exemption must establish, maintain and enforce written policies and procedures reasonably designed to comply with paragraphs (g)(1), (g)(2), (g)(4) and (g)(6) of the Rule.12 The review requirements in paragraphs (g)(2) and (g)(4) for thirdparty debt research reports and independent third-party debt research reports, respectively, would apply to reports distributed to retail investors or to institutional investors. Accordingly, third-party debt research reports distributed pursuant to the exemption would be subject to the same review requirements as third-party debt research reports distributed to retail investors.13 With respect to disclosures, the proposed rule change would clarify that third-party debt research reports distributed pursuant to the institutional exemption are not required to carry the specific disclosures applicable to retail debt research set forth in paragraph (g)(3) of the Rule. FINRA believes that it is consistent with the exemption not to require specific disclosures when distributing third-party research reports, but instead to require a ‘‘health warning.’’ Accordingly, the proposed rule change would amend Rule 2242 to clarify that third-party debt research reports distributed to institutional investors must disclose prominently: (A) ‘‘This document is intended for institutional investors and is not subject 11 See Securities Exchange Act Release No. 75472 (July 16, 2015), 80 FR 43528 (July 22, 2015) (Order Approving File No. SR–FINRA–2014–048). 12 See proposed Rule 2242(j)(3). 13 FINRA notes that, consistent with FINRA Rule 2210(b)(3) (Communications with the Public), thirdparty debt research reports that are subject to review under Rule 2242(g)(2) (i.e., non-independent third-party debt research reports) do not require a registered principal to approve the communication prior to distribution, provided that the firm establishes and implements written procedures for the supervision and review of such communications. See FINRA Rule 2210 Questions and Answers at https://www.finra.org/industry/finrarule-2210-questions-and-answers. E:\FR\FM\07JNN1.SGM 07JNN1 Federal Register / Vol. 81, No. 109 / Tuesday, June 7, 2016 / Notices to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors’’; and (B) if applicable, ‘‘This report may not be independent of [Firm’s] proprietary interests. [Firm] trades the securities covered in this report for its own account and on a discretionary basis on behalf of certain clients. Such trading interests may be contrary to the recommendation(s) offered in this report.’’ 14 FINRA has not proposed requiring that third-party debt research reports distributed to institutional investors disclose prominently the disclosure required by paragraph (j)(4)(B) of the Rule.15 FINRA intended the disclosure in paragraph (j)(4)(B) of the Rule to apply only when the research report was produced by the member.16 FINRA notes that the Rule does not require similar disclosure for third-party research reports distributed to retail investors, nor is there such a requirement in Rule 2241 with respect to third-party equity research reports. FINRA believes that it is commonly understood that the views in third-party research reports may differ from the views of the member or from other third-party research reports. For these reasons, FINRA believes that it is appropriate not to require third-party debt research reports distributed to institutional investors to disclose prominently the disclosure required by paragraph (j)(4)(B) of the Rule. In addition, FINRA has not proposed to include paragraph (g)(5) of the Rule in the list of applicable paragraphs of the Rule set forth in proposed paragraph (j)(3). Paragraph (g)(5) of the Rule dictates the circumstances in which paragraph (g)(3) of the Rule does not apply to third-party research reports.17 14 See proposed Rule 2242(j)(5). 2242(j)(4)(B) requires that debt research reports provided to institutional investors pursuant to the exemption disclose prominently on the first page, if applicable, that ‘‘[t]he views expressed in this report may differ from the views offered in [Firm’s] debt research reports prepared for retail investors.’’ 16 FINRA has previously stated that the disclosure is required only if the member produces both retail and institutional debt research reports that sometimes differ in their views. See Securities Exchange Act Release No. 75472 (July 16, 2015), 80 FR 43528 (July 22, 2015) (Order Approving File No. SR–FINRA–2014–048). 17 Rule 2242(g)(5) states that ‘‘[a] member shall not be considered to have distributed a third-party debt research report for the purposes of paragraph (g)(3) where the research is an independent thirdparty debt research report and made available by a member (a) upon request; (b) through a membermaintained Web site; or (c) to a customer in connection with a solicited order in which the registered representative has informed the customer, during the solicitation, of the availability of independent debt research on the solicited debt asabaliauskas on DSK3SPTVN1PROD with NOTICES 15 Rule VerDate Sep<11>2014 19:13 Jun 06, 2016 Jkt 238001 Because FINRA is proposing not to require the specific disclosures set forth in paragraph (g)(3) of the Rule when distributing third-party research reports, but instead to require a ‘‘health warning,’’ FINRA believes that paragraph (g)(5) of the Rule should not apply to third-party debt research reports distributed via the exemption to institutional investors. Public Appearances by Debt Research Analysts Rule 2242(d) requires disclosures from debt research analysts in public appearances, including debt research analysts that only prepare debt research reports pursuant to the institutional debt research exemption. FINRA has previously stated that it would be inconsistent with the rationale of the institutional exemption—i.e., that all recipients of debt research have sufficient sophistication to understand the conflicts of interest without the specific disclosures and other protections afforded retail debt research—to allow debt research analysts to make public appearances before an audience that could include retail investors.18 However, based on the same rationale, FINRA believes that it is consistent with the institutional exemption in paragraph (j) of the Rule to exempt public appearances by debt research analysts from the disclosure requirements in paragraph (d) of the Rule where attendance is limited to institutional investors eligible to receive institutional debt research reports. Accordingly, FINRA is proposing new Supplementary Material .14 to clarify that the public appearance disclosure requirements do not apply in those circumstances. The proposed rule change would require that the member maintain records sufficient to demonstrate that attendance at the public appearance was limited to institutional investors eligible to receive institutional debt research. The proposed rule change would require that the records be maintained for at least three years from the date of the public appearance. The disclosure requirements of paragraph (d) of the Rule would apply where attendance at the public appearance was not limited to institutional investors eligible to receive institutional debt research reports. FINRA has filed the proposed rule change for immediate effectiveness. The security and the customer requests such independent debt research.’’ 18 See FINRA Research Rules Frequently Asked Questions at https://www.finra.org/industry/faqresearch-rules-frequently-asked-questions-faq. PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 36631 implementation date of the proposed rule change will be July 16, 2016. 2. Statutory Basis FINRA believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,19 which requires, among other things, that FINRA rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. FINRA believes that the proposed rule change is consistent with the Act in that it clarifies the requirements of Rule 2242, which addresses conflicts of interest relating to the publication and distribution of debt research reports. Specifically, FINRA believes the proposed rule change is consistent with the Act in that it clarifies: (1) The consent requirement for institutional debt research reports distributed to non-U.S. investors by non-U.S. affiliates of members; (2) the consent requirement for institutional debt research reports distributed to specified persons for informational purposes unrelated to investing in debt securities; (3) the scope of the exemption for third-party debt research reports distributed via the exemption to institutional investors and the applicable requirements; and (4) the disclosure requirements for debt research analysts in public appearances. FINRA further believes that the proposed rule change would facilitate the flow of valued information to sophisticated U.S. investors, while maintaining the investor protections intended by the Rule for those investors. B. Self-Regulatory Organization’s Statement on Burden on Competition FINRA does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The clarifications in the proposed rule change will result in reduced burdens for members to comply with the requirements of Rule 2242. The proposed rule change does not impose any material new obligations on members. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. 19 15 E:\FR\FM\07JNN1.SGM U.S.C. 78o–3(b)(6). 07JNN1 36632 Federal Register / Vol. 81, No. 109 / Tuesday, June 7, 2016 / Notices III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing proposed rule change does not: (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A) of the Act 20 and Rule 19b– 4(f)(6) thereunder.21 At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: asabaliauskas on DSK3SPTVN1PROD with NOTICES Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– FINRA–2016–017 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–FINRA–2016–017. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the 20 15 21 17 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). VerDate Sep<11>2014 19:13 Jun 06, 2016 Jkt 238001 proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of FINRA. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–FINRA– 2016–017, and should be submitted on or before June 28, 2016. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.22 Brent J. Fields, Secretary. [FR Doc. 2016–13318 Filed 6–6–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–77960; File No. SR– BatsBZX–2016–20] Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rule 14.13, Company Listing Fees June 1, 2016. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on May 20, 2016, Bats BZX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘BZX’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II and III below, which Items have been prepared by the Exchange. The Exchange has designated the proposed rule change as one establishing or changing a member due, fee, or other charge imposed by the Exchange under section 19(b)(3)(A)(ii) of the Act 3 and Rule 19b–4(f)(2) thereunder,4 which renders the proposed rule change effective upon filing with the Commission. The 22 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A)(ii). 4 17 CFR 240.19b–4(f)(2). 1 15 PO 00000 Frm 00117 Fmt 4703 Sfmt 4703 Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of the Substance of the Proposed Rule Change The Exchange filed a proposal to amend the fees applicable to securities listed on the Exchange, which are set forth in BZX Rule 14.13. The text of the proposed rule change is available at the Exchange’s Web site at www.batstrading.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose On August 30, 2011, the Exchange received approval of rules applicable to the qualification, listing, and delisting of companies on the Exchange,5 which it modified on February 8, 2012 in order to adopt pricing for the listing of exchange traded products (‘‘ETPs’’) 6 on the Exchange,7 which it subsequently modified again on June 4, 2014.8 On October 16, 2014, the Exchange modified Rule 14.13, entitled ‘‘Company Listing Fees’’ to eliminate the annual fees for ETPs not participating in the Exchange’s Competitive Liquidity Provider Program pursuant to Rule 11.8, Interpretation and Policy .02 (the ‘‘CLP 5 See Securities Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148 (September 6, 2011) (SR–BATS–2011–018). 6 As defined in Rule 11.8(e)(1)(A), the term ‘‘ETP’’ means any security listed pursuant to Exchange Rule 14.11. 7 See Securities Exchange Act Release No. 66422 (February 17, 2012), 77 FR 11179 (February 24, 2012) (SR–BATS–2012–010). 8 See Securities Exchange Act Release No. 72377 (June 12, 2014), 79 FR 34822 (June 18, 2014) (SR– BATS–2014–024). E:\FR\FM\07JNN1.SGM 07JNN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 81, Number 109 (Tuesday, June 7, 2016)]
[Notices]
[Pages 36628-36632]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-13318]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77963; File No. SR-FINRA-2016-017]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Amend FINRA Rule 2242 (Debt Research Analysts 
and Debt Research Reports)

June 1, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 24, 2016, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. FINRA has 
designated the proposed rule change as constituting a ``non-
controversial'' rule change under paragraph (f)(6) of Rule 19b-4 under 
the Act,\3\ which renders the proposal effective upon receipt of this 
filing by the Commission. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    FINRA is proposing to amend FINRA Rule 2242 (Debt Research Analysts 
and Debt Research Reports) to clarify the application of the rule in 
four respects: (1) The consent requirement for institutional debt 
research reports distributed to non-U.S. investors by non-U.S. 
affiliates of members; (2) the consent requirement for institutional 
debt research reports distributed to specified persons for 
informational purposes unrelated to investing in debt securities; (3) 
the scope of the institutional debt research report exemption when 
distributing third-party debt research reports to eligible 
institutional investors; and (4) the disclosure requirements for debt 
research analysts in public appearances.
    Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in brackets.
* * * * *
    2240. CONFLICTS OF INTEREST
* * * * *
    2242. Debt Research Analysts and Debt Research Reports
    (a) through (i) No Change.
    (j) Exemption for Debt Research Reports Provided to Institutional 
Investors
    (1) Except as provided in paragraphs (j)(2) and (j)(3) of this 
Rule, the provisions of this Rule shall not apply to the distribution 
of a debt research report to:
    (A) through (B) No Change.
    (2) Notwithstanding paragraph (j)(1) of this Rule, a member must 
establish, maintain and enforce written policies and procedures 
reasonably designed to identify and effectively manage conflicts of 
interest described in paragraphs (b)(2)(A)(i), (b)(2)(H) (with respect 
to pressuring), (b)(2)(I), (b)(2)(K), (b)(2)(L), (b)(2)(M), (b)(2)(N) 
and Supplementary Material .02(a) of this Rule.
    (3) Notwithstanding paragraph (j)(1) of this Rule, a member that 
distributes third-party debt research reports to institutional 
investors pursuant to this exemption must establish, maintain and 
enforce written policies and procedures reasonably designed to comply 
with paragraphs (g)(1), (g)(2), (g)(4) and (g)(6) of this Rule.
    [(3)] (4) Debt research reports provided to institutional investors 
pursuant to this exemption (``institutional debt research'') must 
disclose prominently on the first page that:
    (A) ``This document is intended for institutional investors and is 
not subject to all of the independence and disclosure standards 
applicable to debt research reports prepared for retail investors.''
    (B) If applicable, ``The views expressed in this report may differ 
from the views offered in [Firm's] debt research reports prepared for 
retail investors.''
    (C) If applicable, ``This report may not be independent of [Firm's] 
proprietary interests. [Firm] trades the securities covered in this 
report for its own account and on a discretionary basis on behalf of 
certain clients. Such trading interests may be contrary to the 
recommendation(s) offered in this report.''
    (5) Notwithstanding paragraph (j)(4) of this Rule, a member that 
distributes third-party debt research reports to institutional 
investors pursuant to this exemption must disclose prominently the 
disclosures required by paragraphs (j)(4)(A) and (j)(4)(C) of this 
Rule.
    [(4)] (6) A member must establish, maintain and enforce written 
policies and procedures reasonably designed to ensure that 
institutional debt research is made available only to eligible 
institutional investors. A member may not rely on this exemption with 
respect to a debt research report that the member has reason to believe 
will be redistributed to a retail investor.
    [(5)] (7) This paragraph (j) does not relieve a member of its 
obligations to comply with the antifraud provisions of the federal 
securities laws and FINRA rules.
    (k) No Change.
       Supplementary Material: ------
    .01 through .11 No Change.
    .12 Distribution of Institutional Debt Research to Non-U.S. 
Investors. The requirements of paragraphs (j)(1)(A) and (B) of this 
Rule shall not apply to the distribution of an institutional debt 
research report by a non-U.S. affiliate of a member to a non-U.S. 
investor, provided that:
    (a) The non-U.S. investor is not a customer of the member;
    (b) The non-U.S. investor is a customer of the non-U.S. affiliate 
of the member; and
    (c) The non-U.S. affiliate of the member has a reasonable basis to 
believe that the customer meets the definition of ``institutional 
account'' in Rule 4512(c).
    .13 Distribution of Institutional Debt Research for Informational 
Purposes
    (a) A member may distribute institutional debt research reports to 
the persons described in paragraph (c) of this Supplementary Material 
.13 for informational purposes unrelated to

[[Page 36629]]

investing in debt securities, provided that the member does not 
distribute the reports prior to their publication and the member has 
disclosed that:
    (1) The member may provide the recipient debt research reports that 
were prepared for institutional investors and are not subject to all of 
the independence and disclosure standards applicable to debt research 
reports prepared for retail investors; and
    (2) The institutional debt research reports would be provided only 
for informational purposes and not for the purpose of making an 
investment decision related to debt securities.
    (b) If the person receiving institutional debt research pursuant to 
this Supplementary Material .13 does not contact the member to request 
that such institutional debt research not be provided, the member may 
reasonably conclude that the person has consented to receiving debt 
institutional research according to the terms of this Supplementary 
Material .13.
    (c) Institutional debt research may be distributed for 
informational purposes unrelated to investing in debt securities 
pursuant to this Supplementary Material .13 to:
    (1) Regulators for regulatory purposes;
    (2) Academics for academic purposes;
    (3) Issuers for the purpose of enhancing knowledge of their 
industry and competitors and market and economic factors; and
    (4) Media organizations for news gathering purposes.
    .14 Public Appearances by Research Analysts. A member or debt 
research analyst will not be required to make a disclosure required by 
paragraph (d) of this Rule where attendance at the public appearance is 
limited to institutional investors eligible to receive institutional 
debt research pursuant to paragraph (j) of this Rule. Members must 
maintain records of public appearances by debt research analysts 
sufficient to demonstrate that attendance at the public appearance was 
limited to institutional investors eligible to receive institutional 
debt research pursuant to paragraph (j) of this Rule. Such records must 
be maintained for at least three years from the date of the public 
appearance.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    On November 14, 2014, FINRA filed SR-FINRA-2014-048 to adopt new 
Rule 2242 to address conflicts of interest relating to the publication 
and distribution of debt research reports.\4\ On February 19, 2015, 
FINRA filed Amendment No. 1 responding to the comments received to the 
proposal as well as to propose amendments in response to these 
comments.\5\ The proposed rule change, as modified by Amendment No. 1 
thereto, was approved by the Commission on July 16, 2015.\6\
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    \4\ See Securities Exchange Act Release No. 73623 (November 18, 
2014), 79 FR 69905 (November 24, 2014) (Notice of Filing of File No. 
SR-FINRA-2014-048).
    \5\ See Securities Exchange Act Release No. 74490 (March 12, 
2015), 80 FR 14198 (March 18, 2015) (Notice of Filing of Amendment 
No. 1 to File No. SR-FINRA-2014-048).
    \6\ See Securities Exchange Act Release No. 75472 (July 16, 
2015), 80 FR 43528 (July 22, 2015) (Order Approving File No. SR-
FINRA-2014-048).
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    Consistent with the proposed rule change, FINRA announced an 
effective date for Rule 2242 of February 22, 2016 in a Regulatory 
Notice published on August 26, 2015.\7\ FINRA subsequently delayed 
implementation of the Rule until July 16, 2016 to give members 
additional time to implement the requirements of the Rule, including 
incorporating some guidance published by FINRA in some Frequently Asked 
Questions.\8\
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    \7\ See Regulatory Notice 15-31 (August 2015).
    \8\ See Securities Exchange Act Release No. 77158 (February 17, 
2016), 81 FR 9065 (February 23, 2016) (Notice of Filing and 
Immediate Effectiveness of File No. SR-FINRA-2016-008). See also 
Securities Exchange Act Release No. 77726 (April 27, 2016), 81 FR 
26593 (May 3, 2016) (Notice of Filing and Immediate Effectiveness of 
File No. SR-FINRA-2016-013).
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Distribution to Non-U.S. Investors by Non-U.S. Affiliates of Members
    Rule 2242(j) exempts debt research reports distributed solely to 
eligible institutional investors from most of the provisions regarding 
supervision, coverage determinations, budget and compensation 
determinations, and all of the disclosure requirements applicable to 
debt research reports distributed to retail investors. Rule 2242(j)(2) 
sets out the provisions of the Rule to which institutional debt 
research remains subject, and Rule 2242(j)(3) specifies a ``health 
warning'' that must be prominently disclosed on the first page of 
institutional debt research, alerting recipients that, among other 
things, the research report is not subject to all of the protections of 
retail debt research. Rule 2242(j)(1) requires either negative or 
affirmative written consent for eligible institutional investors to 
receive institutional debt research pursuant to the exemption.
    FINRA is proposing to clarify the application of Rule 2242(j) to 
non-U.S. investors that are customers of a member's U.S. affiliate but 
not customers of the member. Specifically, FINRA is proposing to amend 
Rule 2242 to include Supplementary Material providing that the 
requirements of paragraphs (j)(1)(A) and (B) of the Rule \9\ shall not 
apply to the distribution of an institutional debt research report by a 
non-U.S. affiliate of a member to a non-U.S. investor, provided that: 
(a) The non-U.S. investor is not a customer of the member; (b) the non-
U.S. investor is a customer of the non-U.S. affiliate of the member; 
and (c) the non-U.S. affiliate of the member has a reasonable basis to 
believe that the customer meets the definition of ``institutional 
account'' in Rule 4512(c). A member's research reports, including 
globally branded research reports, may be distributed by a non-U.S. 
affiliate of the member to its non-U.S. customers pursuant to proposed 
Supplementary Material .12.
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    \9\ Rule 2242(j)(1)(A) allows distribution of institutional debt 
research via negative written consent to a person who meets the 
definition of a qualified institutional buyer (QIB) and where, 
pursuant to FINRA Rule 2111(b): (1) The member or associated person 
has a reasonable basis to believe that the QIB is capable of 
evaluating investment risks independently, both in general and with 
regard to particular transactions and investment strategies 
involving a debt security or debt securities; and (2) the QIB has 
affirmatively indicated that it is exercising independent judgment 
in evaluating the member's recommendations pursuant to FINRA Rule 
2111 and such affirmation is broad enough to encompass transactions 
in debt securities. Rule 2242(j)(1)(B) allows distribution of 
institutional debt research via affirmative written consent to a 
person who meets the definition of ``institutional account'' in 
FINRA Rule 4512(c).
---------------------------------------------------------------------------

    FINRA drafted the institutional debt research exemption with U.S. 
customers in mind. FINRA is concerned that, absent the proposed 
amendment, the exemption may be impractical for some U.S. member firms 
with global operations. These firms typically have non-U.S. affiliates 
that distribute the member research to those affiliates' non-U.S. 
customers. In many cases, the U.S. member and its non-U.S. affiliates 
will produce a single globally branded research product, which the non-
U.S.

[[Page 36630]]

affiliates will distribute to their own customers. Rule 2242(j)(4) 
states that a member may not rely on the institutional debt research 
exemption with respect to a debt research report that the member has 
reason to believe will be redistributed to a retail investor. Thus, to 
the extent these member firms with global research operations cannot 
obtain the required consents from all non-U.S. customers of their non-
U.S. affiliates, they would lose the ability to use the exemption with 
respect to institutional debt research distributed to their U.S. 
customers--the intended purpose of the Rule. Alternatively, the non-
U.S. affiliates would be required to cut off distribution of such 
research to non-U.S. customers that could not or would not give the 
required consent,\10\ notwithstanding that receipt of the research is 
permitted and subject to applicable regulations in the home 
jurisdiction. Under these circumstances, FINRA believes where these 
customers are not also customers of the U.S. broker-dealers, the 
regulatory concerns addressed by the consent requirements of the 
exemption are far more attenuated.
---------------------------------------------------------------------------

    \10\ FINRA understands that firms have had difficulty obtaining 
consents from non-U.S. entities for several reasons, including the 
absence of the QIB standard in other jurisdictions and confusion 
from the customer as to why it must provide affirmative written 
consent under a U.S.-based rule regime to continue to receive a 
valued product from the non-U.S. affiliate of which it is a 
customer.
---------------------------------------------------------------------------

    Importantly, the proposed rule change would have no investor 
protection impact on either U.S. institutional investors or non-U.S. 
customers of the U.S. broker-dealer, as the consent requirements would 
continue to apply under those circumstances. Moreover, FINRA believes 
the proposed rule change would have minimal investor protection impact 
on the non-U.S. institutional investors, as the institutional debt 
research they would receive would still be subject to all other aspects 
of Rule 2242(j), including notably the ``health warning'' that 
identifies the intended institutional audience and highlights the key 
conflicts associated with the research report.
Distribution to Persons for Informational Purposes
    The requirements of Rule 2242 are premised on the idea that debt 
research reports are distributed to investors that may base their 
investment decisions on the debt research reports or may incorporate 
elements of the debt research reports into their investment decisions. 
FINRA is aware that some members make their research reports available 
to some persons for specific informational purposes unrelated to 
investing in debt securities. The institutional exemption in Rule 
2242(j) does not currently expressly contemplate distributing 
institutional debt research reports to these ``non-investors.'' FINRA 
believes that it is appropriate to permit members to distribute 
institutional debt research reports to these persons, provided that the 
persons negatively consent to receiving institutional debt research 
with the understanding that the research is not being provided for 
investment purposes.
    The proposed rule change would amend Rule 2242 to include 
Supplementary Material .13 permitting a member to distribute 
institutional debt research reports to specified persons for 
informational purposes unrelated to investing in debt securities, 
provided that the member does not distribute the reports prior to their 
publication and the member has disclosed that: (1) The member may 
provide to institutional investors debt research reports that are not 
subject to all of the independence and disclosure standards applicable 
to debt research reports prepared for retail investors; and (2) the 
debt research reports would be provided only for informational purposes 
and not for the purpose of making an investment decision related to 
debt securities. The proposed Supplementary Material would also provide 
that, if the person receiving institutional debt research does not 
contact the member to request that such institutional debt research 
reports not be provided, the member may reasonably conclude that the 
person has consented to receiving debt institutional research reports 
according to the terms of the Supplementary Material.
    The proposed Supplementary Material sets out the circumstances 
where institutional debt research may be distributed for informational 
purposes unrelated to investing in debt securities: (1) Regulators for 
regulatory purposes; (2) academics for academic purposes; (3) issuers 
for the purpose of enhancing knowledge of their industry and 
competitors and market and economic factors; and (4) media 
organizations for news gathering purposes.
    FINRA believes that permitting the provision of institutional debt 
research to these persons for the specified informational purposes 
serves the public interest without investor protection implications.
Distribution of Third-Party Debt Research Reports to Institutional 
Investors
    FINRA previously stated that the institutional exemption in Rule 
2242(j) applies to the content and disclosure requirements for third-
party debt research reports.\11\ FINRA is proposing to amend Rule 2242 
to clarify the requirements applicable to the distribution of third-
party debt research reports pursuant to the institutional debt research 
exemption.
---------------------------------------------------------------------------

    \11\ See Securities Exchange Act Release No. 75472 (July 16, 
2015), 80 FR 43528 (July 22, 2015) (Order Approving File No. SR-
FINRA-2014-048).
---------------------------------------------------------------------------

    The proposed rule change would amend Rule 2242 to clarify that a 
member that distributes third-party debt research reports to 
institutional investors pursuant to the exemption must establish, 
maintain and enforce written policies and procedures reasonably 
designed to comply with paragraphs (g)(1), (g)(2), (g)(4) and (g)(6) of 
the Rule.\12\ The review requirements in paragraphs (g)(2) and (g)(4) 
for third-party debt research reports and independent third-party debt 
research reports, respectively, would apply to reports distributed to 
retail investors or to institutional investors. Accordingly, third-
party debt research reports distributed pursuant to the exemption would 
be subject to the same review requirements as third-party debt research 
reports distributed to retail investors.\13\
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    \12\ See proposed Rule 2242(j)(3).
    \13\ FINRA notes that, consistent with FINRA Rule 2210(b)(3) 
(Communications with the Public), third-party debt research reports 
that are subject to review under Rule 2242(g)(2) (i.e., non-
independent third-party debt research reports) do not require a 
registered principal to approve the communication prior to 
distribution, provided that the firm establishes and implements 
written procedures for the supervision and review of such 
communications. See FINRA Rule 2210 Questions and Answers at https://www.finra.org/industry/finra-rule-2210-questions-and-answers.
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    With respect to disclosures, the proposed rule change would clarify 
that third-party debt research reports distributed pursuant to the 
institutional exemption are not required to carry the specific 
disclosures applicable to retail debt research set forth in paragraph 
(g)(3) of the Rule. FINRA believes that it is consistent with the 
exemption not to require specific disclosures when distributing third-
party research reports, but instead to require a ``health warning.'' 
Accordingly, the proposed rule change would amend Rule 2242 to clarify 
that third-party debt research reports distributed to institutional 
investors must disclose prominently: (A) ``This document is intended 
for institutional investors and is not subject

[[Page 36631]]

to all of the independence and disclosure standards applicable to debt 
research reports prepared for retail investors''; and (B) if 
applicable, ``This report may not be independent of [Firm's] 
proprietary interests. [Firm] trades the securities covered in this 
report for its own account and on a discretionary basis on behalf of 
certain clients. Such trading interests may be contrary to the 
recommendation(s) offered in this report.'' \14\
---------------------------------------------------------------------------

    \14\ See proposed Rule 2242(j)(5).
---------------------------------------------------------------------------

    FINRA has not proposed requiring that third-party debt research 
reports distributed to institutional investors disclose prominently the 
disclosure required by paragraph (j)(4)(B) of the Rule.\15\ FINRA 
intended the disclosure in paragraph (j)(4)(B) of the Rule to apply 
only when the research report was produced by the member.\16\ FINRA 
notes that the Rule does not require similar disclosure for third-party 
research reports distributed to retail investors, nor is there such a 
requirement in Rule 2241 with respect to third-party equity research 
reports. FINRA believes that it is commonly understood that the views 
in third-party research reports may differ from the views of the member 
or from other third-party research reports. For these reasons, FINRA 
believes that it is appropriate not to require third-party debt 
research reports distributed to institutional investors to disclose 
prominently the disclosure required by paragraph (j)(4)(B) of the Rule.
---------------------------------------------------------------------------

    \15\ Rule 2242(j)(4)(B) requires that debt research reports 
provided to institutional investors pursuant to the exemption 
disclose prominently on the first page, if applicable, that ``[t]he 
views expressed in this report may differ from the views offered in 
[Firm's] debt research reports prepared for retail investors.''
    \16\ FINRA has previously stated that the disclosure is required 
only if the member produces both retail and institutional debt 
research reports that sometimes differ in their views. See 
Securities Exchange Act Release No. 75472 (July 16, 2015), 80 FR 
43528 (July 22, 2015) (Order Approving File No. SR-FINRA-2014-048).
---------------------------------------------------------------------------

    In addition, FINRA has not proposed to include paragraph (g)(5) of 
the Rule in the list of applicable paragraphs of the Rule set forth in 
proposed paragraph (j)(3). Paragraph (g)(5) of the Rule dictates the 
circumstances in which paragraph (g)(3) of the Rule does not apply to 
third-party research reports.\17\ Because FINRA is proposing not to 
require the specific disclosures set forth in paragraph (g)(3) of the 
Rule when distributing third-party research reports, but instead to 
require a ``health warning,'' FINRA believes that paragraph (g)(5) of 
the Rule should not apply to third-party debt research reports 
distributed via the exemption to institutional investors.
---------------------------------------------------------------------------

    \17\ Rule 2242(g)(5) states that ``[a] member shall not be 
considered to have distributed a third-party debt research report 
for the purposes of paragraph (g)(3) where the research is an 
independent third-party debt research report and made available by a 
member (a) upon request; (b) through a member-maintained Web site; 
or (c) to a customer in connection with a solicited order in which 
the registered representative has informed the customer, during the 
solicitation, of the availability of independent debt research on 
the solicited debt security and the customer requests such 
independent debt research.''
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Public Appearances by Debt Research Analysts
    Rule 2242(d) requires disclosures from debt research analysts in 
public appearances, including debt research analysts that only prepare 
debt research reports pursuant to the institutional debt research 
exemption. FINRA has previously stated that it would be inconsistent 
with the rationale of the institutional exemption--i.e., that all 
recipients of debt research have sufficient sophistication to 
understand the conflicts of interest without the specific disclosures 
and other protections afforded retail debt research--to allow debt 
research analysts to make public appearances before an audience that 
could include retail investors.\18\
---------------------------------------------------------------------------

    \18\ See FINRA Research Rules Frequently Asked Questions at 
https://www.finra.org/industry/faq-research-rules-frequently-asked-questions-faq.
---------------------------------------------------------------------------

    However, based on the same rationale, FINRA believes that it is 
consistent with the institutional exemption in paragraph (j) of the 
Rule to exempt public appearances by debt research analysts from the 
disclosure requirements in paragraph (d) of the Rule where attendance 
is limited to institutional investors eligible to receive institutional 
debt research reports. Accordingly, FINRA is proposing new 
Supplementary Material .14 to clarify that the public appearance 
disclosure requirements do not apply in those circumstances. The 
proposed rule change would require that the member maintain records 
sufficient to demonstrate that attendance at the public appearance was 
limited to institutional investors eligible to receive institutional 
debt research. The proposed rule change would require that the records 
be maintained for at least three years from the date of the public 
appearance.
    The disclosure requirements of paragraph (d) of the Rule would 
apply where attendance at the public appearance was not limited to 
institutional investors eligible to receive institutional debt research 
reports.
    FINRA has filed the proposed rule change for immediate 
effectiveness. The implementation date of the proposed rule change will 
be July 16, 2016.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\19\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that the proposed rule change is 
consistent with the Act in that it clarifies the requirements of Rule 
2242, which addresses conflicts of interest relating to the publication 
and distribution of debt research reports. Specifically, FINRA believes 
the proposed rule change is consistent with the Act in that it 
clarifies: (1) The consent requirement for institutional debt research 
reports distributed to non-U.S. investors by non-U.S. affiliates of 
members; (2) the consent requirement for institutional debt research 
reports distributed to specified persons for informational purposes 
unrelated to investing in debt securities; (3) the scope of the 
exemption for third-party debt research reports distributed via the 
exemption to institutional investors and the applicable requirements; 
and (4) the disclosure requirements for debt research analysts in 
public appearances. FINRA further believes that the proposed rule 
change would facilitate the flow of valued information to sophisticated 
U.S. investors, while maintaining the investor protections intended by 
the Rule for those investors.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The clarifications in the 
proposed rule change will result in reduced burdens for members to 
comply with the requirements of Rule 2242. The proposed rule change 
does not impose any material new obligations on members.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

[[Page 36632]]

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \20\ and Rule 19b-
4(f)(6) thereunder.\21\
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2016-017 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2016-017. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of FINRA. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2016-017, and should 
be submitted on or before June 28, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-13318 Filed 6-6-16; 8:45 am]
BILLING CODE 8011-01-P

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