Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend FINRA Rules 2210 (Communications With the Public) and 2241 (Research Analysts and Research Reports), 32492-32497 [2019-14402]
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Federal Register / Vol. 84, No. 130 / Monday, July 8, 2019 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86257; File No. SR–FINRA–
2019–017]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a
Proposed Rule Change To Amend
FINRA Rules 2210 (Communications
With the Public) and 2241 (Research
Analysts and Research Reports)
July 1, 2019.
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 June 20,
2019, 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. The 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 Substance of
the Proposed Rule Change
FINRA is proposing to amend FINRA
Rules 2210 (Communications with the
Public) and 2241 (Research Analysts
and Research Reports) to conform to the
requirements of the Fair Access to
Investment Research Act of 2017 (‘‘FAIR
Act’’).3 The proposed rule change would
eliminate the ‘‘quiet period’’ restrictions
in Rule 2241 on publishing a research
report or making a public appearance
concerning a covered investment fund
and would create a filing exclusion
under FINRA Rule 2210 for covered
investment fund research reports.
The text of the proposed rule change
is available on FINRA’s website at
https://www.finra.org, at the principal
office of FINRA and at the
Commission’s Public Reference Room.
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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
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Fair Access to Investment Research Act of
2017, Public Law 115–66, 131 Stat. 1196 (2017).
2 17
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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
The FAIR Act
The FAIR Act requires the SEC to
propose and adopt rule amendments
that would extend the current safe
harbor under Securities Act of 1933
(‘‘Securities Act’’) Rule 139 4 to a
‘‘covered investment fund research
report’’ upon terms and conditions that
the SEC determines are necessary or
appropriate in the public interest, for
the protection of investors, and for the
promotion of capital formation.5 In
implementing the safe harbor for
covered investment fund research
reports, the SEC is required to: (1) Meet
specified requirements concerning the
safe harbor’s conditions, (2) prohibit any
self-regulatory organization (‘‘SRO’’)
from maintaining or enforcing specified
rules regarding such reports, and (3)
provide that a covered investment fund
research report is not subject to the sales
material filing requirements in section
24(b) of the Investment Company Act of
1940 (‘‘Investment Company Act’’).6 On
November 30, 2018, the SEC adopted its
final rules and rule amendments to
implement the mandates of the FAIR
Act.7 These requirements are discussed
in more detail below.
Definition of ‘‘Covered Investment Fund
Research Report’’
Under the FAIR Act, a ‘‘research
report’’ generally has the meaning given
that term under section 2(a)(3) of the
Securities Act.8 Under section 2(a)(3),
‘‘research report’’ means ‘‘a written,
electronic or oral communication that
includes information, opinions, or
recommendations with respect to
securities of an issuer or an analysis of
a security or an issuer, whether or not
it provides information reasonably
sufficient upon which to base an
investment decision.’’ 9 In contrast,
under FINRA Rule 2241 (Research
Analysts and Research Reports), the
term ‘‘research report’’ is defined as
CFR 230.139.
section 2(a) of the FAIR Act.
6 See section 2(b) of the FAIR Act.
7 See Securities Act Release No. 10580 (November
30, 2018), 83 FR 64180 (December 13, 2018) (the
‘‘Release’’).
8 However, the term does not include an oral
communication. See section 2(f)(6) of the FAIR Act.
9 See section 2(a)(3) of the Securities Act, 15
U.S.C. 77b(a)(3).
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4 17
5 See
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‘‘any written (including electronic)
communication that includes an
analysis of equity securities of
individual companies or industries
(other than an open-end investment
registered investment company that is
not listed or traded on an exchange) and
that provides information reasonably
sufficient upon which to base an
investment decision.’’ 10
Under the FAIR Act, the term
‘‘covered investment fund research
report’’ includes a research report
published or distributed by a brokerdealer about a ‘‘covered investment
fund,’’ 11 or any of the covered
investment fund’s securities. However, a
covered investment fund research report
excludes research published or
distributed by the covered investment
fund itself, any affiliate of a covered
investment fund, or any broker-dealer
that is an investment adviser (or an
affiliated person of an investment
adviser) to the covered investment
fund.12
Rule 139
Securities Act Rule 139 provides that
a broker’s or dealer’s publication or
distribution of a research report about
an issuer or any of its securities shall be
deemed for purposes of sections 2(a)(10)
and 5(c) of the Securities Act not to
constitute an offer for sale or offer to sell
a security that is the subject of a
registered offering, provided that the
issuer and its securities meet specified
conditions in the Rule. Rule 139 is
sometimes described as a ‘‘safe harbor’’
for such research reports, since they are
10 The definition includes a number of
exclusions, such as for communications that are
limited to discussions of broad-based indices,
communications that are distributed to fewer than
15 persons, and statutory prospectuses that are filed
as part of an issuer’s registration statement. See
FINRA Rule 2241(a)(11).
11 Section 2(f)(2) of the FAIR Act defines ‘‘covered
investment fund’’ as:
(A) An investment company registered under, or
that has filed an election to be treated as a business
development company under, the Investment
Company Act of 1940 (15 U.S.C. 80a–1 et seq.) and
that has filed a registration statement under the
Securities Act of 1933 (15 U.S.C. 77a et seq.) for the
public offering of a class of its securities, which
registration statement has been declared effective by
the Commission; and
(B) a trust or other person—
(i) issuing securities in an offering registered
under the Securities Act of 1933 (15 U.S.C. 77a et
seq.) and which class of securities is listed for
trading on a national securities exchange;
(ii) the assets of which consist primarily of
commodities, currencies, or derivative instruments
that reference commodities or currencies, or
interests in the foregoing; and
(iii) that provides in its registration statement
under the Securities Act of 1933 (15 U.S.C. 77a et
seq.) that a class of its securities are purchased or
redeemed, subject to conditions or limitations, for
a ratable share of its assets.
12 See section 2(f)(3) of the FAIR Act.
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not subject to many of the Securities
Act’s requirements for written offers of
securities. Prior to the SEC’s adoption of
rules required by the FAIR Act, Rule
139’s safe harbor was not available for
a broker-dealer’s publication or
distribution of research reports
pertaining to specific registered
investment companies or business
development companies (‘‘BDCs’’).
In implementing the safe harbor, the
FAIR Act directs the SEC to meet certain
requirements concerning covered
investment fund research reports. For
example, the SEC is limited in terms of
imposing conditions to the safe harbor
related to a broker-dealer’s initiation of
research, or related to a covered
investment fund’s registration history or
minimum net assets.
In addition, the SEC must provide
that covered investment fund research
reports will not be subject to the filing
requirements of section 24(b) of the
Investment Company Act, or rules or
regulations thereunder, except to the
extent that such reports are not subject
to content standards of any SRO rules
related to research reports, including
those governing communications with
the public.13 However, the FAIR Act
also specifies that nothing in the Act
shall be construed as in any way
limiting the authority of any SRO to
examine or supervise a member’s
practices in connection with covered
investment fund research reports for
compliance with federal law and SRO
rules, or to require the filing of
communications the purpose of which
is not to provide research and analysis
of covered investment funds.14
The FAIR Act also requires the SEC to
provide that SROs may not prohibit the
ability of a broker-dealer to publish or
distribute a covered investment fund
research report solely because the
broker-dealer is participating in a
registered offering or other distribution
of the fund, and that an SRO may not
prohibit the ability of a broker-dealer to
participate in the registered offering or
distribution of a covered investment
fund solely because the broker-dealer
has published or distributed research
about the fund.15
SEC Final Rules Under the FAIR Act
On November 30, 2018, the SEC
adopted its final rules and rule
amendments to implement the
mandates of the FAIR Act.16 First, the
SEC adopted new Rule 139b under the
Securities Act, which expanded the
13 See
section 2(b)(4) of the FAIR Act.
section 2(c)(2) of the FAIR Act.
15 See section 2(b)(3) of the FAIR Act.
16 See Release, supra note 7.
14 See
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Rule 139 safe harbor to include covered
investment fund research reports,
subject to specified conditions. Rule
139b adopts the FAIR Act’s definitions
of ‘‘covered investment fund,’’ ‘‘covered
investment fund research report,’’ and
‘‘research report,’’ subject to minor nonsubstantive revisions.17
Among other things, in order to
qualify for the Rule 139b safe harbor
with respect to an issuer-specific
research report, the covered investment
fund that is the subject of the report
must have been subject to relevant
reporting requirements under the
Investment Company Act and the
Exchange Act for at least 12 calendar
months prior to the reliance on the safe
harbor, and these reports must have
been filed in a timely manner.18 In
addition, the covered investment fund
must satisfy a minimum public market
threshold at the date of reliance on Rule
139b (the ‘‘float’’ requirement), which is
currently $75 million.19 In addition, the
safe harbor requires that a brokerdealer’s publication or distribution of
research reports be ‘‘in the regular
course of its business.’’ 20 Rule 139b also
contains other conditions for industry
reports, and with regard to the
presentation of performance information
of a registered open-end management
investment company or a trust
account.21
In addition, Rule 139b provides that
an SRO may not maintain or enforce any
rule that would prohibit the ability of a
member to publish or distribute a
covered investment fund research report
solely because the member is
participating in a registered offering or
distribution of securities of a covered
investment fund, or to participate in a
registered offering or other distribution
of such securities solely because the
member has published or distributed a
covered investment fund research report
about the fund or its securities.22
The SEC also adopted new Rule 24b–
4 under the Investment Company Act,
which specifies that a covered
investment fund research report as
defined in Rule 139b that concerns a
fund registered under the Investment
Company Act shall not be subject to
section 24(b) of the Act or any rules or
regulations thereunder, unless the
report is not subject to SRO rules
relating to research reports, including
17 CFR 230.139b(c).
18 See 17 CFR 230.139b(a)(1)(i)(A).
19 See 17 CFR 230.139b(a)(1)(i)(B). The required
float value does not include shares held by affiliates
of the fund, and is based on General Instruction
I.B.1 to Form S–3.
20 See 17 CFR 230.139b(a)(1)(ii).
21 See 17 CFR 230.139b(a)(2) and (a)(3).
22 See 17 CFR 230.139b(b).
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17 See
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rules governing communications with
the public.23 Section 24(b) of the
Investment Company Act generally
requires certain registered investment
companies and their underwriters to file
sales material concerning those funds
with the SEC within 10 days of use.24
Changes to FINRA Rules Required by
the FAIR Act
FINRA interprets the FAIR Act as
requiring it to make two changes to
FINRA Rules. First, FINRA is proposing
to amend Rule 2241 to eliminate the
quiet period restrictions on publishing a
research report or making a public
appearance concerning a covered
investment fund that is the subject of
such a report. Second, FINRA is
proposing to amend Rule 2210 to create
a filing exclusion for covered
investment fund research reports that
qualify for the Securities Act Rule 139b
safe harbor.
FINRA Equity Research Rules
FINRA Rule 2241 governs the
publication of research reports
concerning equity securities and the
analysts that produce such research.
Under Rule 2241, members must
establish, maintain and enforce written
policies and procedures reasonably
designed to identify and effectively
manage conflicts of interest related to
the preparation, content and
distribution of research reports and
public appearances by research
analysts.25 Among other things, these
policies and procedures must define
periods during which the member must
not publish or otherwise distribute
research reports, and research analysts
must not make public appearances,
related to the issuer (‘‘quiet periods’’).
These quiet periods restrict a member
that has participated as an underwriter
or dealer in an initial public offering
(‘‘IPO’’) from publishing research or
having its research analysts make public
appearances for a minimum of 10 days
following the date of an IPO. They also
restrict a member that has acted as a
manager or co-manager of a secondary
offering from publishing research or
having its research analysts make
personal appearances for a minimum of
three days following the date of the
offering.26
23 See
17 CFR 270.24b–4.
15 U.S.C. 80a–24(b). This filing
requirement applies to sales material concerning
any registered open-end management investment
company, any registered unit investment trust
(‘‘UIT’’), or any registered face-amount certificate
company (‘‘FACC’’).
25 See FINRA Rule 2241(b)(1).
26 See FINRA Rule 2241(b)(2)(I). This provision
contains specified exceptions to the quiet periods
24 See
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investment fund research report.30
Although the FAIR Act does not address
quiet periods for public appearances by
research analysts, FINRA also proposes
to eliminate quiet periods for public
appearances concerning a covered
investment fund. Under Rule 2241,
quiet periods for both research reports
and public appearances are the same,
and FINRA believes elimination of those
quiet periods would advance the policy
objectives of the FAIR Act.31
While Rule 2241 excludes from its
definition of ‘‘research report’’
communications related to mutual
funds, the Rule applies to
communications that meet the
definition of ‘‘research report’’ under
Rule 2241 concerning other covered
investment funds, including closed-end
funds (‘‘CEFs’’), exchange-traded funds
(‘‘ETFs’’), BDCs, UITs, and commodity
or currency funds, to the extent such
research reports are published by an
underwriter or dealer in the IPO or
manager or co-manager of a secondary
offering.27 Accordingly, such research
reports (as defined under Rule 2241) on
covered investment funds (other than
mutual funds) are subject to Rule 2241’s
quiet periods.
As discussed above, the FAIR Act
requires the SEC to prohibit any SRO
from maintaining or enforcing any rule
that would prohibit the ability of a
member to:
• Publish or distribute a covered
investment fund research report solely
because the member is also participating
in a registered offering or other
distribution of the fund; or
• Participate in a registered offering
or other distribution of securities of a
covered investment fund solely because
the member has published or
distributed a covered investment fund
research report about the fund or its
securities.28
Accordingly, FINRA is proposing to
amend Rule 2241 to add a new
exception from the Rule’s quiet period
requirements for the publication or
distribution of research reports and
research analysts’ public appearances if
the member has participated in the
offering of the subject company’s
securities.29 Under this new exception,
the quiet period requirements shall not
apply to a research report or a public
appearance following any offering of the
securities of a covered investment fund
that is the subject of a covered
Elimination of Filing Requirement
As discussed above, section 24(b) of
the Investment Company Act requires
registered open-end management
investment companies, registered UITs,
registered FACCs, and their
underwriters to file sales material for
the funds with the SEC within 10 days
of first use. Investment Company Act
Rule 24b–3 provides that any sales
material shall be deemed filed with the
SEC for purposes of section 24(b) upon
filing with a registered national
securities association that has adopted
rules providing standards for the
investment company advertising
practices of its members and has
established and implemented
procedures to review that advertising.32
Accordingly, virtually all principal
underwriters of mutual funds, ETFs,
UITs and FACCs satisfy the section
24(b) requirement by filing their sales
material with FINRA. Rule 2210
requires members to file within 10
business days of first use or publication
retail communications that promote or
recommend a specific registered
investment company or family of
registered investment companies
(including mutual funds, ETFs, variable
insurance products, CEFs and UITs), as
well as retail communications that
concern any other registered security
that is derived from or based on a single
security, a basket of securities, an index,
a commodity, a debt issuance or a
foreign currency.33
for research reports and public appearances
following an offering of securities of an Emerging
Growth Company, for reports or appearances that
discuss significant news or events concerning a
subject company, and for reports and appearances
regarding subject companies with ‘‘actively traded
securities’’ as defined in SEC Regulation M.
27 See FINRA Rule 2241(a)(11).
28 See section 2(b)(3) of the FAIR Act. The SEC
implemented this requirement in Securities Act
Rule 139b(b).
29 As discussed above, because the definition of
‘‘research report’’ under Rule 2241 is narrower than
the definition of ‘‘research report’’ under the FAIR
Act, not all covered investment fund research
reports are subject to Rule 2241. Nevertheless, to
the extent that a covered investment fund research
report is also a research report subject to Rule 2241,
the publication and distribution of such reports will
not be subject to the rule’s quiet periods.
30 FINRA also proposes to define the terms
‘‘covered investment fund’’ and ‘‘covered
investment fund research report’’ as having the
same meanings as in Securities Act Rule 139b. See
proposed FINRA Rules 2241(a)(15) and (16) in
Exhibit 5.
31 FINRA rules do not prohibit a member from
participating in a registered offering or other
distribution of securities of a covered investment
fund solely because the member has published
research about the fund. Accordingly, there is no
need to amend any FINRA rule to meet this
requirement of section 2(b)(3) of the FAIR Act or
Securities Act Rule 139b(b).
32 FINRA is currently the only national securities
association registered under the Exchange Act that
has adopted such rules and procedures.
33 See FINRA Rules 2210(c)(3)(A) and (D). For a
one-year period beginning on the date reflected in
FINRA’s Central Registration Depository (CRD®)
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As discussed above, pursuant to
section 2(b)(4) of the FAIR Act, the SEC
has adopted Investment Company Act
Rule 24b–4, which provides that a
covered investment fund research
report, as defined in Securities Act Rule
139b(c)(3), of a covered investment fund
registered as an investment company
under the Investment Company Act,
shall not be subject to section 24(b) of
the Act. However, a covered investment
fund research report is still subject to
the section 24(b) filing requirement if
the report is not subject to the content
standards of any SRO rules related to
research reports, including those
contained in the SRO’s communications
rules regarding investment companies
or substantially similar standards.34
As discussed above, section 2(c)(2) of
the FAIR Act provides that nothing in
the Act shall be construed as in any way
limiting the authority of any SRO to
examine or supervise a member’s
practices in connection with the
member’s publication or distribution of
a covered investment fund research
report for compliance with applicable
provisions of the Federal securities laws
or SRO rules related to research reports,
including those contained in rules
governing communications with the
public, or to ‘‘require the filing of
communications with the public the
purpose of which is not to provide
research and analysis of covered
investment funds.’’ 35 Accordingly,
FINRA interprets the FAIR Act as
requiring FINRA to create a filing
exclusion in Rule 2210 for covered
investment fund research reports, but
permits FINRA to require the filing of a
covered investment fund research report
if the purpose of the report is not to
provide research and analysis of
covered investment funds.
In the Release, the SEC made clear
that, even if the exclusion of covered
investment fund research reports from
the provisions of section 24(b) affects
the applicability of FINRA Rule 2210’s
filing requirements or exclusions, ‘‘it
would not affect FINRA’s authority to
require the filing of a communication
that is included in the FAIR Act
system as the date that FINRA membership became
effective, a member also must file with FINRA at
least 10 business days prior to first use any broadly
disseminated retail communication, regardless of
whether it concerns a registered investment
company. See FINRA Rule 2210(c)(1)(A). In
addition, a member must file at least 10 business
days prior to first use any retail communication
concerning registered investment companies that
includes performance rankings or comparisons that
are not generally published, or that were created by
the investment company, its underwriter, or an
affiliate. See FINRA Rule 2210(c)(2)(A).
34 See 17 CFR 270.24b–4.
35 See section 2(c)(2) of the FAIR Act.
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definition of ‘covered investment fund
research report’ but whose purpose is
not to provide research and analysis.’’ 36
The SEC also discussed in the Release
industry comments recommending that
FINRA modify its rules in light of the
FAIR Act. One commenter
recommended that FINRA harmonize its
research rules with SEC Rule 139b and
that broker-dealers relying on Rule 139b
be exempted from FINRA’s filing
requirements with respect to covered
investment fund research reports.
Another commenter suggested that the
FAIR Act be interpreted as limiting
FINRA’s authority to require the filing
of covered investment fund research
reports only if a report provides
‘‘information’’ that a user would not be
able to use for research and analysis,
since such information would be for
promotional rather than research
purposes. In addition, one commenter
argued that because the definition of
‘‘research report’’ under the FAIR Act is
broader than FINRA’s definition of
‘‘research report’’ in Rule 2241, this
difference may cause confusion and
conflicting interpretive views on what
communications are deemed research
for purposes of the safe harbor and filing
exclusion.37
FINRA believes that it would be
inconsistent with the requirements of
Section 15D of the Exchange Act to
modify the definition of ‘‘research
report’’ under FINRA Rule 2241 to
match the definition of ‘‘research
report’’ under the FAIR Act and Rule
139b. Section 15D of the Exchange Act,
which was enacted as part of the
Sarbanes-Oxley Act, required FINRA to
adopt rules reasonably designed to
address research analyst conflict of
interests, and specifically defined
‘‘research report’’ using language similar
to that used in FINRA Rule 2241.38
FINRA further notes that SEC
Regulation Analyst Certification (‘‘Reg
AC’’) also uses a substantially similar
definition of ‘‘research report.’’ FINRA
Rule 2241 and Reg AC have different
regulatory objectives than the research
report provisions of the FAIR Act, and
Congress could have—but chose not
to—harmonize the statutory definitions
of ‘‘research report’’ in the FAIR Act.
FINRA intends to create a rule that
furthers the purposes of the FAIR Act,
protects investors, and is relatively
straightforward for broker-dealers to
implement. These objectives can best be
achieved if the filing exclusion applies
to any ‘‘covered investment fund
36 See
Release, supra note 7, at 64196.
supra note 36.
38 See Section 15D(d)(2) of the Exchange Act, 15
U.S.C. 78o–6(d)(2).
37 See
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research report’’ as defined by Rule
139b that qualifies for the Rule 139b
safe harbor. The SEC has determined
which research reports should be
subject to the safe harbor, and FINRA
sees no policy reason to create a filing
exclusion for covered investment fund
research reports that differs from this
standard.
The FAIR Act authorizes FINRA to
require members to file any covered
investment fund research report the
purpose of which is not to provide
research and analysis of covered
investment funds. FINRA could simply
amend Rule 2210 by adding a filing
exclusion for covered investment fund
research reports, but qualifying the
filing exclusion as not applying to
reports the purpose of which is not to
provide research and analysis of
covered investment funds. While this
approach would adhere to the text of the
FAIR Act, FINRA believes such an
approach would be difficult to apply in
practice and would be inconsistent with
the purpose and spirit of the FAIR Act
and Rule 139b.
For example, if FINRA took this
approach, members would have to first
determine whether a covered
investment fund research report
qualifies for the Rule 139b safe harbor,
and then determine if it is for the
purpose of providing research and
analysis of covered investment funds.
This approach could create regulatory
uncertainty for members, and also
require more compliance resources to
process reports. FINRA believes that the
intent of the FAIR Act and Rule 139b is
to increase the volume and publication
of research reports on covered
investment funds subject to appropriate
conditions, and thus believes that its
filing exclusion should be consistent
with this approach. Moreover, FINRA
believes that Rule 139b’s requirements
reflect the Commission’s careful
consideration of balancing the need for
more fund research with investor
protection.39 For these reasons, FINRA
proposes to exclude from filing all
covered investment fund research
reports that qualify for the Rule 139b
safe harbor. Of course, FINRA may still
review such reports through
examinations, targeted sweeps, or spot
checks, and such reports will remain
subject to the content standards of
FINRA rules governing communications
with the public.40
Accordingly, FINRA proposes to
create a new filing exclusion under Rule
39 See generally Release, supra note 7, at 64183–
64193.
40 See section 2(c)(2) of the FAIR Act; see also
Release, supra note 7, at 64194 and fn. 185.
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32495
2210 for ‘‘any covered investment fund
research report that is deemed for
purposes of sections 2(a)(10) and 5(c) of
the Securities Act not to constitute an
offer for sale or offer to sell a security
under Securities Act Rule 139b.’’ 41
FINRA also proposes to define ‘‘covered
investment fund research report’’ as
having the same meaning given that
term in paragraph (c)(3) of Securities
Act 139b.42
Affiliated Research Reports
The FAIR Act and Securities Act Rule
139b define ‘‘covered investment fund
research report’’ to exclude a research
report to the extent that the report is
published or distributed by the covered
investment fund, any affiliate of the
covered investment fund, or any broker
or dealer that is an investment adviser
(or an affiliated person of an investment
adviser) for the covered investment
fund.43 Thus, research reports
published or distributed by a covered
investment fund, its affiliate, or any
broker-dealer that is an investment
adviser (or an affiliate of the investment
adviser) for the covered investment fund
will still have to be filed under
Investment Company Act section 24(b)
and FINRA Rule 2210.44
In some cases an investment adviser
or another affiliate of a registered
investment company will enter into an
agreement with an unaffiliated brokerdealer to act as the principal
underwriter for the fund (‘‘third-party
distributor’’). Third-party distributors
provide a variety of services pursuant to
their distribution agreements with
investment companies. Typically, these
funds’ investment advisers or the funds
themselves prepare the retail
communications concerning the funds,
and then submit the communications to
the third-party distributor for
compliance review and filing with
FINRA. These communications
typically are published on the website
for the fund or its investment adviser, or
41 See proposed FINRA Rule 2210(c)(7)(P) in
Exhibit 5.
42 See proposed FINRA Rule 2210(a)(7) in Exhibit
5.
43 See section 2(f)(3) of the FAIR Act and
Securities Act Rule 139b(c)(3).
44 If a research report concerns both a covered
investment fund that is an affiliate of the member
that is publishing or distributing the research
report, as well as a third-party fund that is not
affiliated with the member publishing or
distributing the report, the research report would
not qualify as a covered investment fund research
report. See Release, supra note 7, at 64191 (‘‘[w]e
believe extending the rule 139b safe harbor to
affiliated funds in industry research reports
(whether industry representation or comprehensive
list reports) would not be consistent with the intent
and plain language of section 2(f)(3) of the FAIR
Act’’).
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the investment adviser or another fund
affiliate requests that it be published or
distributed through other media.
As the SEC noted in the Release, one
factor to consider in evaluating whether
a research report has been published or
distributed by a person covered by the
affiliate exclusion from the definition of
covered investment fund research report
is the extent of such person’s
involvement in the preparation of the
research report.45 These determinations
would be based on the extent to which
a person covered by the affiliate
exclusion, or any person acting on its
behalf, has been involved in preparing
the information or explicitly or
implicitly endorsed or approved the
information. The Commission refers to
such affiliate involvement or
endorsement as ‘‘the entanglement or
adoption theory, respectively.’’ 46
Thus, FINRA will not consider
research reports on covered investment
funds to be excluded from filing under
the proposed changes to Rule 2210 if
personnel of the covered investment
fund, any affiliate of the fund, or any
broker-dealer that is the investment
adviser or an affiliated person of the
investment adviser were entangled with
the preparation of the report, or had
adopted its contents after it had been
prepared.47 For example, if a third-party
distributor publishes or distributes
research concerning a fund that was
written by personnel of the fund’s
investment adviser, the report still
would be subject to filing under Rule
2210.
If the Commission approves the
proposed rule change, FINRA will
announce the approval of the proposed
rule change in a Regulatory Notice to be
published no later than 60 days
following Commission approval. The
effective date will be the date of
Commission approval of the proposed
rule change.
jbell on DSK3GLQ082PROD with NOTICES
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,48 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
FAIR Act mandates the proposed
changes to the FINRA Rule 2241 quiet
45 See
Release, supra note 7, at 64182.
supra note 45.
47 See Release, supra note 7, at 64181–64183
(discussion of affiliate exclusion).
48 15 U.S.C. 78o–3(b)(6).
46 See
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19:44 Jul 05, 2019
Jkt 247001
periods around publication of covered
investment fund research reports.
FINRA believes the additional proposed
change to eliminate quiet periods
around public appearances involving an
offering of covered investment fund
securities furthers the policies
underlying the statutory mandate by
improving information flow to investors
regarding such funds. FINRA believes
that the proposed filing exclusion under
FINRA Rule 2210 for covered
investment fund research reports that
qualify for the SEC Rule 139b safe
harbor is consistent with the FAIR Act’s
intent to increase the volume and
publication of research reports on
covered investment funds subject to
appropriate conditions. FINRA also
believes that the proposed rule change
will improve efficiency and reduce
regulatory burden without diminishing
investor protection. As discussed above,
FINRA retains other methods to review
covered investment fund research
reports.
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. FINRA has
undertaken an economic impact
assessment, as set forth below, to
analyze the regulatory need for the
proposed rulemaking, its potential
economic impacts, including
anticipated costs and benefits, and the
alternatives FINRA considered in
assessing how to best meet its regulatory
objectives.
Economic Impact Assessment
FINRA interprets the FAIR Act as
requiring it to make two changes to its
rules regarding quiet periods for covered
investment funds and communications
filings of covered investment fund
research reports. The Economic Impact
Assessment considers only the impacts
of the specific aspects of the proposed
rule changes over which FINRA has
used its discretion. The economic
implications for the other aspects of the
proposed rule change that are mandated
by the FAIR Act can be deemed assessed
as part of the Act.
In this proposal, FINRA used its
discretion in two areas. First, FINRA has
chosen to include research analysts’
public appearances as part of the
proposed exception to Rule 2241’s quiet
period requirements. Second, FINRA
has chosen to create a new filing
exclusion under 2210 for all covered
investment fund research reports that
qualify for the Rule 139b safe harbor
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Frm 00096
Fmt 4703
Sfmt 4703
rather than just the reports that are for
research and analysis purposes.
Regulatory Need
Consistent with requirements in the
FAIR Act, FINRA is proposing to amend
Rule 2241 to eliminate the Rule’s quiet
periods for the publication of research
reports concerning covered investment
funds where the member is also
participating in a registered offering or
other distribution of the fund. Although
not specifically addressed by the FAIR
Act, quiet periods for public
appearances by research analysts that
are responsible for covered investment
fund research reports will also be
eliminated. FINRA believes that
including public appearances in the
proposed amendments is consistent
with how FINRA has traditionally
viewed them vis-a`-vis research reports
and is in accordance with the spirit of
the FAIR Act.
FINRA is also proposing to amend
Rule 2210 to create a new filing
exclusion for any covered investment
fund research report that qualifies for
the Rule 139b safe harbor. The FAIR Act
authorizes FINRA to continue to require
members to file any covered investment
fund research reports whose purpose is
for something other than research and
analysis of covered investment funds.
FINRA has chosen to exclude from Rule
2210 filing requirements all covered
investment fund research reports that
qualify for the safe harbor under Rule
139b regardless of their purpose.
Economic Baseline and Impact
Quiet Period
Currently under Rule 2241, members
must establish policies and procedures
that prohibit research analysts that
produce ‘‘research reports’’ as defined
under that rule from making public
appearances during specified quiet
periods following the offering of an
equity security. As Rule 2241 does not
apply to research reports concerning
mutual funds, this proposed change will
only affect public appearances by
analysts responsible for reports
concerning other types of equity
securities, including covered investment
funds such as BDCs, commodity or
currency funds.
The proposed rule change will create
a new exception from the Rule’s quiet
period requirements for the publication
or distribution of research reports and
research analysts’ public appearances.
Elimination of the quiet period for
research analysts’ public appearances
will allow analysts to provide the same
information contemporaneously through
both research reports and public
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appearances. However, the elimination
of the quiet period could increase the
risk that research analysts make
misleading statements in public
appearances at an earlier date. This risk
is mitigated by the other aspects of Rule
2241, including identifying and
managing conflicts of interest, with
which members are still required to
comply.
Communications Filings
Currently Rule 2210 requires
members to file within 10 business days
of first use or publication certain retail
communications including covered
investment fund research reports that
would qualify under the Rule 139b safe
harbor. FINRA is proposing to create a
new filing exclusion under Rule 2210
for all covered investment fund research
reports that qualify for the safe harbor
under Rule 139b regardless of their
purpose.
Between 2016 and 2018,
approximately 381 covered investment
fund research reports were filed by
members unaffiliated with the covered
investment fund. Over 90 percent of
these reports were filed by three
member firms. FINRA does not know
how many of the filings were for
purposes other than research and
analysis. Members that currently file
these types of reports will benefit
through savings on the administrative
costs associated with tracking filing
deadlines for the communications and
with the time and effort to put together
the filings as well as fees associated
with filing the reports. Alternatively, the
exclusion of these reports from filing
requirements could increase risks to
investors. Lower costs could increase
the number of non-research related
reports on unaffiliated covered
investment funds published by
members. Further, members may risk
including more biased or misleading
statements in the reports given the lack
of immediate FINRA oversight.
This risk to investors is mitigated by
two factors. First, only reports
published or distributed by a member
unaffiliated with the covered
investment fund qualify for the
exclusion. Members unaffiliated with
the covered investment fund have a
lower incentive to provide misleading
information than those affiliated with
the fund. Second, FINRA continues to
have the ability to review these
communications as part of the
examination process or through a sweep
or spot checks.
Alternatives Considered
FINRA considered excluding from the
Rule’s filing requirements only those
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19:44 Jul 05, 2019
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covered investment fund research
reports whose purpose is to provide
research and analysis of the covered
investment funds. If FINRA carved out
of the proposed exclusion non-research
related reports, members would be
required to first evaluate whether the
report was covered under the safe
harbor and then determine whether its
purpose was for research and analysis or
something else. This additional
evaluation criterion could lead to higher
compliance costs and greater regulatory
uncertainty, especially for those
members that publish or distribute a
high number of covered investment
fund research reports. While this
requirement could reduce risks to
investors, FINRA believes that the
reduced risk is not commensurate with
the increased costs to members in
complying with the rule and would be
inconsistent with the purpose and spirit
of the FAIR Act and Rule 139b.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Comments were neither solicited nor
received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be 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:
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–2019–017. 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 website (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 website 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
a.m. and 3 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. Persons
submitting comments are cautioned that
we do not redact or edit personal
identifying information from comment
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–FINRA–
2019–017 and should be submitted on
or before July 29, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.49
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–14402 Filed 7–5–19; 8:45 am]
BILLING CODE 8011–01–P
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–2019–017 on the subject line.
PO 00000
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49 17
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]]>Agencies
[Federal Register Volume 84, Number 130 (Monday, July 8, 2019)]
[Notices]
[Pages 32492-32497]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-14402]
[[Page 32492]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86257; File No. SR-FINRA-2019-017]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend
FINRA Rules 2210 (Communications With the Public) and 2241 (Research
Analysts and Research Reports)
July 1, 2019.
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 June 20, 2019, 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. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend FINRA Rules 2210 (Communications with
the Public) and 2241 (Research Analysts and Research Reports) to
conform to the requirements of the Fair Access to Investment Research
Act of 2017 (``FAIR Act'').\3\ The proposed rule change would eliminate
the ``quiet period'' restrictions in Rule 2241 on publishing a research
report or making a public appearance concerning a covered investment
fund and would create a filing exclusion under FINRA Rule 2210 for
covered investment fund research reports.
---------------------------------------------------------------------------
\3\ See Fair Access to Investment Research Act of 2017, Public
Law 115-66, 131 Stat. 1196 (2017).
---------------------------------------------------------------------------
The text of the proposed rule change is available on FINRA's
website at https://www.finra.org, at the principal office of FINRA 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, 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
The FAIR Act
The FAIR Act requires the SEC to propose and adopt rule amendments
that would extend the current safe harbor under Securities Act of 1933
(``Securities Act'') Rule 139 \4\ to a ``covered investment fund
research report'' upon terms and conditions that the SEC determines are
necessary or appropriate in the public interest, for the protection of
investors, and for the promotion of capital formation.\5\ In
implementing the safe harbor for covered investment fund research
reports, the SEC is required to: (1) Meet specified requirements
concerning the safe harbor's conditions, (2) prohibit any self-
regulatory organization (``SRO'') from maintaining or enforcing
specified rules regarding such reports, and (3) provide that a covered
investment fund research report is not subject to the sales material
filing requirements in section 24(b) of the Investment Company Act of
1940 (``Investment Company Act'').\6\ On November 30, 2018, the SEC
adopted its final rules and rule amendments to implement the mandates
of the FAIR Act.\7\ These requirements are discussed in more detail
below.
---------------------------------------------------------------------------
\4\ 17 CFR 230.139.
\5\ See section 2(a) of the FAIR Act.
\6\ See section 2(b) of the FAIR Act.
\7\ See Securities Act Release No. 10580 (November 30, 2018), 83
FR 64180 (December 13, 2018) (the ``Release'').
---------------------------------------------------------------------------
Definition of ``Covered Investment Fund Research Report''
Under the FAIR Act, a ``research report'' generally has the meaning
given that term under section 2(a)(3) of the Securities Act.\8\ Under
section 2(a)(3), ``research report'' means ``a written, electronic or
oral communication that includes information, opinions, or
recommendations with respect to securities of an issuer or an analysis
of a security or an issuer, whether or not it provides information
reasonably sufficient upon which to base an investment decision.'' \9\
In contrast, under FINRA Rule 2241 (Research Analysts and Research
Reports), the term ``research report'' is defined as ``any written
(including electronic) communication that includes an analysis of
equity securities of individual companies or industries (other than an
open-end investment registered investment company that is not listed or
traded on an exchange) and that provides information reasonably
sufficient upon which to base an investment decision.'' \10\
---------------------------------------------------------------------------
\8\ However, the term does not include an oral communication.
See section 2(f)(6) of the FAIR Act.
\9\ See section 2(a)(3) of the Securities Act, 15 U.S.C.
77b(a)(3).
\10\ The definition includes a number of exclusions, such as for
communications that are limited to discussions of broad-based
indices, communications that are distributed to fewer than 15
persons, and statutory prospectuses that are filed as part of an
issuer's registration statement. See FINRA Rule 2241(a)(11).
---------------------------------------------------------------------------
Under the FAIR Act, the term ``covered investment fund research
report'' includes a research report published or distributed by a
broker-dealer about a ``covered investment fund,'' \11\ or any of the
covered investment fund's securities. However, a covered investment
fund research report excludes research published or distributed by the
covered investment fund itself, any affiliate of a covered investment
fund, or any broker-dealer that is an investment adviser (or an
affiliated person of an investment adviser) to the covered investment
fund.\12\
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\11\ Section 2(f)(2) of the FAIR Act defines ``covered
investment fund'' as:
(A) An investment company registered under, or that has filed an
election to be treated as a business development company under, the
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) and that
has filed a registration statement under the Securities Act of 1933
(15 U.S.C. 77a et seq.) for the public offering of a class of its
securities, which registration statement has been declared effective
by the Commission; and
(B) a trust or other person--
(i) issuing securities in an offering registered under the
Securities Act of 1933 (15 U.S.C. 77a et seq.) and which class of
securities is listed for trading on a national securities exchange;
(ii) the assets of which consist primarily of commodities,
currencies, or derivative instruments that reference commodities or
currencies, or interests in the foregoing; and
(iii) that provides in its registration statement under the
Securities Act of 1933 (15 U.S.C. 77a et seq.) that a class of its
securities are purchased or redeemed, subject to conditions or
limitations, for a ratable share of its assets.
\12\ See section 2(f)(3) of the FAIR Act.
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Rule 139
Securities Act Rule 139 provides that a broker's or dealer's
publication or distribution of a research report about an issuer or any
of its securities shall be deemed for purposes of sections 2(a)(10) and
5(c) of the Securities Act not to constitute an offer for sale or offer
to sell a security that is the subject of a registered offering,
provided that the issuer and its securities meet specified conditions
in the Rule. Rule 139 is sometimes described as a ``safe harbor'' for
such research reports, since they are
[[Page 32493]]
not subject to many of the Securities Act's requirements for written
offers of securities. Prior to the SEC's adoption of rules required by
the FAIR Act, Rule 139's safe harbor was not available for a broker-
dealer's publication or distribution of research reports pertaining to
specific registered investment companies or business development
companies (``BDCs'').
In implementing the safe harbor, the FAIR Act directs the SEC to
meet certain requirements concerning covered investment fund research
reports. For example, the SEC is limited in terms of imposing
conditions to the safe harbor related to a broker-dealer's initiation
of research, or related to a covered investment fund's registration
history or minimum net assets.
In addition, the SEC must provide that covered investment fund
research reports will not be subject to the filing requirements of
section 24(b) of the Investment Company Act, or rules or regulations
thereunder, except to the extent that such reports are not subject to
content standards of any SRO rules related to research reports,
including those governing communications with the public.\13\ However,
the FAIR Act also specifies that nothing in the Act shall be construed
as in any way limiting the authority of any SRO to examine or supervise
a member's practices in connection with covered investment fund
research reports for compliance with federal law and SRO rules, or to
require the filing of communications the purpose of which is not to
provide research and analysis of covered investment funds.\14\
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\13\ See section 2(b)(4) of the FAIR Act.
\14\ See section 2(c)(2) of the FAIR Act.
---------------------------------------------------------------------------
The FAIR Act also requires the SEC to provide that SROs may not
prohibit the ability of a broker-dealer to publish or distribute a
covered investment fund research report solely because the broker-
dealer is participating in a registered offering or other distribution
of the fund, and that an SRO may not prohibit the ability of a broker-
dealer to participate in the registered offering or distribution of a
covered investment fund solely because the broker-dealer has published
or distributed research about the fund.\15\
---------------------------------------------------------------------------
\15\ See section 2(b)(3) of the FAIR Act.
---------------------------------------------------------------------------
SEC Final Rules Under the FAIR Act
On November 30, 2018, the SEC adopted its final rules and rule
amendments to implement the mandates of the FAIR Act.\16\ First, the
SEC adopted new Rule 139b under the Securities Act, which expanded the
Rule 139 safe harbor to include covered investment fund research
reports, subject to specified conditions. Rule 139b adopts the FAIR
Act's definitions of ``covered investment fund,'' ``covered investment
fund research report,'' and ``research report,'' subject to minor non-
substantive revisions.\17\
---------------------------------------------------------------------------
\16\ See Release, supra note 7.
\17\ See 17 CFR 230.139b(c).
---------------------------------------------------------------------------
Among other things, in order to qualify for the Rule 139b safe
harbor with respect to an issuer-specific research report, the covered
investment fund that is the subject of the report must have been
subject to relevant reporting requirements under the Investment Company
Act and the Exchange Act for at least 12 calendar months prior to the
reliance on the safe harbor, and these reports must have been filed in
a timely manner.\18\ In addition, the covered investment fund must
satisfy a minimum public market threshold at the date of reliance on
Rule 139b (the ``float'' requirement), which is currently $75
million.\19\ In addition, the safe harbor requires that a broker-
dealer's publication or distribution of research reports be ``in the
regular course of its business.'' \20\ Rule 139b also contains other
conditions for industry reports, and with regard to the presentation of
performance information of a registered open-end management investment
company or a trust account.\21\
---------------------------------------------------------------------------
\18\ See 17 CFR 230.139b(a)(1)(i)(A).
\19\ See 17 CFR 230.139b(a)(1)(i)(B). The required float value
does not include shares held by affiliates of the fund, and is based
on General Instruction I.B.1 to Form S-3.
\20\ See 17 CFR 230.139b(a)(1)(ii).
\21\ See 17 CFR 230.139b(a)(2) and (a)(3).
---------------------------------------------------------------------------
In addition, Rule 139b provides that an SRO may not maintain or
enforce any rule that would prohibit the ability of a member to publish
or distribute a covered investment fund research report solely because
the member is participating in a registered offering or distribution of
securities of a covered investment fund, or to participate in a
registered offering or other distribution of such securities solely
because the member has published or distributed a covered investment
fund research report about the fund or its securities.\22\
---------------------------------------------------------------------------
\22\ See 17 CFR 230.139b(b).
---------------------------------------------------------------------------
The SEC also adopted new Rule 24b-4 under the Investment Company
Act, which specifies that a covered investment fund research report as
defined in Rule 139b that concerns a fund registered under the
Investment Company Act shall not be subject to section 24(b) of the Act
or any rules or regulations thereunder, unless the report is not
subject to SRO rules relating to research reports, including rules
governing communications with the public.\23\ Section 24(b) of the
Investment Company Act generally requires certain registered investment
companies and their underwriters to file sales material concerning
those funds with the SEC within 10 days of use.\24\
---------------------------------------------------------------------------
\23\ See 17 CFR 270.24b-4.
\24\ See 15 U.S.C. 80a-24(b). This filing requirement applies to
sales material concerning any registered open-end management
investment company, any registered unit investment trust (``UIT''),
or any registered face-amount certificate company (``FACC'').
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Changes to FINRA Rules Required by the FAIR Act
FINRA interprets the FAIR Act as requiring it to make two changes
to FINRA Rules. First, FINRA is proposing to amend Rule 2241 to
eliminate the quiet period restrictions on publishing a research report
or making a public appearance concerning a covered investment fund that
is the subject of such a report. Second, FINRA is proposing to amend
Rule 2210 to create a filing exclusion for covered investment fund
research reports that qualify for the Securities Act Rule 139b safe
harbor.
FINRA Equity Research Rules
FINRA Rule 2241 governs the publication of research reports
concerning equity securities and the analysts that produce such
research. Under Rule 2241, members must establish, maintain and enforce
written policies and procedures reasonably designed to identify and
effectively manage conflicts of interest related to the preparation,
content and distribution of research reports and public appearances by
research analysts.\25\ Among other things, these policies and
procedures must define periods during which the member must not publish
or otherwise distribute research reports, and research analysts must
not make public appearances, related to the issuer (``quiet periods'').
---------------------------------------------------------------------------
\25\ See FINRA Rule 2241(b)(1).
---------------------------------------------------------------------------
These quiet periods restrict a member that has participated as an
underwriter or dealer in an initial public offering (``IPO'') from
publishing research or having its research analysts make public
appearances for a minimum of 10 days following the date of an IPO. They
also restrict a member that has acted as a manager or co-manager of a
secondary offering from publishing research or having its research
analysts make personal appearances for a minimum of three days
following the date of the offering.\26\
---------------------------------------------------------------------------
\26\ See FINRA Rule 2241(b)(2)(I). This provision contains
specified exceptions to the quiet periods for research reports and
public appearances following an offering of securities of an
Emerging Growth Company, for reports or appearances that discuss
significant news or events concerning a subject company, and for
reports and appearances regarding subject companies with ``actively
traded securities'' as defined in SEC Regulation M.
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[[Page 32494]]
While Rule 2241 excludes from its definition of ``research report''
communications related to mutual funds, the Rule applies to
communications that meet the definition of ``research report'' under
Rule 2241 concerning other covered investment funds, including closed-
end funds (``CEFs''), exchange-traded funds (``ETFs''), BDCs, UITs, and
commodity or currency funds, to the extent such research reports are
published by an underwriter or dealer in the IPO or manager or co-
manager of a secondary offering.\27\ Accordingly, such research reports
(as defined under Rule 2241) on covered investment funds (other than
mutual funds) are subject to Rule 2241's quiet periods.
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\27\ See FINRA Rule 2241(a)(11).
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As discussed above, the FAIR Act requires the SEC to prohibit any
SRO from maintaining or enforcing any rule that would prohibit the
ability of a member to:
Publish or distribute a covered investment fund research
report solely because the member is also participating in a registered
offering or other distribution of the fund; or
Participate in a registered offering or other distribution
of securities of a covered investment fund solely because the member
has published or distributed a covered investment fund research report
about the fund or its securities.\28\
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\28\ See section 2(b)(3) of the FAIR Act. The SEC implemented
this requirement in Securities Act Rule 139b(b).
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Accordingly, FINRA is proposing to amend Rule 2241 to add a new
exception from the Rule's quiet period requirements for the publication
or distribution of research reports and research analysts' public
appearances if the member has participated in the offering of the
subject company's securities.\29\ Under this new exception, the quiet
period requirements shall not apply to a research report or a public
appearance following any offering of the securities of a covered
investment fund that is the subject of a covered investment fund
research report.\30\ Although the FAIR Act does not address quiet
periods for public appearances by research analysts, FINRA also
proposes to eliminate quiet periods for public appearances concerning a
covered investment fund. Under Rule 2241, quiet periods for both
research reports and public appearances are the same, and FINRA
believes elimination of those quiet periods would advance the policy
objectives of the FAIR Act.\31\
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\29\ As discussed above, because the definition of ``research
report'' under Rule 2241 is narrower than the definition of
``research report'' under the FAIR Act, not all covered investment
fund research reports are subject to Rule 2241. Nevertheless, to the
extent that a covered investment fund research report is also a
research report subject to Rule 2241, the publication and
distribution of such reports will not be subject to the rule's quiet
periods.
\30\ FINRA also proposes to define the terms ``covered
investment fund'' and ``covered investment fund research report'' as
having the same meanings as in Securities Act Rule 139b. See
proposed FINRA Rules 2241(a)(15) and (16) in Exhibit 5.
\31\ FINRA rules do not prohibit a member from participating in
a registered offering or other distribution of securities of a
covered investment fund solely because the member has published
research about the fund. Accordingly, there is no need to amend any
FINRA rule to meet this requirement of section 2(b)(3) of the FAIR
Act or Securities Act Rule 139b(b).
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Elimination of Filing Requirement
As discussed above, section 24(b) of the Investment Company Act
requires registered open-end management investment companies,
registered UITs, registered FACCs, and their underwriters to file sales
material for the funds with the SEC within 10 days of first use.
Investment Company Act Rule 24b-3 provides that any sales material
shall be deemed filed with the SEC for purposes of section 24(b) upon
filing with a registered national securities association that has
adopted rules providing standards for the investment company
advertising practices of its members and has established and
implemented procedures to review that advertising.\32\
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\32\ FINRA is currently the only national securities association
registered under the Exchange Act that has adopted such rules and
procedures.
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Accordingly, virtually all principal underwriters of mutual funds,
ETFs, UITs and FACCs satisfy the section 24(b) requirement by filing
their sales material with FINRA. Rule 2210 requires members to file
within 10 business days of first use or publication retail
communications that promote or recommend a specific registered
investment company or family of registered investment companies
(including mutual funds, ETFs, variable insurance products, CEFs and
UITs), as well as retail communications that concern any other
registered security that is derived from or based on a single security,
a basket of securities, an index, a commodity, a debt issuance or a
foreign currency.\33\
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\33\ See FINRA Rules 2210(c)(3)(A) and (D). For a one-year
period beginning on the date reflected in FINRA's Central
Registration Depository (CRD[supreg]) system as the date that FINRA
membership became effective, a member also must file with FINRA at
least 10 business days prior to first use any broadly disseminated
retail communication, regardless of whether it concerns a registered
investment company. See FINRA Rule 2210(c)(1)(A). In addition, a
member must file at least 10 business days prior to first use any
retail communication concerning registered investment companies that
includes performance rankings or comparisons that are not generally
published, or that were created by the investment company, its
underwriter, or an affiliate. See FINRA Rule 2210(c)(2)(A).
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As discussed above, pursuant to section 2(b)(4) of the FAIR Act,
the SEC has adopted Investment Company Act Rule 24b-4, which provides
that a covered investment fund research report, as defined in
Securities Act Rule 139b(c)(3), of a covered investment fund registered
as an investment company under the Investment Company Act, shall not be
subject to section 24(b) of the Act. However, a covered investment fund
research report is still subject to the section 24(b) filing
requirement if the report is not subject to the content standards of
any SRO rules related to research reports, including those contained in
the SRO's communications rules regarding investment companies or
substantially similar standards.\34\
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\34\ See 17 CFR 270.24b-4.
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As discussed above, section 2(c)(2) of the FAIR Act provides that
nothing in the Act shall be construed as in any way limiting the
authority of any SRO to examine or supervise a member's practices in
connection with the member's publication or distribution of a covered
investment fund research report for compliance with applicable
provisions of the Federal securities laws or SRO rules related to
research reports, including those contained in rules governing
communications with the public, or to ``require the filing of
communications with the public the purpose of which is not to provide
research and analysis of covered investment funds.'' \35\ Accordingly,
FINRA interprets the FAIR Act as requiring FINRA to create a filing
exclusion in Rule 2210 for covered investment fund research reports,
but permits FINRA to require the filing of a covered investment fund
research report if the purpose of the report is not to provide research
and analysis of covered investment funds.
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\35\ See section 2(c)(2) of the FAIR Act.
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In the Release, the SEC made clear that, even if the exclusion of
covered investment fund research reports from the provisions of section
24(b) affects the applicability of FINRA Rule 2210's filing
requirements or exclusions, ``it would not affect FINRA's authority to
require the filing of a communication that is included in the FAIR Act
[[Page 32495]]
definition of `covered investment fund research report' but whose
purpose is not to provide research and analysis.'' \36\
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\36\ See Release, supra note 7, at 64196.
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The SEC also discussed in the Release industry comments
recommending that FINRA modify its rules in light of the FAIR Act. One
commenter recommended that FINRA harmonize its research rules with SEC
Rule 139b and that broker-dealers relying on Rule 139b be exempted from
FINRA's filing requirements with respect to covered investment fund
research reports. Another commenter suggested that the FAIR Act be
interpreted as limiting FINRA's authority to require the filing of
covered investment fund research reports only if a report provides
``information'' that a user would not be able to use for research and
analysis, since such information would be for promotional rather than
research purposes. In addition, one commenter argued that because the
definition of ``research report'' under the FAIR Act is broader than
FINRA's definition of ``research report'' in Rule 2241, this difference
may cause confusion and conflicting interpretive views on what
communications are deemed research for purposes of the safe harbor and
filing exclusion.\37\
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\37\ See supra note 36.
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FINRA believes that it would be inconsistent with the requirements
of Section 15D of the Exchange Act to modify the definition of
``research report'' under FINRA Rule 2241 to match the definition of
``research report'' under the FAIR Act and Rule 139b. Section 15D of
the Exchange Act, which was enacted as part of the Sarbanes-Oxley Act,
required FINRA to adopt rules reasonably designed to address research
analyst conflict of interests, and specifically defined ``research
report'' using language similar to that used in FINRA Rule 2241.\38\
FINRA further notes that SEC Regulation Analyst Certification (``Reg
AC'') also uses a substantially similar definition of ``research
report.'' FINRA Rule 2241 and Reg AC have different regulatory
objectives than the research report provisions of the FAIR Act, and
Congress could have--but chose not to--harmonize the statutory
definitions of ``research report'' in the FAIR Act.
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\38\ See Section 15D(d)(2) of the Exchange Act, 15 U.S.C. 78o-
6(d)(2).
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FINRA intends to create a rule that furthers the purposes of the
FAIR Act, protects investors, and is relatively straightforward for
broker-dealers to implement. These objectives can best be achieved if
the filing exclusion applies to any ``covered investment fund research
report'' as defined by Rule 139b that qualifies for the Rule 139b safe
harbor. The SEC has determined which research reports should be subject
to the safe harbor, and FINRA sees no policy reason to create a filing
exclusion for covered investment fund research reports that differs
from this standard.
The FAIR Act authorizes FINRA to require members to file any
covered investment fund research report the purpose of which is not to
provide research and analysis of covered investment funds. FINRA could
simply amend Rule 2210 by adding a filing exclusion for covered
investment fund research reports, but qualifying the filing exclusion
as not applying to reports the purpose of which is not to provide
research and analysis of covered investment funds. While this approach
would adhere to the text of the FAIR Act, FINRA believes such an
approach would be difficult to apply in practice and would be
inconsistent with the purpose and spirit of the FAIR Act and Rule 139b.
For example, if FINRA took this approach, members would have to
first determine whether a covered investment fund research report
qualifies for the Rule 139b safe harbor, and then determine if it is
for the purpose of providing research and analysis of covered
investment funds. This approach could create regulatory uncertainty for
members, and also require more compliance resources to process reports.
FINRA believes that the intent of the FAIR Act and Rule 139b is to
increase the volume and publication of research reports on covered
investment funds subject to appropriate conditions, and thus believes
that its filing exclusion should be consistent with this approach.
Moreover, FINRA believes that Rule 139b's requirements reflect the
Commission's careful consideration of balancing the need for more fund
research with investor protection.\39\ For these reasons, FINRA
proposes to exclude from filing all covered investment fund research
reports that qualify for the Rule 139b safe harbor. Of course, FINRA
may still review such reports through examinations, targeted sweeps, or
spot checks, and such reports will remain subject to the content
standards of FINRA rules governing communications with the public.\40\
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\39\ See generally Release, supra note 7, at 64183-64193.
\40\ See section 2(c)(2) of the FAIR Act; see also Release,
supra note 7, at 64194 and fn. 185.
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Accordingly, FINRA proposes to create a new filing exclusion under
Rule 2210 for ``any covered investment fund research report that is
deemed for purposes of sections 2(a)(10) and 5(c) of the Securities Act
not to constitute an offer for sale or offer to sell a security under
Securities Act Rule 139b.'' \41\ FINRA also proposes to define
``covered investment fund research report'' as having the same meaning
given that term in paragraph (c)(3) of Securities Act 139b.\42\
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\41\ See proposed FINRA Rule 2210(c)(7)(P) in Exhibit 5.
\42\ See proposed FINRA Rule 2210(a)(7) in Exhibit 5.
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Affiliated Research Reports
The FAIR Act and Securities Act Rule 139b define ``covered
investment fund research report'' to exclude a research report to the
extent that the report is published or distributed by the covered
investment fund, any affiliate of the covered investment fund, or any
broker or dealer that is an investment adviser (or an affiliated person
of an investment adviser) for the covered investment fund.\43\ Thus,
research reports published or distributed by a covered investment fund,
its affiliate, or any broker-dealer that is an investment adviser (or
an affiliate of the investment adviser) for the covered investment fund
will still have to be filed under Investment Company Act section 24(b)
and FINRA Rule 2210.\44\
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\43\ See section 2(f)(3) of the FAIR Act and Securities Act Rule
139b(c)(3).
\44\ If a research report concerns both a covered investment
fund that is an affiliate of the member that is publishing or
distributing the research report, as well as a third-party fund that
is not affiliated with the member publishing or distributing the
report, the research report would not qualify as a covered
investment fund research report. See Release, supra note 7, at 64191
(``[w]e believe extending the rule 139b safe harbor to affiliated
funds in industry research reports (whether industry representation
or comprehensive list reports) would not be consistent with the
intent and plain language of section 2(f)(3) of the FAIR Act'').
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In some cases an investment adviser or another affiliate of a
registered investment company will enter into an agreement with an
unaffiliated broker-dealer to act as the principal underwriter for the
fund (``third-party distributor''). Third-party distributors provide a
variety of services pursuant to their distribution agreements with
investment companies. Typically, these funds' investment advisers or
the funds themselves prepare the retail communications concerning the
funds, and then submit the communications to the third-party
distributor for compliance review and filing with FINRA. These
communications typically are published on the website for the fund or
its investment adviser, or
[[Page 32496]]
the investment adviser or another fund affiliate requests that it be
published or distributed through other media.
As the SEC noted in the Release, one factor to consider in
evaluating whether a research report has been published or distributed
by a person covered by the affiliate exclusion from the definition of
covered investment fund research report is the extent of such person's
involvement in the preparation of the research report.\45\ These
determinations would be based on the extent to which a person covered
by the affiliate exclusion, or any person acting on its behalf, has
been involved in preparing the information or explicitly or implicitly
endorsed or approved the information. The Commission refers to such
affiliate involvement or endorsement as ``the entanglement or adoption
theory, respectively.'' \46\
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\45\ See Release, supra note 7, at 64182.
\46\ See supra note 45.
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Thus, FINRA will not consider research reports on covered
investment funds to be excluded from filing under the proposed changes
to Rule 2210 if personnel of the covered investment fund, any affiliate
of the fund, or any broker-dealer that is the investment adviser or an
affiliated person of the investment adviser were entangled with the
preparation of the report, or had adopted its contents after it had
been prepared.\47\ For example, if a third-party distributor publishes
or distributes research concerning a fund that was written by personnel
of the fund's investment adviser, the report still would be subject to
filing under Rule 2210.
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\47\ See Release, supra note 7, at 64181-64183 (discussion of
affiliate exclusion).
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If the Commission approves the proposed rule change, FINRA will
announce the approval of the proposed rule change in a Regulatory
Notice to be published no later than 60 days following Commission
approval. The effective date will be the date of Commission approval of
the proposed rule change.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\48\ 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 FAIR Act mandates the proposed
changes to the FINRA Rule 2241 quiet periods around publication of
covered investment fund research reports. FINRA believes the additional
proposed change to eliminate quiet periods around public appearances
involving an offering of covered investment fund securities furthers
the policies underlying the statutory mandate by improving information
flow to investors regarding such funds. FINRA believes that the
proposed filing exclusion under FINRA Rule 2210 for covered investment
fund research reports that qualify for the SEC Rule 139b safe harbor is
consistent with the FAIR Act's intent to increase the volume and
publication of research reports on covered investment funds subject to
appropriate conditions. FINRA also believes that the proposed rule
change will improve efficiency and reduce regulatory burden without
diminishing investor protection. As discussed above, FINRA retains
other methods to review covered investment fund research reports.
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\48\ 15 U.S.C. 78o-3(b)(6).
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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. FINRA has undertaken an
economic impact assessment, as set forth below, to analyze the
regulatory need for the proposed rulemaking, its potential economic
impacts, including anticipated costs and benefits, and the alternatives
FINRA considered in assessing how to best meet its regulatory
objectives.
Economic Impact Assessment
FINRA interprets the FAIR Act as requiring it to make two changes
to its rules regarding quiet periods for covered investment funds and
communications filings of covered investment fund research reports. The
Economic Impact Assessment considers only the impacts of the specific
aspects of the proposed rule changes over which FINRA has used its
discretion. The economic implications for the other aspects of the
proposed rule change that are mandated by the FAIR Act can be deemed
assessed as part of the Act.
In this proposal, FINRA used its discretion in two areas. First,
FINRA has chosen to include research analysts' public appearances as
part of the proposed exception to Rule 2241's quiet period
requirements. Second, FINRA has chosen to create a new filing exclusion
under 2210 for all covered investment fund research reports that
qualify for the Rule 139b safe harbor rather than just the reports that
are for research and analysis purposes.
Regulatory Need
Consistent with requirements in the FAIR Act, FINRA is proposing to
amend Rule 2241 to eliminate the Rule's quiet periods for the
publication of research reports concerning covered investment funds
where the member is also participating in a registered offering or
other distribution of the fund. Although not specifically addressed by
the FAIR Act, quiet periods for public appearances by research analysts
that are responsible for covered investment fund research reports will
also be eliminated. FINRA believes that including public appearances in
the proposed amendments is consistent with how FINRA has traditionally
viewed them vis-[agrave]-vis research reports and is in accordance with
the spirit of the FAIR Act.
FINRA is also proposing to amend Rule 2210 to create a new filing
exclusion for any covered investment fund research report that
qualifies for the Rule 139b safe harbor. The FAIR Act authorizes FINRA
to continue to require members to file any covered investment fund
research reports whose purpose is for something other than research and
analysis of covered investment funds. FINRA has chosen to exclude from
Rule 2210 filing requirements all covered investment fund research
reports that qualify for the safe harbor under Rule 139b regardless of
their purpose.
Economic Baseline and Impact
Quiet Period
Currently under Rule 2241, members must establish policies and
procedures that prohibit research analysts that produce ``research
reports'' as defined under that rule from making public appearances
during specified quiet periods following the offering of an equity
security. As Rule 2241 does not apply to research reports concerning
mutual funds, this proposed change will only affect public appearances
by analysts responsible for reports concerning other types of equity
securities, including covered investment funds such as BDCs, commodity
or currency funds.
The proposed rule change will create a new exception from the
Rule's quiet period requirements for the publication or distribution of
research reports and research analysts' public appearances. Elimination
of the quiet period for research analysts' public appearances will
allow analysts to provide the same information contemporaneously
through both research reports and public
[[Page 32497]]
appearances. However, the elimination of the quiet period could
increase the risk that research analysts make misleading statements in
public appearances at an earlier date. This risk is mitigated by the
other aspects of Rule 2241, including identifying and managing
conflicts of interest, with which members are still required to comply.
Communications Filings
Currently Rule 2210 requires members to file within 10 business
days of first use or publication certain retail communications
including covered investment fund research reports that would qualify
under the Rule 139b safe harbor. FINRA is proposing to create a new
filing exclusion under Rule 2210 for all covered investment fund
research reports that qualify for the safe harbor under Rule 139b
regardless of their purpose.
Between 2016 and 2018, approximately 381 covered investment fund
research reports were filed by members unaffiliated with the covered
investment fund. Over 90 percent of these reports were filed by three
member firms. FINRA does not know how many of the filings were for
purposes other than research and analysis. Members that currently file
these types of reports will benefit through savings on the
administrative costs associated with tracking filing deadlines for the
communications and with the time and effort to put together the filings
as well as fees associated with filing the reports. Alternatively, the
exclusion of these reports from filing requirements could increase
risks to investors. Lower costs could increase the number of non-
research related reports on unaffiliated covered investment funds
published by members. Further, members may risk including more biased
or misleading statements in the reports given the lack of immediate
FINRA oversight.
This risk to investors is mitigated by two factors. First, only
reports published or distributed by a member unaffiliated with the
covered investment fund qualify for the exclusion. Members unaffiliated
with the covered investment fund have a lower incentive to provide
misleading information than those affiliated with the fund. Second,
FINRA continues to have the ability to review these communications as
part of the examination process or through a sweep or spot checks.
Alternatives Considered
FINRA considered excluding from the Rule's filing requirements only
those covered investment fund research reports whose purpose is to
provide research and analysis of the covered investment funds. If FINRA
carved out of the proposed exclusion non-research related reports,
members would be required to first evaluate whether the report was
covered under the safe harbor and then determine whether its purpose
was for research and analysis or something else. This additional
evaluation criterion could lead to higher compliance costs and greater
regulatory uncertainty, especially for those members that publish or
distribute a high number of covered investment fund research reports.
While this requirement could reduce risks to investors, FINRA believes
that the reduced risk is not commensurate with the increased costs to
members in complying with the rule and would be inconsistent with the
purpose and spirit of the FAIR Act and Rule 139b.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be 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 [email protected]. Please include
File Number SR-FINRA-2019-017 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-2019-017. 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 website (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 website 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 a.m. and 3
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. Persons submitting comments are cautioned that
we do not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
FINRA-2019-017 and should be submitted on or before July 29, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\49\
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\49\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-14402 Filed 7-5-19; 8:45 am]
BILLING CODE 8011-01-P
