10538 Federal Register / Vol. 80, No. 38 / Thursday, February 26, 2015 / Notices 

12 15 U.S.C. 78s(b)(3)(A). 

13 17 CFR 240.19b–4(f)(6)(iii). As required under 

Rule 19b–4(f)(6)(iii), the Exchange provided the 

Commission with written notice of its intent to file 

the proposed rule change, along with a brief 

description and the text of the proposed rule 

change, at least five business days prior to the date 

of filing of the proposed rule change, or such 

shorter time as designated by the Commission. 

14For purposes only of waiving the 30-day 

operative delay, the Commission has also 

considered the proposed rule’s impact on 

efficiency, competition, and capital formation. See 

15 U.S.C. 78c(f). 

15 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3Exchange Act Release No. 73623 (Nov. 18, 

2014); 79 FR 69905 (Nov. 24, 2014) (‘‘Notice’’). On 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

The Exchange 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, as amended. 

Specifically, the proposal does not 

impose an intra-market burden on 

competition, because it will apply to all 

members. Nor will the proposal impose 

a burden on competition among the 

options exchanges, because, in addition 

to the vigorous competition for order 

flow among the options exchanges, the 

proposal addresses a regulatory 

situation common to all options 

exchanges. To the extent that market 

participants disagree with the particular 

approach taken by the Exchange herein, 

market participants can easily and 

readily direct order flow to competing 

venues. The Exchange believes this 

proposal will not impose a burden on 

competition and will help provide 

certainty during periods of 

extraordinary volatility in an NMS 

stock. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

No written comments were either 

solicited or received. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Because the proposed rule change 

does not (i) significantly affect the 

protection of investors or the public 

interest; (ii) impose any significant 

burden on competition; and (iii) become 

operative for 30 days from the date on 

which it was filed, or such shorter time 

as the Commission may designate if 

consistent with the protection of 

investors and the public interest, the 

proposed rule change has become 

effective pursuant to Section 19(b)(3)(A) 

of the Act 12 and Rule 19b–4(f)(6)(iii) 

thereunder.13

The Exchange has asked the 

Commission to waive the 30-day 

operative delay so that the proposal may 

become operative immediately upon 

filing. The Commission believes that 

waiving the 30-day operative delay is 

consistent with the protection of 

investors and the public interest, as it 

will allow the obvious error pilot 

program to continue uninterrupted 

while the industry gains further 

experience operating under the Plan, 

and avoid any investor confusion that 

could result from a temporary 

interruption in the pilot program. For 

this reason, the Commission designates 

the proposed rule change to be operative 

upon filing.14

At any time within 60 days of the 

filing of the proposed rule change, the 

Commission summarily may 

temporarily suspend such rule change if 

it appears to the Commission that such 

action is necessary or appropriate in the 

public interest, for the protection of 

investors, or otherwise in furtherance of 

the purposes of the Act. If the 

Commission takes such action, the 

Commission shall institute proceedings 

to determine whether the proposed rule 

should be approved or disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

Phlx–2015–19 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–Phlx–2015–19. This file 

number should be included on the 

subject line if email is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE., 

Washington, DC 20549 on official 

business days between the hours of 

10:00 a.m. and 3:00 p.m. Copies of such 

filing also will be available for 

inspection and copying at the principal 

office of the Exchange. All comments 

received will be posted without change; 

the Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR–Phlx– 

2015–19, and should be submitted on or 

before March 19, 2015. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.15

Jill M. Peterson, 

Assistant Secretary. 

[FR Doc. 2015–03960 Filed 2–25–15; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–74340; File No. SR–FINRA– 

2014–048] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Order Instituting 

Proceedings To Determine Whether To 

Approve or Disapprove a Proposed 

Rule Change To Adopt FINRA Rule 

2242; Debt Research Analysts and 

Debt Research Reports 

February 20, 2015. 

I. Introduction 

On November 14, 2014, Financial 

Industry Regulatory Authority, Inc. 

(‘‘FINRA’’) filed with the Securities and 

Exchange Commission (‘‘SEC’’ or 

‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Act’’) 1 and Rule 19b–4 

thereunder,2 a proposed rule to adopt 

new FINRA Rule 2242 (Debt Research 

Analysts and Debt Research Reports) to 

address conflicts of interest relating to 

the publication and distribution of debt 

research reports. The proposal was 

published for comment in the Federal 

Register on November 24, 2014.3 The 


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January 6, 2015, FINRA consented to extending the 

time period for the Commission to either approve 

or disapprove the proposed rule change, or to 

institute proceedings to determine whether to 

approve or disapprove the proposed rule change, to 

February 20, 2015. 

4See Letter from Kevin Zambrowicz, Associate 

General Counsel & Managing Director and Sean 

Davy, Managing Director, SIFMA, dated Dec. 15, 

2014 (‘‘SIFMA’’), Letter from Hugh D. Berkson, 

President-Elect, Public Investors Arbitration Bar 

Association, dated Dec. 15, 2014 (‘‘PIABA Debt’’), 

Letter from Yoon-Young Lee, WilmerHale, dated 

Dec. 16, 2014 (‘‘WilmerHale Debt’’), Letter from 

William Beatty, President and Washington (State) 

Securities Administrator, North American 

Securities Administrators Association, Inc., dated 

Dec. 19, 2014 (‘‘NASAA Debt’’), and Letter from 

Kurt N. Schacht, CFA, Managing Director, 

Standards and Financial Market Integrity and Linda 

L. Rittenhouse, Director, Capital Markets Policy, 

CFA Institute, dated Feb. 9, 2015 (‘‘CFA Institute’’). 

5 15 U.S.C. 78s(b)(2)(B). 

6See Exchange Act Release No. 73622 (Nov. 18, 

2014); 79 FR 69939 (Nov. 24, 2014) (SR–FINRA– 

2014–047) (proposing amendments to current SRO 

rules relating to equity research). 

7See proposed FINRA Rule 2242(a) for all of the 

proposed defined terms. 

8See Notice for a full description of all 

definitions. FINRA stated that the proposed rule 

change also would adopt defined terms to 

implement the tiered structure of proposed FINRA 

Rule 2242, including the terms ‘‘qualified 

institutional buyer’’ or ‘‘QIB,’’ which is part of the 

description of an institutional investor for purposes 

of the Rule, and ‘‘retail investor.’’ 9See proposed FINRA Rule 2242(a)(3). The 

proposed rule change does not incorporate a 

proposed exclusion from the equity research rule’s 

definition of ‘‘research report’’ of communications 

concerning open-end registered investment 

companies that are not listed or traded on an 

exchange (‘‘mutual funds’’) because it is not 

necessary since mutual fund securities are equity 

securities under Section 3(a)(11) of the Exchange 

Act and therefore would not be captured by the 

proposed definition of ‘‘debt research report’’ in the 

proposed rule change. 

10 In aligning the proposed definition with the 

Regulation AC definition of research report, the 

proposed definition differs in minor respects from 

the definition of ‘‘research report’’ in NASD Rule 

2711. For example, the proposed definition of ‘‘debt 

research report’’ would apply to a communication 

that includes an analysis of a debt security or an 

issuer of a debt security, while the definition of 

‘‘research report’’ in NASD Rule 2711 applies to an 

analysis of equity securities of individual 

companies or industries. 

11These include, for example, discussions of 

broad-based indices and commentaries on 

economic, political, or market conditions. See 

Notice. 

12These include statistical summaries of multiple 

companies’ financial data, including listings of 

current ratings that do not include an analysis of 

individual companies’ data and an analysis 

prepared for a specific person or a limited group of 

fewer than 15 persons. See Notice. 

13See proposed FINRA Rule 2242(a)(4). 14The Commission’s rulemaking in the area of 

security-based swaps, pursuant to Title VII of the 

Dodd-Frank Wall Street Reform and Consumer 

Protection Act (the ‘‘Dodd-Frank Act’’), is ongoing. 

In June 2011, the Commission proposed rules 

addressing policies and procedures with respect to 

research and analysis for security-based swaps as 

part of its proposal governing business conduct 

standards for security-based swap dealers and major 

security-based swap participants. See Securities 

Exchange Act Release No. 64766 (June 29, 2011), 76 

FR 42396 (July 18, 2011) (Business Conduct 

Standards for Security-Based Swap Dealers and 

Major Security-Based Swap Participants). In June 

2012, the Commission staff sought comment on a 

statement of general policy for the sequencing of 

compliance dates for rules applicable to securitybased swaps. See Securities Exchange Act Release 

No. 67177 (June 11, 2012), 77 FR 35625 (June 14, 

2012) (Statement of General Policy on the 

Sequencing of the Compliance Dates for Final Rules 

Applicable to Security-Based Swaps Adopted 

Pursuant to the Securities Exchange Act of 1934 

and the Dodd-Frank Wall Street Reform and 

Consumer Protection Act). In May 2013, the 

Commission re-opened comment on the statement 

of general policy and on the outstanding 

rulemaking releases. The comment period was 

reopened until July 22, 2013. See Securities 

Exchange Act Release No. 69491 (May 1, 2013), 78 

FR 30800 (May 23, 2013) (Reopening of Comment 

Periods for Certain Proposed Rulemaking Releases 

and Policy Statements Applicable to Security-Based 

Swaps). 

15See proposed FINRA Rule 2242(a)(8). 

Commission received five comments on 

the proposal.4 This order institutes 

proceedings under Section 19(b)(2)(B) of 

the Act 5 to determine whether to 

approve or disapprove the proposed 

rule change. 

II. Description of the Proposed Rule 

Change 

As described more fully in the Notice, 

FINRA proposed to adopt FINRA Rule 

2242 to address conflicts of interest 

relating to the publication and 

distribution of debt research reports. 

Proposed FINRA Rule 2242 would 

adopt a tiered approach that FINRA 

believed, in general, would provide 

retail debt research recipients with 

extensive protections similar to those 

provided to recipients of equity research 

under current and proposed FINRA 

rules,6 with modifications to reflect 

differences in the trading of debt 

securities. 

As stated above, the Commission 

received five comments on the proposal. 

All of these commenters expressed 

general support for the proposal. 

A. Definitions 

The proposed rule change would 

adopt defined terms for purposes of 

proposed FINRA Rule 2242.7 Most of 

the defined terms closely follow the 

defined terms for equity research in 

NASD Rule 2711, as amended by the 

equity research filing, with minor 

changes to reflect their application to 

debt research. A summary of selected 

proposed definitions are set forth 

below.8

The proposed rule change would 

define the term ‘‘debt research report’’ 

as any written (including electronic) 

communication that includes an 

analysis of a debt security or an issuer 

of a debt security and that provides 

information reasonably sufficient upon 

which to base an investment decision, 

excluding communications that solely 

constitute an equity research report as 

defined in proposed Rule 2241(a)(11).9

The proposed definition and exceptions 

noted below would generally align with 

the definition of ‘‘research report’’ in 

NASD Rule 2711, while incorporating 

aspects of the Regulation AC definition 

of ‘‘research report’’.10

Communications that constitute 

statutory prospectuses that are filed as 

part of the registration statement would 

not be included in the definition of a 

debt research report. In general, the term 

debt research report also would not 

include a number of communications, 

similar to the equity proposal, if they do 

not include an analysis of, or 

recommend or rate, individual debt 

securities or issuers.11 The term debt 

research report also, in general, would 

not include a number of 

communications, similar to the equity 

proposal, even if they include an 

analysis of an individual debt security 

or issuer and information reasonably 

sufficient upon which to base an 

investment decision.12

The proposed rule change would 

define the term ‘‘debt security’’ as any 

‘‘security’’ as defined in Section 3(a)(10) 

of the Exchange Act, except for any 

‘‘equity security’’ as defined in Section 

3(a)(11) of the Exchange Act, any 

‘‘municipal security’’ as defined in 

Section 3(a)(29) of the Exchange Act, 

any ‘‘security-based swap’’ as defined in 

Section 3(a)(68) of the Exchange Act, 

and any ‘‘U.S. Treasury Security’’ as 

defined in paragraph (p) of FINRA Rule 

6710.13 The proposed definition 

excludes municipal securities, in part 

because of FINRA’s jurisdictional 

limitations with respect to such 

securities. The proposed definition 

excludes security-based swaps given the 

nascent and evolving nature of securitybased swap regulation.14 However, 

FINRA stated it intends to monitor 

regulatory developments with respect to 

security-based swaps and may 

determine to later include such 

securities in the definition of debt 

security. 

The proposed rule change would 

define the term ‘‘investment banking 

department’’ as any department or 

division, whether or not identified as 

such, that performs any investment 

banking service on behalf of a 

member.15 The term ‘‘investment 

banking services’’ would include, 

without limitation, acting as an 

underwriter, participating in a selling 

group in an offering for the issuer or 

otherwise acting in furtherance of a 

public offering of the issuer; acting as a 

financial adviser in a merger or 

acquisition; providing venture capital or 


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16See proposed FINRA Rule 2242(a)(9). The 

current definition in NASD Rule 2711 includes, 

without limitation, many common types of 

investment banking services. The proposed rule 

change and the equity research filing propose to 

add the language ‘‘or otherwise acting in 

furtherance of’’ either a public or private offering 

to further emphasize that the term ‘‘investment 

banking services’’ is meant to be construed broadly. 

17See proposed FINRA Rule 2242(a)(12). 

18See proposed FINRA Rule 2242(a)(14). 

19See proposed FINRA Rule 2242(a)(15). 

20See proposed FINRA Rule 2242(a)(16). 

21WilmerHale Debt. 

22WilmerHale Debt. 

23WilmerHale Debt. 

24See proposed FINRA Rule 2242(b)(1). 

25See proposed FINRA Rule 2242(b)(2). 

26SIFMA and WilmerHale Debt. 

27Letter from Amal Aly, Managing Director and 

Associate General Counsel, SIFMA, to Marcia E. 

Asquith, Corporate Secretary, FINRA, dated 

November 14, 2008 regarding Regulatory Notice 08– 

55 (Research Analysts and Research Reports). 

28NASAA Debt. 

29CFA Institute. 

30WilmerHale Debt. 

equity lines of credit or serving as 

placement agent for the issuer or 

otherwise acting in furtherance of a 

private offering of the issuer.16

Under the proposed rule change the 

term ‘‘qualified institutional buyer’’ 

would have the same meaning as under 

Rule 144A of the Securities Act.17

The proposed rule change would 

define ‘‘research department’’ as any 

department or division, whether or not 

identified as such, that is principally 

responsible for preparing the substance 

of a debt research report on behalf of a 

member.18 The proposed rule change 

would define the term ‘‘subject 

company’’ as the company whose debt 

securities are the subject of a debt 

research report or a public 

appearance.19 Finally, the proposed rule 

change would define the term ‘‘thirdparty debt research report’’ as a debt 

research report that is produced by a 

person or entity other than the 

member.20

One commenter requested that the 

proposal define the term ‘‘sales and 

trading personnel’’ as ‘‘persons who are 

primarily responsible for performing 

sales and trading activities, or exercising 

direct supervisory authority over such 

persons.’’21 The commenter’s proposed 

definition is intended to clarify that the 

proposed restrictions on sales and 

trading personnel activities should not 

extend to: (1) Senior management who 

do not directly supervise those activities 

but have a reporting line from such 

personnel; or (2) persons who 

occasionally function in a sales and 

trading capacity. 

One commenter asked FINRA to 

include an exclusion from the definition 

of ‘‘debt research report’’ for private 

placement memoranda and similar 

offering-related documents prepared in 

connection with investment banking 

services transactions.22 The commenter 

noted that such offering-related 

documents typically are prepared by 

investment banking personnel or nonresearch personnel on behalf of 

investment banking personnel. The 

commenter asserted that absent an 

express exception, the proposals could 

turn investment banking personnel into 

research analysts and make the rule 

unworkable. The commenter noted that 

NASD Rule 2711(a) excludes 

communications that constitute 

statutory prospectuses that are filed as 

part of a registration statement and 

contended that the basis for that 

exception should apply equally to 

private placement memoranda and 

similar offering-related documents. 

One commenter suggested that FINRA 

revise the definition of ‘‘subject 

company’’ to specify that the term 

means the ‘‘issuer (rather than the 

‘‘company’’) whose debt securities are 

the subject of a debt research report or 

a public appearance.’’23 The commenter 

noted that, among other things, the 

proposal would cover debt issued by 

persons other than corporate entities, 

such as foreign sovereigns or special 

purpose vehicles. 

B. Identifying and Managing Conflicts of 

Interest 

Similar to the proposed equity 

research rules, the proposed rule change 

contains an overarching provision that 

would require members to 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 debt 

research reports, public appearances by 

debt research analysts, and the 

interaction between debt research 

analysts and persons outside of the 

research department, including 

investment banking, sales and trading 

and principal trading personnel, subject 

companies and customers.24

Specifically, members must implement 

written policies and procedures 

reasonably designed to promote 

objective and reliable debt research that 

reflects the truly held opinions of debt 

research analysts and to prevent the use 

of debt research reports or debt research 

analysts to manipulate or condition the 

market or favor the interests of the firm 

or current or prospective customers or 

class of customers.25 The proposed rule 

change then sets forth minimum 

requirements for those written policies 

and procedures. 

According to FINRA, these provisions 

set out the fundamental obligation for a 

member to establish and maintain a 

system to identify and mitigate conflicts 

to foster integrity and fairness in its debt 

research products and services. FINRA 

stated that these provisions are also 

intended to require firms to be more 

proactive in identifying and managing 

conflicts as new research products, 

affiliations and distribution methods 

emerge. FINRA believes this approach 

allows for some flexibility to manage 

identified conflicts, with some specified 

prohibitions and restrictions where 

disclosure does not adequately mitigate 

them. According to FINRA, most of the 

minimum requirements have been 

experience tested and found effective in 

the equity research rules. 

The rule proposal thus would adopt a 

policies and procedures approach to 

identification and management of 

research-related conflicts of interest and 

require those policies and procedures 

to, at a minimum, prohibit or restrict 

particular conduct. Commenters 

expressed several concerns with the 

approach. 

Two commenters asserted that the 

mix of a principles-based approach with 

prescriptive requirements was confusing 

in places and posed operational 

challenges. In particular, the 

commenters recommended eliminating 

the minimum standards for the policies 

and procedures.26 One of those 

commenters had previously expressed 

support for the proposed policies-based 

approach with minimum 

requirements,27 but asserted that the 

proposed rule text requiring procedures 

to ‘‘at a minimum, be reasonably 

designed to prohibit’’ specified conduct 

is either superfluous or confusing. 

Another commenter favored retaining 

the proscriptive approach in the current 

equity rules and also requiring that 

firms maintain policies and procedures 

designed to ensure compliance.28

Another commenter supported the types 

of communications between debt 

research analysts and other persons that 

may be permitted by a firm’s policies 

and procedures.29 One commenter 

questioned the necessity of the 

‘‘preamble’’ requiring policies and 

procedures that ‘‘restrict or limit 

activities by research analysts that can 

reasonably be expected to compromise 

their objectivity’’ that precedes specific 

prohibited activities related to 

investment banking transactions.30

One commenter asked FINRA to 

refrain from using the concept of 

‘‘reliable’’ research in the proposal as it 

may inappropriately connote accuracy 


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31SIFMA. 32See proposed FINRA Rule 2242(b)(2)(A) and 

(B). FINRA clarified that a firm would be required 

to specify in its policies and procedures the 

circumstances, if any, where prepublication review 

would be permitted as necessary and appropriate 

pursuant to proposed FINRA Rule 2242(b)(2)(B), for 

example, where non-research personnel are best 

situated to verify select facts or where 

administrative personnel review for formatting. 

FINRA noted that members still would be subject 

to the overarching requirement to have policies and 

procedures reasonably designed to effectively 

manage conflicts of interest between research 

analysts and those outside of the research 

department. See also proposed FINRA Rule 2242.05 

(Submission of Sections of a Draft Research Report 

for Factual Review). 

33See proposed FINRA Rule 2242(b)(2)(N). 

34See proposed FINRA Rule 2242(b)(2)(C). 

35WilmerHale Debt. 

36See proposed FINRA Rule 2242(b)(2)(L). 

37See proposed FINRA Rule 2242.01 (Efforts to 

Solicit Investment Banking Business). 

38See proposed FINRA Rule 2242(b)(2)(M). 

39See proposed FINRA Rule 2242.02(a) 

(Restrictions on Communications with Customers 

and Internal Personnel). 

40WilmerHale Debt. 

41See proposed FINRA Rule 2242(b)(2)(D). 

FINRA stated that the provision is substantively the 

same as current NASD Rule 2711(b)(1), which they 

characterized as a core structural separation 

requirement in the equity research rules they 

believe is essential to safeguarding analyst 

objectivity. 

42See proposed FINRA Rule 2242(b)(2)(H). 

43SIFMA and WilmerHale Debt. 

44WilmerHale Debt. 

45WilmerHale Debt. 

46WilmerHale Debt. 

47WilmerHale Debt. 

in the context of a research analyst’s 

opinions.31

1. Prepublication Review 

As proposed, the first of these 

minimum requirements would require 

that the policies and procedures must, 

at a minimum, be reasonably designed 

to prohibit prepublication review, 

clearance or approval of debt research 

by persons involved in investment 

banking, sales and trading or principal 

trading, and either restrict or prohibit 

such review, clearance and approval by 

other non-research personnel other than 

legal and compliance.32 The policies 

and procedures also must prohibit 

prepublication review of a debt research 

report by a subject company, other than 

for verification of facts.33 No specific 

comments were received on this 

provision. 

2. Coverage Decisions 

The proposed rule change would 

require that policies and procedures 

must restrict or limit input by 

investment banking, sales and trading 

and principal trading personnel to 

ensure that research management 

independently makes all final decisions 

regarding the research coverage plan.34

However, the provision does not 

preclude personnel from these or any 

other department from conveying 

customer interests and coverage needs, 

so long as final decisions regarding the 

coverage plan are made by research 

management. 

One commenter asked FINRA to 

eliminate as redundant the term 

‘‘independently’’ from the provisions 

permitting non-research personnel to 

have input into research coverage, so 

long as research management 

‘‘independently makes all final 

decisions regarding the research 

coverage plan.’’35 The commenter 

asserted that inclusion of 

‘‘independently’’ is confusing since the 

proposal would permit input from nonresearch personnel into coverage 

decisions. 

3. Solicitation and Marketing of 

Investment Banking Transactions 

A member’s written policies and 

procedures would also be required, at a 

minimum, restrict or limit activities by 

debt research analysts that can 

reasonably be expected to compromise 

their objectivity.36 This would include 

prohibiting participation in pitches and 

other solicitations of investment 

banking services transactions and road 

shows and other marketing on behalf of 

issuers related to such transactions. The 

proposed rule change proposes a 

Supplementary Material that 

incorporates an existing FINRA 

interpretation for the equity research 

rules that prohibits in pitch materials 

any information about a member’s debt 

research capacity in a manner that 

suggests, directly or indirectly, that the 

member might provide favorable debt 

research coverage.37

The proposed rule change also would 

prohibit investment banking personnel 

from directing debt research analysts to 

engage in sales or marketing efforts 

related to an investment banking 

services transaction or any 

communication with a current or 

prospective customer about an 

investment banking services 

transaction.38 In addition, the proposed 

rule change proposes a Supplementary 

Material to provide that, consistent with 

this requirement, no debt research 

analyst may engage in any 

communication with a current or 

prospective customer in the presence of 

investment banking department 

personnel or company management 

about an investment banking services 

transaction.39

One commenter asked that FINRA 

modify the prohibition on debt analyst 

attendance at road shows to permit 

passive participation since there is less 

opportunity to meet and assess issuer 

management than in the equity 

context.40

4. Supervision 

The proposed rule change would 

require that the policies and procedures 

prohibit persons engaged in investment 

banking activities sales and trading or 

principal trading activities from 

supervision of debt research analysts.41

No specific comments were received on 

this provision. 

5. Information Barriers 

The proposed rule change would 

require that the policies and procedures 

establish information barriers or other 

institutional safeguards to ensure that 

debt research analysts are insulated 

from the review, pressure or oversight 

by persons engaged in investment 

banking services, principal trading or 

sales and trading activities or others 

who might be biased in their judgment 

or supervision.42

Some commenters suggested that 

‘‘review’’ was unnecessary in this 

provision because the review of debt 

research analysts was addressed 

sufficiently in other parts of the 

proposed rule.43 One commenter further 

suggested that the terms ‘‘review’’ and 

‘‘oversight’’ are redundant.44 One 

commenter asked FINRA to clarify that 

the information barriers or other 

institutional safeguards required by the 

proposed rule are not intended to 

prohibit or limit activities that would 

otherwise be permitted under other 

provisions of the rule.45 The commenter 

also asserted that the terms ‘‘bias’’ and 

‘‘pressure’’ are broad and ambiguous on 

their face and requested that FINRA 

clarify that for purposes of the 

information barriers requirement that 

they are intended to address persons 

who may try to improperly influence 

research.46 As an example, the 

commenter asked whether a bias would 

be present if an analyst was pressured 

to change the format of a research report 

to comply with the research 

department’s standard procedures or the 

firm’s technology specifications. One 

commenter asked FINRA to modify the 

information barriers or other 

institutional safeguards requirement to 

conform the provision to FINRA’s 

‘‘reasonably designed’’ standard for 

related policies and procedures.47

6. Budget and Compensation 

A member’s written policies and 

procedures would also be required to 

limit the determination of a firm’s debt 

research department budget to senior 


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48See proposed FINRA Rule 2242(b)(2)(E). 

49See proposed FINRA Rule 2242(b)(2)(D) and 

(F). 

50See proposed FINRA Rule 2242(b)(2)(G). 

51These include, for example, the debt research 

analyst’s individual performance, including the 

analyst’s productivity and the quality of the debt 

research analyst’s research. See Notice. 

52See proposed FINRA Rule 2242(b)(2)(D) and 

(G). 

53WilmerHale Debt. 54SIFMA and WilmerHale Debt. 55SIFMA. 56See proposed FINRA Rule 2242(b)(2)(J). See 

Notice for a description of the term ‘‘debt research 

analyst account.’’ 

57See proposed FINRA Rule 2242.07 (Ability to 

Influence the Content of a Research Report) which 

would provide that for the purposes of the rule, an 

associated person with the ability to influence the 

content of a debt research report is an associated 

person who, in the ordinary course of that person’s 

duties, has the authority to review the debt research 

report and change that debt research report prior to 

publication or distribution. 

58See proposed FINRA Rule 2242.10. 

management, excluding senior 

management engaged in investment 

banking or principal trading activities, 

and without regard to specific revenues 

or results derived from investment 

banking.48 However, the proposed rule 

change would expressly permit all 

persons to provide input to senior 

management regarding the demand for 

and quality of debt research, including 

product trends and customer interests. It 

further would allow consideration by 

senior management of a firm’s overall 

revenues and results in determining the 

debt research budget and allocation of 

expenses. 

With respect to compensation 

determinations, a member’s written 

policies and procedures would be 

required to prohibit compensation based 

on specific investment banking services 

or trading transactions or contributions 

to a firm’s investment banking or 

principal trading activities and prohibit 

investment banking and principal 

trading personnel from input into the 

compensation of debt research 

analysts.49 Further, the firm’s written 

policies and procedures would be 

required to establish that the 

compensation of a debt research analyst 

who is primarily responsible for the 

substance of a research report be 

reviewed and approved at least annually 

by a committee that reports to a 

member’s board of directors or, if the 

member has no board of directors, a 

senior executive officer of the 

member.50 This committee may not 

have representation from investment 

banking personnel or persons engaged 

in principal trading activities and must 

consider the enumerated factors when 

reviewing a debt research analyst’s 

compensation, if applicable.51

Neither investment banking personnel 

nor persons engaged in principal trading 

activities may give input with respect to 

the compensation determination for 

debt research analysts. However, sales 

and trading personnel may give input to 

debt research management as part of the 

evaluation process in order to convey 

customer feedback, provided that final 

compensation determinations are made 

by research management, subject to 

review and approval by the 

compensation committee.52 The 

committee, which may not have 

representation from investment banking 

or persons engaged in principal trading 

activities, must document the basis for 

each debt research analyst’s 

compensation, including any input from 

sales and trading personnel. 

One commenter requested that the 

proposal define the terms ‘‘principal 

trading activities,’’ ‘‘principal trading 

personnel,’’ and ‘‘persons engaged in 

principal trading activities’’ to exclude 

traders who are primarily involved in 

customer accommodation or customer 

facilitation trading, such as market 

makers that trade on a principal basis.53

The commenter stated that the 

exclusion is necessary to allow those 

traders to provide feedback from clients 

for the purposes of evaluating debt 

research analysts for compensation 

determination. More directly to that 

point, the same commenter and an 

additional commenter asserted that the 

proposal should not prohibit those 

engaged in principal trading activities 

from providing customer feedback as 

part of the evaluation and compensation 

process for a debt research analyst.54

They contended that the fixed income 

markets operate primarily on a principal 

basis and prohibiting such input would 

have a broad impact on research 

management’s ability to appropriately 

evaluate and compensate debt research 

analysts. Another commenter asked for 

clarification of the term ‘‘principal 

trading’’ because it believes the term 

‘‘sales and trading’’ already 

encompasses all agency, principal and 

proprietary trading activities.55 The debt 

proposal imposes greater restrictions on 

interaction between debt research 

analysts and principal trading personnel 

than between debt research analysts and 

sales and trading personnel because the 

magnitude of the conflict is greater with 

respect to the former. 

7. Personal Trading Restrictions 

Under the proposed rule change, a 

member’s written policies and 

procedures would be required to restrict 

or limit trading by a ‘‘debt research 

analyst account’’ in securities, 

derivatives and funds whose 

performance is materially dependent 

upon the performance of securities 

covered by the debt research analyst.56

The procedures would be required to 

ensure that those accounts, supervisors 

of debt research analysts and associated 

persons with the ability to influence the 

content of debt research reports do not 

benefit in their trading from knowledge 

of the content or timing of debt research 

reports before the intended recipients of 

such research have had a reasonable 

opportunity to act on the information in 

the report.57 Furthermore, the 

procedures would also be required to 

generally prohibit a debt research 

analyst account from purchasing or 

selling any security or any option or 

derivative of such security in a manner 

inconsistent with the debt research 

analyst’s most recently published 

recommendation, except that they may 

define circumstances of financial 

hardship (e.g., unanticipated significant 

change in the personal financial 

circumstances of the beneficial owner of 

the research analyst account) in which 

the firm will permit trading contrary to 

that recommendation. In determining 

whether a particular trade is contrary to 

an existing recommendation, FINRA 

stated that firms would be permitted to 

take into account the context of a given 

trade, including the extent of coverage 

of the subject security. While the 

proposed rule change does not include 

a recordkeeping requirement, FINRA 

stated it expects members to evidence 

compliance with their policies and 

procedures and retain any related 

documentation in accordance with 

FINRA Rule 4511. 

The proposed rule change includes 

Supplementary Material .10, which 

would provide that FINRA would not 

consider a research analyst account to 

have traded in a manner inconsistent 

with a research analyst’s 

recommendation where a member has 

instituted a policy that prohibits any 

research analyst from holding securities, 

or options on or derivatives of such 

securities, of the companies in the 

research analyst’s coverage universe, 

provided that the member establishes a 

reasonable plan to liquidate such 

holdings consistent with the principles 

in paragraph (b)(2)(J)(i) and such plan is 

approved by the member’s legal or 

compliance department.58

No specific comments were received 

on this provision. 

8. Retaliation and Promises of Favorable 

Research 

The proposed rule change would 

require that the policies and procedures 

must prohibit direct or indirect 


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59See proposed FINRA Rule 2242(b)(2)(I). This 

provision is not intended to limit a member’s 

authority to discipline or terminate a debt research 

analyst, in accordance with the member’s written 

policies and procedures, for any cause other than 

writing an adverse, negative, or otherwise 

unfavorable research report or for making similar 

comments during a public appearance. 

60See proposed FINRA Rule 2242(b)(2)(K). 

61See proposed FINRA Rule 2242(b)(1)(C). 

62See proposed FINRA Rule 2242.09 (Joint Due 

Diligence). 

63See proposed FINRA Rule 2242.03(a)(1) 

(Information Barriers between Research Analysts 

and Trading Desk Personnel). 

64See proposed FINRA Rule 2242.03(a)(2) 

(Information Barriers between Research Analysts 

and Trading Desk Personnel). 

65See proposed FINRA Rule 2242.03(b)(1) 

(Information Barriers between Research Analysts 

and Trading Desk Personnel). 

66See proposed FINRA Rule 2242.03(b)(3) 

(Information Barriers between Research Analysts 

and Trading Desk Personnel). 

67See proposed FINRA Rule 2242.03(b)(4) 

(Information Barriers between Research Analysts 

and Trading Desk Personnel). 

68See proposed FINRA Rule 2242.03(c) 

(Information Barriers between Research Analysts 

and Trading Desk Personnel). 

69WilmerHale Debt. Among other things, Rule 

5280 requires members to establish, maintain and 

enforce policies and procedures reasonably 

designed to restrict or limit the information flow 

between research department personnel, or other 

persons with knowledge of the content or timing of 

a research report, and trading department 

personnel, so as to prevent trading department 

personnel from utilizing non-public advance 

knowledge of the issuance or content of a research 

report for the benefit of the member or any other 

person. See FINRA Rule 5280. 

70WilmerHale Debt. 

71WilmerHale Debt. 

retaliation or threat of retaliation against 

debt research analysts by any employee 

of the firm for publishing research or 

making a public appearance that may 

adversely affect the member’s current or 

prospective business interests.59 The 

policies and procedures would also be 

required to prohibit explicit or implicit 

promises of favorable debt research, 

specific research content or a specific 

rating or recommendation as 

inducement for the receipt of business 

or compensation.60 No specific 

comments were received on these 

provisions. 

9. Joint Due Diligence With Investment 

Banking Personnel 

The proposed rule change would 

establish a proscription with respect to 

joint due diligence activities—i.e., due 

diligence by the debt research analyst in 

the presence of investment banking 

department personnel—during a 

specified time period. Specifically, the 

proposed rule change states that FINRA 

would interpret the overarching 

principle requiring members to, among 

other things, establish, maintain and 

enforce written policies and procedures 

that address the interaction between 

debt research analysts, banking and 

subject companies,61 to prohibit the 

performance of joint due diligence prior 

to the selection of underwriters for the 

investment banking services 

transaction.62 No specific comments 

were received on this provision. 

10. Communications Between Debt 

Research Analysts and Trading 

Personnel 

The proposed rule change would 

delineate the prohibited and permissible 

interactions between debt research 

analysts and sales and trading and 

principal trading personnel. The 

proposed rule change would require 

members to establish, maintain and 

enforce written policies and procedures 

reasonably designed to prohibit sales 

and trading and principal trading 

personnel from attempting to influence 

a debt research analyst’s opinions or 

views for the purpose of benefiting the 

trading position of the firm, a customer 

or a class of customers.63 It would 

further prohibit debt research analysts 

from identifying or recommending 

specific potential trading transactions to 

sales and trading or principal trading 

personnel that are inconsistent with 

such debt research analyst’s currently 

published debt research reports or from 

disclosing the timing of, or material 

investment conclusions in, a pending 

debt research report.64

The proposed rule change would 

permit sales and trading and principal 

trading personnel to communicate 

customers’ interests to a debt research 

analyst, so long as the debt research 

analyst does not respond by publishing 

debt research for the purpose of 

benefiting the trading position of the 

firm, a customer or a class of 

customers.65 The proposed rule change 

also would permit sales and trading and 

principal trading personnel to seek the 

views of debt research analysts 

regarding the creditworthiness of the 

issuer of a debt security and other 

information regarding an issuer of a debt 

security that is reasonably related to the 

price or performance of the debt 

security, so long as, with respect to any 

covered issuer, such information is 

consistent with the debt research 

analyst’s published debt research report 

and consistent in nature with the types 

of communications that a debt research 

analyst might have with customers. In 

determining what is consistent with the 

debt research analyst’s published debt 

research, a member would be permitted 

to consider the context, including that 

the investment objectives or time 

horizons being discussed differ from 

those underlying the debt research 

analyst’s published views.66 Finally, 

debt research analysts would be 

permitted to seek information from sales 

and trading and principal trading 

personnel regarding a particular debt 

instrument, current prices, spreads, 

liquidity and similar market information 

relevant to the debt research analyst’s 

valuation of a particular debt security.67

The proposed rule change clarifies 

that communications between debt 

research analysts and sales and trading 

or principal trading personnel that are 

not related to sales and trading, 

principal trading or debt research 

activities would be permitted to take 

place without restriction, unless 

otherwise prohibited.68

One commenter asked that FINRA 

clarify that members that have 

developed policies and procedures 

consistent with FINRA Rule 5280 

(Trading Ahead of Research Reports) 

would also be in compliance with the 

debt proposal’s expectation of structural 

separation between investment banking 

and debt research, and between sales 

and trading and principal trading and 

debt research.69

The commenter also asked FINRA to 

delete the term ‘‘attempting’’ in the 

proposed Supplementary Material 

.03(a)(1), the provision which would 

require members to have policies and 

procedures reasonably designed to 

prohibit sales and trading and principal 

trading personnel from ‘‘attempting to 

influence a debt research analyst’s 

opinion or views for the purpose of 

benefitting the trading position of the 

firm, a customer, or a class of 

customers.’’ 70 The commenter stated 

that it is unclear how a firm should 

enforce a prohibition on attempts to 

influence. 

The commenter further expressed 

concern that the term ‘‘pending’’ is 

vague in the above-cited provision.71

The commenter suggested that FINRA 

delete the term or confirm that 

‘‘pending’’ means ‘‘imminent 

publication of a debt research report.’’ 

As explained above, Supplementary 

Material .03(b)(3) provides that in 

determining what is consistent with a 

debt research analyst’s published debt 

research for purposes of sharing certain 

views with sales and trading and 

principal trading personnel, members 

would be permitted to consider the 

context, including that the investment 

objectives or time horizons being 

discussed may differ from those 

underlying the debt analyst’s published 

views. One commenter asked FINRA to 

clarify that the standard may be applied 


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72WilmerHale Debt. 73See proposed FINRA Rule 2242.02(b) 

(Restrictions on Communications with Customers 

and Internal Personnel). 74See proposed FINRA Rule 2242(c)(1)(A). 

75See proposed FINRA Rule 2242(c)(2). 

76See proposed FINRA Rule 2242(c)(2)(A). 

77See proposed FINRA Rule 2242(c)(2)(B). 

78See proposed FINRA Rule 2242(c)(2)(C). 

79See proposed FINRA Rule 2242(c)(3). 

80See proposed FINRA Rule 2242(c)(4). 

81See also discussion of proposed FINRA Rule 

2242.04 (Disclosure of Compensation Received by 

Affiliates) below. 

82This provision is analogous to the equity 

research rule requirement to disclose market 

making activity. 

83For example, FINRA would consider it to be a 

material conflict of interest if the debt research 

analyst or a member of the debt research analyst’s 

household serves as an officer, director or advisory 

board member of the subject company. 

wherever consistency with a debt 

research analyst’s views may be 

assessed under the proposed debt rule, 

such as with respect to debt research 

analyst account trading or providing 

customized analysis, recommendations, 

or trade ideas to sales and trading, 

principal trading, and customers.72

11. Restrictions on Communications 

With Customers and Internal Sales 

Personnel 

The proposed rule change would 

apply standards to communications 

with customers and internal sales 

personnel. Any written or oral 

communication by a debt research 

analyst with a current or prospective 

customer or internal personnel related 

to an investment banking services 

transaction would be required to be fair, 

balanced and not misleading, taking 

into consideration the overall context in 

which the communication is made.73

Consistent with the prohibition on 

investment banking department 

personnel directly or indirectly 

directing a debt research analyst to 

engage in sales or marketing efforts 

related to an investment banking 

services transaction or directing a debt 

research analyst to engage in any 

communication with a current or 

prospective customer about an 

investment banking services transaction, 

no debt research analyst would be 

permitted to engage in any 

communication with a current or 

prospective customer in the presence of 

investment banking department 

personnel or company management 

about an investment banking services 

transaction. No specific comments were 

received on this provision. 

C. Content and Disclosure in Research 

Reports 

The proposed rule change would, in 

general, adopt the disclosures in the 

equity research rule for debt research, 

with modifications to reflect the 

different characteristics of the debt 

market. The proposed rule change 

would require members to establish, 

maintain and enforce written policies 

and procedures reasonably designed to 

ensure that purported facts in their debt 

research reports are based on reliable 

information.74 While there is no 

obligation to employ a rating system 

under the proposed rule, members that 

choose to employ a rating system would 

be required to clearly define in each 

debt research report the meaning of each 

rating in the system, including the time 

horizon and any benchmarks on which 

a rating is based. In addition, the 

definition of each rating would be 

required to be consistent with its plain 

meaning.75

Consistent with the equity rules, 

irrespective of the rating system a 

member employs, a member would be 

required to disclose, in each debt 

research report that includes a rating, 

the percentage of all debt securities 

rated by the member to which the 

member would assign a ‘‘buy,’’ ‘‘hold’’ 

or ‘‘sell’’ rating.76 In addition, a member 

would be required to disclose in each 

debt research report the percentage of 

subject companies within each of the 

‘‘buy,’’ ‘‘hold’’ and ‘‘sell’’ categories for 

which the member has provided 

investment banking services within the 

previous 12 months.77 All such 

information would be required to be 

current as of the end of the most recent 

calendar quarter or the second most 

recent calendar quarter if the 

publication date of the debt research 

report is less than 15 calendar days after 

the most recent calendar quarter.78

If a debt research report contains a 

rating for a subject company’s debt 

security and the member has assigned a 

rating to such debt security for at least 

one year, the debt research report would 

be required to show each date on which 

a member has assigned a rating to the 

debt security and the rating assigned on 

such date. This information would be 

required for the period that the member 

has assigned any rating to the debt 

security or for a three-year period, 

whichever is shorter.79 Unlike the 

equity research rules, the proposed rule 

change would not require those ratings 

to be plotted on a price chart because of 

limits on price transparency, including 

daily closing price information, with 

respect to many debt securities. 

The proposed rule change would 

require 80 a member to disclose in any 

debt research report at the time of 

publication or distribution of the report: 

• If the debt research analyst or a 

member of the debt research analyst’s 

household has a financial interest in the 

debt or equity securities of the subject 

company (including, without limitation, 

any option, right, warrant, future, long 

or short position), and the nature of 

such interest; 

• if the debt research analyst has 

received compensation based upon 

(among other factors) the member’s 

investment banking, sales and trading or 

principal trading revenues; 

• if the member or any of its affiliates: 

managed or co-managed a public 

offering of securities for the subject 

company in the past 12 months; 

received compensation for investment 

banking services from the subject 

company in the past 12 months; or 

expects to receive or intends to seek 

compensation for investment banking 

services from the subject company in 

the next three months; 

• if, as of the end of the month 

immediately preceding the date of 

publication or distribution of a debt 

research report (or the end of the second 

most recent month if the publication 

date is less than 30 calendar days after 

the end of the most recent month), the 

member or its affiliates have received 

from the subject company any 

compensation for products or services 

other than investment banking services 

in the previous 12 months; 81

• if the subject company is, or over 

the 12-month period preceding the date 

of publication or distribution of the debt 

research report has been, a client of the 

member, and if so, the types of services 

provided to the issuer. Such services, if 

applicable, shall be identified as either 

investment banking services, noninvestment banking securities-related 

services or non-securities services; 

• if the member trades or may trade 

as principal in the debt securities (or in 

related derivatives) that are the subject 

of the debt research report; 82

• if the debt research analyst received 

any compensation from the subject 

company in the previous 12 months; 

and 

• any other material conflict of 

interest of the debt research analyst or 

member that the debt research analyst or 

an associated person of the member 

with the ability to influence the content 

of a debt research report knows or has 

reason to know at the time of the 

publication or distribution of a debt 

research report.83

The proposed rule change would 

incorporate a proposed amendment to 

the corresponding provision in the 

equity research rules that expands the 

existing ‘‘catch all’’ disclosure to require 

disclosure of material conflicts known 


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84See proposed FINRA Rule 2242.04 (Disclosure 

of Compensation Received by Affiliates). 

85See proposed FINRA Rule 2242(c)(5). 

86See proposed FINRA Rule 2242(c)(6). 

87See proposed FINRA Rule 2242(c)(7). 

88WilmerHale Debt. 

89WilmerHale Debt. 

90WilmerHale Debt. 

91WilmerHale Debt. 

92WilmerHale Debt. 

93 15 U.S.C. 78o–6(b). 

94See proposed FINRA Rule 2242(d)(1). 

not only by the research analyst, but 

also by any ‘‘associated person of the 

member with the ability to influence the 

content of a research report.’’ In so 

doing, the proposed rule change would 

capture material conflicts of interest 

that, for example, only a supervisor or 

the head of research may be aware of. 

The ‘‘reason to know’’ standard would 

not impose a duty of inquiry on the debt 

research analyst or others who can 

influence the content of a debt research 

report. Rather, it would cover disclosure 

of those conflicts that should reasonably 

be discovered by those persons in the 

ordinary course of discharging their 

functions. 

The proposed equity research rules 

include an additional disclosure if the 

member or its affiliates maintain a 

significant financial interest in the debt 

or equity of the subject company, 

including, at a minimum, if the member 

or its affiliates beneficially own 1% or 

more of any class of common equity 

securities of the subject company. 

FINRA did not include this provision in 

the proposed debt research rule because, 

unlike equity holdings, firms do not 

typically have systems to track 

ownership of debt securities. 

The proposed rule change would 

provide that a member would be 

permitted to satisfy the disclosure 

requirement with respect to receipt of 

non-investment banking services 

compensation by an affiliate by 

implementing written policies and 

procedures reasonably designed to 

prevent the debt research analyst and 

associated persons of the member with 

the ability to influence the content of 

debt research reports from directly or 

indirectly receiving information from 

the affiliate as to whether the affiliate 

received such compensation.84 In 

addition, a member would be permitted 

to satisfy the disclosure requirement 

with respect to the receipt of investment 

banking compensation from a foreign 

sovereign by a non-U.S. affiliate of the 

member by implementing written 

policies and procedures reasonably 

designed to prevent the debt research 

analyst and associated persons of the 

member with the ability to influence the 

content of debt research reports from 

directly or indirectly receiving 

information from the non-U.S. affiliate 

as to whether such non-U.S. affiliate 

received or expects to receive such 

compensation from the foreign 

sovereign. However, a member would be 

required to disclose receipt of 

compensation by its affiliates from the 

subject company (including any foreign 

sovereign) in the past 12 months when 

the debt research analyst or an 

associated person with the ability to 

influence the content of a debt research 

report has actual knowledge that an 

affiliate received such compensation 

during that time period. 

The proposed rule change would 

adopt from the equity research rules the 

general exception for disclosure that 

would reveal material non-public 

information regarding specific potential 

future investment banking transactions 

of the subject company.85 Similar to the 

equity research rules, the proposed rule 

change would require that disclosures 

be presented on the front page of debt 

research reports or the front page must 

refer to the page on which the 

disclosures are found. Electronic debt 

research reports, however, may provide 

a hyperlink directly to the required 

disclosures. All disclosures and 

references to disclosures required by the 

proposed rule must be clear, 

comprehensive and prominent.86

Like the equity research rule, the 

proposed rule change would permit a 

member that distributes a debt research 

report covering six or more companies 

(compendium report) to direct the 

reader in a clear manner to the 

applicable disclosures. Electronic 

compendium reports must include a 

hyperlink to the required disclosures. 

Paper-based compendium reports must 

provide either a toll-free number or a 

postal address to request the required 

disclosures and also may include a Web 

address of the member where the 

disclosures can be found.87

One commenter opposed as overbroad 

the proposed expansion of the current 

‘‘catch-all’’ disclosure requirement to 

include ‘‘any other material conflict of 

interest of the research analyst or 

member that a research analyst or an 

associated person of the member with 

the ability to influence the content of a 

research report knows or has reason to 

know’’ at the time of publication or 

distribution of research report.88

(emphasis added) The commenter 

expressed concern about the 

emphasized language. 

One commenter requested 

confirmation that members may rely on 

hyperlinked disclosures for research 

reports that are delivered electronically, 

even if these reports are subsequently 

printed out by customers.89

One commenter expressed concern 

about the requirements that a member 

disclose in retail debt research reports 

its distribution of all debt security 

ratings (and the percentage of subject 

companies in each buy/hold/sell 

category for which the member has 

provided investment banking services 

within the previous 12 months) and 

historical ratings information on the 

debt securities that are the subject of the 

debt research report for a period of three 

years or the time during which the 

member has assigned a rating, 

whichever is shorter.90 The commenter 

asked FINRA to eliminate these 

provisions because they are impractical 

and provide minimal benefit to 

investors in the context of debt research, 

even though they may be very useful in 

the equity context.91 The commenter 

stated that the large number of bond 

issues followed by analysts make the 

provisions especially burdensome and 

do not allow for helpful comparisons for 

investors across debt securities or 

issuers. With respect to the ratings 

distribution requirements, the 

commenter asserted that in some cases, 

a debt analyst may assign a rating to the 

issuer that applies to all of that issuer’s 

bonds, thereby skewing the distribution 

because those issuers will be 

overrepresented in the distribution. The 

commenter also stated that the tracking 

requirements for these provisions would 

be particularly burdensome, given the 

numerous bonds issued by the same 

subject company and the fact that bonds 

are constantly being replaced with 

newer ones. Finally, the commenter 

stated that the three-year look back 

period is too long and suggested instead 

a one-year period if FINRA retains the 

historical rating table requirement. 

The same commenter also requested 

that FINRA allow members to provide a 

hyperlink or Web address to Web-based 

disclosures in all debt research reports, 

rather than requiring the disclosures 

within a printed report.92 The 

commenter noted that while the 

Commission has interpreted Section 

15D(b) of the Act 93 to require disclosure 

in each equity report, the law does not 

apply to debt research. 

D. Disclosures in Public Appearances 

The proposed rule change closely 

parallels the equity research rules with 

respect to disclosure in public 

appearances. Under the proposed rule, a 

debt research analyst would be required 

to disclose in public appearances: 94


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95See proposed FINRA Rule 2242(d)(2). 

96See proposed FINRA Rule 2242(d)(3). 

97See proposed FINRA Rule 2242(e). 

98See proposed FINRA Rule 2242(f). 

99See proposed FINRA Rule 2242.06 

(Distribution of Member Research Products). 

100WilmerHale Debt. 

101PIABA Debt. 

102WilmerHale Debt. 

103CFA Institute. 

104See Notice for a full explanation of the 

treatment of third-party and independent thirdparty debt research reports. 

• If the debt research analyst or a 

member of the debt research analyst’s 

household has a financial interest in the 

debt or equity securities of the subject 

company (including, without limitation, 

whether it consists of any option, right, 

warrant, future, long or short position), 

and the nature of such interest; 

• if, to the extent the debt research 

analyst knows or has reason to know, 

the member or any affiliate received any 

compensation from the subject company 

in the previous 12 months; 

• if the debt research analyst received 

any compensation from the subject 

company in the previous 12 months; 

• if, to the extent the debt research 

analyst knows or has reason to know, 

the subject company currently is, or 

during the 12-month period preceding 

the date of publication or distribution of 

the debt research report, was, a client of 

the member. In such cases, the debt 

research analyst also must disclose the 

types of services provided to the subject 

company, if known by the debt research 

analyst; or 

• any other material conflict of 

interest of the debt research analyst or 

member that the debt research analyst 

knows or has reason to know at the time 

of the public appearance. 

However, a member or debt research 

analyst would not be required to make 

any such disclosure to the extent it 

would reveal material non-public 

information regarding specific potential 

future investment banking transactions 

of the subject company.95 Unlike in debt 

research reports, the ‘‘catch all’’ 

disclosure requirement in public 

appearances would apply only to a 

conflict of interest of the debt research 

analyst or member that the analyst 

knows or has reason to know at the time 

of the public appearance and does not 

extend to conflicts that an associated 

person with the ability to influence the 

content of a research report or public 

appearance knows or has reason to 

know. 

The proposed rule change would 

require members to maintain records of 

public appearances by debt research 

analysts sufficient to demonstrate 

compliance by those debt research 

analysts with the applicable disclosure 

requirements for public appearances. 

Such records would be required to be 

maintained for at least three years from 

the date of the public appearance.96

No specific comments were received 

on this provision not already discussed 

in connection with the disclosures that 

would be required in research reports. 

E. Disclosure Required by Other 

Provisions 

With respect to both research reports 

and public appearances, the proposed 

rule change would require that, in 

addition to the disclosures required 

under the proposed rule, members and 

debt research analysts must comply 

with all applicable disclosure 

provisions of FINRA Rule 2210 

(Communications with the Public) and 

the federal securities laws.97 No specific 

comments were received on this 

provision. 

F. Distribution of Member Research 

Reports 

The proposed rule change, like the 

proposed amendments to the equity 

research rules, would codify an existing 

interpretation of FINRA Rule 2010 

(Standards of Commercial Honor and 

Principles of Trade) and provides 

additional guidance regarding 

selective—or tiered—dissemination of a 

firm’s debt research reports. The 

proposed rule change would require 

firms to establish, maintain and enforce 

written policies and procedures 

reasonably designed to ensure that a 

debt research report is not distributed 

selectively to internal trading personnel 

or a particular customer or class of 

customers in advance of other 

customers that the member has 

previously determined are entitled to 

receive the debt research report.98 The 

proposed rule change includes further 

guidance to explain that firms may 

provide different debt research products 

and services to different classes of 

customers, provided the products are 

not differentiated based on the timing of 

receipt of potentially market moving 

information and the firm discloses its 

research dissemination practices to all 

customers that receive a research 

product.99

One commenter supported the 

provisions as proposed with general 

disclosure,100 while another contended 

that FINRA should require members to 

disclose when its research products and 

services do, in fact, contain a 

recommendation contrary to the 

research product or service received by 

other customers.101 The commenter 

favoring general disclosure asserted that 

disclosure of specific instances of 

contrary recommendations would 

impose significant burdens unjustified 

by the investor protection benefits. The 

commenter stated that a specific 

disclosure requirement would require 

close tracking and analysis of every 

research product or service to determine 

if a contrary recommendation exists. 

The commenter further stated that the 

difficulty of complying with such a 

requirement would be exacerbated in 

large firms by the number of research 

reports published and research analysts 

employed and the differing audiences 

for research products and services.102

The commenter asserted that some firms 

may publish tens of thousands of 

research reports each year and employ 

hundreds of analysts across various 

disciplines and that a given research 

analyst or supervisor could not 

reasonably be expected to know of all 

other research products and services 

that may contain differing views. 

Another commenter expressed 

concern that the proposal raises issues 

about the parity of information received 

by retail and institutional investors, and 

whether research provided to 

institutional investors could contain 

views that differ from those in research 

to retail investors.103

G. Distribution of Third-Party Debt 

Research Reports 

The proposed rule change would 

incorporate the current standards for 

third-party equity research, including 

the distinction between independent 

and non-independent third-party 

research with respect to the review and 

disclosure requirements. In addition, 

the proposed rule change would adopt 

an expanded requirement in the 

proposed equity research rules that 

requires members to disclose any other 

material conflict of interest that can 

reasonably be expected to have 

influenced the member’s choice of a 

third-party research provider or the 

subject company of a third-party 

research report.104

No specific comments were received 

on this provision. 

H. Obligations of Persons Associated 

With a Member 

The proposed rule change would 

clarify the obligations of each associated 

person under those provisions of the 

proposed rule that require a member to 

restrict or prohibit certain conduct by 

establishing, maintaining and enforcing 

particular policies and procedures. 

Specifically, the proposed rule change 

provides that, consistent with FINRA 

Rule 0140, persons associated with a 


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105See proposed FINRA Rule 2242.08 

(Obligations of Persons Associated with a Member). 

106SIFMA and WilmerHale Debt. 

107WilmerHale Debt. 

108See proposed FINRA Rule 2242(h) and (i). 

109CFA Institute. 

110See proposed FINRA Rule 2242(j). 

111PIABA Debt. 

112SIFMA. 

113CFA Institute. 

114WilmerHale Debt. 

member would be required to comply 

with such member’s written policies 

and procedures as established pursuant 

to the proposed rule. Failure of an 

associated person to comply with such 

policies and procedures would 

constitute a violation of the proposed 

rule.105 In addition, consistent with 

Rule 0140, the proposed rule states in 

Supplementary Material .08 that it 

would be a rule violation for an 

associated person to engage in the 

restricted or prohibited conduct to be 

addressed through the establishment, 

maintenance and enforcement of written 

policies and procedures required by 

provisions of FINRA Rule 2242, 

including applicable Supplementary 

Material, that embed in the policies and 

procedures specific obligations on 

individuals. 

Some commenters suggested FINRA 

eliminate this language in the 

supplementary material that provides 

that the failure of an associated person 

to comply with the firm’s policies and 

procedures constitutes a violation of the 

proposed rule itself.106 These 

commenters argued that because 

members may establish policies and 

procedures that go beyond the 

requirements set forth in the rule, the 

provision may have the unintended 

consequence of discouraging firms from 

creating standards in their policies and 

procedures that extend beyond the rule. 

One of those commenters suggested that 

the remaining language in the 

supplementary material adequately 

holds individuals responsible for 

engaging in restricted or prohibited 

conduct covered by the proposals.107

I. Exemption for Members With Limited 

Principal Trading Activity or Investment 

Banking Activity 

The proposed rule change would 

exempt members with limited principal 

trading activity or limited investment 

banking activity from the review, 

supervision, budget, and compensation 

provisions in the proposed rule related 

to principal trading and investment 

banking personnel, respectively.108 The 

limited principal trading exemption 

would apply to firms that engage in 

principal trading activity where, in 

absolute value on an annual basis, the 

member’s trading gains or losses on 

principal trades in debt securities are 

$15 million or less over the previous 

three years, on average per year, and the 

member employs fewer than 10 debt 

traders. The limited investment banking 

exemption would apply, as it does in 

the equity rules, to firms that have 

managed or co-managed 10 or fewer 

investment banking services 

transactions on average per year, over 

the previous three years and generated 

$5 million or less in gross investment 

banking revenues from those 

transactions. 

One commenter questioned whether 

the exemptions could compromise the 

independence and accuracy of the 

analysis and opinions provided.109 The 

commenter further expressed concern 

that the exemption might allow traders 

to act on debt research prior to 

publication and distribution of that 

research. The commenter noted FINRA’s 

commitment to monitor firms that avail 

themselves of the exemptions to 

evaluate whether the thresholds for the 

exemptions are appropriate and asked 

FINRA to publish findings that could 

help properly weigh the burdens on 

small firms while ensuring the 

independence of investment research. 

The commenter also encouraged FINRA 

to provide additional guidance as to 

what specific measures should be taken 

to ensure that debt research analysts are 

insulated from pressure by persons 

engaged in principal trading or sales 

and trading activities or other persons 

who might be biased in their judgment 

or supervision. 

J. Exemption for Debt Research Reports 

Provided to Institutional Investors 

The proposed rule change would 

exempt debt research provided solely to 

certain eligible institutional investors 

from many of the proposed rule’s 

provisions, provided that a member 

obtains consent from the institutional 

investor to receive that research and the 

research reports contain specified 

disclosure to alert recipients that the 

reports do not carry the same 

protections as retail debt research.110

The proposal distinguishes between 

larger and smaller institutions in the 

manner in which the consent must be 

obtained. Firms may use negative 

consent where the customer meets the 

definition of QIB and satisfies the 

institutional suitability standards of 

FINRA Rule 2111 with respect to debt 

transactions and strategies. Institutional 

accounts that meet the definition of 

FINRA Rule 4512(c), but do not satisfy 

the higher tier standard required for 

negative consent, may affirmatively 

elect in writing to receive institutional 

debt research. 

One commenter opposed providing 

any exemption for debt research 

distributed solely to eligible 

institutional investors, contending that 

it would deprive the market’s largest 

participants of the important protections 

of the proposed rules for retail debt 

research.111 Another commenter 

reiterated concerns expressed in 

response to an earlier iteration of the 

debt research proposal that the 

proposed standard for negative consent 

would be difficult to implement and 

would disadvantage institutional 

investors who are capable of, and in 

fact, make independent investment 

decisions about debt transactions and 

strategies. The commenter suggested as 

an alternative that the institutional 

investor standard should be based on 

only on the institutional suitability 

standard in Rule 2111.112

Another commenter supported the 

proposed tiered approach for how 

institutional investors may receive 

research reports.113 The commenter 

stated that a QIB presumably has the 

sophistication and human and financial 

resources to evaluate debt research 

without the disclosures and other 

protections that accompany reports 

provided to retail investors. The 

commenter also supported permitting 

an institutional investor that does not 

fall within the higher tier category to 

receive the debt research without the 

retail investor protections if it notifies 

the firm in writing of its election. 

Another commenter asked that FINRA 

confirm that, in distributing debt 

research reports under the institutional 

debt research framework to certain nonU.S. institutional investors who are 

customers of a member’s non-U.S. 

broker-dealer affiliate, the member may 

rely on similar classifications in the 

non-U.S. institutional investors’ home 

jurisdictions.114 The commenter 

contended that this is necessary because 

some global firm distribute their debt 

research reports to non-U.S. 

institutional investors who may not 

have been vetted as QIBs for a variety 

of reasons. 

The same commenter asked FINRA to 

clarify the application of the 

institutional debt research framework to 

desk analysts or other personnel who 

are part of the trading desk and are not 

‘‘research department’’ personnel. In 

particular, the commenter suggested 

that proposed Rules 2242(b)(2)(H) (with 

respect to pressuring) and (b)(2)(L) 

should not apply when sales and 


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115WilmerHale Debt. 

116See proposed FINRA Rule 2242(k). 

117WilmerHale Debt. 

118SIFMA. 

119WilmerHale Debt. 

120 15 U.S.C. 78s(b)(2). Section 19(b)(2)(B) of the 

Act provides that proceedings to determine whether 

to disapprove a proposed rule change must be 

concluded within 180 days of the date of 

publication of notice of the filing of the proposed 

rule change. The time for conclusion of the 

proceedings may be extended for up to an 

additional 60 days if the Commission finds good 

cause for such extension and publishes its reasons 

for so finding or if the self-regulatory organization 

consents to the extension. 

121 15 U.S.C. 78s(b)(2). 

122 15 U.S.C. 78o–3(b)(6). 

123Section 19(b)(2) of the Act, as amended by the 

Securities Act Amendments of 1975, Pub. L. 94–29 

(June 4, 1975), grants the Commission flexibility to 

determine what type of proceeding—either oral or 

notice and opportunity for written comments—is 

appropriate for consideration of a particular 

proposal by a self-regulatory organization. See 

Securities Act Amendments of 1975, Senate Comm. 

on Banking, Housing & Urban Affairs, S. Rep. No. 

75, 94th Cong., 1st Sess. 30 (1975). 

trading personnel or principal trading 

personnel publish debt research reports 

in reliance on the institutional research 

exemption because the requirements of 

those provisions cannot be reconciled 

with the inherent nature of conflicts 

present. 115 Those provisions would 

require firms to have policies and 

procedures to: (i) Establish information 

barrier or other institutional safeguards 

reasonably designed to insulate debt 

research analysts from pressure by, 

among others, principal trading or sales 

and trading personnel; and (ii) restrict 

or limit activities by debt research 

analyst that can reasonably be expected 

to compromise their objectivity. 

K. General Exemptive Authority 

The proposed rule change would 

provide FINRA, pursuant to the FINRA 

Rule 9600 Series, with authority to 

conditionally or unconditionally grant, 

in exceptional and unusual 

circumstances, an exemption from any 

requirement of the proposed rule for 

good cause shown, after taking into 

account all relevant factors and 

provided that such exemption is 

consistent with the purposes of the rule, 

the protection of investors, and the 

public interest.116 No specific comments 

were received on this provision. 

L. Other General Comments 

One commenter asked FINRA to 

consider amending FINRA Rule 2210 to 

exclude debt research reports from that 

rule’s filing requirements, since there is 

an exception from the filing 

requirements for equity research reports 

that concern only equity securities that 

trade on an exchange.117

Also, one commenter requested that 

the implementation date be at least 12 

months after SEC approval of the 

proposed rule change and that FINRA 

sequence the compliance dates of the 

equity research filing and the proposed 

rule change in that order.118 Another 

commenter requested that FINRA 

provide a ‘‘grace period’’ of one year or 

the maximum time permissible, if that 

is less than one year, between the 

adoption of the proposed rule and the 

implementation date.119

III. Proceedings to Determine Whether 

to Approve or Disapprove SR–FINRA– 

2014–048 

The Commission is instituting 

proceedings pursuant to Section 

19(b)(2)(B) of the Act to determine 

whether the proposals should be 

approved or disapproved.120 Institution 

of such proceedings is appropriate at 

this time in view of the legal and policy 

issues raised by the proposal. Institution 

of proceedings does not indicate that the 

Commission has reached any 

conclusions with respect to any of the 

issues involved. Rather, as described 

below, the Commission seeks and 

encourages interested persons to 

comment on the proposed rule change. 

Pursuant to Section 19(b)(2)(B) of the 

Act,121 the Commission is providing 

notice of the grounds for disapproval 

under consideration. The Commission is 

instituting proceedings to allow for 

additional analysis of the proposed rule 

change’s consistency with Section 

15A(b)(9) of the Act,122 which requires 

that FINRA’s rules be designed to, 

among other things, promote just and 

equitable principles of trade, remove 

impediments to and perfect the 

mechanism of a free and open market 

and a national market system, and, in 

general, to protect investors and the 

public interest. 

IV. Procedure: Request for Written 

Comments 

The Commission requests that 

interested persons provide written 

submissions of their views, data, and 

arguments with respect to the concerns 

identified above, as well as any others 

they may have with the proposed rule 

change. In particular, the Commission 

invites the written views of interested 

persons concerning whether the 

proposed rule change is inconsistent 

with Section 15A(b)(9) or any other 

provision of the Act, or the rules and 

regulation thereunder. Although there 

do not appear to be any issues relevant 

to approval or disapproval which would 

be facilitated by an oral presentation of 

views, data, and arguments, the 

Commission will consider, pursuant to 

Rule 19b–4, any request for an 

opportunity to make an oral 

presentation.123

Interested persons are invited to 

submit written data, views, and 

arguments regarding whether the 

proposed rule changes should be 

approved or disapproved by March 19, 

2015. Any person who wishes to file a 

rebuttal to any other person’s 

submission must file that rebuttal by 

April 2, 2015. 

Comments may be submitted by any 

of the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

FINRA–2014–048 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Brent J. Fields, Secretary, Securities 

and Exchange Commission, 100 F Street 

NE., Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–FINRA–2014–048. This file 

number should be included on the 

subject line if email is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE., 

Washington, DC 20549, on official 

business days between the hours of 10 

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; the Commission 

does not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–FINRA–2014–048 and 

should be submitted on or before March 

19, 2015. 


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124 17 CFR 200.30–3(a)(57). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 69329 

(April 5, 2013), 78 FR 21657 (April 11, 2014) (SR– 

ISE–2013–22) (Approval Order); 69110 (March 11, 

2013) 78 FR 16726 (March 18, 2013) (SR–ISE–2013– 

22) (Notice of Filing). 

4See Securities Exchange Act Release No. 67091 

(May 31, 2012), 77 FR 33498 (June 6, 2012) (the 

‘‘Limit Up-Limit Down Release’’). 

5The term ‘‘Limit State’’ means the condition 

when the national best bid or national best offer for 

an underlying security equals an applicable price 

band, as determined by the primary listing 

exchange for the underlying security. See Rule 

703A. 

6The term ‘‘Straddle State’’ means the condition 

when the national best bid or national best offer for 

an underlying security is non-executable, as 

determined by the primary listing exchange for the 

underlying security, but the security is not in a 

Limit State. See Rule 703A. 

7See Securities Exchange Act Release No. 71884 

(April 7, 2014), 79 FR 20269 (April 11, 2014) (SR– 

ISE–2014–22). 

8See Exchange Act Release No. 74110 (January 

21, 2015), 80 FR 4321 (January 27, 2015) (Eighth 

Amendment to the Limit-Up Limit-Down Plan). 9 15 U.S.C. 78f(b). 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.124

Jill M. Peterson, 

Assistant Secretary. 

[FR Doc. 2015–03963 Filed 2–25–15; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–74335; File No. SR–ISE– 

2015–07] 

Self-Regulatory Organizations; 

International Securities Exchange, 

LLC; Notice of Filing and Immediate 

Effectiveness of Proposed Rule 

Change To Extend the Limit Up-Limit 

Down Obvious Error Pilot 

February 20, 2015. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 (the 

‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on February 

19, 2015, the International Securities 

Exchange, LLC (the ‘‘Exchange’’ or the 

‘‘ISE’’) filed with the Securities and 

Exchange Commission (‘‘Commission’’) 

the proposed rule change as described 

in Items I and II below, which Items 

have been prepared by the selfregulatory organization. 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 the Substance 

of the Proposed Rule Change 

The ISE proposes to extend a pilot 

program under Rule 703A(d) that 

suspends Rule 720 regarding obvious 

errors during Limit and Straddle States 

in securities that underlie options 

traded on the Exchange. The text of the 

proposed rule change is available on the 

Exchange’s Web site (http://

www.ise.com), at the principal office of 

the Exchange, and at the Commission’s 

Public Reference Room. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

self-regulatory organization included 

statements concerning the purpose of, 

and basis for, the proposed rule change 

and discussed any comments it received 

on the proposed rule change. The text 

of these statements may be examined at 

the places specified in Item IV below. 

The self-regulatory organization has 

prepared summaries, set forth in 

sections A, B and C below, of the most 

significant aspects of such statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

On April 5, 2013,3 the Commission 

approved a proposed rule change 

designed to address certain issues 

related to the Plan to Address 

Extraordinary Market Volatility 

Pursuant to Rule 608 of Regulation NMS 

under the Act (the ‘‘Limit Up-Limit 

Down Plan’’ or the ‘‘Plan’’).4 The rules 

adopted in that filing established a one 

year pilot program to exclude 

transactions executed during a Limit 

State 5 or Straddle State 6 from the 

obvious error provisions of Rule 720. On 

April 4, 2014 the Exchange filed to 

extend this pilot program to its current 

end date of February 20, 2015.7 The 

purpose of this filing is to extend the 

effectiveness of the pilot program to 

coincide with the proposed extension of 

the Limit Up-Limit Down Plan to 

October 23, 2015.8

The Exchange believes the benefits to 

market participants from this provision 

should continue on a pilot basis. The 

Exchange continues to believe that 

adding certainty to the execution of 

orders in Limit or Straddle States will 

encourage market participants to 

continue to provide liquidity to the 

Exchange, and, thus, promote a fair and 

orderly market during these periods. 

Barring this provision, the obvious error 

provisions of Rule 720 would likely 

apply in many instances during Limit 

and Straddle States. The Exchange 

believes that continuing the pilot will 

protect against any unanticipated 

consequences in the options markets 

during a Limit or Straddle State. Thus, 

the Exchange believes that the 

protections of current rule should 

continue while the industry gains 

further experience operating the Plan. 

In connection with this proposed 

extension, each month the Exchange 

shall provide to the Commission, and 

the public, a dataset containing the data 

for each Straddle and Limit State in 

optionable stocks that had at least one 

trade on the Exchange. For each trade 

on the Exchange, the Exchange will 

provide (a) the stock symbol, option 

symbol, time at the start of the Straddle 

or Limit State, an indicator for whether 

it is a Straddle or Limit State, and (b) 

for the trades on the Exchange, the 

executed volume, time-weighted quoted 

bid-ask spread, time-weighted average 

quoted depth at the bid, time-weighted 

average quoted depth at the offer, high 

execution price, low execution price, 

number of trades for which a request for 

review for error was received during 

Straddle and Limit States, an indicator 

variable for whether those options 

outlined above have a price change 

exceeding 30% during the underlying 

stock’s Limit or Straddle State compared 

to the last available option price as 

reported by OPRA before the start of the 

Limit or Straddle State (1 if observe 

30% and 0 otherwise), and another 

indicator variable for whether the 

option price within five minutes of the 

underlying stock leaving the Limit or 

Straddle State (or halt if applicable) is 

30% away from the price before the start 

of the Limit or Straddle State. 

In addition, the Exchange will 

provide to the Commission, and the 

public, no later than May 29, 2015, 

assessments relating to the impact of the 

operation of the obvious error rules 

during Limit and Straddle States 

including: (1) An evaluation of the 

statistical and economic impact of Limit 

and Straddle States on liquidity and 

market quality in the options markets, 

and (2) an assessment of whether the 

lack of obvious error rules in effect 

during the Straddle and Limit States are 

problematic. 

2. Statutory Basis 

The Exchange believes that its 

proposal is consistent with the 

requirements of the Act and the rules 

and regulations thereunder that are 

applicable to a national securities 

exchange, and, in particular, with the 

requirements of Section 6(b) of the Act.9

In particular, the proposal is consistent 


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