14198 Federal Register / Vol. 80, No. 52 / Wednesday, March 18, 2015 / Notices 

11 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 

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 infra note 10. 

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

6Exchange Act Release No. 74340 (Feb. 20, 2015); 

80 FR 10538 (Feb. 26, 2015). The comment period 

closes on March 19, 2015. 

7For a comparison of the changes of the rule text 

between the proposal as originally noticed and the 

proposal as amended by Amendment No. 1, see 

Exhibit 4 to SR–FINRA–2014–048. 

8See Securities Exchange Act Release No. 73623 

(November 18, 2014), 79 FR 69905 (November 24, 

2014) (Notice of Filing File No. SR–FINRA–2014– 

048) (‘‘Proposing Release’’). The comment period 

closed on December 15, 2014. 

9The current FINRA rulebook includes, in 

addition to FINRA Rules, (1) NASD Rules and (2) 

rules incorporated from NYSE (‘‘Incorporated NYSE 

Rules’’) (together, the NASD Rules and Incorporated 

NYSE Rules are referred to as the ‘‘Transitional 

Rulebook’’). While the NASD Rules generally apply 

to all FINRA members, the Incorporated NYSE 

Rules apply only to those members of FINRA that 

are also members of the NYSE (‘‘Dual Members’’). 

For more information about the rulebook 

consolidation process, see Information Notice, 

March 12, 2008 (Rulebook Consolidation Process). 

10See Letter from Hugh D. Berkson, Executive 

Vice President and President-Elect, Public Investors 

Arbitration Bar Association, to Brent J. Fields, 

Secretary, SEC, dated December 15, 2014 (‘‘PIABA 

Debt’’); Letter from Kevin Zambrowicz, Associate 

General Counsel and Managing Director, and Sean 

Davy, Managing Director, Securities Industry and 

Financial Markets Association, to Brent J. Fields, 

Secretary, SEC, dated December 15, 2014 

(‘‘SIFMA’’); Letter from Yoon-Young Lee, Wilmer 

Cutler Pickering Hale and Dorr LLP, to Brent J. 

Fields, Secretary, SEC, dated December 16, 2014 

(‘‘WilmerHale Debt’’); Letter from William Beatty, 

President, North American Securities 

Administrators Association, Inc., Brent J. Fields, 

Secretary, SEC, dated December 19, 2014 (‘‘NASAA 

Debt’’); and Letter from Kurt N. Schacht, Managing 

Director, Standards and Financial Market Integrity, 

and Linda L. Rittenhouse, Director, Capital Markets 

Policy, CFA Institute, to Brent J. Fields, Secretary, 

SEC, dated February 9, 2015 (‘‘CFA Institute’’). 

11The proposed rule change reflects proposed 

amendments to FINRA’s equity research rules set 

forth in a companion filing to the proposed rule 

change (the ‘‘equity research filing’’). See Securities 

Exchange Act Release No. 73622 (November 18, 

2014), 79 FR 69939 (November 24, 2014) (Notice of 

Filing File No. SR–FINRA–2014–047). See also 

Amendment No. 1 to SR–FINRA–2014–047. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.11

Brent J. Fields, 

Secretary. 

[FR Doc. 2015–06093 Filed 3–17–15; 08:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–74490; File No. SR–FINRA– 

2014–048] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Notice of Filing of 

Amendment No. 1 to a Proposed Rule 

Change To Adopt FINRA Rule 2242 

(Debt Research Analysts and Debt 

Research Reports) 

March 12, 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’’ or ‘‘Exchange 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 Commission 

received five comments on the 

proposal.4 On February 19, 2015, FINRA 

filed Amendment No. 1 responding to 

the comments received to the proposal 

as well as to propose amendments in 

response to these comments. On 

February 20, 2015, the Commission 

issued an order instituting proceedings 

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

Act 5 to determine whether to approve 

or disapprove the proposal. The order 

was published for comment in the 

Federal Register on February 26, 2015.6

The proposed rule change, as 

modified by Amendment No. 1, is 

described in Items II and III below, 

which Items have been substantially 

prepared by FINRA.7 The Commission 

is publishing this notice to solicit 

comments from interested persons on 

the proposal as amended by 

Amendment No. 1. 

II. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

FINRA is proposing Amendment No. 

1 to SR–FINRA–2014–048, a proposed 

rule change to adopt 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 text of the proposed rule change 

is available on FINRA’s Web site at 

http://www.finra.org, at the principal 

office of FINRA and at the 

Commission’s Public Reference Room. 

III. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, 

FINRA included statements concerning 

the purpose of and basis for the 

proposed rule change and discussed any 

comments it received on the proposed 

rule change. The text of these statements 

may be examined at the places specified 

in Item V below. FINRA has prepared 

summaries, set forth in sections A, B, 

and C below, of the most significant 

aspects of such statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

Rule Filing History 

On November 14, 2014, FINRA filed 

with the Securities and Exchange 

Commission (‘‘Commission’’) SR– 

FINRA–2014–048,8 a proposed rule 

change to adopt in the consolidated 

FINRA rulebook (‘‘Consolidated FINRA 

Rulebook’’) 9 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 Commission published the 

proposed rule change for public 

comment in the Federal Register on 

November 24, 2014. The Commission 

received five comment letters directed 

to the filing.10 Based on comments 

received, FINRA is filing this 

Amendment No. 1 to respond to the 

comments and to propose amendments, 

where appropriate. The Amendment 

also includes a few technical, nonsubstantive changes. 

Proposal 

As described in greater detail in the 

Proposing Release, the proposed rule 

change would adopt a tiered approach 

that, 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, with 

modifications to reflect the different 

nature and trading of debt securities,11

while exempting from many of the 

provisions debt research distributed 

solely to eligible institutional investors. 

Definitions 

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. The 

proposed definitions are set forth below. 

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Federal Register / Vol. 80, No. 52 / Wednesday, March 18, 2015 / Notices 14199 

12See proposed FINRA Rule 2242(a)(1). 

13See proposed FINRA Rule 2242(a)(2). The 

exclusion for a registered investment company over 

which a research analyst has discretion or control 

in the proposed definition mirrors proposed 

changes to the definition of ‘‘research analyst 

account’’ in the equity research rules. 

14See 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. 

15 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. 

16See proposed FINRA Rule 2242(a)(4). 

17See proposed FINRA Rule 2242(a)(5). 

18See proposed FINRA Rule 2242(a)(6). 

19See proposed FINRA Rule 2242(a)(8). 

Under the proposed rule change, the 

term ‘‘debt research analyst’’ would 

mean an associated person who is 

primarily responsible for, and any 

associated person who reports directly 

or indirectly to a debt research analyst 

in connection with, the preparation of 

the substance of a debt research report, 

whether or not any such person has the 

job title of ‘‘research analyst.’’ 12 The 

term ‘‘debt research analyst account’’ 

would mean any account in which a 

debt research analyst or member of the 

debt research analyst’s household has a 

financial interest, or over which such 

analyst has discretion or control; 

provided, however, it would not include 

an investment company registered 

under the Investment Company Act over 

which the debt research analyst or a 

member of the debt research analyst’s 

household has discretion or control, 

provided that the debt research analyst 

or member of a debt research analyst’s 

household has no financial interest in 

such investment company, other than a 

performance or management fee. The 

term also would not include a ‘‘blind 

trust’’ account that is controlled by a 

person other than the debt research 

analyst or member of the debt research 

analyst’s household where neither the 

debt research analyst nor a member of 

the debt research analyst’s household 

knows of the account’s investments or 

investment transactions.13

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).14

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.’’ 15

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. Further, 

communications that constitute private 

placement memoranda and comparable 

offering-related documents, other than 

those that purport to be research, would 

not be included in the definition of a 

debt research report. In general, the term 

debt research report also would not 

include communications that are 

limited to the following, if they do not 

include an analysis of, or recommend or 

rate, individual debt securities or 

issuers: 

• Discussions of broad-based indices; 

• commentaries on economic, 

political or market conditions; 

• commentaries on or analyses of 

particular types of debt securities or 

characteristics of debt securities; 

• technical analyses concerning the 

demand and supply for a sector, index 

or industry based on trading volume 

and price; 

• recommendations regarding 

increasing or decreasing holdings in 

particular industries or sectors or types 

of debt securities; or 

• notices of ratings or price target 

changes, provided that the member 

simultaneously directs the readers of the 

notice to the most recent debt research 

report on the subject company that 

includes all current applicable 

disclosures required by the rule and that 

such debt research report does not 

contain materially misleading 

disclosure, including disclosures that 

are outdated or no longer applicable. 

The term debt research report also, in 

general, would not include the 

following communications, even if they 

include an analysis of an individual 

debt security or issuer and information 

reasonably sufficient upon which to 

base an investment decision: 

• Statistical summaries of multiple 

companies’ financial data, including 

listings of current ratings that do not 

include an analysis of individual 

companies’ data; 

• an analysis prepared for a specific 

person or a limited group of fewer than 

15 persons; 

• periodic reports or other 

communications prepared for 

investment company shareholders or 

discretionary investment account clients 

that discuss individual debt securities 

in the context of a fund’s or account’s 

past performance or the basis for 

previously made discretionary 

investment decisions; or 

• internal communications that are 

not given to current or prospective 

customers. 

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 

6710.16

The proposed rule change would 

define the term ‘‘debt trader’’ as a 

person, with respect to transactions in 

debt securities, who is engaged in 

proprietary trading or the execution of 

transactions on an agency basis.17

The proposed rule change would 

provide that the term ‘‘independent 

third-party debt research report’’ means 

a third-party debt research report, in 

respect of which the person producing 

the report: (1) Has no affiliation or 

business or contractual relationship 

with the distributing member or that 

member’s affiliates that is reasonably 

likely to inform the content of its 

research reports; and (2) makes content 

determinations without any input from 

the distributing member or that 

member’s affiliates.18

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.19 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 

equity lines of credit or serving as 

placement agent for the issuer or 

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14200 Federal Register / Vol. 80, No. 52 / Wednesday, March 18, 2015 / Notices 

20See proposed FINRA Rule 2242(a)(9). 

21See proposed FINRA Rule 2242(a)(10). 

22See proposed FINRA Rule 2242(a)(11). 

23See proposed FINRA Rule 2242(a)(12). 

24See proposed FINRA Rule 2242(a)(14). 

25See proposed FINRA Rule 2242(a)(15). 

26See proposed FINRA Rule 2242(a)(16). 

27See proposed FINRA Rule 2242(b)(1). 

28See proposed FINRA Rule 2242(b)(2). 

29See proposed FINRA Rule 2242(b)(2)(A) and 

(B). 

30See proposed FINRA Rule 2242(b)(2)(N). 

31See proposed FINRA Rule 2242.05 (Submission 

of Sections of a Draft Research Report for Factual 

Review). 

32See proposed FINRA Rule 2242(b)(2)(C). 

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

34See proposed FINRA Rule 2242.01 (Efforts to 

Solicit Investment Banking Business). 

otherwise acting in furtherance of a 

private offering of the issuer.20

The proposed rule change would 

define the term ‘‘member of a debt 

research analyst’s household’’ as any 

individual whose principal residence is 

the same as the debt research analyst’s 

principal residence.21

The proposed rule change would 

define ‘‘public appearance’’ as any 

participation in a conference call, 

seminar, forum (including an interactive 

electronic forum) or other public 

speaking activity before 15 or more 

persons or before one or more 

representatives of the media, a radio, 

television or print media interview, or 

the writing of a print media article, in 

which a debt research analyst makes a 

recommendation or offers an opinion 

concerning a debt security or an issuer 

of a debt security.22

Under the proposed rule change the 

term ‘‘qualified institutional buyer’’ has 

the same meaning as under Rule 144A 

of the Securities Act.23

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.24 The proposed rule change 

would define the term ‘‘subject 

company’’ as the issuer whose debt 

securities are the subject of a debt 

research report or a public 

appearance.25 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.26

Identifying and Managing Conflicts of 

Interest 

Similar to the proposed equity 

research rule, 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.27

The proposed rule change introduces 

a distinction between sales and trading 

personnel and persons engaged in 

principal trading activities, where the 

conflicts addressed by the proposal are 

of most concern. 

The written policies and procedures 

must be 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.28

Prepublication Review 

FINRA is proposing that the required 

policies and procedures must 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 nonresearch personnel other than legal and 

compliance.29 The policies and 

procedures also must prohibit 

prepublication review of a debt research 

report by a subject company, other than 

for verification of facts.30 The proposed 

rule change allows sections of a draft 

debt research report to be provided to 

non-investment banking personnel, nonprincipal trading personnel, non-sales 

and trading personnel or to the subject 

company for factual review, so long as: 

(a) The sections of the draft debt 

research report submitted do not 

contain the research summary, 

recommendation or rating; (b) a 

complete draft of the debt research 

report is provided to legal or 

compliance personnel before sections of 

the report are submitted to noninvestment banking personnel, nonprincipal trading personnel, non-sales 

and trading personnel or the subject 

company; and (c) if, after submitting 

sections of the draft debt research report 

to non-investment banking personnel, 

non-principal trading personnel, nonsales and trading personnel or the 

subject company, the research 

department intends to change the 

proposed rating or recommendation, it 

must first provide written justification 

to, and receive written authorization 

from, legal or compliance personnel for 

the change. The member must retain 

copies of any draft and the final version 

of such debt research report for three 

years after publication.31

Coverage Decisions 

With respect to coverage decisions, a 

member’s written 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.32

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. 

Solicitation and Marketing of 

Investment Banking Transactions 

A member’s written policies and 

procedures also must restrict or limit 

activities by debt research analysts that 

can reasonably be expected to 

compromise their objectivity.33 This 

includes 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 adopts 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.34 By way of example, 

the Supplementary Material explains 

that FINRA would consider the 

publication in a pitch book or related 

materials of an analyst’s industry 

ranking to imply the potential outcome 

of future research because of the manner 

in which such rankings are compiled. 

The Supplementary Material further 

notes that a member would be permitted 

to include in the pitch materials the fact 

of coverage and the name of the debt 

research analyst, since that information 

alone does not imply favorable 

coverage. 

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 

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35See proposed FINRA Rule 2242(b)(2)(M). 

36See proposed FINRA Rule 2242.02(a) 

(Restrictions on Communications with Customers 

and Internal Personnel). 

37See proposed FINRA Rule 2242(b)(2)(D). 

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

39See proposed FINRA Rule 2242(b)(2)(E). 

40See proposed FINRA Rule 2242(b)(2)(D) and 

(F). 41See proposed FINRA Rule 2242(b)(2)(G). 42See proposed FINRA Rule 2242(b)(2)(D) and 

(G). 43See proposed FINRA Rule 2242(b)(2)(J). 

44See proposed FINRA Rule 2242.07 (Ability to 

Influence the Content of a Research Report). 

45See proposed FINRA Rule 2242.10. 

46See proposed FINRA Rule 2242(b)(2)(I). 

services transaction or any 

communication with a current or 

prospective customer about an 

investment banking services 

transaction.35 In addition, the proposed 

rule change adopts 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.36

Supervision 

A member’s written policies and 

procedures must limit the supervision 

of debt research analysts to persons not 

engaged in investment banking, sales 

and trading or principal trading 

activities.37 In addition, they further 

must establish information barriers or 

other institutional safeguards reasonably 

designed 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.38

Budget and Compensation 

A member’s written policies and 

procedures also must limit the 

determination of a firm’s debt research 

department budget to senior 

management, excluding senior 

management engaged in investment 

banking or principal trading activities, 

and without regard to specific revenues 

or results derived from investment 

banking.39 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 must 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.40 Further, the 

firm’s written policies and procedures 

must require 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.41 This committee 

may not have representation from 

investment banking personnel or 

persons engaged in principal trading 

activities and must consider the 

following factors when reviewing a debt 

research analyst’s compensation, if 

applicable: the debt research analyst’s 

individual performance, including the 

analyst’s productivity and the quality of 

the debt research analyst’s research; and 

the overall ratings received from 

customers and peers (independent of 

the member’s investment banking 

department and persons engaged in 

principal trading activities) and other 

independent ratings services. 

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.42 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. 

Personal Trading Restrictions 

Under the proposed rule change, a 

member’s written policies and 

procedures must 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.43

The procedures must 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.44

Furthermore, the procedures must 

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, firms may 

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 

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 

provides 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.45

Retaliation and Promises of Favorable 

Research 

A member’s written policies and 

procedures must prohibit direct or 

indirect 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.46 The policies and 

procedures also must prohibit explicit 

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14202 Federal Register / Vol. 80, No. 52 / Wednesday, March 18, 2015 / Notices 

47See proposed FINRA Rule 2242(b)(2)(K). 

48See proposed FINRA Rule 2242(b)(1)(C). 

49See proposed FINRA Rule 2242.09 (Joint Due 

Diligence). 

50See proposed FINRA Rule 2242.03(a)(1) 

(Information Barriers between Research Analysts 

and Trading Desk Personnel). 

51See proposed FINRA Rule 2242.03(a)(2) 

(Information Barriers between Research Analysts 

and Trading Desk Personnel). 

52See proposed FINRA Rule 2242.03(b)(1) 

(Information Barriers between Research Analysts 

and Trading Desk Personnel). 

53See proposed FINRA Rule 2242.03(b)(2) 

(Information Barriers between Research Analysts 

and Trading Desk Personnel). 

54See proposed FINRA Rule 2242.03(b)(3) 

(Information Barriers between Research Analysts 

and Trading Desk Personnel). 

55See proposed FINRA Rule 2242.03(b)(4) 

(Information Barriers between Research Analysts 

and Trading Desk Personnel). 

56See proposed FINRA Rule 2242.03(c) 

(Information Barriers between Research Analysts 

and Trading Desk Personnel). 

57See proposed FINRA Rule 2242.02(b) 

(Restrictions on Communications with Customers 

and Internal Personnel). 

58See proposed FINRA Rule 2242(c)(1)(A). 

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.47

Joint Due Diligence With Investment 

Banking Personnel 

The proposed rule change establishes 

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 

interprets 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 and those outside the 

research department, including 

investment banking department 

personnel, sales and trading personnel, 

principal trading personnel, subject 

companies and customers,48 to prohibit 

the performance of joint due diligence 

prior to the selection of underwriters for 

the investment banking services 

transaction.49

Communications Between Debt 

Research Analysts and Trading 

Personnel 

The proposed rule change delineates 

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.50 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.51

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.52 In addition, debt research 

analysts may provide customized 

analysis, recommendations or trade 

ideas to sales and trading and principal 

trading personnel and customers, 

provided that any such communications 

are not inconsistent with the analyst’s 

currently published or pending debt 

research, and that any subsequently 

published debt research is not for the 

purpose of benefiting the trading 

position of the firm, a customer or a 

class of customers.53

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 may consider the 

context, including that the investment 

objectives or time horizons being 

discussed differ from those underlying 

the debt research analyst’s published 

views.54 Finally, debt research analysts 

may 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.55

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 may take place without 

restriction, unless otherwise 

prohibited.56

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 must be fair, balanced and 

not misleading, taking into 

consideration the overall context in 

which the communication is made.57

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 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. 

Content and Disclosure in Debt 

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.58 In addition, the policies 

and procedures must be reasonably 

designed to ensure that any 

recommendation or rating has a 

reasonable basis and is accompanied by 

a clear explanation of any valuation 

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59See proposed FINRA Rule 2242(c)(1)(B). 

60See proposed FINRA Rule 2242(c)(2). 

61See proposed FINRA Rule 2242(c)(2)(A). 

62See proposed FINRA Rule 2242(c)(2)(B). 

63See proposed FINRA Rule 2242(c)(2)(C). 

64See proposed FINRA Rule 2242(c)(3). 

65See proposed FINRA Rule 2242(c)(4). 

66See also discussion of proposed FINRA Rule 

2242.04 (Disclosure of Compensation Received by 

Affiliates) below. 

67See proposed FINRA Rule 2242.07. 

68See proposed FINRA Rules 2242(c)(4)(H) and 

(d)(1)(E). 

69See proposed FINRA Rule 2242(c)(5). 

70See proposed FINRA Rule 2242(c)(6). 

method used and a fair presentation of 

the risks that may impede achievement 

of the recommendation or rating.59

While there is no obligation to employ 

a rating system under the proposed rule, 

members that choose to employ a rating 

system must 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 must be 

consistent with its plain meaning.60

Consistent with the equity rules, 

irrespective of the rating system a 

member employs, a member must 

include in each debt research report 

limited to the analysis of an issuer of a 

debt security that includes a rating of 

the subject company the percentage of 

all subject companies rated by the 

member to which the member would 

assign a ‘‘buy,’’ ‘‘hold’’ or ‘‘sell’’ 

rating.61 In addition, a member must 

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.62 All 

such information must 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.63

If a debt research report limited to the 

analysis of an issuer of a debt security 

contains a rating for the subject 

company and the member has assigned 

a rating to such subject company for at 

least one year, the debt research report 

must 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.64 Unlike the 

equity research rules, the proposed rule 

change does 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 65 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; 66

• 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; 

• 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. 

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 

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.’’ The 

proposed rule change defines a person 

with the ‘‘ability to influence the 

content of a research report’’ as an 

associated person who is required to 

review the content of the debt research 

report or has exercised authority to 

review or change the debt research 

report prior to publication or 

distribution. This term does not include 

legal or compliance personnel who may 

review a debt research report for 

compliance purposes but are not 

authorized to dictate a particular 

recommendation or rating.67 The 

‘‘reason to know’’ standard in the 

provision 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 rule change requires 

disclosure of firm ownership of debt 

securities in research reports or a public 

appearance to the extent those holdings 

constitute a material conflict of 

interest.68

The proposed rule change adopts an 

exception for disclosure that would 

reveal material non-public information 

regarding specific potential future 

investment banking transactions.69

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.70

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 

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71See proposed FINRA Rule 2242(c)(7). 

72See proposed FINRA Rule 2242.04 (Disclosure 

of Compensation Received by Affiliates). 

73See proposed FINRA Rule 2242(d)(1). 

74See proposed FINRA Rule 2242(d)(2). 

75See proposed FINRA Rule 2242(d)(3). 

76See proposed FINRA Rule 2242(e). 

77See proposed FINRA Rule 2242(f). 

78See proposed FINRA Rule 2242.06 

(Distribution of Member Research Products). 

79See proposed FINRA Rule 2242.06 

(Distribution of Member Research Products). 

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.71

Disclosure of Compensation Received 

by Affiliates 

The proposed rule change would 

provide that a member may 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.72 In 

addition, a member may 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 

must 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. 

Disclosure 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 must disclose in 

public appearances: 73

• 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 will 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.74

Unlike in debt research reports, the 

‘‘catch-all’’ disclosure requirement in 

public appearances applies 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. FINRA 

understands that supervisors or legal 

and compliance personnel, who 

otherwise might be captured by the 

definition of an associated person ‘‘with 

the ability to influence,’’ typically do 

not have the opportunity to review and 

insist on changes to public appearances, 

many of which are extemporaneous in 

nature. 

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 must be maintained for at 

least three years from the date of the 

public appearance.75

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.76

Distribution of Member Research 

Reports 

The proposed rule change requires 

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.77 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.78

In addition, a member that provides 

different debt research products and 

services for certain customers must 

inform its other customers that its 

alternative debt research products and 

services may reach different conclusions 

or recommendations that could impact 

the price of the debt security.79

Distribution of Third-party Debt 

Research Reports 

FINRA is proposing to apply the 

supervisory review and disclosure 

obligations applicable to the 

distribution of third-party equity 

research similarly to third-party retail 

debt research. Moreover, the proposed 

rule change would incorporate the 

current standards for third-party equity 

research, including the distinction 

between independent and nonindependent third-party research with 

respect to the review and disclosure 

requirements. In addition, the proposed 

rule change adopts 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 

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80See proposed FINRA Rule 2242(g)(1). 

81See proposed FINRA Rule 2242(g)(2). 

82See proposed FINRA Rule 2242(g)(3). 

83See proposed FINRA Rule 2242(g)(4). 

84See proposed FINRA Rule 2242(g)(5). 

85See proposed FINRA Rule 2242(g)(6). This 

requirement codifies guidance in Notice to 

Members 04–18 (March 2004) related to equity 

research reports. 

86See proposed FINRA Rule 2242(h). 87See proposed FINRA Rule 2242(b)(2)(A)(i), 

(b)(2)(B), (b)(2)(C) (with respect to investment 

banking), (b)(2)(D)(i), (b)(2)(E) (with respect to 

investment banking), (b)(2)(G) and (b)(2)(H)(i) and 

(iii). 88For the purposes of proposed FINRA Rule 

2242(h), the term ‘‘investment banking services 

transactions’’ includes the underwriting of both 

corporate debt and equity securities but not 

municipal securities. 

subject company of a third-party 

research report. 

The proposed rule change would 

prohibit a member from distributing 

third-party debt research if it knows or 

has reason to know that such research 

is not objective or reliable.80 A member 

would satisfy the standard based on its 

actual knowledge and reasonable 

diligence; however, there would be no 

duty of inquiry to definitively establish 

that the third-party research is, in fact, 

objective and reliable. 

In addition, the proposed rule change 

would require a member to establish, 

maintain and enforce written policies 

and procedures reasonably designed to 

ensure that any third-party debt 

research report it distributes contains no 

untrue statement of material fact and is 

otherwise not false or misleading.81 For 

the purpose of this requirement, a 

member’s obligation to review a thirdparty debt research report extends to 

any untrue statement of material fact or 

any false or misleading information that 

should be known from reading the debt 

research report or is known based on 

information otherwise possessed by the 

member. 

The proposed rule change would 

require that a member accompany any 

third-party debt research report it 

distributes with, or provide a Web 

address that directs a recipient to, 

disclosure of any material conflict of 

interest that can reasonably be expected 

to have influenced the choice of a thirdparty debt research report provider or 

the subject company of a third-party 

debt research report, including: 

• 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 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; 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.82

The proposed rule change would not 

require members to review a third-party 

debt research report prior to distribution 

if such debt research report is an 

independent third-party debt research 

report.83 For the purposes of the 

disclosure requirements for third-party 

research reports, a member shall not be 

considered to have distributed a thirdparty debt research report where the 

research is an independent third-party 

debt research report and made available 

by a member upon request, through a 

member-maintained Web site, or to a 

customer in connection with a solicited 

order in which the registered 

representative has informed the 

customer, during the solicitation, of the 

availability of independent debt 

research on the solicited debt security 

and the customer requests such 

independent debt research.84

The proposed rule would require that 

members ensure that third-party debt 

research reports are clearly labeled as 

such and that there is no confusion on 

the part of the recipient as to the person 

or entity that prepared the debt research 

reports.85

Obligations of Persons Associated With 

a Member 

The proposed rule change clarifies 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 member must 

comply with such member’s written 

policies and procedures as established 

pursuant to the proposed rule. In 

addition, consistent with Rule 0140, the 

proposed rule states in Supplementary 

Material .08 that it shall be a violation 

of proposed Rule 2242 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. 

Exemption for Members With Limited 

Investment Banking Activity 

Similar to the equity research rule, the 

proposed rule change exempts from 

certain provisions regarding supervision 

and compensation of debt research 

analysts those members that over the 

previous three years, on average per 

year, have participated in 10 or fewer 

investment banking services 

transactions as manager or co-manager 

and generated $5 million or less in gross 

investment banking revenues from those 

transactions.86 Specifically, members 

that meet those thresholds would be 

exempt from the requirement to 

establish, maintain and enforce policies 

and procedures that: prohibit 

prepublication review of debt research 

reports by investment banking 

personnel or other persons not directly 

responsible for the preparation, content 

or distribution of debt research reports 

(but not principal trading or sales and 

trading personnel, unless the member 

also qualifies for the limited principal 

trading activity exemption); restrict or 

limit investment banking personnel 

from input into coverage decisions; 

limit supervision of debt research 

analysts to persons not engaged in 

investment banking; limit determination 

of the research department budget to 

senior management, excluding senior 

management engaged in investment 

banking activities; require that 

compensation of a debt research analyst 

be approved by a compensation 

committee that may not have 

representation from investment banking 

personnel; and establish information 

barriers to insulate debt research 

analysts from the review or oversight by 

persons engaged in investment banking 

services or other persons who might be 

biased in their judgment or 

supervision.87 However, the proposed 

rule would require that members with 

limited investment banking activity 

establish information barriers or other 

institutional safeguards reasonably 

designed to ensure debt research 

analysts are insulated from pressure by 

persons engaged in investment banking 

services activities or other persons, 

including persons engaged in principal 

trading or principal sales and trading 

activities, who might be biased in their 

judgment or supervision.88

While small investment banks may 

need those who supervise debt research 

analysts under such circumstances also 

to be involved in the determination of 

those analysts’ compensation, the 

proposal still prohibits these firms from 

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14206 Federal Register / Vol. 80, No. 52 / Wednesday, March 18, 2015 / Notices 

89See proposed FINRA Rule 2242(i). 

90See proposed FINRA Rule 2242(b)(2)(A)(ii) and 

(iii), (b)(2)(B), (b)(2)(C) (with respect to sales and 

trading and principal trading), (b)(2)(D)(ii) and (iii), 

(b)(2)(E) (with respect to principal trading), (b)(2)(G) 

and (b)(2)(H)(ii) and (iii). 

91See proposed FINRA Rule 2242(j)(1). 

92See proposed FINRA Rule 2242(a)(13). 

93See proposed FINRA Rule 2242(a)(12) under 

which a QIB has the same meaning as under Rule 

144A of the Securities Act. 

94See proposed FINRA Rule 2242(j)(1)(A)(i) and 

(ii). 

95See proposed FINRA Rule 2242(j)(1)(B). 

compensating a debt research analyst 

based upon specific investment banking 

services transactions or contributions to 

a member’s investment banking services 

activities. Members that qualify for this 

exemption must maintain records 

sufficient to establish eligibility for the 

exemption and also maintain for at least 

three years any communication that, but 

for this exemption, would be subject to 

all of the requirements of proposed 

FINRA Rule 2242(b). 

Exemption for Limited Principal 

Trading Activity 

The proposed rule change includes an 

exemption from certain provisions 

regarding supervision and 

compensation of debt research analysts 

for members that engage in limited 

principal trading activity where: (1) 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 (2) 

the member employs fewer than 10 debt 

traders; provided, however, such 

members must establish information 

barriers or other institutional safeguards 

reasonably designed to ensure 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.89 Specifically, members 

that meet those thresholds would be 

exempt from the requirement to 

establish, maintain and enforce policies 

and procedures that: prohibit 

prepublication review of debt research 

reports by principal trading or sales and 

trading personnel or other persons not 

directly responsible for the preparation, 

content or distribution of debt research 

reports (but not investment banking 

personnel, unless the firm also qualifies 

for the limited investment banking 

activity exemption); restrict or limit 

principal trading or sales and trading 

personnel from input into coverage 

decisions; limit supervision of debt 

research analysts to persons not engaged 

in sales and trading or principal trading 

activities, including input into the 

compensation of debt research analysts; 

limit determination of the research 

department budget to senior 

management, excluding senior 

management engaged in principal 

trading activities; require that 

compensation of a debt research analyst 

be approved by a compensation 

committee that may not have 

representation from principal trading 

personnel; and establish information 

barriers to insulate debt research 

analysts from the review or oversight by 

persons engaged in principal trading or 

sales and trading activities or other 

persons who might be biased in their 

judgment or supervision.90

As with the limited investment 

banking activity exemption, members 

still would be required to establish 

information barriers or other 

institutional safeguards reasonably 

designed to ensure 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. Members that 

qualify for this exemption must 

maintain records sufficient to establish 

eligibility for the exemption and also 

maintain for at least three years any 

communication that, but for this 

exemption, would be subject to all of 

the requirements of proposed FINRA 

Rule 2242(b). 

Exemption for Debt Research Reports 

Provided to Institutional Investors 

Given the debt market and the needs 

of its participants, the proposed rule 

change would exempt debt research 

distributed solely to eligible 

institutional investors (‘‘institutional 

debt research’’) from most of the 

provisions regarding supervision, 

coverage determinations, budget and 

compensation determinations and all of 

the disclosure requirements applicable 

to debt research reports distributed to 

retail investors (‘‘retail debt 

research’’).91 Under the proposed rule 

change, the term ‘‘retail investor’’ means 

any person other than an institutional 

investor.92

The proposed rule distinguishes 

between larger and smaller institutions 

in the manner in which their opt-in 

decision is obtained. The larger may 

receive institutional debt research based 

on negative consent, while the smaller 

must affirmatively consent in writing to 

receive that research. 

Specifically, the proposed rule would 

allow firms to distribute institutional 

debt research by negative consent to a 

person who meets the definition of a 

qualified institutional buyer (‘‘QIB’’) 93

and where, pursuant to FINRA Rule 

2111(b): (1) The member or associated 

person has a reasonable basis to believe 

that the QIB is capable of evaluating 

investment risks independently, both in 

general and with regard to particular 

transactions and investment strategies 

involving a debt security or debt 

securities; and (2) the QIB has 

affirmatively indicated that it is 

exercising independent judgment in 

evaluating the member’s 

recommendations pursuant to FINRA 

Rule 2111 and such affirmation is broad 

enough to encompass transactions in 

debt securities. The proposed rule 

change would require written disclosure 

to the QIB that the member may provide 

debt research reports that are intended 

for institutional investors and are not 

subject to all of the independence and 

disclosure standards applicable to debt 

research reports prepared for retail 

investors. If the QIB does not contact the 

member and request to receive only 

retail debt research reports, the member 

may reasonably conclude that the QIB 

has consented to receiving institutional 

debt research reports.94 FINRA 

interprets this standard to allow an 

order placer, e.g., a registered 

investment adviser, for a QIB that 

satisfies the FINRA Rule 2111 

institutional suitability requirements 

with respect to debt transactions to 

agree to receive institutional debt 

research on behalf of the QIB by 

negative consent. 

Institutional accounts that meet the 

definition of FINRA Rule 4512(c) but do 

not satisfy the higher tier requirements 

described above may still affirmatively 

elect in writing to receive institutional 

debt research. Specifically, a person that 

meets the definition of ‘‘institutional 

account’’ in FINRA Rule 4512(c) may 

receive institutional debt research 

provided that such person, prior to 

receipt of a debt research report, has 

affirmatively notified the member in 

writing that it wishes to receive 

institutional debt research and forego 

treatment as a retail investor for the 

purposes of the proposed rule. Retail 

investors may not choose to receive 

institutional debt research.95

To avoid a disruption in the receipt of 

institutional debt research, the proposed 

rule change would allow firms to send 

institutional debt research to any FINRA 

Rule 4512(c) account, except a natural 

person, without affirmative or negative 

consent for a period of up to one year 

after SEC approval while they obtain the 

necessary consents. Natural persons that 

qualify as an institutional account under 

FINRA Rule 4512(c) must provide 

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96See proposed FINRA Rule 2242.11 

(Distribution of Institutional Debt Research During 

Transition Period). 

97See proposed FINRA Rule 2242(j)(2). 

98See proposed FINRA Rule 2242(j)(3). 

99See proposed FINRA Rule 2242(j)(4). 

100See proposed FINRA Rule 2242(j)(5). 

101See proposed FINRA Rule 2242(k). 

102SIFMA, WilmerHale Debt, PIABA Debt, 

NASAA Debt and CFA Institute. 

103WilmerHale Debt. 

affirmative consent to receive 

institutional debt research during this 

transition period and thereafter.96

The proposed exemption relieves 

members that distribute institutional 

debt research to institutional investors 

from the requirements to have written 

policies and procedures for this research 

with respect to: (1) Restricting or 

prohibiting prepublication review of 

institutional debt research by principal 

trading and sales and trading personnel 

or others outside the research 

department, other than investment 

banking personnel; (2) input by 

investment banking, principal trading 

and sales and trading into coverage 

decisions; (3) limiting supervision of 

debt research analysts to persons not 

engaged in investment banking, 

principal trading or sales and trading 

activities; (4) limiting determination of 

the debt research department’s budget to 

senior management not engaged in 

investment banking or principal trading 

activities and without regard to specific 

revenues derived from investment 

banking; (5) determination of debt 

research analyst compensation; (6) 

restricting or limiting debt research 

analyst account trading; and (7) 

information barriers or other 

institutional safeguards reasonably 

designed to ensure debt research 

analysts are insulated from review or 

oversight by investment banking, sales 

and trading or principal trading 

personnel, among others (but members 

still must have written policies and 

procedures to guard again those persons 

pressuring analysts). The exemption 

further would apply to all disclosure 

requirements, including content and 

disclosure requirements for third-party 

research. 

Notwithstanding the proposed 

exemption, some provisions of the 

proposed rule still would apply to 

institutional debt research, including 

the prohibition on prepublication 

review of debt research reports by 

investment banking personnel and the 

restrictions on such review by subject 

companies. While prepublication 

review by principal trading and sales 

and trading personnel would not be 

prohibited pursuant to the exemption, 

other provisions of the rule continue to 

require management of those conflicts, 

including the requirement to establish 

information barriers reasonably 

designed to insulate debt research 

analysts from pressure by those persons. 

Furthermore, the requirements in 

Supplementary Material .05 related to 

submission of sections of a draft debt 

research report for factual review would 

apply to any permitted prepublication 

review by persons not directly 

responsible for the preparation, content 

or distribution of debt research reports. 

In addition, members must prohibit debt 

research analysts from participating in 

the solicitation of investment banking 

services transactions, road shows and 

other marketing on behalf of issuers and 

further prohibit investment banking 

personnel from directly or indirectly 

directing a debt research analyst to 

engage in sales and marketing efforts 

related to an investment banking deal or 

to communicate with a current or 

prospective customer with respect to 

such transactions. The provisions 

regarding retaliation against debt 

research analysts and promises of 

favorable debt research also still apply 

with respect to research distributed to 

eligible institutional investors.97

While the proposed rule change does 

not require institutional debt research to 

carry the specific disclosures applicable 

to retail debt research, it does require 

that such research carry general 

disclosures prominently on the first 

page warning that: (1) The report is 

intended only for institutional investors 

and does not carry all of the 

independence and disclosure standards 

of retail debt research reports; (2) if 

applicable, that the views in the report 

may differ from the views offered in 

retail debt research reports; and (3) if 

applicable, that the report may not be 

independent of the firm’s proprietary 

interests and that the firm trades the 

securities covered in the report for its 

own account and on a discretionary 

basis on behalf of certain customers, and 

such trading interests may be contrary 

to the recommendation in the report.98

Thus, the second and third disclosures 

described above would be required only 

if the member produces both retail and 

institutional debt research reports that 

sometimes differ in their views or if the 

member maintains a proprietary trading 

desk or trades on a discretionary basis 

on behalf of some customers and those 

interests sometimes are contrary to 

recommendations in institutional debt 

research reports. 

The proposed rule change would 

require members to establish, maintain 

and enforce written policies and 

procedures reasonably designed to 

ensure that institutional debt research is 

made available only to eligible 

institutional investors.99 A member may 

not rely on the proposed exemption 

with respect to a debt research report 

that the member has reason to believe 

will be redistributed to a retail investor. 

The proposed rule change also states 

that the proposed exemption does not 

relieve a member of its obligations to 

comply with the antifraud provisions of 

the federal securities laws and FINRA 

rules.100

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.101

Response to Comments 

General Support 

All of the commenters to the proposal 

expressed general support for the 

proposal.102

Definitions and Terms 

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.’’ 103 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. FINRA intends for the 

sales and trading personnel conflict 

management provisions to apply to 

individuals who perform sales and 

trading functions, irrespective of their 

job title or the frequency of engaging in 

the activities. As such, FINRA does not 

intend for the rule to capture as sales 

and trading personnel senior 

management, such as the chief 

executive officer, who do not engage in 

or supervise day-to-day sales and 

trading activities. However, FINRA 

believes the applicable provisions 

should apply to individuals who may 

occasionally perform or directly 

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104WilmerHale Debt. 

105SIFMA. 

106WilmerHale Debt. 

107WilmerHale Debt. 

108SIFMA and WilmerHale Debt. 

109SIFMA. 

supervise sales and trading activities; 

otherwise, investors could be put at risk 

with respect to the research or 

transactions involved when those 

individuals are functioning in those 

capacities because the conflict 

management procedures and 

proscriptions and required disclosures 

would not apply. Therefore, FINRA has 

proposed to amend the rule to define 

sales and trading personnel to include 

‘‘persons in any department or division, 

whether or not identified as such, who 

perform any sales or trading service on 

behalf of a member.’’ FINRA notes that 

this proposed definition is more 

consistent with the definition of 

‘‘investment banking department’’ in the 

proposed rule change. 

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.104 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. 

As noted with respect to the 

definition of ‘‘research report’’ in the 

equity research filing, a ‘‘debt research 

report’’ is generally understood not to 

include such offering-related documents 

prepared in connection with investment 

banking services transactions. In the 

course of administering the filing review 

programs under FINRA Rules 2210 

(Communications with the Public), 5110 

(Corporate Financing Rule), 5122 

(Member Private Offerings) and 5123 

(Private Placements of Securities), 

FINRA has not received any inquiries or 

addressed any issues that indicate there 

is confusion regarding the scope of the 

research analyst rules as applied to 

offering-related documents prepared in 

connection with investment banking 

activities. Nonetheless, to provide firms 

with greater clarity as to the status of 

such offering-related documents under 

the proposals, FINRA proposes to 

amend the proposed rule to exclude 

private placement memoranda and 

similar offering-related documents 

prepared in connection with investment 

banking services transactions other than 

those that purport to be research from 

the definition of ‘‘debt research report.’’ 

One commenter asked FINRA to 

refrain from using the concept of 

‘‘reliable’’ research in the proposal as it 

may inappropriately connote accuracy 

in the context of a research analyst’s 

opinions.105 FINRA believes that the 

term ‘‘reliable’’ is commonly understood 

and notes that the term is used in 

certain research-related provisions in 

the Sarbanes-Oxley Act of 2002 

(‘‘Sarbanes-Oxley’’) without definition. 

FINRA does not believe the term 

connotes accuracy of opinions. 

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.’’ 106 The commenter 

asserted that inclusion of 

‘‘independently’’ is confusing since the 

proposal would permit input from nonresearch personnel into coverage 

decisions. FINRA has included 

‘‘independently’’ to make clear that 

research management alone is vested 

with making final coverage decisions. 

Thus, for example, a firm could not 

have a committee that includes a 

majority of research management 

personnel but also other individuals 

make final coverage decisions by a vote. 

As such, FINRA declines to eliminate 

the term as suggested. 

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.107 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.108

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. 

The proposal would allow sales and 

trading personnel, but not personnel 

engaged in principal trading activities, 

to provide input to debt research 

management into the evaluation of debt 

research analysts. As discussed in detail 

in Item 5 of the Proposing Release in 

response to the same comment raised to 

earlier iterations of the debt proposal, 

given the importance of principal 

trading operations to the revenues of 

many firms, FINRA believes there is 

increased risk that a principal trader 

could improperly pressure or influence 

debt research if he or she has a say into 

analyst compensation or can selectively 

relay customer feedback. FINRA 

believes the risk to retail investors—the 

compensation evaluation restrictions 

would not apply to institutional debt 

research—outweighs the benefit of an 

additional data point for research 

management to assess the quality of 

research produced by those that they 

oversee. FINRA also notes that the 

proposal would allow sales and trading 

personnel to provide customer feedback. 

Accordingly, FINRA declines to define 

the terms as the commenter suggested. 

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.109 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. This 

structure evolved based on extensive 

consultation and feedback from the 

industry. Based on those 

communications, FINRA understands 

and intends for the term ‘‘sales and 

trading’’ to exclude principal and 

proprietary trading activities. FINRA 

will consider providing guidance where 

it is unclear whether a particular job 

function or activity falls within ‘‘sales 

and trading’’ or ‘‘principal trading’’ 

activities. 

One commenter suggested that FINRA 

revise the definition of ‘‘subject 

company’’ to specify that the term 

means the ‘‘issuer (rather than the 

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110WilmerHale Debt. 

111SIFMA and WilmerHale Debt. 

112Letter 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). 

113NASAA Debt. 

114CFA Institute. 

115WilmerHale Debt. 

116SIFMA and WilmerHale Debt. 

117WilmerHale Debt. 

‘‘company’’) whose debt securities are 

the subject of a debt research report or 

a public appearance.’’ 110 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. FINRA agrees 

that the change is appropriate and 

therefore proposes to amend the 

definition accordingly. 

Policies and Procedures 

The rule proposal as originally 

proposed would have adopted 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.111 One of those 

commenters had previously expressed 

support for the proposed policies-based 

approach with minimum 

requirements,112 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.113

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.114 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.115

Finally, some commenters suggested 

FINRA eliminate 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.116 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.117

As discussed in more detail in the 

proposed rule change, FINRA believes 

the framework will maintain the same 

level of investor protection in the 

current equity rules (which also would 

largely apply to retail debt research) 

while providing both some flexibility 

for firms to align their compliance 

systems with their business model and 

philosophy and imposing additional 

obligations to proactively identify and 

manage emerging conflicts. Even under 

a policies and procedures approach, the 

proposal would effectively maintain, 

with some modifications, the key 

proscriptions in the current rules—e.g., 

prohibitions on prepublication review, 

supervision of research analysts by 

investment banking and participation in 

pitches and road shows. FINRA 

disagrees that the ‘‘preamble’’ to some of 

those prohibitions is unnecessary. As 

with the more general overarching 

principles-based requirement to identify 

and manage conflicts of interest, the 

introductory principle that requires 

written policies and procedures to 

restrict or limit activities by research 

analysts that can reasonably be expected 

to compromise their objectivity 

recognizes that FINRA cannot identify 

every conflict related to research at 

every firm and therefore requires 

proactive monitoring and management 

of those conflicts. FINRA does not 

believe this ‘‘preamble’’ language is 

redundant with the broader overarching 

principle because it applies more 

specifically to the activities of research 

analysts and, unlike the broader 

principle, would preclude the use of 

disclosure as a means of conflict 

management for those activities. 

In light of the overarching principle 

that requires firms to establish, maintain 

and enforce written policies and 

procedures reasonably designed to 

identify and effectively manage 

research-related conflicts, the ‘‘at a 

minimum’’ language was meant to 

convey that additional conflicts 

management policies and procedures 

may be needed to address emerging 

conflicts that may arise as the result of 

business changes, such as new research 

products, affiliations or distribution 

methods at a particular firm. As 

discussed in the Proposing Release, 

FINRA intends for firms to proactively 

identify and manage those conflicts 

with appropriately designed policies 

and procedures. FINRA’s inclusion of 

the ‘‘at a minimum’’ language was not 

intended to suggest that firms’ written 

policies and procedures must go beyond 

the specified prohibitions and 

restrictions in the proposal where no 

new conflicts have been identified. 

However, FINRA believes the 

overarching requirement for policies 

and procedures reasonably designed to 

identify and effectively manage 

research-related conflicts suffices to 

achieve the intended regulatory 

objective, and therefore to eliminate any 

confusion, FINRA proposes to amend 

the proposals to delete the ‘‘at a 

minimum’’ language. 

FINRA appreciates the commenters’ 

concerns with respect to language in the 

supplementary material that would 

make a violation of a firm’s policies a 

violation of the underlying rule. The 

supplementary material was intended to 

hold individuals responsible for 

engaging in the conduct that the policies 

and procedures effectively restrict or 

prohibit. FINRA agrees that purpose is 

achieved with the language in the 

supplementary material that states that, 

consistent with FINRA Rule 0140, ‘‘it 

shall be a violation of [the Rule] for an 

associated person to engage in the 

restricted or prohibited conduct to be 

addressed through the establishment, 

maintenance and enforcement of 

policies and procedures required by [the 

Rule] or related Supplementary 

Material.’’ Therefore, FINRA proposes to 

amend the proposals to delete the 

language stating that a violation of a 

firm’s policies and procedures shall 

constitute a violation of the rule itself. 

Information Barriers 

The proposed rule would require 

written policies and procedures to 

‘‘establish information barriers or other 

institutional safeguards reasonably 

designed to ensure that research 

analysts are insulated from review, 

pressure or oversight by persons 

engaged in investment banking services 

activities or other persons, including 

sales and trading department personnel, 

who might be biased in their judgment 

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118SIFMA and WilmerHale Debt. 

119WilmerHale Debt. 

120WilmerHale Debt. 

121WilmerHale Debt. 

122WilmerHale Debt. 

123WilmerHale Debt. 124WilmerHale Debt. 

or supervision.’’ 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.118 One commenter 

further suggested that the terms 

‘‘review’’ and ‘‘oversight’’ are 

redundant.119 FINRA does not agree that 

the terms ‘‘review’’ and ‘‘oversight’’ are 

coextensive, as the former may connote 

informal evaluation, while the latter 

may signify more formal supervision or 

authority. And while other provisions of 

the proposed rule change may address 

related conduct—e.g., the provision that 

prohibits investment banking personnel, 

principal trading personnel and sales 

and trading personnel from supervision 

or control of debt research analysts— 

this provision extends to ‘‘other 

persons’’ who may be biased in their 

judgment or supervision. Finally, 

FINRA included the ‘‘review, pressure 

or oversight’’ language to mirror the 

requirements for equity rules in 

Sarbanes-Oxley and therefore promote 

consistency. Accordingly, FINRA 

declines to revise the proposed rule 

change. 

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.120 That was 

clearly FINRA’s intent, and FINRA 

believes that the rules of statutory 

construction would compel that result. 

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.121 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. FINRA believes the terms 

‘‘pressure’’ and ‘‘bias’’ are commonly 

understood, particularly in the context 

of rules intended to promote analyst 

independence and objectivity. To that 

end, FINRA notes that the terms appear 

in certain research-related provisions of 

Sarbanes-Oxley without definition. 

Thus, with respect to the commenter’s 

example, FINRA does not believe a bias 

would be present simply because 

someone insists that a research analyst 

comply with formatting or technology 

specifications that do not otherwise 

implicate the rules. 

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.122

FINRA believes the change would be 

consistent with the standard for policies 

and procedures elsewhere in the 

proposal, and therefore proposes to 

amend the provision as requested. 

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.123

(emphasis added) The commenter 

expressed concern about the 

emphasized language. 

FINRA proposed the change to 

capture material conflicts of interest 

known by persons other than the 

research analyst (e.g., a supervisor or the 

head of research) who are in a position 

to improperly influence a debt research 

report. FINRA defined ‘‘ability to 

influence the content of a debt research 

report’’ in supplementary material as 

‘‘an associated person who, in the 

ordinary course of that person’s duties, 

has the authority to review the research 

report and change that research report 

prior to publication or distribution.’’ 

The commenter stated that the proposed 

change could capture individuals 

(especially legal and compliance 

personnel) who might be required to 

disclose confidential information that is 

not covered by the exception in the 

proposals that would not require 

disclosure where it would ‘‘reveal 

material non-public information 

regarding specific potential future 

investment banking transactions of the 

subject company.’’ This is because, 

according to the commenter, legal and 

compliance may be aware of material 

conflicts of interest relating to the 

subject company that involve material 

non-public information regarding 

specific future investment banking 

transactions of a competitor of the 

subject company. The commenter also 

expressed concern the provision would 

slow down dissemination of research to 

canvass all research supervisors and 

management for conflicts. The 

commenter suggested that the change 

was unnecessary given other objectivity 

safeguards in the proposals that would 

guard against improper influence. 

FINRA continues to believe that the 

catch-all provision must include 

persons with the ability to influence the 

content of a debt research report to 

avoid creating a gap where a supervisor 

or other person with the authority to 

change the content of a research report 

knows of a material conflict. However, 

FINRA intended for the provision to 

capture only those individuals who are 

required to review the content of a 

particular research report or have 

exercised their authority to review or 

change the research report prior to 

publication or distribution. In addition, 

FINRA did not intend to capture legal 

or compliance personnel who may 

review a research report for compliance 

purposes but are not authorized to 

dictate a particular recommendation or 

rating. FINRA proposes to amend the 

supplementary material in the proposals 

consistent with this clarification. In 

addition, FINRA proposes to modify the 

exception in proposed Rules 2242(c)(5) 

and (d)(2) (applying to public 

appearances) not to require disclosure 

that would otherwise reveal material 

non-public information regarding 

specific potential future investment 

banking transactions, whether or not the 

transaction involves the subject 

company. 

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.124 As long as 

a research report delivered 

electronically contains a hyperlink 

directly to the required disclosures, the 

standard will be satisfied. 

Research Products With Differing 

Recommendations 

The proposed rule change would 

require firms to establish, maintain and 

enforce written policies and procedures 

reasonably designed to ensure that a 

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 firm has previously 

determined are entitled to receive the 

research report. The proposals also 

include supplementary material that 

explains that firms may provide 

different research products to different 

classes of customers—e.g., long term 

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125WilmerHale Debt. 

126PIABA Debt. 

127WilmerHale Debt. 

128CFA Institute. 

129The proposed rule change would not require 

that all investors receive all research products, nor 

would it preclude a firm from offering, for example, 

a research product to select customers that includes 

greater depth of analysis. However, it would not be 

consistent with the proposed rule change to provide 

inconsistent views to different classes of customers 

or to advantage one class of customers based on the 

timing of receipt of a recommendation, rating or 

potentially market moving information. 

130WilmerHale Debt. 

131WilmerHale Debt. 

132WilmerHale Debt. 

fundamental research to all customers 

and short-term trading research to 

certain institutional customers— 

provided the products are not 

differentiated based on the timing of 

receipt of potentially market moving 

information and the firm discloses, if 

applicable, that one product may 

contain a different recommendation or 

rating from another product. 

One commenter supported the 

provisions as proposed with general 

disclosure,125 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.126 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.127

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.128

Importantly, the supplementary 

material states that products may lead to 

different recommendations or ratings, 

provided that each is consistent with 

the member’s ratings system for each 

respective product. In other words, all 

differing recommendations or ratings 

must be reconcilable such that they are 

not truly at odds with one another. As 

such, the proposed rule change would 

not allow research provided to an 

institutional investor to contain views 

inconsistent with those offered in retail 

debt research.129 An example in the 

equity rule filing is illustrative. A firm 

might define a ‘‘buy’’ rating in its longterm research product to mean that a 

stock will outperform the S&P 500 over 

the next 12 months, while a ‘‘sell’’ 

rating in its short-term trading product 

might mean the stock will underperform 

its sector index over the next month. 

The firm could maintain a ‘‘buy’’ in the 

long-term research and a ‘‘sell’’ in its 

trading research at the same time if the 

firm believed the stock would 

temporarily drop near term based on 

failing to meet expectations in an 

earnings report but still outperform the 

S&P over the next 12 months. 

Since the proposed rule change would 

not allow inconsistent 

recommendations that could mislead 

one or more investors, FINRA believes 

general disclosure of alternative 

products with different objectives and 

recommendations is appropriate relative 

to its investor protection benefits. 

Structural and Procedural Safeguards 

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.130 FINRA indicated in the 

proposed rule change that while the 

proposed rule would not require 

physical separation, FINRA would 

expect such physical separation except 

in extraordinary circumstances where 

the costs are unreasonable due to a 

firm’s size and resource limitations. 

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. The rule does not 

specify physical separation between all 

of the persons involved. While similar 

in design and purpose to some aspects 

of the proposed requirements in the 

debt proposal, Rule 5280 is not 

congruent with the proposal to the point 

where compliance with the policies and 

procedures provision of that rule would 

be deemed compliance with the debt 

proposal separation requirements. Both 

Rule 5280 and the debt proposal require 

policies and procedures reasonably 

designed to limit information flow. 

FINRA believes that physical separation 

is an effective component to a 

reasonably designed compliance system 

that requires information barriers. 

The same 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.131 FINRA discussed this same 

comment in detail in Item 5 of the 

Proposing Release. In short, FINRA 

believes that even passive participation 

by debt research analysts in road shows 

and other marketing may present 

conflicts of interest and, therefore, 

declines to revise the proposal as 

suggested. 

Communications Between Research 

Analysts and Trading Desk Personnel 

The commenter also asked FINRA to 

delete the term ‘‘attempting’’ in the 

proposed Supplementary Material 

.03(a)(1), 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.’’ 132 The 

commenter stated that it is unclear how 

a firm should enforce a prohibition on 

attempts to influence. FINRA notes that 

Supplementary Material .03(b)(2) sets 

forth permissible communications 

between debt research analysts and 

sales and trading and principal trading 

personnel, including, for example, 

allowing a debt research analyst to 

provide ‘‘customized analysis, 

recommendations or trade ideas’’ to 

customers or traders upon request, 

provided that the communications are 

‘‘not inconsistent with the analyst’s 

current or pending debt research, and 

that any subsequently published debt 

research is not for the purpose of 

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133WilmerHale Debt. 

134WilmerHale Debt. 

135WilmerHale Debt. 

136WilmerHale Debt. 137WilmerHale Debt. 

benefitting the trading position of the 

firm, a customer or a class of 

customers.’’ In the context of such a 

request, it is not hard to envision the 

possibility that a trader, for example, 

might attempt to influence the analyst’s 

view by emphasizing that a particular 

recommendation would be beneficial to 

the firm. FINRA believes there are a 

variety of policies and procedures that 

could address such attempts, including 

periodic monitoring of such 

communications. As such, FINRA 

declines to delete ‘‘attempting’’ from the 

provision. 

The commenter further expressed 

concern that the term ‘‘pending’’ is 

vague in the above-cited provision.133

The commenter suggested that FINRA 

delete the term or confirm that 

‘‘pending’’ means ‘‘imminent 

publication of a debt research report.’’ 

FINRA believes it is important that any 

customized analysis, recommendations 

or trade ideas be consistent not only 

with published research, but also any 

research being drafted in anticipation of 

publication or distribution that may 

contain changed or additional view or 

opinions. FINRA considers such 

research in draft to be pending and 

therefore declines to delete the term or 

adopt an ‘‘imminent’’ standard. 

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 may 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 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.134 FINRA agrees 

that context may be considered 

whenever consistency of research or 

views is at issue. 

Disclosure Requirements 

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.135 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.136 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. 

Similar to the current equity rules, 

FINRA believes that to the extent that a 

firm produces retail debt research that 

assigns a rating to an issuer—i.e., a 

credit analysis—these disclosure 

provisions would provide value to retail 

investors to quickly gauge any apparent 

bias toward more or less favorable 

ratings or investment banking clients 

and to assess the accuracy of past 

ratings. Moreover, FINRA understands 

that the burden to comply with the 

requirements with respect to this 

limited subset of debt research would be 

manageable for firms. Therefore, FINRA 

is proposing to amend Rules 2242(c)(2) 

and (3) to apply the ratings distribution 

requirement and historical rating table 

requirement only to each debt research 

report limited to the analysis of an 

issuer of a debt security that includes a 

rating of the subject company. Since the 

proposal would be limited to these 

issuer credit analyses and would not 

apply to individual bonds, FINRA 

believes many of the commenter’s 

burden concerns would be alleviated 

and that it would be reasonable and 

appropriate to maintain the proposed 

three-year look back period with respect 

to the historical rating provision. 

While FINRA also believes that the 

disclosures would be valuable to retail 

investors with respect to debt research 

on individual debt securities, FINRA 

recognizes the additional complexity 

and cost associated with compliance, 

particularly where a retail debt research 

report may include multiple ratings of 

individual debt securities, some of 

which may be positive and others 

negative or neutral. FINRA believes it 

would be beneficial to obtain additional 

information about the array of debt 

research products that are now being 

distributed to retail investors, as well as 

the operational challenges and costs to 

apply these disclosure provisions to 

debt research on individual debt 

securities. Accordingly, FINRA is 

proposing to eliminate for now the 

requirements with respect to debt 

research reports on individual debt 

securities. FINRA will reconsider the 

appropriateness of the disclosure 

requirements as applied to research on 

individual debt securities after 

obtaining and assessing the additional 

information. 

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.137 The 

commenter noted that while the SEC 

has interpreted Sarbanes-Oxley to 

require disclosure in each equity report, 

the law does not apply to debt research. 

FINRA believes that disclosures in retail 

debt research reports should be 

proximate to the content of those reports 

and easily available to recipients of the 

research without requiring any 

substantive additional steps. Therefore, 

to the extent a debt research report is 

not delivered electronically with 

hyperlinked disclosures, FINRA 

believes the disclosures must be in the 

research report itself. FINRA also 

believes this will promote consistency 

between equity and retail debt research. 

Finally, FINRA notes that institutional 

debt research would not require the 

specific disclosures. 

Institutional Debt Research Exemption 

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 

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138PIABA Debt. 

139SIFMA. 

140CFA Institute. 141WilmerHale Debt. 142WilmerHale Debt. 

disclosure to alert recipients that the 

reports do not carry the same 

protections as retail debt research. 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.138 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 2111.139

Another commenter supported the 

proposed tiered approach for how 

institutional investors may receive 

research reports.140 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. 

As discussed in detail in the 

Proposing Release, FINRA believes an 

institutional exemption is appropriate to 

allow more sophisticated institutional 

market participants that can assess risks 

associated with debt trading and are 

aware of conflicts that may exist 

between a member’s recommendations 

and trading interests, to continue to 

receive the timely flow of analysis and 

trade ideas that they value. FINRA notes 

that institutional debt research still 

would remain subject to several 

provisions of the rules, including the 

required separation between debt 

research and investment banking and 

the requirements for conflict 

management policies and procedures to 

insulate debt analysts from pressure by 

traders and others. In addition, FINRA 

notes that no institutional investor will 

be exposed to this less-protected 

institutional research without either 

negative or affirmative consent, as 

applicable. 

With respect to the standard for 

negative consent, FINRA addressed that 

issue in great detail in Item 5 of the 

Proposing Release. In short, FINRA does 

not believe that less sophisticated 

institutional investors should be 

required to take any additional steps to 

receive the full protections of the 

proposed rules. To the extent the QIB 

standard for negative consent is too 

difficult to implement, the proposal 

provides an alternative to obtain a onetime affirmative consent for any Rule 

4512(c) institutional account and further 

provides a one-year grace period to 

obtain that consent, so as not to disrupt 

the current flow of debt research to 

institutional customers. As discussed in 

the rule filing, FINRA included the 

alternative methods of consent and the 

grace period to satisfy the differing 

industry views on which of two consent 

options would be most cost effective. 

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.141 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 debt proposal never 

contemplated recognizing equivalent 

institutional standards in other 

jurisdictions, and FINRA does not 

believe that approach is appropriate or 

workable. FINRA questions whether 

there are standards in other jurisdictions 

that are truly the equivalent of the QIB 

standard, and it is impractical for 

FINRA to survey and assess the 

institutional standards around the world 

to determine equivalency, not to 

mention whether the home jurisdiction 

adequately examines for and enforces 

compliance with the standard. To the 

extent non-U.S. institutional investors 

have not been vetted as QIBs, firms have 

the option of either vetting them if they 

wish to send them institutional debt 

research by negative consent or 

obtaining affirmative written consent to 

the extent the institution satisfies the 

Rule 4212(c) standard. 

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 

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.142 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. FINRA 

disagrees with the commenter. FINRA 

believes that minimum objectivity 

standards should apply to institutional 

debt research regardless of whether the 

research is published by research 

department personnel, sales and trading 

personnel or principal trading 

personnel. FINRA believes that a firm 

can and should put in place policies 

and procedures reasonably designed to 

ensure that other traders or sales and 

trading personnel do not overtly 

pressure a trader who produces debt 

research to express a particular view 

and to prevent that trader from 

participating in solicitations of 

investment banking or road show 

participation. 

Exemptions for Limited Investment 

Banking Activity and Limited Principal 

Trading 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. The 

limited principal trading exemption 

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143CFA Institute. 144WilmerHale Debt. 

145SIFMA. 

146WilmerHale Debt. 

147 15 U.S.C. 78o–3(b)(6). 

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.143 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. 

As discussed in detail the Proposing 

Release, FINRA included the 

exemptions to balance the burdens of 

compliance with the level or risk to 

investors. FINRA determined the 

thresholds for each exemption based on 

data analysis and a survey of firms that 

engage in principal trading activity or 

investment banking activity, 

respectively. FINRA has not found 

abuses with respect to the limited 

investment banking exemption in the 

equity context and notes that some 

important separation requirements 

would still apply to the eligible firms, 

such as the prohibition on 

compensating a debt research analyst 

based on a specific investment banking 

transaction or contributions to a 

member’s investment banking services 

activities. 

Similarly, the proposed limited 

principal trading exemption would 

apply where, based on the survey and 

data analysis, FINRA reasonably 

believes the amount of potential 

principal trading profits poses 

appreciably lower risk of pressure on 

debt research analysts by sales and 

trading or principal trading personnel 

and where there would be a significant 

marginal cost to add a trader dedicated 

to producing research relative to the 

increase in investor protection. The 

proposal would still prohibit debt 

research analysts at exempt firms from 

being compensated based on specific 

trading transactions. 

With respect to both exemptions, as 

the commenter noted, firms would still 

be required to establish information 

barriers or other institutional safeguards 

reasonably designed to ensure debt 

research analysts are insulated from 

pressure by persons engaged in 

investment banking or principal trading 

activities, among others. FINRA believes 

a number of policies could be 

implemented to achieve compliance 

with this requirement. For example, in 

the context of principal trading, these 

measures might include monitoring of 

communications between debt research 

analysts and individuals on the trading 

desk and reviewing published research 

in relation to transactions executed by 

the firm in the subject company’s debt 

securities. FINRA also notes that neither 

exemption would allow trading ahead of 

research by firm traders, as FINRA Rule 

5280 would continue to apply to both 

debt and equity research and prohibits 

such conduct. Finally, as noted, FINRA 

intends to monitor the research 

produced by firms that avail themselves 

of the exemptions to assess whether the 

thresholds to qualify for the exemptions 

are appropriate or should be modified. 

Filing Requirement Exclusion 

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.144 FINRA is 

willing to separately consider the merits 

of the request, but does not believe the 

issue is appropriate for resolution in the 

context of the debt proposal since it 

primarily relates to the provisions of a 

rule that is not the subject of the 

proposed rule change. 

Implementation Date 

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.145 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.146 FINRA is 

sensitive to the time firms will require 

to update their policies and procedures 

and systems to comply with the 

proposed rule change and will take 

those factors into consideration when 

establishing implementation dates. 

FINRA believes that the foregoing 

fully responds to the issues raised by 

the commenters. 

FINRA will announce the effective 

date of the proposed rule change in a 

Regulatory Notice to be published no 

later than 60 days following 

Commission approval. The effective 

date will be no later than 180 days 

following publication of the Regulatory 

Notice announcing Commission 

approval. 

2. Statutory Basis 

FINRA believes that the proposed rule 

change is consistent with the provisions 

of Section 15A(b)(6) of the Act,147

which requires, among other things, that 

FINRA rules must be designed to 

prevent fraudulent and manipulative 

acts and practices, to promote just and 

equitable principles of trade, and, in 

general, to protect investors and the 

public interest. FINRA believes that the 

proposed rule change would promote 

increased quality, objectivity and 

transparency of debt research 

distributed to investors by requiring 

firms to identify and mitigate conflicts 

in the preparation and distribution of 

such research. FINRA further believes 

the rule will provide investors with 

more reliable information on which to 

base investment decisions in debt 

securities, while maintaining timely 

flow of information important to 

institutional market participants and 

providing those institutional investors 

with appropriate safeguards. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

FINRA does not believe that the 

proposed rule change will result in any 

burden on competition that is not 

necessary or appropriate in furtherance 

of the purposes of the Act. FINRA 

provided a comprehensive statement 

regarding the burden on competition in 

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148See Proposing Release, supra note 3. 

149See supra note 6. 150 17 CFR 200.30–3(a)(12). 

1We will use this Social Security Ruling (SSR) 

beginning on its effective date. We will apply this 

SSR to new applications filed on or after the 

effective date of the SSR and to claims that are 

pending on and after the effective date. This means 

that we will use these rules on and after their 

effective date in any case in which we make a 

determination or decision. We expect that Federal 

courts will review our final decisions using the 

rules that were in effect at the time we issued the 

decisions. If a court reverses our final rules and 

remands a case for further administrative 

proceedings after the effective date of these final 

rules, we will apply these final rules to the entire 

period at issue in the decision we make after the 

court’s remand. 

2For simplicity, we refer in this SSR only to 

initial adult claims for disability benefits under 

titles II and XVI of the Act and to the steps of the 

Continued 

the Proposing Release. FINRA’s 

response to comments and proposed 

revisions as set forth in this Amendment 

No. 1 does not change FINRA’s 

statement in the Proposing Release. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

Written comments on the proposed 

rule change were solicited by the 

Commission in response to the 

publication of SR–FINRA–2014–048.148

The Commission received five comment 

letters, which are summarized above. 

IV. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 180 days after the date of 

publication of the initial notice in the 

Federal Register (i.e., November 24, 

2014) or within such longer period up 

to an additional 60 days (i) as the 

Commission may designate if it finds 

such longer period to be appropriate 

and publishes its reasons for so finding 

or (ii) as to which the self-regulatory 

organization consents, the Commission 

will issue an order approving or 

disapproving such proposed rule 

change, as amended. 

V. 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: 149

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 April 

8, 2015. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.150

Brent J. Fields, 

Secretary. 

[FR Doc. 2015–06094 Filed 3–17–15; 8:45 am] 

BILLING CODE 8011–01–P 

SOCIAL SECURITY ADMINISTRATION 

[Docket No. SSA–2014–0053] 

Social Security Ruling, SSR 15–1p; 

Titles II and XVI: Evaluating Cases 

Involving Interstitial Cystitis (IC) 

AGENCY: Social Security Administration. 

ACTION: Notice of Social Security Ruling 

(SSR). 

SUMMARY: We are providing notice of 

SSR 15–1p. This SSR provides guidance 

on how we develop evidence to 

establish that a person has a medically 

determinable impairment of interstitial 

cystitis (IC), and how we evaluate IC in 

disability claims and continuing 

disability reviews under titles II and 

XVI of the Social Security Act. 

DATES: Effective Date: March 18, 2015. 

FOR FURTHER INFORMATION CONTACT: 

Cheryl Williams, Office of Medical 

Policy, Social Security Administration, 

6401 Security Boulevard, Baltimore, 

Maryland 21235–6401, (410) 965–1020. 

SUPPLEMENTARY INFORMATION: Although 

5 U.S.C. 552(a)(1) and (a)(2) do not 

require us to publish this SSR, we are 

doing so in accordance with 20 CFR 

402.35(b)(1). 

Through SSRs, we convey to the 

public SSA precedential decisions 

relating to the Federal old-age, 

survivors, disability, supplemental 

security income, and special veterans 

benefits programs. We may base SSRs 

on determinations or decisions made at 

all levels of administrative adjudication, 

Federal court decisions, Commissioner’s 

decisions, opinions of the Office of the 

General Counsel, or other 

interpretations of the law and 

regulations. 

Although SSRs do not have the same 

force and effect as statutes or 

regulations, they are binding on all 

components of the Social Security 

Administration. 20 CFR 402.35(b)(1). 

This SSR will remain in effect until 

we publish a notice in the Federal 

Register that rescinds it, or we publish 

a new SSR that replaces or modifies it. 

(Catalog of Federal Domestic Assistance, 

Programs Nos. 96.001, Social Security— 

Disability Insurance; 96.002, Social 

Security—Retirement Insurance; 96.004, 

Social Security—Survivors Insurance; 

96.006—Supplemental Security Income.) 

Dated: March 3, 2015. 

Carolyn W. Colvin, 

Acting Commissioner of Social Security. 

Policy Interpretation Ruling 

Titles II and XVI: Evaluating Cases 

Involving Interstitial Cystitis (IC) 

This Social Security Ruling (SSR) 

rescinds and replaces SSR 02–2p: 

‘‘Titles II and XVI: Evaluation of 

Interstitial Cystitis.’’ 1

Purpose: This SSR clarifies our policy 

on how we develop evidence to 

establish that a person has a medically 

determinable impairment (MDI) of IC 

and how we evaluate this impairment in 

disability claims and continuing 

disability reviews under titles II and 

XVI of the Social Security Act (Act).2

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