Federal Register / Vol. 79, No. 226 / Monday, November 24, 2014 / Notices 69905 

12 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3The 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 Exchange 

Act Rel. No. 34–[] (Nov. 17, 2014) (SR–FINRA– 

2014–047). 

4See 15 U.S.C. 78c(a)(11). 

5 In contrast to FINRA’s current research rules, 

SEC Regulation Analyst Certification (‘‘Regulation 

AC’’), the SEC’s primary vehicle to foster objective 

and transparent research, applies to both debt and 

equity research. See 17 CFR 242.500 et seq. 

6NASD Rule 1050 (Registration of Research 

Analysts) and Incorporated NYSE Rule 344 

(Research Analysts and Supervisory Analysts) 

require any person associated with a member and 

who functions as a research analyst to be registered 

as such and pass the Series 86 and 87 exams, unless 

an exemption applies. FINRA is considering 

whether debt research analysts also should be 

subject to the same or a similar qualification 

requirement. 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

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

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

CBOE–2014–086 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street NE., 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–CBOE–2014–086. This file 

number should be included on the 

subject line if email is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

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

rules/sro.shtml ). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

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

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE., 

Washington, DC 20549, on official 

business days between the hours of 

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

filing also will be available for 

inspection and copying at the principal 

office of the Exchange. All comments 

received will be posted without change; 

the Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR–CBOE– 

2014–086 and should be submitted on 

or before December 15, 2014. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.12

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2014–27702 Filed 11–21–14; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–73623; File No. SR–FINRA– 

2014–048] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Notice of Filing of a 

Proposed Rule Change To Adopt 

FINRA Rule 2242 (Debt Research 

Analysts and Debt Research Reports) 

November 18, 2014. 

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

Securities Exchange Act of 1934 

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

notice is hereby given that on November 

14, 2014, Financial Industry Regulatory 

Authority, Inc. (‘‘FINRA’’) filed with the 

Securities and Exchange Commission 

(‘‘SEC’’ or ‘‘Commission’’) the proposed 

rule change as described in Items I, II, 

and III below, which Items have been 

prepared by FINRA. The Commission is 

publishing this notice to solicit 

comments on the proposed rule change 

from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

FINRA is proposing to 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 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. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, 

FINRA included statements concerning 

the purpose of and basis for the 

proposed rule change and discussed any 

comments it received on the proposed 

rule change. The text of these statements 

may be examined at the places specified 

in Item IV below. FINRA has prepared 

summaries, set forth in sections A, B, 

and C below, of the most significant 

aspects of such statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

Background 

The proposed rule change would 

adopt FINRA Rule 2242 to address 

conflicts of interest relating to the 

publication and distribution of debt 

research reports. Proposed FINRA Rule 

2242 would adopt a tiered approach 

that, 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 differences in 

the trading of debt securities.3

Currently, FINRA’s research rules, 

NASD Rule 2711 (Research Analysts 

and Research Reports) and Incorporated 

NYSE Rule 472 (Communications with 

the Public) (the ‘‘equity research rules’’), 

set forth requirements to foster 

objectivity and transparency in equity 

research and provide investors with 

more reliable and useful information to 

make investment decisions. The equity 

research rules apply only to research 

reports that include analysis of an 

‘‘equity security,’’ as that term is 

defined under the Exchange Act,4

subject to certain exceptions.5 The 

equity research rules were intended to 

restore public confidence in the 

objectivity of research and the veracity 

of research analysts, who are expected 

to function as unbiased intermediaries 

between issuers and the investors who 

buy and sell those issuers’ securities.6

The integrity of research had eroded due 

to the pervasive influences of 

investment banking and other conflicts 

during the market boom of the late 

1990s. 

In general, the equity research rules 

require disclosure of conflicts of interest 


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69906 Federal Register / Vol. 79, No. 226 / Monday, November 24, 2014 / Notices 

7 15 U.S.C. 78o–6. 

8 Joint Report by NASD and the NYSE on the 

Operation and Effectiveness of the Research 

Analyst Conflict of Interest Rules (December 2005), 

available at http://www.finra.org/web/groups/

industry/@ip/@issues/@rar/documents/industry/

p015803.pdf. 

9United States Government Accountability 

Office, Securities Research, Additional Actions 

Could Improve Regulatory Oversight of Analyst 

Conflicts of Interest, January 2012. 

10The basis for the recommended changes to the 

equity research rules is described in more detail in 

the equity research filing. See supra note 3. 

11 In 2005, the BMA merged with the Securities 

Industry Association (‘‘SIA’’) to form the Securities 

Industry and Financial Markets Association 

(‘‘SIFMA’’). 

12Notice to Members 06–36 (July 2006). 

13As noted in the 2005 report, FINRA believes 

that the anti-fraud statutes, as well as existing 

FINRA rules, such as the requirement in FINRA 

Rule 2010 (Standards of Commercial Honor and 

Principles of Trade) that members, in the conduct 

of their business, ‘‘observe high standards of 

commercial honor and just and equitable principles 

of trade,’’ can reach any egregious conduct 

involving fixed-income research. 

14The 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). 

in research reports and public 

appearances by research analysts. The 

equity research rules further prohibit 

conflicted conduct—investment banking 

personnel involvement in the content of 

research reports and determination of 

analyst compensation, for example— 

where the conflicts are too pronounced 

to be cured by disclosure. Several 

requirements in the equity research 

rules implement provisions of the 

Sarbanes-Oxley Act of 2002 (‘‘SarbanesOxley’’), which mandates separation 

between research and investment 

banking, proscribes conduct that could 

compromise a research analyst’s 

objectivity and requires specific 

disclosures in research reports and 

public appearances.7 The SarbanesOxley research provisions do not apply 

to debt research. 

In December 2005, in response to a 

Commission Order, FINRA and NYSE 

Regulation, Inc. (‘‘NYSE’’) submitted to 

the Commission a joint report on the 

operation and effectiveness of the 

research analyst conflict of interest rules 

(the ‘‘Joint Report’’).8 Among other 

things, the Joint Report analyzed the 

impact of the equity research rules 

based on academic studies, media 

reports and commentary. The Joint 

Report concluded that the equity 

research rules have been effective in 

helping to restore integrity to research 

by minimizing the influence of 

investment banking and promoting 

transparency of other potential conflicts 

of interest. Evidence from academic 

studies, among other sources, further 

suggested that investors are benefiting 

from more balanced and accurate 

research to aid their investment 

decisions. A January 2012 GAO report 

on securities research (‘‘GAO Report’’) 

also concluded that empirical studies 

suggest the rules have resulted in 

increased equity analyst independence 

and weakened the influence of conflicts 

of interest on analyst 

recommendations.9

The Joint Report also recommended 

changes to the equity research rules to 

strike a better balance between ensuring 

objective and reliable research on the 

one hand, and permitting the flow of 

information to investors and minimizing 

costs and burdens to members on the 

other.10 The proposed rule change is 

informed by FINRA’s experience with 

and the effectiveness of the equity 

research rules and incorporates many of 

the findings and recommendations from 

the Joint Report. 

A number of events and 

circumstances contributed to FINRA’s 

determination that a dedicated debt 

research rule is needed to further 

investor protection. In 2004, the Bond 

Market Association (‘‘BMA’’) published 

its Guiding Principles to Promote the 

Integrity of Fixed Income Research 

(‘‘Guiding Principles’’),11 a set of 

voluntary guidelines intended to foster 

management and transparency of 

conflicts of interest with respect to debt 

research. The Guiding Principles 

acknowledge that potential conflicts of 

interest could arise in the preparation of 

debt research, and many of the 

principles to maintain integrity of debt 

research hew closely to the equity 

research rule requirements. The Guiding 

Principles also reflect what the BMA 

asserted are several significant 

differences in the role and impact of 

research on the equity and fixed income 

markets, as well as differences in 

research regarding individual fixedincome asset classes. For example, the 

BMA contended that the prices of debt 

securities were less sensitive to the 

views of research analysts and that the 

major rating agencies provided a reliable 

source of independent information for 

the debt markets. It also asserted that 

most debt research was provided to 

sophisticated market participants for 

which it serves as one of many sources 

of information to consider when making 

an investment decision. 

The Joint Report discussed the need 

for rules to govern debt research 

distribution. NASD and NYSE indicated 

that they would examine the extent to 

which firms voluntarily adopted the 

Guiding Principles and would consider 

further rulemaking after assessing the 

effectiveness of voluntary compliance. 

The Joint Report noted that the antifraud statutes and existing NASD and 

NYSE broad ethical rules could reach 

instances of misconduct involving debt 

research. NASD and NYSE subsequently 

surveyed a selection of firms’ debt 

research supervisory systems and found 

many instances where firms failed to 

adhere to the Guiding Principles. More 

significantly, NASD and NYSE found 

cases where firms lacked any policies 

and procedures to manage debt research 

conflicts to ensure compliance with 

applicable ethical and anti-fraud rules. 

Those findings were published in 

Notice to Members 06–36,12 where 

FINRA expressly noted that it would 

continue to consider more definitive 

rulemaking that might differ from or 

expand on the Guiding Principles.13

Following publication of its findings 

in 2006, FINRA continued to examine 

whether firms had implemented and 

enforced supervisory policies and 

procedures to promote the integrity of 

debt research and address attendant 

conflicts of interest. As noted in the 

GAO Report, between 2005 and 2010, 

FINRA conducted 55 such examinations 

and found deficiencies involving 

inadequate supervisory procedures to 

manage debt research conflicts or failure 

to disclose such conflicts in 11 (20%) 

examinations. The GAO Report stated 

that most market participants and 

observers that the GAO interviewed 

‘‘acknowledged that additional 

rulemaking is needed to protect 

investors, particularly retail investors.’’ 

The GAO Report concluded that ‘‘until 

FINRA adopts a fixed-income research 

rule, investors continue to face a 

potential risk.’’ 

Following the consolidation of NASD 

and the member regulatory functions of 

NYSE Regulation, Inc. into FINRA, and 

as part of the process to develop the 

consolidated FINRA rulebook,14 FINRA 

conducted a comprehensive review of 

all of its research rules and considered 

the appropriateness of adopting a 

dedicated rule to address potential 

conflicts of interest in the publication 

and distribution of debt research 

reports. In addition to its examination 

findings, and later, the conclusions of 

the GAO Report, several other factors 

also weighed in FINRA’s decision to 

propose dedicated debt research conflict 

of interest rules. Misconduct in the sale 

of auction rate securities (i.e., debt 


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Federal Register / Vol. 79, No. 226 / Monday, November 24, 2014 / Notices 69907 

15See e.g., SEC Finalizes ARS Settlements With 

Bank of America, RBC and Deutsch Bank, Litigation 

Release No. 21066, 2009 SEC LEXIS 1799 (June 3, 

2009); SEC Finalizes ARS Settlement With 

Wachovia, Litigation Release No. 20885, 2009 SEC 

LEXIS 282 (February 5, 2009); SEC Finalizes 

Settlements With Citigroup and UBS, Litigation 

Release No. 20824, 2008 WL 5189517 (December 

11, 2008). 

16See Regulatory Notice 11–11 (March 2011), 

available at http://www.finra.org/web/groups/

industry/@ip/@reg/@notice/documents/notices/

p123296.pdf. 

17See supra notes 8 and 9. 

18FINRA notes that the proposed rule change 

differs from the current equity rules in some other 

respects, including not incorporating the quiet 

periods and restrictions on pre-IPO share 

ownership. FINRA believes that the different nature 

and trading of debt securities, as discussed in detail 

above, does not necessitate the restrictions in the 

context of debt research. We further note that the 

quiet periods in the equity rules are mandated by 

Sarbanes-Oxley and that FINRA has proposed to 

reduce or eliminate those quiet periods, consistent 

with Sarbanes-Oxley, in the proposed equity rules. 

traders pressured research analysts to 

help prop up the market with optimistic 

research) demonstrates that potential 

conflicts of interest in the publication 

and distribution of debt research can 

exist just as they do for equity 

research.15 Also, the reliability of credit 

agency ratings was called into question 

during the financial crisis that began in 

2008. Furthermore, the Dodd-Frank 

legislation in response to that crisis has 

resulted in rules by the Commodity 

Futures Trading Commission (‘‘CFTC’’) 

to govern conflicts of interest regarding 

non-security-based swaps and 

commodities research, and the SEC has 

proposed rules that would require 

security-based swap dealers and major 

security-based swap participants to 

adopt written policies and procedures to 

address conflicts related to securitybased swaps and research. Based on the 

foregoing considerations, and consistent 

with the regulatory trend to require 

mitigation and transparency of conflicts 

related to all types of investment 

research, FINRA believes it necessary 

and appropriate to provide better 

protections to recipients of debt 

research, particularly less sophisticated 

investors. FINRA’s belief is buttressed 

by observations of retail investment in 

debt securities. For example, FINRA 

TRACE data shows that from 2007 

through 2013, retail-sized transactions 

(defined to mean trades with a face 

value of less than $100,000) in corporate 

bonds increased approximately 97 

percent to about 16,000 daily trades. 

In developing the proposed rule 

change, FINRA recognized that the debt 

markets operate differently from the 

equity markets in some respects. Several 

of the differences were noted by the 

BMA in the release accompanying the 

Guiding Principles. For example, the 

debt markets feature a number of 

different asset classes (e.g., corporate, 

high yield, mortgage backed and assetbacked) with unique characteristics. 

Within each class, there are typically 

many issues with similar terms, creating 

a fungibility of securities that doesn’t 

exist to the same extent in the equity 

markets. As the BMA noted, these 

securities are often priced in relation to 

benchmark securities or interest rate 

measures, and their prices tend to 

depend more on interest rate 

movements and other macroeconomic 

factors than issuer fundamentals, 

although an issuer’s ability to service its 

debt remains an important factor. As a 

result of these dynamics, it is less likely 

that a debt research report will 

influence the price of a subject 

company’s debt securities than an 

equity report will impact the price of 

that company’s equity securities. Also, 

while retail and institutional market 

participants invest in both equity and 

debt securities, relative to the equity 

markets, the debt markets are dominated 

by institutional market participants. 

The nature of the debt markets has 

resulted in several different types of 

debt research. There is debt research 

that focuses on the creditworthiness of 

an issuer or its individual debt 

securities. Debt research reports on 

individual debt securities may look at 

the relative value of those securities 

compared to similar securities of other 

issuers. Some debt research compares 

debt asset classes or issues within those 

asset classes. And in light of the 

importance of interest rates on the price 

of debt securities, much of the research 

related to debt analyzes macroeconomic 

factors, monetary policy and economic 

events without reference to particular 

assets classes or securities. While much 

of this research is prepared by a 

dedicated research department, FINRA 

also understands that trading desks 

generate market color, analysis and 

trading ideas, sometimes known as 

‘‘trader commentary,’’ geared towards 

institutional customers. FINRA 

understands from those participants that 

they value timely information from the 

trading desk and incorporate that 

information into their own analysis 

when making an investment decision 

about debt securities. As discussed in 

more detail below, the tiered structure 

of the proposed rule change and the 

definition of ‘‘debt research report’’ are 

intended to recognize these different 

forms of debt research and to 

accommodate the needs of the 

institutional market participants. 

In a concept proposal published in 

Regulatory Notice 11–11,16 FINRA first 

sought to gather additional information 

on differences between debt and equity 

research and the most appropriate rules 

to protect recipients of debt research. 

FINRA subsequently published two rule 

proposals in Regulatory Notice 12–09 

and Regulatory Notice 12–42, each 

refining the previous proposal in 

response to comments. 

The proposed rule change reflects 

feedback from those proposals and 

extensive discussions with industry 

participants. This proposal is narrowly 

tailored to achieve the regulatory 

objective to foster objectivity and 

transparency in debt research, 

particularly for retail investors, and to 

provide more reliable and useful 

information for investors to make 

investment decisions. 

The proposed rule change adopts a 

substantial portion of the equity 

research rules and their basic framework 

for debt research distributed to retail 

investors. The equity research rules 

have proven to be effective in mitigating 

conflicts of interest in the publication 

and distribution of equity research.17

Notwithstanding the differences in the 

operation of the equity and debt markets 

noted above, FINRA believes that many 

of the conflicts of interest in the 

publication and distribution of equity 

research are also present in debt 

research. Therefore, FINRA believes it 

reasonable generally to apply the same 

standards to address these conflicts for 

recipients of debt research reports. 

Moreover, FINRA believes that both 

investors and firms’ compliance systems 

would benefit from consistency between 

those rules. 

As noted above, the proposed rule 

change adopts 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. 

Proposed FINRA Rule 2242 would differ 

from FINRA’s current equity research 

rules in three key respects.18 First, the 

proposed rule change would delineate 

the prohibited and permissible 

communications between debt research 

analysts and principal trading and sales 

and trading personnel. These 

restrictions take into account the need 

to ration a debt research analyst’s 

resources among the multitude of debt 

securities, the limitations on price 

discovery in the debt markets, and the 

need for trading personnel to perform 

credit risk analyses with respect to 


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69908 Federal Register / Vol. 79, No. 226 / Monday, November 24, 2014 / Notices 

19See proposed FINRA Rule 2242(a) for all of the 

proposed defined terms. 

20The proposed rule change also adopts defined 

terms to implement the tiered structure of proposed 

FINRA Rule 2242, including the terms ‘‘qualified 

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

description of an institutional investor for purposes 

of the Rule, and ‘‘retail investor.’’ A detailed 

discussion of these definitions and the tiered 

structure of the proposed rule is available at pages 

89 through 95. 

21See proposed FINRA Rule 2242(a)(1). 

22See 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. 

23See 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. 

24 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. 

current and prospective inventory. 

Second, the proposed rule change 

would exempt debt research provided 

solely to institutional investors from 

many of the structural protections and 

prescriptive disclosure requirements 

that apply to research reports 

distributed to retail investors. FINRA 

believes that this tiered approach is 

appropriate as it recognizes the needs of 

institutional market participants who 

rely on timely market color, trading 

strategies and other communications 

from the trading desk. Third, in addition 

to the exemption for limited investment 

banking activity found in the current 

and proposed equity research rules, the 

proposed rule change has a similar 

additional exemption for limited 

principal trading activity. The proposed 

rule change, in general, would exempt 

members that engage in limited 

investment banking activity or those 

with limited principal trading activity 

and revenues generated from debt 

trading from the review, supervision, 

budget, and compensation provisions in 

the proposed rule related to investment 

banking activity or principal trading 

activity, respectively. 

Like the equity research rules, the 

proposed rule change is intended to 

foster objectivity and transparency in 

debt research and to provide investors 

with more reliable and useful 

information to make investment 

decisions. The proposed rule change is 

set forth in detail below. 

Proposed FINRA Rule 2242 

Definitions 

The proposed rule change would 

adopt defined terms for purposes of 

proposed FINRA Rule 2242.19 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.20

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.’’ 21 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.22

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).23

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.’’ 24

Communications that constitute 

statutory prospectuses that are filed as 

part of the registration statement would 

not be included in the definition of a 

debt research report. In general, the term 

debt research report also would not 

include 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 


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Federal Register / Vol. 79, No. 226 / Monday, November 24, 2014 / Notices 69909 

25See proposed FINRA Rule 2242(a)(4). 26The Commission’s rulemaking in the area of 

security-based swaps, pursuant to Title VII of the 

Dodd-Frank Wall Street Reform and Consumer 

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

In June 2011, the Commission proposed rules 

addressing policies and procedures with respect to 

research and analysis for security-based swaps as 

part of its proposal governing business conduct 

standards for security-based swap dealers and major 

security-based swap participants. See Securities 

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

FR 42396 (July 18, 2011) (Business Conduct 

Standards for Security-Based Swap Dealers and 

Major Security-Based Swap Participants). In June 

2012, the Commission staff sought comment on a 

statement of general policy for the sequencing of 

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

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

2012) (Statement of General Policy on the 

Sequencing of the Compliance Dates for Final Rules 

Applicable to Security-Based Swaps Adopted 

Pursuant to the Securities Exchange Act of 1934 

and the Dodd-Frank Wall Street Reform and 

Consumer Protection Act). In May 2013, the 

Commission re-opened comment on the statement 

of general policy and on the outstanding 

rulemaking releases. The comment period was 

reopened until July 22, 2013. See Securities 

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

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

Periods for Certain Proposed Rulemaking Releases 

and Policy Statements Applicable to Security-Based 

Swaps). 

27See proposed FINRA Rule 2242(a)(5). 

28See proposed FINRA Rule 2242(a)(6). 

29See proposed FINRA Rule 2242(a)(8). 

30See proposed FINRA Rule 2242(a)(9). The 

current definition in NASD Rule 2711 includes, 

without limitation, many common types of 

investment banking services. The proposed rule 

change and the equity research filing propose to 

add the language ‘‘or otherwise acting in 

furtherance of’’ either a public or private offering 

to further emphasize that the term ‘‘investment 

banking services’’ is meant to be construed broadly. 

31See proposed FINRA Rule 2242(a)(10). 

32See proposed FINRA Rule 2242(a)(11). 

33See proposed FINRA Rule 2242(a)(12). 

34See proposed FINRA Rule 2242(a)(14). 

35See proposed FINRA Rule 2242(a)(15). 

36See proposed FINRA Rule 2242(a)(16). 

37See proposed FINRA Rule 2242(b)(1). 

‘‘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 

6710.25 The proposed definition 

excludes municipal securities, in part 

because of FINRA’s jurisdictional 

limitations with respect to such 

securities. The proposed definition 

excludes security-based swaps given the 

nascent and evolving nature of securitybased swap regulation.26 However, 

FINRA intends to monitor regulatory 

developments with respect to securitybased swaps and may determine to later 

include such securities in the definition 

of debt security. 

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.27

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.28

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.29 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 

otherwise acting in furtherance of a 

private offering of the issuer.30

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.31 This term would 

not include an unrelated person who 

shares the same residence as a debt 

research analyst, provided that the debt 

research analyst and unrelated person 

are financially independent of one 

another. 

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.32 This term shall not 

include a password protected webcast, 

conference call or similar event with 15 

or more existing customers, provided 

that all of the event participants 

previously received the most current 

debt research report or other 

documentation that contains the 

required applicable disclosures, and 

that the debt research analyst appearing 

at the event corrects and updates during 

the event any disclosures in the debt 

research report that are inaccurate, 

misleading or no longer applicable. 

Under the proposed rule change the 

term ‘‘qualified institutional buyer’’ has 

the same meaning as under Rule 144A 

of the Securities Act.33

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.34 The proposed rule change 

would define the term ‘‘subject 

company’’ as the company whose debt 

securities are the subject of a debt 

research report or a public 

appearance.35 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.36

Identifying and Managing Conflicts of 

Interest 

Similar to the proposed equity 

research rules, the proposed rule change 

contains an overarching provision that 

would require members to establish, 

maintain and enforce written policies 

and procedures reasonably designed to 

identify and effectively manage conflicts 

of interest related to the preparation, 

content and distribution of debt 

research reports, public appearances by 

debt research analysts, and the 

interaction between debt research 

analysts and persons outside of the 

research department, including 

investment banking, sales and trading 

and principal trading personnel, subject 

companies and customers.37 The 

proposed rule change then sets forth 

minimum requirements for those 

written policies and procedures. These 

provisions set out the fundamental 

obligation for a member to establish and 

maintain a system to identify and 

mitigate conflicts to foster integrity and 

fairness in its debt research products 

and services. The provisions are also 

intended to require firms to be more 

proactive in identifying and managing 

conflicts as new research products, 

affiliations and distribution methods 

emerge. This approach allows for some 

flexibility to manage identified 

conflicts, with some specified 

prohibitions and restrictions where 


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38Among the structural safeguards, FINRA 

believes separation between investment banking 

and debt research, and between sales and trading 

and principal trading and debt research, is of 

particular importance. As such, while the proposed 

rule change does not mandate physical separation 

between the debt research department and the 

investment banking, sales and trading and principal 

trading departments (or other person who might 

seek to influence research analysts), FINRA would 

expect such physical separation except in 

extraordinary circumstances where the costs are 

unreasonable due to a firm’s size and resource 

limitations. In those instances, a firm must 

implement written policies and procedures, 

including information barriers, to effectively 

achieve and monitor separation between debt 

research and investment banking, sales and trading 

and principal trading personnel. 

39See NASD Rule 3010, recently adopted with 

changes as a consolidated FINRA rule by Securities 

Exchange Act Release No. 71179 (December 23, 

2013), 78 FR 79542 (December 30, 2013) (Order 

Approving File No. SR–FINRA–2013–025). The 

consolidated rule becomes effective December 1, 

2014. FINRA notes that the policies and procedures 

approach is consistent with the effective practices 

highlighted by FINRA in its Report on Conflicts of 

Interest, among them that firms should implement 

a robust conflicts management framework that 

includes structures, processes and policies to 

identify and manage conflicts of interest. See Report 

on Conflicts of Interest, FINRA (October 2013) at 5, 

available at http://www.finra.org/web/groups/

industry/@ip/@reg/@guide/documents/industry/

p359971.pdf. The proposed changes also help to 

harmonize with approaches in international 

jurisdictions, such as the rules of the Financial 

Conduct Authority in the United Kingdom. See 

COBS 12.2.5 R, The Financial Conduct Authority 

Handbook, available at http://fshandbook.info/FS/

html/handbook/COBS/12/2. 

40See proposed FINRA Rule 2242(b)(2). 

41See proposed FINRA Rule 2242(b)(2)(A) and 

(B). Thus, a firm must specify in its policies and 

procedures the circumstances, if any, where 

prepublication review would be permitted as 

necessary and appropriate pursuant to proposed 

FINRA Rule 2242(b)(2)(B); for example, where nonresearch personnel are best situated to verify select 

facts or where administrative personnel review for 

formatting. FINRA notes that members still would 

be subject to the overarching requirement to have 

policies and procedures reasonably designed to 

effectively manage conflicts of interest between 

research analysts and those outside of the research 

department. See also proposed FINRA Rule 2242.05 

(Submission of Sections of a Draft Research Report 

for Factual Review). 

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

43See proposed FINRA Rule 2242.05 (Submission 

of Sections of a Draft Research Report for Factual 

Review). 44See proposed FINRA Rule 2242(b)(2)(C). 45See proposed FINRA Rule 2242(b)(2)(L). 

disclosure does not adequately mitigate 

them. Most of the minimum 

requirements have been experience 

tested and found effective in the equity 

research rules. 

In general, the proposed rule change 

adopts, with slight modifications, the 

structural safeguards that the Joint 

Report found effective to promote 

analyst independence and objective 

research in the equity research rules, but 

in the form of mandated policies and 

procedures with some baseline 

proscriptions.38 FINRA believes this 

approach will impose less cost than a 

pure prescriptive approach by requiring 

members to adopt a compliance system 

that aligns with their particular 

structure, business model and 

philosophy. FINRA notes that the 

approach is consistent with FINRA’s 

general supervision rule, which 

similarly provides firms flexibility to 

establish and maintain supervisory 

programs best suited to their business 

models, reasonably designed to achieve 

compliance with applicable federal 

securities law and regulations and 

FINRA rules.39 The proposed rule 

change introduces a distinction between 

sales and trading personnel— 

institutional sales representatives and 

sales traders—and persons engaged in 

principal trading activities, where the 

conflicts addressed by the proposal are 

of most concern. 

Specifically, members must 

implement written policies and 

procedures reasonably designed to 

promote objective and reliable debt 

research that reflects the truly held 

opinions of debt research analysts and 

to prevent the use of debt research 

reports or debt research analysts to 

manipulate or condition the market or 

favor the interests of the firm or current 

or prospective customers or class of 

customers.40 Such policies and 

procedures must, at a minimum, 

address the following. 

Prepublication Review 

The required policies and procedures 

must, at a minimum, be reasonably 

designed to prohibit prepublication 

review, clearance or approval of debt 

research by persons involved in 

investment banking, sales and trading or 

principal trading, and either restrict or 

prohibit such review, clearance and 

approval by other non-research 

personnel other than legal and 

compliance.41 The policies and 

procedures also must prohibit 

prepublication review of a debt research 

report by a subject company, other than 

for verification of facts.42 Similar 

provisions in the equity rules have 

proven effective to ensure independence 

of the research department, and FINRA 

believes that the objectivity of debt 

research could be compromised to the 

extent conflicted persons, e.g., those 

involved in investment banking and 

trading activities, have an opportunity 

to review and comment on the content 

of a debt research report. The proposed 

rule change would allow limited review 

by the subject company because it is 

sometimes in a unique position to verify 

facts; otherwise, FINRA believes 

research analysts should confirm that 

purported facts are based on other 

reliable information. The proposed rule 

change allows sections of a draft debt 

research report to be provided to noninvestment 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.43

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.44

However, as discussed below, 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. 

FINRA believes this provision strikes an 

appropriate balance by allowing input 

of customer interests in determining the 

allocation of limited research resources 

to a wide range of debt securities, while 

preserving the final decisions for 

research management. 

Solicitation and Marketing of 

Investment Banking Transactions 

A member’s written policies and 

procedures also must, at a minimum, 

restrict or limit activities by debt 

research analysts that can reasonably be 

expected to compromise their 

objectivity.45 This includes prohibiting 

participation in pitches and other 

solicitations of investment banking 


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46See proposed FINRA Rule 2242.01 (Efforts to 

Solicit Investment Banking Business). 

47See NASD Notice to Members 07–04 (January 

2007) and NYSE Information Memo 07–11 (January 

2007). 

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

49See proposed FINRA Rule 2242.02(a) 

(Restrictions on Communications with Customers 

and Internal Personnel). 

50See proposed FINRA Rule 2242(b)(2)(D). The 

provision is substantively the same as current 

NASD Rule 2711(b)(1), a core structural separation 

requirement in the equity research rules that FINRA 

believes is essential to safeguarding analyst 

objectivity. 

51See proposed FINRA Rule 2242(b)(2)(H). 

52See proposed FINRA Rule 2242(b)(2)(E). 

53See proposed FINRA Rule 2242(b)(2)(D) and 

(F). 

54See proposed FINRA Rule 2242(b)(2)(G). 

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.46 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. FINRA notes that, consistent 

with existing guidance on the equity 

research rules, debt research analysts 

may listen to or view a live webcast of 

a transaction-related road show or other 

widely attended presentation by 

investment banking to investors or the 

sales force from a remote location, or 

another room if they are in the same 

location.47

The proposed rule change also would 

prohibit investment banking personnel 

from directing debt research analysts to 

engage in sales or marketing efforts 

related to an investment banking 

services transaction or any 

communication with a current or 

prospective customer about an 

investment banking services 

transaction.48 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.49 FINRA believes that the 

presence of investment bankers or issuer 

management could compromise a debt 

research analyst’s candor when talking 

to a current or prospective customer 

about a deal. 

FINRA believes that the role of any 

research analyst, debt or equity, is to 

provide unbiased analysis of issuers and 

their securities for the benefit of 

investors, not to help win business for 

their firms or market transactions on 

behalf of issuers. FINRA believes the 

prohibitions in these provisions, which 

have been a cornerstone of the equity 

research rules, are equally important to 

mitigate significant conflicts between 

investment banking and debt research 

analysts. 

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.50 In addition, they further 

must establish information barriers or 

other institutional safeguards to ensure 

that debt research analysts are insulated 

from the review, pressure or oversight 

by persons engaged in investment 

banking services, principal trading or 

sales and trading activities or others 

who might be biased in their judgment 

or supervision.51

The requirement for information 

barriers or other institutional safeguards 

to insulate research analysts from 

pressure is taken from Sarbanes-Oxley, 

which applies only to research reports 

on equity securities. FINRA believes 

this provision has equal application to 

debt research reports and that firms 

must not allow supervision or influence 

by anyone in the firm outside of the 

research department whose interests 

may be at odds with producing objective 

research. FINRA believes that 

independence for debt research analysts 

requires effective separation from those 

whose economic interests may be in 

conflict with the content of debt 

research. The proposed rule change 

furthers that separation by prohibiting 

oversight of debt research analysts by 

those involved in investment banking or 

trading activities. 

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.52 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. FINRA believes the budget 

provisions strike a reasonable balance 

by prohibiting final budget 

determinations by those persons most 

conflicted, but allowing input from all 

persons and consideration of revenues 

other than investment banking to best 

allocate scarce budget resources. 

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.53 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.54 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 


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55See proposed FINRA Rule 2242(b)(2)(D) and 

(G). 

56See proposed FINRA Rule 2242(b)(2)(J). 

57See proposed FINRA Rule 2242.07 (Ability to 

Influence the Content of a Research Report) would 

provide that for the purposes of the rule, an 

associated person with the ability to influence the 

content of a debt research report is an associated 

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

duties, has the authority to review the debt research 

report and change that debt research report prior to 

publication or distribution. 58See proposed FINRA Rule 2242.10. 

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

provision is not intended to limit a member’s 

authority to discipline or terminate a debt research 

analyst, in accordance with the member’s written 

policies and procedures, for any cause other than 

writing an adverse, negative, or otherwise 

unfavorable research report or for making similar 

comments during a public appearance. 

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

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

62See proposed FINRA Rule 2242.09 (Joint Due 

Diligence). 

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.55 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. 

The compensation provisions are 

similar to those that have proven 

effective in the equity research rules. 

However, the separation extends to not 

only investment banking, but also those 

engaged in principal trading activities, 

because such persons have the most 

pronounced conflict with respect to 

debt research. FINRA believes that the 

compensation determination is a key 

source of influence on the content of 

debt research reports and therefore it is 

important to require both separation 

from those who might influence 

research analysts and consideration of 

the quality of the research produced in 

making that determination. 

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.56

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.57

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.58 This 

provision is intended to provide a 

mechanism by which a firm’s analysts 

can divest their holdings to comply with 

a more restrictive personal trading 

policy without violating the trading 

against recommendation provision in 

circumstances where an analyst has, for 

example, a ‘‘buy’’ rating on a subject 

company or debt security. 

FINRA believes these provisions will 

protect investors by prohibiting research 

analysts and those with an ability to 

influence the content of research 

reports, such as supervisors, from 

trading ahead of their customers based 

on knowledge that may move the market 

once made public. FINRA further 

believes the provisions, in general, will 

promote objective research by requiring 

consistency between personal trading by 

research analysts and recommendations 

to customers. 

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.59 FINRA believes it is 

essential to a research analyst’s 

independence and objectivity that no 

person employed by the member that is 

in a position to retaliate or threaten to 

retaliate should be permitted to do so 

based on the content of a research report 

or public appearance. The policies and 

procedures also must prohibit explicit 

or implicit promises of favorable debt 

research, specific research content or a 

specific rating or recommendation as 

inducement for the receipt of business 

or compensation.60 This provision is 

also key to preserving the integrity of 

debt research and the independence of 

debt research analysts, who otherwise 

may feel pressure to tailor the content 

of debt research to the business interests 

of the firm. 

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, banking and subject 

companies,61 to prohibit the 

performance of joint due diligence prior 

to the selection of underwriters for the 

investment banking services 

transaction.62 FINRA understands that 

in some instances, due diligence 

activities take place even before an 

issuer has awarded the mandate to 

manage or co-manage an offering. There 

is heightened risk in those 

circumstances that investment bankers 

may pressure analysts to produce 

favorable research that may bolster the 

firm’s bid to become an underwriter for 

the offering. Once the mandate has been 

awarded, FINRA believes joint due 

diligence may take place in accordance 


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

(Information Barriers between Research Analysts 

and Trading Desk Personnel). 

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

(Information Barriers between Research Analysts 

and Trading Desk Personnel). 

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

(Information Barriers between Research Analysts 

and Trading Desk Personnel). 66See proposed FINRA Rule 2242.03(b)(2) 

(Information Barriers between Research Analysts 

and Trading Desk Personnel). 

67See proposed FINRA Rule 2242.03(b)(3) 

(Information Barriers between Research Analysts 

and Trading Desk Personnel). 

68See proposed FINRA Rule 2242.03(b)(4) 

(Information Barriers between Research Analysts 

and Trading Desk Personnel). 

69See proposed FINRA Rule 2242.03(c) 

(Information Barriers between Research Analysts 

and Trading Desk Personnel). 

70See proposed FINRA Rule 2242.02(b) 

(Restrictions on Communications with Customers 

and Internal Personnel). 

71See proposed FINRA Rule 2242.02(a) 

(Restrictions on Communications with Customers 

and Internal Personnel). 

with appropriate written policies and 

procedures to guard against interactions 

to further the interests of the investment 

banking department. At that time, 

FINRA believes that the efficiencies of 

joint due diligence outweigh the risk of 

pressure on debt research analysts by 

investment banking. 

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.63 It would 

further prohibit debt research analysts 

from identifying or recommending 

specific potential trading transactions to 

sales and trading or principal trading 

personnel that are inconsistent with 

such debt research analyst’s currently 

published debt research reports or from 

disclosing the timing of, or material 

investment conclusions in, a pending 

debt research report.64 The 

communications prohibited under the 

proposed rule change are intended to 

prevent undue influence on debt 

research analysts to generate or conform 

research to a firm’s proprietary trading 

interests or those of particular 

customers. FINRA believes that these 

prohibitions are necessary to mitigate a 

significant conflict between firms and 

their customers. 

However, FINRA understands that 

certain communications between debt 

research analysts and trading desk 

personnel are essential to the discharge 

of their functions, e.g., debt research 

analysts need to obtain from trading 

personnel information relevant to a 

valuation analysis and trading 

personnel need to obtain from debt 

research analysts information regarding 

the creditworthiness of an issuer. These 

departments also must communicate 

regarding coverage decisions, given the 

large number of debt instruments. 

Therefore, the proposed rule change 

would permit sales and trading and 

principal trading personnel to 

communicate customers’ interests to a 

debt research analyst, so long as the 

debt research analyst does not respond 

by publishing debt research for the 

purpose of benefiting the trading 

position of the firm, a customer or a 

class of customers.65 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.66

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.67 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.68

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.69

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.70

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. These provisions are 

intended to allow debt research analysts 

to educate investors and internal sales 

personnel about an investment banking 

transaction in fair and balanced manner, 

in a setting that promotes candor by the 

debt research analyst.71

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. As discussed above, the equity 

research rules are designed to provide 

investors with useful information on 

which to base their investment 

decisions. FINRA believes retail debt 

investors would benefit from similar 

disclosures applied to debt research 

reports. In addition, FINRA understands 

from industry participants that members 

have systems in place to track the 

disclosures required under the equity 


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72See proposed FINRA Rule 2242(c)(1)(A). 

73See proposed FINRA Rule 2242(c)(1)(B). 

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

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

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

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

78See proposed FINRA Rule 2242(c)(3). 

79See proposed FINRA Rule 2242(c)(4). 

80See also discussion of proposed FINRA Rule 

2242.04 (Disclosure of Compensation Received by 

Affiliates) below. 

81This provision is analogous to the equity 

research rule requirement to disclose market 

making activity. 

82For example, FINRA would consider it to be a 

material conflict of interest if the debt research 

analyst or a member of the debt research analyst’s 

household serves as an officer, director or advisory 

board member of the subject company. 

research rules that can be leveraged to 

meet the debt research disclosure 

requirements in the proposed rule 

change. 

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.72 FINRA has included this 

provision because it believes members 

should have policies and procedures to 

foster verification of facts and 

trustworthy research on which investors 

may rely. 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 method used and a fair 

presentation of the risks that may 

impede achievement of the 

recommendation or rating.73 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.74

Consistent with the equity rules, 

irrespective of the rating system a 

member employs, a member must 

disclose, in each debt research report 

that includes a rating, the percentage of 

all debt securities rated by the member 

to which the member would assign a 

‘‘buy,’’ ‘‘hold’’ or ‘‘sell’’ rating.75 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.76 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.77

If a debt research report contains a 

rating for a subject company’s debt 

security and the member has assigned a 

rating to such debt security for at least 

one year, the debt research report 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.78 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 79 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; 80

• 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; 81

• 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.82

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.’’ In so 

doing, the proposed rule change would 

capture material conflicts of interest 

that, for example, only a supervisor or 

the head of research may be aware of. 

The ‘‘reason to know’’ standard would 

not impose a duty of inquiry on the debt 

research analyst or others who can 

influence the content of a debt research 

report. Rather, it would cover disclosure 

of those conflicts that should reasonably 

be discovered by those persons in the 

ordinary course of discharging their 

functions. 

The proposed equity research rules 

include an additional disclosure if the 

member or its affiliates maintain a 

significant financial interest in the debt 

or equity of the subject company, 

including, at a minimum, if the member 

or its affiliates beneficially own 1% or 

more of any class of common equity 

securities of the subject company. 

FINRA did not include this provision in 

the proposed debt research rule because, 

unlike equity holdings, firms do not 

typically have systems to track 

ownership of debt securities. Moreover, 

the number and complexity of bonds, 

together with the fact that a firm may be 

both long and short different bonds of 

the same issuer, make it difficult to have 

real-time disclosure of a firm’s credit 

exposure. Therefore, the proposed rule 

change only requires disclosure of firm 


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83See proposed FINRA Rules 2242(c)(4)(H) and 

(d)(1)(E). 

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

85See proposed FINRA Rule 2242(c)(6). 

86See proposed FINRA Rule 2242(c)(7). 

87See proposed FINRA Rule 2242.04 (Disclosure 

of Compensation Received by Affiliates). 

88See proposed FINRA Rule 2242(d)(1). 

89See proposed FINRA Rule 2242(d)(2). 

90See proposed FINRA Rule 2242(d)(3). 

91See proposed FINRA Rule 2242(e). 

ownership of debt securities in research 

reports or a public appearance to the 

extent those holdings constitute a 

material conflict of interest.83 While the 

ownership of the equity securities of the 

subject company of a debt research 

report can constitute a conflict of 

interest for the member that publishes 

or distributes the research report, 

FINRA does not believe the conflict 

requires routine disclosure, even above 

some threshold of ownership. This is 

because the impact of a debt research 

report on the market for an equity 

security is more attenuated than that of 

an equity research report. In those 

circumstances where the impact is 

heightened—e.g., a debt research report 

asserting that a subject company may 

not be able to meet its debt service— 

disclosure could be captured by the 

material conflict of interest provision. 

The proposed rule change adopts 

from the equity research rules the 

general exception for disclosure that 

would reveal material non-public 

information regarding specific potential 

future investment banking transactions 

of the subject company.84 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.85

Like the equity research rule, the 

proposed rule change would permit a 

member that distributes a debt research 

report covering six or more companies 

(compendium report) to direct the 

reader in a clear manner to the 

applicable disclosures. Electronic 

compendium reports must include a 

hyperlink to the required disclosures. 

Paper-based compendium reports must 

provide either a toll-free number or a 

postal address to request the required 

disclosures and also may include a web 

address of the member where the 

disclosures can be found.86

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.87 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: 88

• 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 of the 

subject company.89 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 and does not extend to 

conflicts that an associated person with 

the ability to influence the content of a 

research report or public appearance 

knows or has reason to know. FINRA 

understands that supervisors 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.90

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.91

Distribution of Member Research 

Reports 

The proposed rule change, like the 

proposed amendments to the equity 

research rules, codifies an existing 

interpretation of FINRA Rule 2010 

(Standards of Commercial Honor and 

Principles of Trade) and provides 


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92See proposed FINRA Rule 2242(f). 93See proposed FINRA Rule 2242.06 

(Distribution of Member Research Products). 94See proposed FINRA Rule 2242.06 

(Distribution of Member Research Products). A 

member that distributes both institutional and retail 

debt research would be required to inform its retail 

customers of the existence of the institutional debt 

research product and, if applicable, that the product 

may contain different recommendations or ratings 

than its retail debt research product. This disclosure 

need not be in each retail debt research report; 

rather, a member may establish policies and 

procedures reasonably designed to inform retail 

investors of the existence and nature of the 

institutional debt research product. 95See proposed FINRA Rule 2242(g)(1). 

96See proposed FINRA Rule 2242(g)(2). 

97See proposed FINRA Rule 2242(g)(3). 

additional guidance regarding 

selective—or tiered—dissemination of a 

firm’s debt 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.92 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.93

A member, for example, may offer one 

debt research product for those with a 

long-term investment horizon (‘‘investor 

research’’) and a different debt research 

product for those customers with a 

short-term investment horizon (‘‘trading 

research’’). These products may lead to 

different recommendations or ratings, 

provided that each is consistent with 

the meaning of the member’s ratings 

system for each respective product. 

However, a member may not 

differentiate a debt research product 

based on the timing of receipt of a 

recommendation, rating or other 

potentially market moving information, 

nor may a member label a debt research 

product with substantially the same 

content as a different debt research 

product as a means to allow certain 

customers to trade in advance of other 

customers. 

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.94 Thus, 

for example, a member that offers 

trading research must inform its 

investment research customers that its 

trading research product may contain 

different recommendations or ratings 

that could result in short-term price 

movements contrary to the 

recommendation in its investment 

research. FINRA understands, however, 

that customers may actually receive at 

different times research reports 

originally made available at the same 

time because of the mode of delivery 

elected by the customer eligible to 

receive such research services (e.g., in 

paper form versus electronic). However, 

members may not design or implement 

a distribution system intended to give a 

timing advantage to some customers 

over others. FINRA will read with 

interest comments as to whether a 

member should be required to disclose 

to its other customers when an 

alternative research product or service 

does, in fact, contain a recommendation 

contrary to the research product or 

service that those customers receive. 

Distribution of Third-Party Debt 

Research Reports 

FINRA believes that the supervisory 

review and disclosure obligations 

applicable to the distribution of thirdparty equity research should similarly 

apply 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 non-independent 

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 

subject company of a third-party 

research report. FINRA believes that it 

is important that readers be made aware 

of any conflicts of interest present that 

may have influenced either the selection 

or content of third-party research 

disseminated to investors. 

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.95 FINRA 

believes that, where a member is 

distributing or ‘‘pushing-out’’ thirdparty debt research, the member must 

have written policies and procedures to 

vet the quality of the research 

producers. 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 thirdparty 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.96 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, at a 

minimum: 

• 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.97

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 


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98See proposed FINRA Rule 2242(g)(4). 

99See proposed FINRA Rule 2242(g)(5). 

100See proposed FINRA Rule 2242(g)(6). This 

requirement codifies guidance in Notice to 

Members 04–18 (March 2004) related to equity 

research reports. 

101See proposed FINRA Rule 2242.08 

(Obligations of Persons Associated with a Member). 102See proposed FINRA Rule 2242(h). 

103See 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). 

104For 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. 

report.98 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.99

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.100

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. Failure of 

an associated person to comply with 

such policies and procedures shall 

constitute a violation of the proposed 

rule.101 In addition, consistent with 

Rule 0140, the proposed rule states in 

Supplementary Material .08 that it shall 

be a rule violation for an associated 

person to engage in the restricted or 

prohibited conduct to be addressed 

through the establishment, maintenance 

and enforcement of written policies and 

procedures required by provisions of 

FINRA Rule 2242, including applicable 

Supplementary Material, that embed in 

the policies and procedures specific 

obligations on individuals. This 

Supplementary Material reflects 

FINRA’s position that associated 

persons can be held liable for engaging 

in conduct that is proscribed by the 

member under FINRA rules. FINRA is 

clarifying this point in the 

Supplementary Material because the 

proposed rule change would adopt a 

policies and procedures approach to 

restricted and prohibited conduct with 

respect to research in place of specific 

proscriptions in the current equity 

research rules. Thus, for example, where 

the proposed rule requires a member to 

establish policies and procedures to 

prohibit debt research analyst 

participation in road shows, associated 

persons also are directly prohibited 

from engaging in such conduct, even 

where a member has failed to establish 

policies and procedures. FINRA 

believes that it is incumbent upon each 

associated person to familiarize 

themselves with the regulatory 

requirements applicable to his or her 

business and should not be able to avoid 

responsibility where minimum 

standards of conduct have been 

established for members. 

Exemption for Members With Limited 

Investment Banking Activity 

Similar to the equity research rules, 

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.102 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.103 However, the proposed 

rule would require that members with 

limited investment banking activity 

establish information barriers or other 

institutional safeguards 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.104 FINRA believes that 

even where research analysts need not 

be structurally separated from 

investment banking or other nonresearch personnel, they should not be 

subject to pressures that could 

compromise their independence and 

objectivity. 

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 

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). 

FINRA has found the thresholds in 

the current equity rule to be reasonable 

and appropriate: They reduce the 

challenges and costs of compliance for 

select provisions for those firms whose 

limited investment banking business 

significantly reduces the magnitude of 

conflicts that could impact investors. In 

addition, in the context of the equity 

rules, FINRA analyzed data to see if 

changing the magnitude of either or 

both thresholds—the number of 

transactions managed or co-managed or 

the amount of gross revenues generated 

from those transactions—yielded a more 

appropriate universe of exempted firms. 

FINRA reviewed and analyzed deal data 


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105See proposed FINRA Rule 2242(i). 106See 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). 

for calendar years 2009 through 2011. 

FINRA reviewed firms that either 

managed or co-managed deals and 

earned underwriting revenues from 

those transactions during the review 

period. The analysis found that 155 of 

317 such firms—or 49%—would have 

been eligible for the exemption. The 

data further suggested that incremental 

upward adjustments to the exemption 

thresholds would not result in a 

significant number of additional firms 

eligible for the exemption. For example, 

increasing both of the thresholds by 

33% (to 40 transactions managed or comanaged and $20 million in gross 

revenues over a three-year period) 

would result in 18 additional exempted 

firms. As such, FINRA believes the 

current exemption produces a 

reasonable and appropriate universe of 

exempted firms. Since the exemption in 

the equity research rules relates to the 

same investment banking conflicts that 

debt research analysts face, FINRA 

believes the exemption, with its current 

thresholds, is equally reasonable and 

appropriate for the debt research rules. 

Exemption for Limited Principal 

Trading Activity 

FINRA believes it appropriate to 

provide an exemption from some 

provisions of the proposed rule that 

require separation of debt research from 

sales and trading and principal trading 

for firms whose limited principal 

trading operations results in an 

appreciably increased burden of 

compliance relative to the expected 

investor protection benefits. In general, 

FINRA believes that firms with modest 

potential principal trading profits pose 

lower risk of having sales and trading or 

principal trading personnel pressure 

debt analysts, provided other safeguards 

remain in place. The proposed rule 

change therefore 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 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.105 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.106

As with the limited investment 

banking activity exemption, members 

still would be required to establish 

information barriers or other 

institutional safeguards 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). 

In crafting the exemption, FINRA 

sought a rational principal debt trading 

revenue threshold for small firms where 

the conflicts addressed by the proposal 

might be minimized. FINRA further 

considered the ability of firms with 

limited personnel to comply with the 

provisions that require effective 

separation of principal debt trading and 

debt research activities. To those ends, 

FINRA reviewed and analyzed available 

TRACE and FOCUS data, particularly 

with respect to small firms (150 or fewer 

registered representatives). FINRA 

supplemented its analysis with survey 

results from 72 geographically diverse 

small firms that engage in principal debt 

trading in varying magnitudes. The 

survey sought more specific information 

on the nature of the firms’ debt 

trading—the breakdown between 

trading in corporate versus municipal 

securities (which are excepted from the 

proposal) and the amount of ‘‘riskless 

principal’’ trading—as well as the 

number of debt traders, whether any of 

those traders write research or market 

commentary, and the prospective ability 

of firms to comply with the proposal’s 

structural separation requirements. 

Based on the data, FINRA analyzed 

the range of principal debt revenues 

generated by small firms and 

determined that $15 million would be a 

reasonable threshold for the exemption. 

However, because the revenue figure 

represents a net gain or loss (in absolute 

terms) from principal debt trading 

activity, the potential exists that a firm 

with substantial trading operations 

could have an anomalous year that 

yields net revenues under the threshold. 

Therefore, FINRA added as a backstop 

the second criterion of having fewer 

than 10 debt traders, to ensure the 

exemption applies only to firms with 

modest debt trading activity. 

Furthermore, based on the assessment, 

FINRA believes firms with 10 or more 

debt traders are more capable of 

dedicating a debt trader to writing 

research. FINRA notes that only eight of 

the 72 responding survey firms 

indicated that they have debt traders 

that write either research or market 

commentary—which is excepted from 

the definition of ‘‘debt research report’’ 

under the proposal—on debt securities. 

FINRA intends to monitor the research 

produced by firms that avail themselves 

of the exemption to assess whether the 

thresholds to qualify for the exemption 

are appropriate or should be modified. 

Exemption for Debt Research Reports 

Provided to Institutional Investors 

FINRA understands that, unlike in the 

equity market, institutional investors 

trading in debt securities tend to 

interact with broker-dealers in a manner 

more closely resembling that of a 

counterparty than a customer. FINRA 

further understands that these 

institutional investors value the timely 

flow of analysis and trade ideas related 

to debt securities, are aware of the types 

of potential conflicts that may exist 


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107See proposed FINRA Rule 2242(j)(1). 

108See proposed FINRA Rule 2242(a)(13). 

109See proposed FINRA Rule 2242(a)(12) under 

which a QIB has the same meaning as under Rule 

144A of the Securities Act. 

110See proposed FINRA Rule 2242(j)(1)(A)(i) and 

(ii). 111See proposed FINRA Rule 2242(j)(1)(B). 112See proposed FINRA Rule 2242.11 

(Distribution of Institutional Debt Research During 

Transition Period). 

between a member’s recommendations 

and trading interests, and are capable of 

exercising independent judgment in 

evaluating such recommendations (and 

selectively incorporate research as a 

data point in their own analytics) and 

reaching pricing decisions. Moreover, 

some well-regarded debt research is 

produced by analysts that are part of the 

trading desk. The separation required by 

the Rule would preclude this source of 

information. 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’’).107 Under the 

proposed rule change, the term ‘‘retail 

investor’’ means any person other than 

an institutional investor.108

FINRA believes that institutional 

investors should opt in to receive 

institutional debt research and should 

be able to choose to receive only debt 

research that is subject to the full 

protections of the rule. 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 

QIB 109 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.110 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.111

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 

affirmative consent to receive 

institutional debt research during this 

transition period and thereafter.112

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 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 impose 

information barriers 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 


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113See proposed FINRA Rule 2242(j)(2). A 

member must establish, maintain and enforce 

written policies and procedures reasonably 

designed to identify and effectively manage 

conflicts of interest described in paragraphs 

(b)(2)(A)(i), (b)(2)(H) (with respect to pressuring), 

(b)(2)(I), (b)(2)(K), (b)(2)(L), (b)(2)(M), (b)(2)(N) and 

Supplementary Material .02(a). 

114See proposed FINRA Rule 2242(j)(3). With 

respect to the disclosure requirement, if applicable, 

that the views in the institutional debt research 

report may differ from views in retail debt research, 

FINRA notes institutional debt research is not 

subject to Supplementary Material .06, which 

otherwise requires a member to inform its 

customers of the existence of a different research 

product offered to other customers that may reach 

different conclusions or recommendations that 

could impact the price of the debt security. 

115See proposed FINRA Rule 2242(j)(4). 

116See proposed FINRA Rule 2242(j)(5). 

117See proposed FINRA Rule 2242(k). 

118 15 U.S.C. 78o¥3(b)(6). 

119See Joint Report, supra note 8 at 12–23. 

120See GAO Report, supra note 9 at 11–15. 

research analysts and promises of 

favorable debt research also still apply 

with respect to research distributed to 

eligible institutional investors.113

FINRA believes that, notwithstanding 

the sophistication of its recipients, 

minimum objectivity standards should 

apply to institutional debt research and 

members should not be encouraged to 

use debt research analysts for the 

purpose of soliciting and marketing 

investment banking transactions. 

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.114

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. Although FINRA 

typically favors specific disclosure e.g., 

that a view or recommendation does, in 

fact, differ or is contrary to the 

member’s trading interests—FINRA 

believes that the cost to track and 

identify a specific conflict with respect 

to institutional debt research reports 

exceeds the value that specific 

disclosure would provide to 

sophisticated institutional investors, 

particularly since those investors value 

timely analysis and trade ideas that 

could be diminished due to the burdens 

associated with a specific disclosure 

requirement. 

FINRA believes that this approach 

will maintain the flow of institutional 

debt research to most institutional 

investors and allow firms to leverage 

existing compliance efforts, while 

ensuring that those investors who 

receive institutional debt research 

through negative consent have a high 

level of experience in evaluating 

transactions involving debt securities, 

and that certain protections remain in 

place to manage potential conflicts of 

interest. In addition, FINRA believes 

that this approach appropriately 

acknowledges the arm’s-length nature of 

transactions between trading desk 

personnel and institutional buyers. 

Finally, FINRA notes that no 

institutional investor will be exposed to 

this less-protected institutional research 

without either negative or affirmative 

consent, as applicable. 

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.115 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.116

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.117 Given the scope of 

the rule’s subject matter and the 

diversity of firm sizes, structures and 

research business and distribution 

models, FINRA believes it would be 

useful and appropriate to have the 

ability to provide relief from a particular 

provision of the proposed rules under 

specific factual circumstances. 

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,118

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. The 

proposed rule change largely adopts 

provisions that have proven effective to 

promote objective and reliable research 

in the equity research space, as detailed 

through academic studies and other 

observations in the Joint Report and the 

GAO Report.119 The GAO report, for 

example, concluded that empirical 

studies suggest the rules have resulted 

in increased analyst independence and 

weakened the influence of conflicts of 

interest on analyst recommendations.120

The proposed rule change would 

adopt a policies and procedures 

approach that allows members to 

implement a compliance system that 


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121See Letter from Joseph R.V. Romano, 

President, Romano Brothers & Co., to Marcia E. 

Asquith, Corporate Secretary, FINRA, dated March 

31, 2012 (‘‘Romano’’); letter from Ryan K. Bakhtiari, 

President, Public Investors Arbitration Bar 

Association, to Marcia E. Asquith, Corporate 

Secretary, FINRA, dated April 2, 2012 (‘‘PIABA’’); 

letter from Ira D. Hammerman, Senior Managing 

Director, General Counsel and Secretary, Securities 

Industry and Financial Markets Association, to 

Marcia E. Asquith, Corporate Secretary, FINRA, 

dated April 2, 2012 (‘‘SIFMA’’); letter from Michael 

Nicholas, CEO, Bond Dealers of America, to Marcia 

E. Asquith, Corporate Secretary, FINRA, dated April 

2, 2012 (‘‘BDA’’); letter from Lee A. Pickard and 

William D. Edick, Pickard and Djinis LLP, to Marcia 

E. Asquith, Corporate Secretary, FINRA, dated April 

2, 2012 (‘‘ASIR’’); letter from Chris Charles, 

President, Wulff, Hansen & Co., to Marcia E. 

Asquith, Corporate Secretary, FINRA, dated April 5, 

2012 (‘‘Wulff’’); and letter from Amy Natterson 

Kroll, Bingham McCutchen LLP, to Marcia E. 

Asquith, Corporate Secretary, FINRA, dated April 

10, 2012 (‘‘Morgan Stanley’’). 

aligns with their particular structure 

and business models, without 

diminishing investor protection. FINRA 

believes that this proposed approach 

imposes less cost on members without 

reducing investor protections than does 

a purely prescriptive approach or ‘‘one 

size fits all’’ approach with respect to 

compliance. In addition, the proposed 

rule adopts a substantial portion of the 

equity research rules. FINRA believes 

that many of the same conflicts of 

interest are present in the publication 

and distribution of equity and debt 

research and that consistency among the 

debt and equity research rules will 

further minimize the burdens to 

members to comply with the proposed 

rule change. 

As set forth in Item II.C., FINRA 

elicited comment on proposed debt 

research rules in two separate 

Regulatory Notices. In each instance, 

FINRA carefully considered the 

commenters’ concerns and amended the 

proposal to address issues with respect 

to costs and burdens raised by 

commenters. Even before the two 

proposals, FINRA issued a concept 

proposal in Regulatory Notice 11–11 to 

gather information and identify 

provisions of the equity research rules 

that would not be efficient or effective 

in a debt research proposal. For 

example, the concept proposal included 

a parallel provision to the equity rules 

that would have required a firm to 

promptly notify its customers if it 

intends to terminate coverage in a debt 

security and include with the notice a 

final research report. If it were 

impracticable to provide such final 

report, the concept proposal would have 

required a firm to disclose to customers 

its reason for terminating coverage. 

FINRA recognized that firms may have 

an extensive coverage universe of debt 

securities that may only be the subject 

of episodic research coverage. As such, 

FINRA determined that the termination 

of coverage provision in the debt 

context would be overly burdensome to 

firms relative to its investor protection 

value and therefore eliminated the 

provision from this revised proposal. 

In addition, and as detailed below in 

Item II.C., FINRA considered numerous 

iterations of an institutional exemption 

for debt research. Several commenters 

raised issues regarding an earlier 

provision that would have required 

affirmative consent for all institutional 

investors. In response to comments that 

the proposal was overly burdensome 

and may exclude a significant number 

of institutional investors from receiving 

the debt research that they receive 

today, FINRA is now proposing a higher 

tier of institutional investors that may 

receive institutional debt research based 

on negative consent. As set forth in 

Regulatory Notice 12–42, FINRA also 

made several other changes and 

clarifications in response to comments, 

including to the definition of ‘‘debt 

research report,’’ the standard for 

disclosure of conflicts and the 

permissible interactions between debt 

research analysts and sales and trading 

personnel. 

FINRA also considered an alternative 

suggested by commenters to exempt all 

trader commentary from the protections 

of the proposed rule. FINRA did not 

adopt this alternative because it would 

create an avenue through which firms 

could funnel debt research to retail 

investors without objectivity and 

reliability safeguards or disclosure of 

conflicts. FINRA reviewed examples of 

trader commentary and believes that 

many of those communications either 

do not meet the definition of a research 

report or are subject to exceptions from 

that definition. For those that are debt 

research reports, FINRA believes retail 

recipients should be entitled to the same 

protections, irrespective of the author or 

department of origin. FINRA further 

understands that most trader 

commentary is intended for 

sophisticated institutional investors, 

and to the extent a firm limits 

distribution to eligible institutional 

investors, most of the provisions of the 

proposed rule change would not apply. 

Therefore, FINRA believes its 

institutional exemption approach strikes 

the appropriate balance between 

protecting retail investors and 

maintaining timely information flow to 

more sophisticated investors. 

FINRA also sought comment and 

engaged in data analysis, as described in 

Item II.A.1., to fashion exemptions for 

firms with limited investment banking 

activity and limited principal trading 

activity. In combination with the 

institutional investor exemption, FINRA 

believes the proposed rule change is 

narrowly tailored to achieve its 

regulatory objectives. 

Finally, FINRA notes that it solicited 

comment in Regulatory Notice 12–42 on 

the economic impact of the proposed 

rule change, including quantified costs 

and the anticipated effects on 

competition, but received little or no 

feedback. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

Earlier iterations of the proposed rule 

change were published for comment in 

Regulatory Notice 12–09 (‘‘Regulatory 

Notice 12–09 Proposal) and Regulatory 

Notice 12–42 (’’Regulatory Notice 12–42 

Proposal’’) (together, the ‘‘Notice 

Proposals’’). Copies of the Regulatory 

Notices are attached as Exhibit 2a. A list 

of the commenters and copies of the 

comment letters received in response to 

the Notice Proposals are attached as 

Exhibits 2b and 2c, respectively. 

The Regulatory Notice 12–09 Proposal 

sought comment on a proposed rule to 

govern the preparation and distribution 

of debt research pursuant to a tiered 

approach based on whether debt 

research is distributed to retail or 

institutional investors. Under the 

proposal, debt research distributed to 

retail investors would carry most of the 

same protections provided to recipients 

of equity research, while institutional 

investors could affirmatively opt in to a 

framework that would exempt such 

research from many of those provisions. 

FINRA received seven comments in 

response to the proposal.121

Commenters suggested significant 

changes to the proposal, most notably 

with respect to the definitions of ‘‘debt 

security’’ and ‘‘debt research report,’’ 

the opt-in requirement for institutional 

investors, and the restrictions on input 

into debt research budget and 

compensation determinations by those 

involved in principal trading activities. 

FINRA addressed several of the 

commenters’ concerns in the Regulatory 

Notice 12–42 Proposal, which included, 

among other things, amended 

exemptions for research distributed to 

certain institutional investors and for 

firms with limited principal debt 

trading activity. The amended 

exemption for institutional investors 

added a higher tier of institutional 

investor that could receive institutional 

debt research by negative consent. 

FINRA received five comment letters on 


asabaliauskas on DSK5VPTVN1PROD with NOTICES
69922 Federal Register / Vol. 79, No. 226 / Monday, November 24, 2014 / Notices 

122See Letter from Kurt N. Schacht, Managing 

Director, and Linda L. Rittenhouse, Director, CFA 

Institute, to Marcia E. Asquith, Corporate Secretary, 

FINRA, dated December 7, 2012 (‘‘CFA’’); letter 

from Michael Nicholas, CEO, Bond Dealers of 

America, to Marcia E. Asquith, Corporate Secretary, 

FINRA, dated December 20, 2012 (‘‘BDA’’); letter 

from Lee A. Pickard and William D. Edick, Pickard 

and Djinis LLP, to Marcia E. Asquith, Corporate 

Secretary, FINRA, dated December 20, 2012 

(‘‘ASIR’’); letter from Roberts J. Stracks, Counsel, 

BMO Capital Markets GKST Inc., to Marcia E. 

Asquith, Corporate Secretary, FINRA, dated 

December 20, 2012 (‘‘BMO’’); and letter from Kevin 

A. Zambrowicz, Managing Director, Associate 

General Counsel, Securities Industry and Financial 

Markets Association, to Marcia E. Asquith, 

Corporate Secretary, FINRA, dated January 4, 2013 

(‘‘SIFMA’’). 

123See proposed FINRA Rule 2242. 04 

(Disclosure of Compensation Received by 

Affiliates). 

the proposal.122 The comments focused 

on two primary issues: The higher tier 

definition of institutional investor and 

the restrictions on input by principal 

trading personnel into research budget 

and evaluation and compensation 

determinations. Despite specific 

requests in the Regulatory Notice, 

FINRA received little or no comment on 

the economic impact of the proposal or 

any particular provisions. 

A summary of the comments received 

on the Notice Proposals and FINRA’s 

responses are set forth below. 

Definitions 

The Regulatory Notice 12–09 Proposal 

defined ‘‘debt security’’ to mean any 

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

of the Exchange Act, except for any 

‘‘equity security,’’ ‘‘municipal security’’ 

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

Section 3(a) of the Exchange Act, or any 

U.S. Treasury Security as defined in 

FINRA Rule 6710(p). SIFMA and BDA 

urged FINRA to expand the exceptions 

to the definition to include U.S. agency 

securities and investment grade foreign 

government securities. BDA again urged 

FINRA to exclude U.S. agency securities 

in response to the Regulatory Notice 12– 

42 Proposal. SIFMA further asked 

FINRA to clarify that ‘‘derivatives,’’ as 

defined in the CFTC conflict rules are 

excluded from the definition of ‘‘debt 

security’’ because they are subject to a 

separate federal regulatory regime. 

PIABA, on the other hand, thought 

FINRA should include municipal 

securities and security-based swaps 

within the definition. 

FINRA did not believe it was 

appropriate to expand the exceptions to 

the definition of ‘‘debt security’’ to 

include agency securities or foreign 

sovereign debt securities and did not 

propose these changes to the definition. 

FINRA has not provided these 

exclusions in the proposed rule change 

for a variety of reasons. First, 

commenters did not provide a rationale 

to exclude other non-equity securities. 

Second, treasury securities are excluded 

because FINRA is reticent to interfere 

with the markets involving direct 

obligations of the United States. In 

contrast, FINRA already has reporting 

schemes around agency securities and 

does not think it appropriate to carve 

out Fannie Mae and Freddie Mac 

securities, for example. Municipal 

securities were excluded from the 

proposal in part due to FINRA’s 

jurisdictional limitations with respect to 

those securities, so suggestions to 

exclude other securities as analogous to 

municipals are misplaced. 

FINRA believes an exclusion for 

foreign sovereign debt of other G–20 

countries is too broad, as the conflicts 

the rules address are similarly present 

with respect to research on such 

securities, and therefore retail investors 

would benefit from the proposal’s 

protections. Alternatively, commenters 

asked for greater flexibility with respect 

to disclosure of compensation on 

foreign sovereign issues, in large part 

due to tracking difficulties given the 

many and diverse relationships that 

firms’ affiliates have with governments. 

In response, FINRA amended the 

proposal to permit firms, in lieu of 

disclosing investment banking 

compensation received by a non-U.S. 

affiliate from foreign sovereigns, to 

instead implement information barriers 

between that affiliate and the debt 

research department to prevent direct or 

indirect receipt of such information.123

However, the proposed rule change 

would still require disclosure if the debt 

research analyst has actual knowledge 

of receipt of investment banking 

compensation by the non-U.S. affiliate. 

As stated in Item II.A. above, the 

proposed rule excludes security-based 

swaps from the definition of debt 

security given the nascent and evolving 

nature of security-based swaps 

regulation. FINRA intends to monitor 

regulatory developments with respect to 

security-based swaps and may 

determine to later include such 

securities in the definition of debt 

security. 

The Regulatory Notice 12–09 proposal 

defined ‘‘debt research report’’ as any 

written (including electronic) 

communication that includes an 

analysis of debt securities and that 

provides information sufficient upon 

which to base an investment decision. 

The term excluded the same 

communications excepted from the 

definition of ‘‘research report’’ in NASD 

Rule 2711. Morgan Stanley and SIFMA 

suggested that the definition should be 

amended to conform to the definition of 

‘‘research report’’ in Regulation AC, 

which defines ‘‘research report’’ as a 

‘‘written communication . . . that 

includes an analysis of a security or 

issuer . . . .’’ They further suggested 

that FINRA should include an exception 

from the definition of ‘‘research report’’ 

similar to interpretive guidance found 

in the Commission’s adopting release 

about the general characteristics of that 

term as it is used in Regulation AC for 

‘‘reports commenting on or analyzing 

particular types of debt securities or 

characteristics of debt securities’’ that 

do not include an analysis of, or 

recommend or rate individual securities 

or companies. In response to comments 

to both of the Notice Proposals, FINRA 

agreed that the definition of ‘‘debt 

research report’’ should be consistent 

with the definition in Regulation AC 

and therefore amended the proposal to 

achieve that regulatory harmony, 

including the exception for reports on 

classes of debt securities. This 

amendment is reflected in the proposed 

rule change. 

In response to a suggestion by BDA to 

the Regulatory Notice 12–09 Proposal, 

FINRA included the exceptions to the 

definition of ‘‘debt research report’’ in 

the rule text rather than by reference to 

the exceptions in NASD Rule 2711. 

BDA, BMO, Morgan Stanley, SIFMA, 

and Wulff, in response to one or both of 

the Notice Proposals, suggested that 

FINRA should exclude from the 

definition desk communications, 

including trader commentary, if such 

communications are sent only to 

institutional investors. Among other 

arguments, these commenters asserted 

that trader commentary is common in 

the debt markets, that institutions don’t 

rely on it as the sole basis for their 

investment decisions and that inclusion 

of trader commentary within the 

definition of ‘‘debt research report’’ is 

unduly burdensome and costly and 

could reduce available market 

information to investors without 

‘‘commensurate policy returns.’’ BDA 

asserted that the proposal would 

categorically eliminate an entire 

segment of analysis for retail investors 

without providing evidence that it is a 

harmful or abusive practice. In response 

to Regulatory Notice 12–42, BDA also 

stated that the definition should exclude 

offering documents for unregistered 

transactions and securities and any 

document prepared by or at the request 

of the issuer or obligor of a security. 

FINRA continues to believe it 

imprudent to create a broad exception 

from the definition of ‘‘debt research 

report’’ based on the author or 


asabaliauskas on DSK5VPTVN1PROD with NOTICES
Federal Register / Vol. 79, No. 226 / Monday, November 24, 2014 / Notices 69923 

124See Letter from James A. Brigagliano, Assistant 

Director, SEC Division of Trading and Markets, to 

Dana G. Fleischman, Clearly, Gottlieb, Steen & 

Hamilton, dated Nov. 2, 2004. 

department of origin. As explained in 

Regulatory Notice 12–09, such an 

approach creates a potential loophole 

through which biased and nontransparent research could be 

disseminated to investors, including 

retail investors. FINRA notes that the 

Sarbanes-Oxley Act declined to adopt 

such an approach in the equity context. 

Furthermore, Regulation AC has no 

such exception, so the regulatory 

consistency that commenters seek 

would be undermined. If, as 

commenters maintain, trader 

commentary is mostly provided only to 

institutions, then the institutional 

research exemption could exclude these 

communications from most of the 

provisions of the rule that otherwise 

apply to retail debt research for 

institutions that opt in. While FINRA 

understands that institutions may be 

more attuned to conflicts, FINRA 

believes it appropriate that even 

institutional debt research should retain 

certain minimum standards of 

independence and transparency, 

including restrictions on prepublication 

review by investment banking and the 

issuer, prohibitions on promises of 

favorable research as an inducement for 

receipt of business or compensation and 

general disclosure alerting recipients of 

the lesser standards and potential 

conflicts of interest attendant to the 

research report. 

FINRA declined BDA’s suggestion to 

exclude from the definition of ‘‘debt 

research report’’ offering documents for 

unregistered transactions or any 

document prepared by or at the request 

of the issuer or obligor of a security. 

BDA offered no rationale for the 

exclusions, which would be 

inconsistent with Regulation AC. 

Moreover, FINRA believes an exception 

for any document requested by an issuer 

would seriously undermine the 

regulatory purpose of the proposed rule 

change because it would allow a brokerdealer to distribute to retail investors a 

communication that contains all of the 

elements of a debt research report but 

none of the protections where the 

issuer, a conflicted party, requested it be 

created. 

Prepublication Review 

The proposed rule change maintains 

provisions in the Notice Proposals that 

would prohibit prepublication review, 

clearance or approval of debt research 

reports by investment banking, 

principal trading and sales and trading 

personnel. In response to the Regulatory 

Notice 12–09 Proposal, SIFMA 

contended that the rule should permit 

investment banking and sales and 

trading to review debt research reports 

prior to publication for factual accuracy, 

subject to appropriate supervision. As 

an example, SIFMA cited research on 

new complex structured products, 

suggesting analysts need to verify with 

investment banking or sales and trading 

that the basic facts about the products 

are correct and to corroborate the 

accuracy of the analyst’s statements 

regarding trading activity, prevailing 

market prices or yields. SIFMA also 

pointed out that current NASD Rule 

2711 permits such factual review of 

research reports by investment banking 

and other non-research personnel. 

First, FINRA notes that it has 

proposed to eliminate any 

prepublication review by investment 

banking or other persons not directly 

responsible for the preparation, content 

and distribution of equity research 

reports, other than legal and compliance 

personnel. FINRA believes that review 

of facts in a report by investment 

banking and other non-research 

personnel is unnecessary in light of the 

numerous other sources available to 

verify factual information, including the 

subject company. FINRA notes that such 

review may invite pressure on a 

research analyst that could be difficult 

to monitor. FINRA further notes that 

such factual review is not permitted 

under the terms of the Global 

Settlement 124 and that FINRA staff has 

seen no evidence that the factual 

accuracy of research produced by Global 

Settlement firms has suffered. Second, 

with respect to debt research, the 

proposal delineates certain permissible 

communications between debt research 

analysts and sales and trading and 

principal trading personnel necessary 

for each to effectively discharge their 

responsibilities and facilitate debt 

market trading. Among the allowable 

communications, a debt research analyst 

may seek information from sales and 

trading and principal trading personnel 

regarding a ‘‘particular bond instrument, 

current prices, spreads, liquidity and 

similar market information relevant to 

the debt research analyst’s valuation of 

a particular security.’’ In light of these 

permissible communications, and the 

other reasons stated above, FINRA sees 

no compelling reason why a debt 

research analyst needs further factual 

review from sales and trading or 

principal trading personnel by sharing 

portions of a draft research report. 

FINRA believes that any incremental 

improvement in accuracy by permitting 

factual review by investment banking, 

principal trading or sales and trading 

personnel is outweighed by the 

increased risk of pressure on a research 

analyst and the prospect that the 

perceived objectivity of the research 

may be undermined. Therefore, the 

proposed rule change does not 

incorporate the commenter’s suggestion. 

Research Department Budget 

The Regulatory Notice 12–09 Proposal 

limited determination of the research 

department budget to senior 

management, other than persons 

engaged in investment banking or 

principal trading activities, and without 

regard to specific revenues or results 

derived from those activities. However, 

the proposal noted that revenues and 

results of the firm as a whole may be 

considered in determining the debt 

research department budget and 

allocation of research department 

expenses. Moreover, the proposal 

permitted all persons within the firm to 

provide senior management input 

regarding the demand for and quality of 

debt research, including product trends 

and customer interests. 

In response to that proposal, SIFMA 

commented that senior management 

should be permitted to consider 

principal trading and other business 

revenues in making budget decisions, 

else senior management cannot 

accurately marry research funding to 

customer needs. SIFMA further 

contended that the proposal’s other 

provisions adequately safeguard against 

inappropriate pressures by investment 

banking and principal trading with 

respect to debt research budget 

determinations. The Regulatory Notice 

12–42 Proposal maintained these 

restrictions on debt research budget 

input, and in response, SIFMA again 

asserted that the provision denies 

research management the ability to 

assess the value of the permissible input 

by comparing it to the revenues 

generated from principal trading 

activities, thereby resulting in a 

misallocation of resources. SIFMA 

contended that the allocation of the 

research department’s resources to a 

particular asset class ‘‘will be and 

should be influenced by the size and 

profitability of the respective market.’’ 

FINRA appreciates the desire of firms 

to allocate research costs based on the 

revenues to which the research 

department contributes, but also sees a 

countervailing investor protection 

interest in firms managing conflicts 

between their revenue-producing 

operations and research. FINRA believes 

that the size and allocation of the 

research budget should be insulated 

from pressure by those business 


asabaliauskas on DSK5VPTVN1PROD with NOTICES
69924 Federal Register / Vol. 79, No. 226 / Monday, November 24, 2014 / Notices 

125See proposed FINRA Rule 2242(b)(2)(E). 

126See proposed FINRA Rule 2242(b)(2)(H). 

127The CFTC rules apply to research on 

derivatives, which is predominantly an institutional 

business. As noted below, the proposed rule change 

exempts from the compensation prohibitions 

institutional debt research. By comparison, SIFMA 

asked to allow principal traders to relay customer 

feedback in connection with retail debt research. 

segments. In the case of investment 

banking, FINRA believes the conflict is 

too pronounced to allow any 

consideration of investment banking 

revenues in determining the research 

department budget. However, given the 

vast array of debt securities and classes, 

FINRA believes it appropriate to allow 

some consideration of revenue streams 

in allocating research budget resources. 

Therefore, the proposed rule change 

would permit consideration of those 

revenues, provided that: (1) Senior 

management, other than persons 

engaged in principal trading or 

investment banking activities, makes the 

final research department budget 

determination; 125 and (2) the member 

establishes information barriers or other 

institutional safeguards to ensure that 

debt research analysts are insulated 

from the review, pressure or oversight 

by persons engaged in principal trading 

activities, among others.126

Debt Research Analyst Evaluation and 

Compensation 

With respect to evaluation and 

compensation of debt research analysts, 

the proposed rule change maintains a 

provision in the Notice Proposals that 

would allow sales and trading 

personnel, but not persons engaged in 

principal trading activities, to provide 

input to research management into the 

evaluation of a debt research analyst, so 

long as research management makes 

final determinations on compensation, 

subject to review by the compensation 

committee. 

In response to the Regulatory Notice 

12–09 Proposal, SIFMA argued that the 

proposal was too strict in prohibiting 

the input of principal trading personnel 

and contributions to principal trading 

activities in determining debt research 

analyst compensation. SIFMA asserted 

that as long as final compensation 

decisions rest with research 

management and the compensation 

committee, FINRA should allow input 

from principal trading personnel 

because those individuals regularly 

interface with customers and therefore 

are a necessary resource for customer 

feedback on the quality and 

productivity of debt research analysts. 

SIFMA also noted that the provision 

would preclude input from persons who 

wear multiple hats and engage in both 

sales and principal trading activities. 

Finally, SIFMA contended that 

compensation prohibitions fail to 

acknowledge the important role that 

debt research analysts play in assisting 

market making and customer facilitation 

desks. 

In response to Regulatory Notice 12– 

42, SIFMA reiterated that the provision 

will deprive research management of 

important client feedback to evaluate 

debt research analysts’ performance 

because principal traders are the 

primary conduit for such information. 

According to SIFMA, there are limited 

means to obtain direct customer 

feedback on the quality of research, and 

reliance on the sales force to provide 

customer feedback is inadequate 

because debt traders can have as much 

or more interaction with clients. In 

addition, SIFMA noted that the CFTC 

business conduct rules permit 

employees of the business trading unit 

or clearing unit of a swap dealer or 

major swap participant to communicate 

customer feedback, ratings and other 

indicators of research analyst 

performance to research department 

management.127

While FINRA recognizes that there is 

some value in input from those engaged 

in principal trading activities, FINRA 

believes such input is outweighed by 

conflicts that could provide incentive 

for principal trading personnel to 

reward or punish a debt research analyst 

with selected feedback based on 

whether his or her research or trading 

ideas benefitted the firm’s trading 

activities. Conversely, debt research 

analysts may feel compelled to produce 

research and trade ideas to benefit firm 

or particular customer positions if their 

compensation is tied to contributions to 

principal trading activities. Moreover, 

FINRA believes, in part based on 

discussions with research management 

personnel, that input from sales and 

trading personnel provides an effective 

proxy for customer feedback, to the 

extent such feedback cannot be obtained 

directly from customers. Furthermore, 

FINRA believes that research 

management should be in a position to 

assess the quality of the research it 

oversees. Finally, to the extent firms 

qualify for the limited principal trading 

exemption in the proposed rule change, 

dual-hatted persons engaged in both 

research and principal trading activities 

would be able to provide feedback to 

research department management. 

Given the importance of principal 

trading operations to the revenues of 

many firms, FINRA believes there is 

increased risk that principal traders 

could improperly pressure or influence 

debt research if they have input into 

analyst compensation or can solicit, 

relay or characterize customer feedback 

on retail debt research. FINRA believes 

this risk, which if manifested could 

directly impact retail investors, 

outweighs the benefit of an additional 

data point for research management to 

evaluate the quality of research 

produced by analysts they oversee. 

BDA stated that FINRA should amend 

the proposal to clarify that debt research 

analyst compensation may be based on 

the revenues and results of the firm as 

a whole. FINRA agrees that a member 

may consider the overall success of the 

firm when determining a debt analyst’s 

compensation, provided the member 

complies with the compensation review 

and approval requirements. FINRA 

notes that the proposed rule change 

specifies that the revenues and results of 

the firm as a whole may be considered 

in determining the research department 

budget, including expenses. Since debt 

analyst compensation is a research 

department expense, FINRA does not 

believe it necessary to further amend the 

compensation provisions. 

Prohibitions on Interactions With 

Investment Banking Personnel 

The proposed rule change would 

require members to have written 

policies and procedures to prohibit 

participation in pitches and other 

solicitations of investment banking 

services transactions and participation 

in road shows and other marketing on 

behalf of an issuer related to investment 

banking services transactions. 

The Regulatory Notice 12–09 Proposal 

had a similar provision, but did not 

limit the marketing prohibition to 

investment banking services 

transactions. SIFMA asked whether the 

proposed requirement with respect to 

road shows was intended to operate 

identically with NASD Rule 2711. 

SIFMA also asked FINRA to clarify that, 

consistent with NASD Rule 2711, the 

prohibition on road shows is only 

intended to cover road shows and other 

marketing related to an investment 

banking transaction and not non-deal 

road shows. FINRA is primarily 

concerned with marketing by research 

analysts in connection with an 

investment banking services transaction, 

and therefore FINRA has added that 

limitation to the provision in proposed 

rule change. FINRA notes, however, that 

the overarching requirement to have 

written policies and procedures to 

manage conflicts related to the 

interaction between debt research 

analysts and, among others, subject 

companies would apply to other 


asabaliauskas on DSK5VPTVN1PROD with NOTICES
Federal Register / Vol. 79, No. 226 / Monday, November 24, 2014 / Notices 69925 

128See proposed FINRA Rule 2242.09 (Joint Due 

Diligence). 

129See proposed FINRA Rule 2242.03(c). 

130See proposed FINRA Rule 2242.03(b)(3). 

marketing activity on behalf of an 

issuer. FINRA does not believe that 

merely facilitating a meeting between 

issuer management and investors, 

absent other facts, would constitute 

marketing on behalf of the issuer. 

In response to the Regulatory Notice 

12–09 Proposal, SIFMA contended that 

the prohibition on joint due diligence 

conducted with the subject company in 

the presence of investment banking 

personnel was overly restrictive. FINRA 

has clarified in the proposed rule 

change that the prohibition on joint due 

diligence applies only during the period 

prior to the selection by the issuer of the 

underwriters for the investment banking 

services transaction.128 In response to 

the Regulatory Notice 12–42 Proposal, 

SIFMA commented that debt research 

analysts should be able to passively 

attend road show presentations because, 

unlike equity analysts that frequently 

have access to issuer management, the 

road show is often the only opportunity 

for a debt research analyst to view an 

issuer’s management presentation and 

evaluate the credibility of management’s 

business plan and outlook. SIFMA 

contended that it is impractical for 

issuers to meet separately with debt 

research analysts and challenging for 

analysts to call in and listen to an issuer 

presentation. SIFMA also noted that the 

concern is more pronounced in certain 

sectors of the debt markets, such as 

high-yield and emerging markets. 

FINRA does not believe that the 

prohibition with respect to road show 

participation should differ between the 

debt and equity research rules, since the 

conflicts are the same. FINRA believes 

the ability to listen remotely to a road 

show presentation provides debt 

research analysts a reasonable means to 

hear the issuer management’s story, 

while not appearing to be part of the 

deal team to prospective customers 

attending the presentation in person. 

Therefore, FINRA did not amend this 

provision of the proposal. 

Prohibitions on Interactions with Sales 

and Trading 

The proposed rule change maintains a 

provision in the Notice Proposals that 

would require members to have written 

policies and procedures to prohibit 

certain interactions between debt 

research and sales and trading and 

principal trading personnel. The 

proposed rule change also delineates 

prohibited and permissible 

communications between those persons. 

In response to the Regulatory Notice 12– 

09 Proposal, SIFMA asked FINRA to 

clarify that the prohibition on 

attempting to influence analysts for the 

purpose of benefiting the firm, a 

customer or class of customers would 

not capture ordinary-course 

communications and is meant to 

prohibit non-research direction over the 

decision to publish a report and nonresearch direction over the views and 

opinions expressed in debt reports. The 

proposed rule provides that 

communications between debt research 

analysts and trading desk personnel that 

are not related to sales and trading, 

principal trading or debt research 

activities may take place without 

restriction, unless otherwise 

prohibited.129

SIFMA also recommended that 

FINRA include in the proposed rule text 

the language provided in Regulatory 

Notice 12–09 that, in assessing whether 

a debt research analyst’s permissible 

communications are ‘‘inconsistent’’ 

with the analyst’s published research, 

firms may consider the context, 

including that the investment objectives 

or time horizons being discussed differ 

from those underlying the analyst’s 

published views. FINRA incorporated 

the suggested language into proposed 

FINRA Rule 2242.130

ASIR noted that the Regulatory Notice 

12–09 Proposal goes beyond NASD Rule 

2711 by restricting not only 

communications between analysts and 

investment banking, but also between 

debt research analysts and sales and 

trading personnel. ASIR asserted that 

the debt research proposal should only 

restrict communications between 

research and investment banking 

personnel, so as to harmonize with the 

equity rules. 

The proposed rule change specifically 

addresses communications between 

debt research and sales and trading and 

principal trading personnel because the 

interests of the trading department 

create a particularly pronounced 

conflict with respect to debt research. 

This is because, under current market 

conditions, principal trading is far more 

prevalent in the debt markets than in 

the equity markets. However, FINRA 

continues to monitor the relationship 

between equity research and sales and 

trading and principal trading personnel 

to assess whether similar specific 

restrictions should be applied in the 

equity research context. FINRA notes 

that the current and proposed equity 

research rules do require firms to 

manage conflicts between equity 

research and other non-research 

personnel, including those engaged in 

sales and trading and principal trading 

activities. 

Conflicts Disclosure 

With respect to the Regulatory Notice 

12–09 Proposal, SIFMA and BDA found 

overly broad the provision that requires 

disclosure of ‘‘all conflicts that 

reasonably could be expected to 

influence the objectivity of the research 

report and that are known or should 

have been known by the member or debt 

research analyst on the date of 

publication or distribution of the 

report.’’ SIFMA contended that the 

language would require firms to identify 

‘‘all possible conflicts (material or 

immaterial)’’ and encouraged FINRA to 

either specify the conflicts it intends to 

capture or rely on the standard in NASD 

Rule 2711 requiring disclosure of 

‘‘actual, material’’ conflicts. SIMFA 

further questioned whether conflicts 

could ever be expected to influence the 

objectivity of research reports and 

suggested that existing FINRA research 

rules and Regulation AC assume the 

contrary. 

In response to SIFMA’s doubt that 

conflicts could ever be expected to 

influence the objectivity of research 

reports, FINRA notes that its research 

rules are premised on the belief that 

conflicts can be disinfected—and 

possibly discouraged—by disclosure 

and will give investors the material 

information needed to assess the 

objectivity of a research report. In 

addition, the rules prohibit certain 

conduct where the conflicts are too 

pronounced to be cured by disclosure. 

Yet the rules do not—and cannot— 

identify every such conflict. Thus, at a 

minimum, FINRA’s proposal would 

require firms to identify and disclose 

them. 

In general, FINRA believes that an 

immaterial conflict could not reasonably 

be expected to influence the objectivity 

of a research report, and therefore a 

materiality standard is essentially 

congruent with the proposed standard. 

FINRA agrees that the ‘‘catch-all’’ 

disclosure provision captures such 

material conflicts that the research 

analyst and persons with the ability to 

influence the content of a research 

report know or have reason to know. 

Therefore, FINRA has amended the 

proposal to delete as superfluous the 

overarching obligation to disclose ‘‘all 

conflicts that reasonably could be 

expected to influence the objectivity of 

the research report and that are known 

or should have been known by the 

member or research analyst on the date 

of publication or distribution of the 

report.’’ 


asabaliauskas on DSK5VPTVN1PROD with NOTICES
69926 Federal Register / Vol. 79, No. 226 / Monday, November 24, 2014 / Notices 

131See Letter from James A. Brigagliano, Assistant 

Director, SEC Division of Trading and Markets, to 

Dana G. Fleischman, Clearly, Gottlieb, Steen & 

Hamilton, dated Nov. 2, 2004. 

132See Letter from Michael D. Udoff, SIFMA, to 

Nancy M. Morris, Secretary, SEC, dated Nov. 14, 

2006. 

133See proposed FINRA Rules 2242(g)(2) and 

(g)(4). 

SIFMA also contended that the 

requirement in proposed FINRA Rule 

2242(c)(5) to disclose information on the 

date of publication or distribution is 

broader than current NASD Rule 2711, 

which only applies at the time of 

publication, and problematic logistically 

because the broader standard is not 

reflective of the conflicts that apply at 

the time the debt research analyst writes 

the research report. In addition, SIFMA 

argues that it is unclear how members 

could control and prevent the 

distribution of reports that have already 

been published in order to determine if 

additional disclosures are required. 

FINRA notes that the term 

‘‘distribution’’ is drawn from the 

provisions of the Sarbanes-Oxley Law 

that apply to equity research reports and 

is intended to capture research that may 

only be distributed electronically as 

opposed to published in hard copy. 

FINRA has included the same 

‘‘publication or distribution’’ language 

in the proposed changes to the equity 

research rules. However, FINRA 

interprets this language to require the 

disclosures to be current only as of the 

date of first publication or distribution, 

provided that the research report is 

prominently dated, and the disclosures 

are not known to be misleading. 

The proposed rule text in the 

Regulatory Notice 12–09 Proposal 

required firms to ensure any 

recommendation or rating has a 

reasonable basis in fact and is 

accompanied by a clear explanation of 

the valuation method utilized and a fair 

presentation of the risks that may 

impede achievement of the 

recommendation or rating. SIFMA 

requested clarification that the 

requirement with respect to valuation 

method should apply only if the analyst 

used a ‘‘formal’’ valuation method. 

FINRA is not clear what constitutes a 

‘‘formal’’ valuation method, but made a 

clarification in the proposed rule change 

to provide that any recommendation or 

rating must be accompanied by a clear 

explanation of ‘‘any’’ (as opposed to 

‘‘the’’) valuation method used. 

SIFMA also sought several other 

clarifications on the proposal. First, it 

asked FINRA to clarify that the 

requirement to include in research 

reports that contain a rating a 

distribution of ‘‘all securities rated by 

the member to which the member 

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

rating’’ is limited to debt securities. 

FINRA agrees that the proposed 

provision is limited to debt securities 

and has changed the text accordingly. 

Second, SIFMA sought flexibility to 

make a good faith determination as to 

which securities constitute a debt 

security that must be accompanied by a 

‘‘ratings table,’’ given that bonds of the 

same issuer may have different ratings. 

FINRA agrees that any ratings table 

should reflect ratings of distinct 

securities rather than issuers. Finally, 

SIFMA requested guidance to 

distinguish between a 

‘‘recommendation’’ and a ‘‘rating’’ for 

the purposes of disclosure under the 

revised proposal. In particular, SIFMA 

suggested that a recommendation of a 

relative value or paired trade idea 

should constitute a recommendation but 

not a rating. While any determination 

will be fact specific, FINRA believes in 

general that a recommendation is a 

suggestion to make a particular 

investment while a rating is a label or 

conclusion attached to a research report. 

SIFMA asked that FINRA allow firms 

to modify the required ‘‘health warning’’ 

disclosure for institutional debt research 

to refer to ‘‘this document’’ rather than 

‘‘this research report’’ when the material 

is not prepared by research department 

personnel. While FINRA would permit 

firms to use the word ‘‘document’’ 

rather than ‘‘research report,’’ such 

labeling must be used consistently and 

would have no bearing on whether the 

communication constitutes a ‘‘research 

report’’ for purposes of the proposed 

rule. 

Third-Party Research Reports 

With respect to distribution of thirdparty debt research reports, SIMFA 

objected to requirements in the Notice 

Proposals that do not currently apply to 

equity research under NASD Rule 2711. 

In particular, SIFMA cited the 

requirement to establish, maintain and 

enforce written policies and procedures 

reasonably designed to ensure that any 

third-party debt research report it 

distributes is ‘‘reliable and objective.’’ 

SIFMA stated that it is unclear what 

FINRA means by ‘‘objective.’’ With 

respect to the requirement to disclose 

‘‘any material conflict of interest that 

can reasonably expected to have 

influenced the choice of a third-party 

debt research provider or the subject 

company of a third-party debt research 

report,’’ SIFMA stated that it is ‘‘not 

clear what types of conflicts this 

provision is intended to capture.’’ 

FINRA notes that its equity research 

proposal contains identical 

requirements with respect to the 

selection and distribution of third-party 

research. FINRA believes it reasonable 

to require firms to conduct upfront due 

diligence on the quality of its thirdparty research providers, particularly 

given the lesser review obligations 

imposed prior to distribution. FINRA 

notes that Global Settlement firms had 

to have such procedures to select their 

independent research providers,131 and 

FINRA does not believe it unreasonable 

to have some type of screening 

procedures to ensure, for example that 

the third-party provider is not being 

paid by the issuer or that the research 

has some kind of track record or good 

reputation. In fact, in a 2006 comment 

letter, SIFMA stated that firms should 

‘‘demand high standards’’ from 

providers of third-party research.132

FINRA further believes it appropriate 

for firms to disclose to investors any 

relationship, e.g., an affiliate 

relationship, or other circumstances that 

rise to a material conflict of interest that 

could reasonably be seen as having 

influenced the choice of third-party 

research provider. FINRA believes this 

disclosure is consistent with the 

requirement to disclosure material 

conflicts of interest with respect to a 

firm’s own research, and therefore will 

similarly promote objectivity and 

transparency of information provided to 

investors that may influence their 

investment decisions. FINRA notes that 

a firm may avoid the requirement to 

review third-party research for false or 

misleading statements if it chooses to 

distribute only independent third-party 

research.133

In response to the Notice Proposals, 

ASIR commented that the proposal 

could be read to impose obligations on 

members who make available thirdparty research pursuant to Section 28(e) 

of the Exchange Act to have procedures 

to ensure that such research is reliable 

and objective and labeled in a certain 

manner. FINRA is not proposing to 

make any changes based on this 

comment. However, research made 

available pursuant to Section 28(e) is 

not ‘‘distributed’’ and therefore the 

proposed requirements would not 

apply. 

Institutional Investor Definition 

The Regulatory Notice 12–09 proposal 

would have exempted from many of the 

rule’s provisions debt research reports 

disseminated only to ‘‘institutional 

investors,’’ provided that those 

institutional investors had, prior to 

receipt of a debt research report, 

affirmatively notified the member in 

writing that they wished to forego 

treatment as a retail investor for the 


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134At the time of the comment letters, those 

content standards were found in NASD IM–2110– 

1. Since that time, the Commission has approved 

a consolidated FINRA communications with the 

public rule, and those standards are now found in 

FINRA Rule 2210(d). 

purposes of the rule. ASIR, BDA and 

SIFMA found this provision 

unnecessarily burdensome and difficult 

to implement and track. The 

commenters noted that they already 

expend resources to document similar 

consents under FINRA’s suitability rule 

and that the nature of research 

distribution makes it more challenging 

than the suitability rule to track and 

process all eligible institutional 

investors that have consented to receive 

institutional debt research. Commenters 

instead advocated an approach whereby 

persons or entities that otherwise meet 

the definition of ‘‘institutional 

investor’’—as defined in FINRA Rule 

4512(c)—are presumed to have 

consented to the institutional debt 

research regime unless they 

affirmatively choose to receive the 

protections afforded recipients of retail 

debt research. Among other things, 

these commenters asserted that this 

alternative approach would be less 

costly and burdensome to administer 

and that the remaining protections 

afforded institutional debt research 

under the proposal, together with the 

content standards applicable to 

institutional communications pursuant 

to FINRA’s Communications with the 

Public rules,134 provide less 

sophisticated institutional investors 

adequate protections should they not to 

choose be treated as retail investors for 

the purposes of debt research. 

After considering these comments and 

discussing the issue further with 

industry members, FINRA proposed a 

revised institutional investor exemption 

in the Regulatory Notice 12–42 

Proposal. Under the revised proposal, 

institutional investors that meet the 

definition of QIB and satisfy the FINRA 

Rule 2111 institutional suitability 

standards with respect to debt trading 

and strategies would be eligible to 

receive institutional debt research by 

way of negative consent. Other 

institutional investors that meet the 

definition in FINRA Rule 4512(c) but do 

not satisfy the higher tier requirements 

could still affirmatively elect in writing 

to receive institutional debt research. 

The revised proposal asked whether 

alternative standards for the higher tier 

would be more appropriate, including 

one that combines the FINRA Rule 

4512(c) definition and the institutional 

suitability requirements. 

CFA Institute supported the revised 

higher tier of QIB plus suitability 

standard in Regulatory Notice 12–42. 

SIFMA, BDA and BMO opposed it. BDA 

asserted that all QIBs should be able to 

receive research on debt securities 

without consent since they are in the 

business of investing and that an 

institutional suitability standard should 

be imposed to determine whether other 

institutional accounts may receive 

institutional debt research. BMO 

expressed concern that the proposal to 

require affirmative consent is 

cumbersome and burdensome and 

would deprive some smaller and midsize institutional investors of research 

they receive today, in part because 

experience has shown that some 

institutional clients cannot or will not 

provide the affirmation required in 

FINRA Rule 2111. 

SIFMA contended that the proposal 

had both practical and logical flaws. 

SIFMA maintained that the QIB 

component would introduce a 

problematic new standard that would 

require complex and costly systems to 

track QIB certifications and link them to 

FINRA Rule 2111 certifications and 

research distribution lists. SIFMA stated 

that one firm estimated a cost of $5 

million to develop such a system. 

SIFMA further noted that suitability 

certifications are tracked at the order 

placer level, whereas QIBs are tracked 

for particular transactions. SIFMA also 

asserted that the proposal would lead to 

anomalous results, such as the 

circumstance where a dual registered 

investment adviser has multiple 

institutional accounts, only some of 

which have QIB certificates. SIFMA 

asked how the registered investment 

adviser could meet its duty to all of its 

clients but only utilize the institutional 

debt research for the QIBs. SIFMA 

further questioned the logic of a 

proposal that would allow institutional 

investors to transact in restricted 

securities but not receive research on 

those securities without taking 

additional steps. 

SIFMA offered two alternatives for the 

higher tier: (1) Non-natural persons that 

satisfy institutional suitability 

requirements with respect to debt 

trading and strategies; or (2) certain 

order placing institutions: QIBs; 

registered broker-dealers, banks, savings 

and loans, insurance companies, 

registered investment companies; 

registered investment advisers; 

institutions with $50–$100 million in 

assets and represented by an 

independent investment adviser; and 

universities, regulatory and government 

entities that use research for academic 

purposes. 

FINRA does not believe that retail 

investors or less sophisticated 

institutional investors should be 

required to take any additional steps to 

receive the full protections of the 

proposed rule. FINRA believes that 

some QIBs may lack expertise and 

experience in debt market analysis and 

trading, including some employee 

benefit plans, trust funds with 

participants of employee benefit plans 

and charitable organizations. For the 

same reasons, FINRA believes SIFMA’s 

first alternative is too broad in that it 

would require less sophisticated 

institutional customers to affirmatively 

opt-in to the full protections of the rule. 

Therefore, the proposed rule change 

would adopt a standard under which 

firms may use negative consent only for 

the higher standard QIBs that also 

satisfy the institutional suitability 

requirements under FINRA Rule 2111 

with respect to debt transactions, and 

affirmative consent from any 

institutional account as defined in 

FINRA Rule 4512(c). 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 

Rule 4512(c) must provide affirmative 

consent to receive institutional debt 

research during this transition period 

and thereafter. 

FINRA believes that the proposed 

institutional investor definition strikes 

an appropriate balance between 

protecting less sophisticated 

institutional investors and maintaining 

the flow of research—and minimizing 

the burdens and costs of distributing 

debt research—to knowledgeable 

institutional investors. The exemption 

provides additional protections beyond 

the FINRA Rule 4512(c) standard for 

firms to receive institutional debt 

research by negative consent by 

ensuring that those institutions satisfy 

the higher QIB standard and are both 

capable of evaluating investment risks 

with respect to debt trading and 

strategies and have affirmatively 

indicated that they are exercising 

independent judgment in evaluating 

recommendations for such transactions. 

FINRA believes an affirmative consent 

requirement is appropriate for FINRA 

Rule 4512(c) accounts, which are more 

likely to include investors lacking 

experience in debt market analysis and 

trading. To the extent a FINRA Rule 

4512(c) institutional investor values 

institutional debt research, FINRA 


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69928 Federal Register / Vol. 79, No. 226 / Monday, November 24, 2014 / Notices 

believes the proposed rule change 

imposes a one-time small burden on 

such investors to provide written 

consent. Some firms indicated to FINRA 

that the consent could be obtained at the 

time of other required written 

authorizations. FINRA believes the oneyear grace period will ease the transition 

to the new rules without disrupting the 

current flow of debt research to 

institutional clients. 

As to SIFMA’s second alternative 

above, FINRA believes it would only 

exacerbate SIFMA’s stated concerns 

about introducing a new standard, as 

the suggested standard has no precedent 

and is even more complex and 

presumably difficult to track than the 

QIB plus suitability standard FINRA 

proposes to adopt to receive 

institutional debt research by negative 

consent. 

SIFMA also commented that even if 

FINRA adopted its preferred 

institutional suitability standard for the 

higher tier, many firms may not avail 

themselves of the exemption because of 

cost, logistics and obligations to provide 

their research to retail customers. Thus, 

SIFMA asked to narrow the scope of 

restricted persons by adopting the 

following definition of ‘‘principal 

trading’’ to mean: 

Engaging in proprietary trading activities 

for the trading book of a member but does not 

include transactions undertaken as part of 

underwriting related, market making related, 

or hedging activities, or otherwise on behalf 

of clients. 

FINRA declined to adopt the 

suggested definition. FINRA believes 

the definition is overly broad and 

ambiguous and could encourage traders 

to pressure debt research analysts to 

support firm inventory positions. For 

example, the proposed definition would 

seem to permit traders of auction rate 

securities to participate in the 

determination of compensation for debt 

research analysts, thereby sanctioning 

the type of concerning conduct that 

served as a catalyst for rulemaking in 

this area. For the same reason, FINRA 

declines a request by BMO for FINRA to 

clarify that persons who position debt 

inventory to sell on a principal basis to 

customers but not for a firm’s 

proprietary trading account would not 

be deemed to be engaged in principal 

trading activities. 

SIFMA indicated to FINRA in 

discussions subsequent to their 

comment letter that firms with large 

institutional client bases were divided 

on whether the QIB-based negative 

consent standard or the FINRA Rule 

4512(c) affirmative consent standard 

would be preferable from a cost 

efficiency perspective. The proposed 

rule change provides both options, 

which FINRA believes will help reduce 

the costs to satisfy the exemption 

requirements. The proposed rule change 

further reduces the costs of compliance 

by interpreting the QIB-based 

alternative to capture both QIBs and any 

order placer (e.g. registered investment 

adviser) that has at least one QIB subaccount. FINRA believes this 

interpretation addresses SIFMA’s 

concern that suitability certifications are 

tracked at the order placer level, while 

QIBs are tracked for particular 

transactions, as well as concerns as to 

how the requirement would apply to a 

registered investment adviser with both 

QIB and non-QIB accounts. FINRA 

understands that the single $5 million 

estimate referenced by SIFMA in its 

letter was based in large part on the cost 

of developing a system that could 

directly link institutional suitability 

certifications to QIB sub-accounts and 

that the interpretation would 

appreciably reduce the burden. 

Limited Investment Banking or 

Principal Trading Activities Exemptions 

The proposed rule change includes an 

exemption for firms with limited 

investment banking activity, which is 

defined as managing or co-managing 10 

or fewer investment banking services 

transactions on average per year over 

the previous three years and generating 

$5 million or less in gross investment 

banking revenues from those 

transactions. The proposed rule change 

also includes an exemption for firms 

that engage in limited 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. 

In response to Regulatory Notice 12– 

42, CFA opposed both the proposed 

exemption for firms with limited 

investment banking and the proposed 

exemption for firms with limited 

principal debt trading activities because 

they would allow influences that could 

compromise the independence and 

accuracy of debt research distributed to 

retail investors. FINRA did not propose 

any changes based on CFA’s comments. 

With respect to the limited investment 

banking exemption, FINRA notes that 

this provision parallels an exemption in 

the equity research rules and FINRA has 

not found any evidence of abuse by 

firms subject to the exemption. With 

respect to the exemption for limited 

principal trading activity, FINRA notes 

that it would be limited to those firms 

whose limited trading activity makes 

the conflicts less pronounced and where 

it would be a significant marginal cost 

to add a trader dedicated to producing 

research. 

In response to Regulatory Notice 12– 

09, Wulff and Romano expressed 

concerns regarding the exemption for 

firms that engage in limited investment 

banking activity, arguing that it did not 

go far enough to curtail the burden of 

the proposed rule on small firms, many 

of which have associated persons that 

engage in both producing debt research 

and principal trading activities, and that 

the thresholds were not appropriate for 

a proposal regarding debt research 

conflicts of interest. FINRA 

subsequently amended the proposal to 

add a more targeted exemption for firms 

with limited principal trading activity. 

The exemption, discussed in detail in 

Item II.A.1., addresses the concerns of 

small firms with dual-hatted persons by 

exempting those firms that engage in 

modest principal trading activity from 

the restrictions on supervision and 

compensation determination of debt 

research analysts by those engaged in 

sales and trading and principal trading 

activities. As noted above, FINRA 

determined the thresholds for the 

exemption based on data analysis and a 

survey of firms that engage in principal 

trading activity. 

In addition, FINRA maintained the 

exemption for firms with limited 

investment banking activity, exempting 

eligible firms from similar supervision 

and compensation determination 

restrictions with respect to investment 

banking personnel. FINRA also engaged 

in data analysis, discussed in Item 

II.A.1., to confirm the appropriateness of 

the proposed thresholds for that 

exemption. 

Effective Date 

In response to both Regulatory 

Notices, SIFMA requested that FINRA 

establish an effective date that will 

provide adequate time for 

implementation of the proposed rule 

change, e.g., 12 to 18 months after SEC 

approval. FINRA notes that it will 

provide sufficient time for 

implementation taking into account any 

required systems changes. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 45 days of the date of 

publication of this notice in the Federal 

Register or within such longer period (i) 

as the Commission may designate up to 

90 days of such date if it finds such 

longer period to be appropriate and 

publishes its reasons for so finding or 


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Federal Register / Vol. 79, No. 226 / Monday, November 24, 2014 / Notices 69929 

135 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 72015 

(Apr. 24, 2014), 79 FR 24475 (‘‘Notice’’). 

4 In Amendment No. 1, the Exchange clarified the 

valuation of investments for purposes of calculating 

net asset value, provided additional details 

regarding the dissemination of the Disclosed 

Portfolio, and made other minor technical edits to 

the proposed rule change. Amendment No. 1 

provided clarification to the proposed rule change, 

and because it does not materially affect the 

substance of the proposed rule change or raise 

novel or unique regulatory issues, Amendment No. 

1 is not subject to notice and comment. 

5The Exchange filed Amendment No. 2 on June 

4, 2014 and withdrew it on June 5, 2014, and filed 

Amendment No. 3 on June 5, 2014 and withdrew 

it on June 6, 2014. Amendment No. 4 supersedes 

both Amendments No. 2 and No. 3. In Amendment 

No. 4, the Exchange amended the proposal to reflect 

a change to the name of the Fund and the 

underlying index. Specifically, the Exchange 

replaced each reference in the proposal to the 

‘‘Reality Shares Isolated Dividend Growth Index 

ETF’’ (the original name of the Fund) with a 

reference to the ‘‘Reality Shares DIVS Index ETF.’’ 

Similarly, the Exchange replaced each reference in 

the proposal to the ‘‘Reality Shares Isolated 

Dividend Growth Index’’ with a reference to the 

‘‘Reality Shares DIVS Index.’’ Amendment No. 4 is 

a technical amendment and is not subject to notice 

and comment as it does not materially affect the 

substance of the filing. 

6 15 U.S.C. 78s(b)(2). 

7See Securities Exchange Act Release No. 72385, 

79 FR 35205 (Jun. 19, 2014). The Commission 

designated a longer period within which to take 

action on the proposed rule change and designated 

July 29, 2014, as the date by which it should 

approve, disapprove, or institute proceedings to 

determine whether to disapprove the proposed rule 

change. 

8 15 U.S.C. 78s(b)(2)(B). 

9See Securities Exchange Act Release No. 72714, 

79 FR 45574 (Aug. 5, 2014) (‘‘Order Instituting 

Proceedings’’). Specifically, the Commission 

instituted proceedings to allow for additional 

analysis of the proposed rule change’s consistency 

with Section 6(b)(5) of the Act, which requires, 

among other things, that the rules of a national 

securities exchange be ‘‘designed to prevent 

fraudulent and manipulative acts and practices, to 

promote just and equitable principles of trade,’’ and 

‘‘to protect investors and the public interest.’’ See 

id. 

10See Letter from Eric R. Ervin, President, Reality 

Shares ETF Trust and Reality Shares Advisors, LLC, 

and President and CEO, Reality Shares, Inc., to 

Kevin M. O’Neill, Deputy Secretary, Commission, 

dated August 22, 2014 (‘‘Reality Shares Letter 1’’); 

Letter from Eric R. Ervin, President, Reality Shares 

ETF Trust and Reality Shares Advisors, LLC, and 

President and CEO, Reality Shares, Inc., to Arun 

Manoharan, Financial Economist, Commission, 

dated October 21, 2014 (‘‘Reality Shares Letter 2’’). 

11See Securities Exchange Act Release No. 73417, 

79 FR 64430 (Oct. 29, 2014). 

(ii) as to which the self-regulatory 

organization consents, the Commission 

will: 

(A) By order approve or disapprove 

such proposed rule change, or 

(B) institute proceedings to determine 

whether the proposed rule change 

should be disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (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 

December 15, 2014. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.135

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2014–27701 Filed 11–21–14; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–73631; File No. SR– 

NYSEArca–2014–41] 

Self-Regulatory Organizations; NYSE 

Arca, Inc.; Order Granting Approval of 

a Proposed Rule Change, as Modified 

by Amendments No. 1 and No. 4 

Thereto, Relating to Listing and 

Trading of Shares of the Reality Shares 

DIVS Index ETF Under NYSE Arca 

Equities Rule 5.2(j)(3) 

November 18, 2014. 

I. Introduction 

On April 11, 2014, NYSE Arca, Inc. 

(‘‘Exchange’’ or ‘‘NYSE Arca’’) filed 

with the Securities and Exchange 

Commission (‘‘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 change to 

list and trade shares (‘‘Shares’’) of the 

Reality Shares DIVS Index ETF 

(‘‘Fund’’) under NYSE Arca Equities 

Rule 5.2(j)(3). The proposed rule change 

was published for comment in the 

Federal Register on April 30, 2014.3 On 

May 6, 2014, the Exchange filed 

Amendment No. 1 to the proposed rule 

change, which amended and replaced 

the proposed rule change in its 

entirety.4 On June 6, 2014, the Exchange 

filed Amendment No. 4 to the proposed 

rule change.5 On June 13, 2014, 

pursuant to Section 19(b)(2) of the Act,6

the Commission designated a longer 

period within which to approve the 

proposed rule change, disapprove the 

proposed rule change, or institute 

proceedings to determine whether to 

disapprove the proposed rule change.7

On July 29, 2014, the Commission 

instituted proceedings under Section 

19(b)(2)(B) of the Act 8 to determine 

whether to approve or disapprove the 

proposed rule change.9 In response to 

the Order Instituting Proceedings, the 

Commission received two comment 

letters on the proposal.10 On October 23, 

2014, the Commission designated a 

longer period for Commission action on 

the Order Instituting Proceedings.11

This order grants approval of the 

proposed rule change, as modified by 

Amendments No. 1 and No. 4 thereto. 

II. Description of the Proposal, as 

Modified by Amendments No. 1 and 

No. 4 Thereto 

A. The Fund, Generally 

The Exchange proposes to list and 

trade Shares of the Fund under NYSE 

Arca Equities Rule 5.2(j)(3), which 


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