Federal Register / Vol. 79, No. 226 / Monday, November 24, 2014 / Notices 69939 

10See supra note 9. 

11 15 U.S.C. 78s(b)(3)(A). 

12 17 CFR 240.19b–4(f)(2). 

13 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

with those firms that have only paid the 

current year GIA. 

The GIA is predicated on the fact that 

larger firms individually require greater 

regulatory resources. The proposed rule 

change largely keeps in place a GIA 

pricing structure that, as the 

Commission noted in approving the 

reformulated calculation in SR–FINRA– 

2009–057, ‘‘is reasonable in that it 

achieves a generally equitable impact 

across FINRA’s membership and 

correlates the fees assessed to the 

regulatory services provided by 

FINRA.’’ 10

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 would reduce the 

costs of approximately one-third of 

FINRA members. As described in Item 

II.A. above, FINRA considered various 

thresholds for applying the modified 

GIA pricing structure to strike the 

appropriate balance between providing 

limited relief to smaller firms negatively 

impacted by the current GIA 

calculation, while maintaining a pricing 

structure that adequately supports its 

regulatory programs and minimizes 

revenue volatility. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants or Others 

Written comments were neither 

solicited nor received. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

The foregoing rule change has become 

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

of the Act 11 and paragraph (f)(2) of Rule 

19b–4 thereunder.12 At any time within 

60 days of the filing of the proposed rule 

change, the Commission summarily may 

temporarily suspend such rule change if 

it appears to the Commission that such 

action is necessary or appropriate in the 

public interest, for the protection of 

investors, or otherwise in furtherance of 

the purposes of the Act. If the 

Commission takes such action, the 

Commission shall institute proceedings 

to determine whether the proposed rule 

should be approved or disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

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

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

FINRA–2014–046 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. 

All submissions should refer to File 

Number SR–FINRA–2014–046. This file 

number should be included on the 

subject line if email is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

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

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

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

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE., 

Washington, DC 20549, on official 

business days between the hours of 

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

filing also will be available for 

inspection and copying at the principal 

office of 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– 

2014–046 and should be submitted on 

or before December 15, 2014. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.13

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2014–27708 Filed 11–21–14; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–73622; File No. SR–FINRA– 

2014–047] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Notice of Filing of a 

Proposed Rule Change To Adopt 

FINRA Rule 2241 (Research Analysts 

and Research Reports) in the 

Consolidated FINRA Rulebook 

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 NASD 

Rule 2711 (Research Analysts and 

Research Reports) as a FINRA rule, with 

several modifications. The proposed 

rule change also would amend NASD 

Rule 1050 (Registration of Research 

Analysts) and Incorporated NYSE Rule 

344 to create an exception from the 

research analyst qualification 

requirement. The proposed rule change 

would renumber NASD Rule 2711 as 

FINRA Rule 2241 in the consolidated 

FINRA rulebook. 

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. 


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3The 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). 

4The one substantive difference between the 

rules involves the recordkeeping obligations when 

a research analyst makes a public appearance. 

Incorporated NYSE Rule 472(k)(2) requires a record 

of the public appearance to be made within 48 

hours and include specific information about the 

nature of the appearance and applicable 

disclosures. NASD Rule 2711(h)(12) provides that 

members must maintain records of public 

appearances sufficient to demonstrate compliance 

with the applicable disclosure requirements. 

5 15 U.S.C. 78o–6. 

6 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. 

7United States Government Accountability 

Office, Securities Research, Additional Actions 

Could Improve Regulatory Oversight of Analyst 

Conflicts of Interest, January 2012. 

8FINRA previously filed two proposed rule 

changes to implement recommendations from the 

Joint Report. On October 17, 2006, FINRA filed for 

immediate effectiveness a proposed rule change to 

codify previously issued interpretive guidance. See 

Securities Exchange Act Release No. 54616 (October 

17, 2006), 71 FR 62331 (October 24, 2006) (Notice 

of Filing File Nos. SR–NYSE–2006–77; SR–NASD– 

2006–112). However, FINRA withdrew the second 

proposal in anticipation of filing this more 

comprehensive consolidated proposed rule change. 

See Securities Exchange Act Release No. 55072 

(January 9, 2007), 72 FR 2058 (January 17, 2007) 

(Notice of Filing File Nos. SR–NYSE–2006–78; SR– 

NASD–2006–113) (Withdrawn October 25, 2012). 

9 In 2003, federal and state authorities and selfregulatory organizations reached a settlement with 

10 of the nation’s largest broker-dealers to resolve 

allegations of misconduct involving conflicts of 

interest between their research analysts and 

investment bankers. In 2004, two additional firms 

settled substantively under the same terms, which 

included provisions to effectively separate research 

from investment banking. 

10FINRA has not incorporated all of the Joint 

Report recommendations in the proposed rule 

change. As discussed infra at 72, FINRA is not 

incorporating the recommendation to exclude direct 

participation programs from the definition of 

‘‘research report.’’ FINRA previously addressed a 

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 

As part of the process of developing 

a new consolidated rulebook 

(‘‘Consolidated FINRA Rulebook’’),3

FINRA is proposing to adopt in the 

Consolidated FINRA Rulebook NASD 

Rule 2711 (Research Analysts and 

Research Reports) with several 

modifications as FINRA Rule 2241. The 

proposed rule change also would amend 

NASD Rule 1050 (Registration of 

Research Analysts) and Incorporated 

NYSE Rule 344 (Research Analysts and 

Supervisory Analysts) to create an 

exception from the research analyst 

qualification requirements. 

Background 

NASD Rule 2711 and Incorporated 

NYSE Rule 472 (Communications with 

the Public) (‘‘the 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 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. The integrity of 

research had eroded due to the 

pervasive influences of investment 

banking and other conflicts that became 

apparent during the market boom of the 

late 1990s. 

The current NASD and Incorporated 

NYSE rules have no significant 

differences.4 In general, the Rules 

require disclosure of conflicts of interest 

in research reports and public 

appearances by research analysts. The 

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 of the Rules’ 

provisions 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.5

NASD 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. NASD Rule 1050 defines 

‘‘research analyst’’ as ‘‘an associated 

person who is primarily responsible for 

the preparation of the substance of a 

research report or whose name appears 

on a research report.’’ Incorporated 

NYSE Rule 344 has a substantially 

similar definition. 

In December 2005, in response to a 

Commission Order, FINRA and the 

NYSE submitted to the Commission a 

joint report on the operation and 

effectiveness of the research analyst 

conflict of interest rules (‘‘Joint 

Report’’).6 Among other things, the Joint 

Report analyzed the impact of the Rules 

based on academic studies, media 

reports and commentary. The Joint 

Report concluded that the 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 results 

suggest the Rules have resulted in 

increased analyst independence and 

weakened the influence of conflicts of 

interest on analyst recommendations.7

The Joint Report also recommended 

changes to the Rules to strike an even 

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.8 The recommendations resulted 

from a comprehensive review of the 

Rules. In evaluating the Rules, FINRA 

staff considered several analytical 

touchstones: whether a provision was 

accomplishing its intended purpose; 

findings from examinations, sweeps and 

enforcement actions; interpretive 

requests and member questions; a 

comparison of provisions of the ‘‘Global 

Settlement’’; 9 potential gaps or 

overbreadth in the provisions; and input 

from members and industry groups. The 

proposed rule change maintains those 

aforementioned objectives and therefore 

incorporates many of the 

recommendations in the Joint Report 

not already incorporated into the 

current rules.10


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recommendation to provide guidance with respect 

to the road show prohibition. FINRA set forth 

guidance in Regulatory Notice 07–04 that it is 

permissible for research analysts to listen to or view 

a live webcast of a road show or other widely 

attended presentation to investors or the sales force 

from a remote location. That guidance remains 

applicable to the proposed rule change. As 

discussed infra at 21, FINRA is not incorporating 

the recommendation to completely eliminate the 

quiet period after secondary offerings. FINRA also 

is not incorporating the recommendation to expand 

the exceptions to the personal trading restrictions 

because, as discussed infra at 27, FINRA is 

proposing to replace the prescriptive restrictions 

with a requirement to establish, maintain and 

enforce policies and procedures that obviate the 

need to set out specific exceptions to those 

provisions. In addition, as discussed infra at 34–35, 

FINRA is not proposing to replace the current 

disclosure requirements with a prominent warning 

on the cover of a research report that conflicts of 

interest exist, together with information on how the 

reader may obtain more detail about the conflicts 

on the member’s Web site. 

11For economy, the discussion generally refers 

only to NASD Rules; however, those references 

apply equally to the corresponding Incorporated 

NYSE Rules. 

12See proposed FINRA Rule 2241(a)(5). The 

current definition includes, without limitation, 

many common types of investment banking 

services. FINRA is proposing 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. 

13See proposed FINRA Rule 2241(a)(9). 

14See proposed FINRA Rule 2241(a)(11). 

15See proposed FINRA Rules 2241(a)(3) and (13). 

FINRA believes it creates a more streamlined and 

user friendly rule to combine defined terms in a 

single definitional section. 

16See FINRA Rule 2210(c)(3)(A). A retail 

communication concerning a registered investment 

company that includes a performance ranking or 

performance comparison of the investment 

company with other investment companies that is 

not generally published or is created by the fund 

or its affiliates must be filed with FINRA at least 

10 business days prior to first use or publication. 

FINRA Rule 2210(c)(7) lists categories of member 

communications that are excluded from the rule’s 

filing requirements, including certain retail 

communications concerning investment companies. 

For example, FINRA Rule 2210(c)(7)(I) excludes 

from the rule’s filing requirements certain 

independently prepared reprints or excerpts of 

articles or reports concerning investment 

companies. However, this filing exclusion only 

applies to articles or reports where the publisher is 

not an affiliate of the member using the reprint or 

any underwriter or issuer of a security mentioned 

in the reprint, and neither the member using the 

reprint nor any underwriter or issuer of a security 

mentioned in the reprint has commissioned the 

reprinted article or report. 

The proposed rule change would 

retain the core provisions of the current 

rules, broaden the obligations on 

members to identify and manage 

research-related conflicts of interest, 

restructure the rules to provide some 

flexibility in compliance without 

diminishing investor protection, extend 

protections where gaps have been 

identified, and provide clarity to the 

applicability of existing rules. Where 

consistent with protection of users of 

research, the proposed rule change 

reduces burdens: For example, it would 

modify or eliminate requirements (e.g., 

quiet periods and the annual 

attestation), expand the exemption for 

firms with limited investment banking 

activity, and create a new limited 

exemption from the registration 

requirements for ‘‘research reports’’ 

produced by persons whose primary job 

function is something other than 

producing research. Taken together, 

FINRA believes the proposed 

amendments will result in rules that 

more effectively and efficiently achieve 

their intended goals of objective, 

transparent and useful research for 

investors. The proposed rule change 

reflects input from FINRA advisory 

committees and market participants and 

includes changes made in response to 

comments received to an earlier 

consolidated rule proposal set forth in 

Regulatory Notice 08–55. The 

substantive proposed changes to the 

existing research rules are described 

below.11

Definitions 

The proposed rule change mostly 

maintains the definitions in current 

NASD Rule 2711, with the following 

modifications: 

• Minor changes to the definition of 

‘‘investment banking services’’ to clarify 

that such services include all acts in 

furtherance of a public or private 

offering on behalf of an issuer.12

• clarification in the definition of 

‘‘research analyst account’’ that the 

definition does not apply to a registered 

investment company over which a 

research analyst has discretion or 

control, provided that the research 

analyst or a member of that research 

analyst’s household has no financial 

interest in the investment company, 

other than a performance or 

management fee.13

• exclusion from the definition of 

‘‘research report’’ of communications 

concerning open-end registered 

investment companies that are not listed 

or traded on an exchange (‘‘mutual 

funds’’).14

• move into the definitional section 

the definitions of ‘‘third-party research 

report’’ and ‘‘independent third-party 

research report’’ that are now in a 

separate provision of the rules.15

The current rules define ‘‘research 

analyst account’’ to include any account 

over which a research analyst or 

member of the research analyst’s 

household has a financial interest, or 

over which such person has discretion 

or control, other than an investment 

company registered under the 

Investment Company Act of 1940. The 

purpose of the exception is to 

accommodate circumstances where a 

research analyst also manages a 

registered investment company; 

otherwise, every transaction in the 

investment company’s fund would be 

subject to personal trading restrictions, 

including any blackout periods a firm 

may establish, creating substantial 

logistical difficulties in operating the 

fund. The proposed change is intended 

to clarify that the exception does not 

apply where the research analyst 

account has a financial interest in the 

fund, other than a performance or 

management fee. In those 

circumstances, FINRA believes the 

conflict is too serious because the 

research analyst account could benefit 

more directly by taking positions in 

advance of publishing research or 

making a public appearance that could 

affect the price of the holdings. 

‘‘Research report’’ currently is defined 

in Rule 2711(a)(9) as a ‘‘written 

(including electronic) communication 

that includes an analysis of equity 

securities of individual companies or 

industries, and that provides 

information reasonably sufficient upon 

which to base an investment decision.’’ 

Since shares of mutual funds are 

‘‘equity securities’’ as defined in Section 

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

communication that contains an 

analysis of mutual fund securities and 

information sufficient upon which to 

base an investment decision technically 

is covered by the definition. 

However, FINRA believes that 

communications concerning mutual 

funds should be excluded from the 

definition of ‘‘research report.’’ Sales 

material regarding mutual funds is 

already subject to a separate regulatory 

regime, including FINRA Rule 2210 and 

Securities Act of 1933 (‘‘Securities Act’’) 

Rule 482, and, subject to certain 

exceptions, retail communications 

regarding registered investment 

companies must be filed with FINRA 

within 10 business days of first use.16

The extensive content standards of these 

rules, combined with the filing and 

review of mutual fund sales material by 

FINRA staff, substantially reduce the 

likelihood that such material will 

include materially misleading 

information about the funds. Moreover, 

FINRA does not believe that the 

conflicts underpinning the research 

rules are manifest to the same extent 

with respect to reports on mutual funds. 

For example, a mutual fund’s share 

price is determined by the fund’s net 

asset value (‘‘NAV’’), which is based on 

the total value of the fund’s portfolio. 

Because most mutual funds hold a large 


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17See proposed FINRA Rule 2241(b)(1). 

18See proposed FINRA Rule 2241(b)(2). 

19Among the structural safeguards, FINRA 

believes separation between investment banking 

and research is of particular importance. As such, 

while the proposed rule change does not mandate 

physical separation between the research and 

investment banking 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 research 

and investment banking personnel. 

20See 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 further 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. 

21See proposed FINRA Rule 2241(b)(2)(A). 

number of individual securities, it is 

much less likely that a report on a 

mutual fund would affect the fund’s 

NAV to the same extent that a research 

report on a single stock might impact its 

share price. 

Identifying and Managing Conflicts of 

Interest 

The proposal creates a new section 

entitled ‘‘Identifying and Managing 

Conflicts of Interest.’’ This section 

contains an overarching provision that 

requires 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 research 

reports and public appearances by 

research analysts and the interaction 

between research analysts and persons 

outside of the research department, 

including investment banking and sales 

and trading personnel, the subject 

companies and customers.17 A second 

provision sets forth more specifically 

what those written policies and 

procedures must address. They must 

promote objective and reliable research 

that reflects the truly held opinions of 

research analysts and prevent the use of 

research or research analysts to 

manipulate or condition the market or 

favor the interests of the member or a 

current or prospective customer or class 

of customers.18 These provisions, 

therefore, 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 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. 

The proposed rule change then sets 

forth minimum requirements for those 

written policies and procedures. This 

approach allows for some flexibility to 

manage identified conflicts, with some 

specified prohibitions and restrictions 

where disclosure does not adequately 

mitigate them. Most of the minimum 

requirements have been experience 

tested and found effective. 

Sarbanes-Oxley mandates specific 

rules to prohibit or restrict conduct 

related to the preparation, approval and 

distribution of research reports and the 

determination of research analyst 

compensation. Thus, the proposal 

requires members to establish, maintain 

and enforce written policies and 

procedures reasonably designed 

specifically to achieve compliance with 

those Sarbanes-Oxley requirements. 

This approach provides firms with more 

flexibility to adopt policies and 

procedures to effectuate those mandates 

in a manner consistent with the 

member’s size and organizational 

structure. The proposed rule changes 

also goes beyond Sarbanes-Oxley to 

require additional written policies and 

procedures that further the separation 

between research and not only 

investment banking, but also other nonresearch personnel, such as sales and 

trading, that may have interests that 

conflict with independent, unbiased 

research. 

Thus, the proposed rule change 

mostly retains or slightly modifies the 

current structural safeguards that the 

Joint Report found effective to promote 

analyst independence and objective 

research, but in the form of mandated 

written policies and procedures with 

some baseline proscriptions.19 FINRA 

believes this approach will provide the 

same investor protections as the current 

rules, but impose less cost than a pure 

prescriptive approach by requiring firms 

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.20

Prepublication Review 

The required policies and procedures 

must, at a minimum, be reasonably 

designed to prohibit prepublication 

review, clearance or approval of 

research reports by persons engaged in 

investment banking services activities 

and restrict or prohibit such review, 

clearance or approval by other persons 

not directly responsible for the 

preparation, content and distribution of 

research reports, other than legal and 

compliance personnel.21 Thus, this 

provision maintains the current 

prohibition on prepublication review by 

investment banking personnel, but 

eliminates the exception in paragraph 

(b)(3) of Rule 2711 that permits prepublication review of research by 

investment banking to verify the factual 

accuracy of information in a research 

report. FINRA believes that review of 

facts in a report by investment banking 

is unnecessary in light of the numerous 

other sources available to verify factual 

information, including the subject 

company, and only raises concerns 

about the objectivity of the report. Such 

review may invite pressure on a 

research analyst from such personnel 

that could be difficult to monitor. 

Factual review by investment banking 

personnel is not permitted under the 

terms of the Global Settlement, and 

FINRA staff is not aware of any 

evidence that the factual accuracy of 

research produced by Global Settlement 

firms has suffered. Moreover, legal and 

compliance can adequately perform a 

conflict review without sharing draft 

research reports with investment 

banking. 

The proposal requires policies and 

procedures reasonably designed to at 

least restrict prepublication review by 

other non-research personnel, other 

than legal and compliance personnel. 

Thus, a firm must specify in its policies 

and procedures the circumstances, if 

any, where such review would be 

permitted as necessary and appropriate; 

for example, where non-research 

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 


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22See proposed FINRA Rule 2241(b)(2)(B). 

23See proposed FINRA Rule 2241(b)(2)(C). 

24See proposed FINRA Rule 2241(b)(2)(D). 

25See proposed FINRA Rule 2241(b)(2)(E). 

26See proposed FINRA Rule 2241(b)(2)(F). 27See proposed FINRA Rule 2241(b)(2)(G). 28See proposed FINRA Rule 2241(b)(2)(H). This 

provision is not intended to limit a member’s 

authority to discipline or terminate a 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. 

29See proposed FINRA Rule 2241(b)(2)(I). 

Consistent with the Jumpstart Our Business 

Startups Act (‘‘JOBS Act’’), those quiet periods do 

not apply following the IPO or secondary offering 

of an Emerging Growth Company (‘‘EGC’’), as that 

term is defined in Section 3(a)(80) of the Exchange 

Act. 

research analysts and those outside of 

the research department. 

Coverage Decisions 

The required policies and procedures 

must be reasonably designed to restrict 

or limit input by investment banking 

department into research coverage 

decisions to ensure that research 

management independently makes all 

final decisions regarding the research 

coverage plan.22 This provision makes 

express FINRA’s interpretation that the 

separation requirements in current Rule 

2711(b)(1) prohibit investment banking 

personnel from making any final 

coverage decisions. The proposed 

provision does not preclude investment 

banking personnel from conveying 

customer interests or providing input 

into coverage considerations, so long as 

final decisions regarding the coverage 

plan are made by research management. 

Supervision and Control of Research 

Analysts 

The required policies and procedures 

must be reasonably designed to prohibit 

persons engaged in investment banking 

activities from supervision or control of 

research analysts, including influence or 

control over research analyst 

compensation evaluation and 

determination.23 The provision is 

substantively the same as current Rule 

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

requirement that FINRA believes is 

essential to safeguarding analyst 

objectivity. 

Research Budget Determinations 

The required policies and procedures 

must be reasonably designed to limit 

determination of research department 

budget to senior management, excluding 

senior management engaged in 

investment banking services activities.24

This provision makes express FINRA’s 

interpretation that the separation 

requirements of current Rule 2711(b)(1) 

prohibit investment banking personnel 

from making any determination of 

research budget decisions. 

Compensation 

The required policies and procedures 

must be reasonably designed to prohibit 

compensation based upon specific 

investment banking services 

transactions or contributions to a 

member’s investment banking services 

activities.25 The policies and procedures 

further must require a committee that 

reports to the member’s board of 

directors—or if none exists, a senior 

executive officer—to review and 

approve at least annually the 

compensation of any research analyst 

who is primarily responsible for 

preparation of the substance of a 

research report. The committee may not 

have representation from a member’s 

investment banking department. The 

committee must consider, among other 

things, the productivity of the research 

analyst and the quality of his or her 

research and must document the basis 

for each research analyst’s 

compensation.26 These provisions are 

consistent with the requirements in 

current Rule 2711(d). 

Information Barriers 

The required policies and procedures 

must be reasonably designed to 

establish information barriers or other 

institutional safeguards to ensure that 

research analysts are insulated from the 

review, pressure or oversight by persons 

engaged in investment banking services 

activities or other persons, including 

sales and trading department personnel, 

who might be biased in their judgment 

or supervision.27 FINRA believes the 

other policies and procedures required 

by the proposed rule change to identify 

and manage research-related conflicts of 

interest should effectively result in 

compliance with this Sarbanes-Oxleybased provision. However, FINRA is 

including the provision to emphasize 

that the conflicts management must 

extend to persons other than investment 

banking personnel, including sales and 

trading department personnel, who may 

be placed in a position to supervise or 

influence the content of research reports 

or public appearances. 

Retaliation 

The required policies and procedures 

must be reasonably designed to prohibit 

direct or indirect retaliation or threat of 

retaliation against research analysts 

employed by the member or its affiliates 

by persons engaged in investment 

banking services activities or other 

employees as the result of an adverse, 

negative, or otherwise unfavorable 

research report or public appearance 

written or made by the research analyst 

that may adversely affect the member’s 

present or prospective business 

interests.28 This provision is consistent 

with current Rule 2711(j), except that it 

extends the retaliation prohibition to 

employees other than investment 

banking personnel. FINRA believes it is 

essential to a research analyst’s 

independence and objectivity that no 

person employed by a 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. 

Quiet Periods 

The required policies and procedures 

must be reasonably designed to define 

quiet periods of a minimum of 10 days 

after an initial public offering, and a 

minimum of three days after a 

secondary offering, during which the 

member must not publish or otherwise 

distribute research reports, and research 

analysts must not make public 

appearances, relating to the issuer if the 

member has participated as an 

underwriter or dealer in the initial 

public offering or, with respect to the 

quiet periods after a secondary offering, 

as a manager or co-manager of that 

offering.29 This provision represents a 

significant change from the current 

rules, which impose a 40-day quiet 

period on a member acting as manager 

or co-manager of an IPO, a 25-day quiet 

period on a member participating as an 

underwriter or dealer (other than 

manager or co-manager) in an IPO, and 

a 10-day quiet period on a member 

acting as manager or co-manager of a 

secondary offering. As mentioned 

above, the quiet periods do not apply to 

EGCs. 

With respect to these quiet-period 

provisions, the proposed rule change 

reduces the current 40-day quiet period 

for IPOs to a minimum of 10 days after 

the completion of the offering for any 

member that participated as an 

underwriter or dealer, and reduces the 

10-day secondary offering quiet period 

to three days after the completion of the 

offering for any member that 

participated as a manager or co-manager 

in the secondary offering. 

The lengthier quiet period for 

managers and co-managers was 

intended to allow other voices to 

publicly analyze and value a subject 

company before members most vested 

in the success of the offering expressed 

a view in their reports and public 

appearances. However, in light of the 

objectivity safeguards in other 


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30See Joint Report, supra note 6 at 17–20; see 

GAO Report, supra note 7 at 12–15. 

31See Facebook Shares No Lock for Pop After 

Quiet Period, available at http://blogs.wsj.com/

marketbeat/2012/06/27/facebook-shares-no-lockfor-pop-after-quiet-period/; see also Warburg 

Analyst Advises Investors to Sell JetBlue, available 

at http://articles.latimes.com/2002/may/08/

business/fi-wrap8. 

32 15 U.S.C. 78o–6(a)(2). 

33FINRA notes that the proposed changes to the 

quiet periods do not affect any quiet periods that 

may be required under federal law. 

34See proposed FINRA Rule 2241(b)(2)(L). 

35See NASD Notice to Members 07–04 (January 

2007) and NYSE Information Memo 07–11 (January 

2007). 

36See Jumpstart Our Business Startups Act, 

Frequently Asked Questions About Research 

Analysts and Underwriters, available at http://

www.sec.gov/divisions/marketreg/tmjobsactresearchanalystsfaq.htm. 

37See proposed FINRA Rule 2241.01 and Notice 

to Members 07–04 (January 2007). 

provisions of the research rules and the 

certification requirement of SEC 

Regulation AC, FINRA believes it is no 

longer necessary to impose a longer 

period on managers and co-managers. 

Both the Joint Report and the GAO 

Report noted that analysts have been 

issuing less optimistic 

recommendations since the regulatory 

reforms, particularly at firms involved 

in underwriting subject company 

securities.30 FINRA believes that the 

separation, disclosure and certification 

requirements in the rules and 

Regulation AC have had greater impact 

on the objectivity of research than 

maintaining quiet periods during which 

research may not be distributed and 

research analysts may not make public 

appearances. FINRA has observed—and 

media reports have documented— 

instances when a manager or comanager of an IPO has initiated 

coverage of the subject company with a 

‘‘hold’’ or even ‘‘sell’’ rating once the 

quiet period ended.31 These examples 

buttress FINRA’s belief that the other 

provisions of the rules and Regulation 

AC have been effective in deterring 

biased research. FINRA also notes that 

there is a cost to investors when they are 

deprived of information and analysis 

during quiet periods. 

Accordingly, FINRA is proposing to 

reduce all of the quiet periods after IPOs 

and secondary offerings. By doing so, 

FINRA believes the proposed rule 

change would promote more 

information flow to investors without 

jeopardizing the objectivity of research. 

As reflected in the Joint Report, FINRA 

was in favor of completely eliminating 

the quiet periods around secondary 

offerings; however, SEC staff has since 

indicated its view that the SarbanesOxley reference to ‘‘public offering of 

securities’’ 32 encompasses both initial 

public offerings and secondary offerings 

and therefore mandates a quiet period 

after such public offerings, except for 

EGCs. FINRA will read with interest 

comments with evidence that suggests 

that maintaining longer quiet periods for 

manager and co-managers after the IPO 

of a non-EGC issuer would provide a 

meaningful benefit to investors. 

As recommended in the Joint Report, 

the proposed rule change also 

eliminates the current quiet periods 15 

days before and after the expiration, 

waiver or termination of a lock-up 

agreement. FINRA believes that research 

issued during such periods potentially 

offers valuable market information, and 

the other provisions of the research 

rules and SEC Regulation AC provide 

sufficient protection that such research 

will reflect the analyst’s honest beliefs 

and be free from other conflicts that 

would undermine the value or integrity 

of research issued during these periods. 

FINRA understands from some 

underwriters that issuers will time 

release of negative news to occur during 

these quiet periods, thereby depriving 

investors of timely analysis of the 

impact of the news on their holdings. 

FINRA also notes that the change will 

bring consistency to the application of 

the rules, irrespective of the subject 

company, because, as noted above, 

recent amendments implementing the 

JOBS Act exempt research regarding 

EGCs from the current quiet periods.33

Solicitation and Marketing 

In addition, the proposed rule change 

requires firms to adopt written policies 

and procedures to restrict or limit 

activities by research analysts that can 

reasonably be expected to compromise 

their objectivity.34 This includes the 

existing prohibitions on participation in 

pitches and other solicitations of 

investment banking services 

transactions and road shows and other 

marketing on behalf of issuers related to 

such transactions. FINRA notes that 

consistent with existing guidance 

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.35

Pursuant to the recent amendments 

implementing the JOBS Act, the 

prohibition on participation in pitch 

meetings does not apply to a research 

analyst that attends a pitch meeting in 

connection with an IPO of an EGC that 

is also attended by investment banking 

personnel. However, FINRA notes that 

research analysts still are prohibited 

from soliciting an investment banking 

services transaction or promising 

favorable research during permissible 

attendance at those pitch meetings.36

The proposed rule change also adds 

Supplementary Material .01, which 

codifies the existing interpretation that 

the pitch provision prohibits members 

from including in pitch materials any 

information about a member’s research 

capacity in a manner that suggests, 

directly or indirectly, that the member 

might provide favorable research 

coverage.37 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 research 

analyst, since that information alone 

does not imply favorable coverage. 

Joint Due Diligence and Other 

Interactions With Investment Banking 

The proposed rule establishes a new 

proscription with respect to joint due 

diligence activities—i.e., due diligence 

by the research analyst in the presence 

of investment banking department 

personnel—during a specified time 

period. Specifically, proposed 

Supplementary Material .02 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 

research analysts, banking and subject 

companies, to prohibit the performance 

of joint due diligence prior to the 

selection of underwriters for the 

investment banking services transaction. 

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. FINRA believes 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 with 

appropriate 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 


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38See proposed FINRA Rule 2241(b)(2)(M). 

FINRA notes that this provision does not prohibit 

investment banking personnel from forwarding to a 

research analyst the name of a prospective investor 

in an investment banking transaction, provided that 

the research analyst retains discretion whether to 

contact the investor and for the content of any 

discussion that ensues. See Regulatory Notice 12– 

49 (November 2012). 

39See proposed FINRA Rule 2241.03. 

40See proposed FINRA Rule 2241(b)(2)(K). 

FINRA provided additional guidance on the current 

provision, NASD Rule 2711(e), in Regulatory Notice 

11–41 (September 2011). 

41See proposed FINRA Rule 2241(b)(2)(N). 

42See proposed FINRA Rule 2241.05. 

43See proposed FINRA Rule 2241(b)(2)(J). 

44See proposed FINRA Rule 2241(b)(2)(J)(i). 

45See proposed FINRA Rule 2241(b)(2)(J)(ii). 

on research analysts by investment 

banking. Also, FINRA understands that 

typically an analyst that is participating 

in due diligence activities will not be 

publishing research at that time due to 

quiet periods under the offering rules of 

the Securities Act or because the analyst 

has been brought ‘‘over the wall.’’ 

FINRA notes that this provision is 

consistent with restrictions in the 

Global Settlement. 

The proposed rule continues to 

prohibit investment banking department 

personnel from directly or indirectly 

directing a research analyst to engage in 

sales or marketing efforts related to an 

investment banking services transaction, 

and directing a research analyst to 

engage in any communication with a 

current or prospective customer about 

an investment banking services 

transaction.38 Supplementary Material 

.03 clarifies that three-way meetings 

between research analysts and a current 

or prospective customer in the presence 

of investment banking department 

personnel or company management 

about an investment banking services 

transaction are prohibited by this 

provision.39 FINRA believes that the 

presence of investment bankers or issuer 

management could compromise a 

research analyst’s candor when talking 

to a current or prospective customer 

about a deal. Supplementary Material 

.03 also retains the current requirement 

that any written or oral communication 

by a 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. 

Promises of Favorable Research and 

Prepublication Review by Subject 

Company 

The proposal maintains the current 

prohibition against promises of 

favorable research, a particular research 

recommendation, rating or specific 

content as inducement for receipt of 

business or compensation.40 It further 

prohibits prepublication review of a 

research report by a subject company for 

purposes other than verification of 

facts.41

Supplementary Material .05 maintains 

the current guidance applicable to the 

prepublication submission of a research 

report to a subject company. 

Specifically, sections of a draft research 

report may be provided to noninvestment banking personnel or the 

subject company for factual review, 

provided: (1) That the draft section does 

not contain the research summary, 

research rating or price target; (2) a 

complete draft of the report is provided 

to legal or compliance personnel before 

sections are submitted to noninvestment banking personnel or the 

subject company; and (3) any 

subsequent proposed changes to the 

rating or price target are accompanied 

by a written justification to legal or 

compliance and receive written 

authorization for the change. The 

member also must retain copies of any 

draft and the final version of the report 

for three years.42

Personal Trading Restrictions 

The proposal provides for a more 

encompassing and flexible supervisory 

approach with respect to research 

analyst account trading in securities of 

companies the research analyst covers. 

The current rules impose specific 

blackout periods during which a 

research analyst account may not trade 

covered securities and require preapproval by legal and compliance of 

transactions in covered securities by 

persons who oversee research analysts. 

The current rules also provide several 

exceptions to the blackout periods, 

including where a report or change in 

rating or price target results from 

‘‘significant news or a significant event 

concerning the subject company.’’ In 

addition, the blackout periods do not 

apply to: (1) Transactions in the 

securities of a registered diversified 

investment company as defined under 

Section (5)(b)(1) of the Investment 

Company Act of 1940; or (2) purchases 

or sales of securities in other investment 

funds over which neither the research 

analyst nor a member of a research 

analyst’s household has any investment 

discretion or control, provided that the 

research analyst account collectively 

owns interests representing no more 

than 1% of the fund’s assets and that the 

fund invests no more than 20% of its 

assets in securities of issuers principally 

engaged in the same types of businesses 

as companies in the research analyst’s 

coverage universe. The rules further 

prohibit a research analyst account from 

purchasing or selling any security or 

any option or derivative of such security 

in a manner inconsistent with the 

research analyst’s recommendation as 

reflected in the most recent research 

report published by the member. Legal 

or compliance may authorize 

transactions otherwise prohibited by the 

rules based on an unanticipated 

significant change in the personal 

financial circumstances of the beneficial 

owner of the research analyst account, 

provided that the authorization is in 

accordance with policies and 

procedures reasonably designed to 

avoid a conflict between the 

professional responsibilities of the 

research analyst and his or her personal 

trading and that the member maintains 

for three years written records 

documenting the justification for 

permitting the transaction. 

The proposal instead requires that 

firms establish written policies and 

procedures that restrict or limit research 

analyst account trading in securities, 

any derivatives of such securities and 

funds whose performance is materially 

dependent upon the performance of 

securities covered by the research 

analyst.43 Such policies and procedures 

must ensure that research analyst 

accounts, supervisors of research 

analysts and associated persons with the 

ability to influence the content of 

research reports do not benefit in their 

trading from knowledge of the content 

or timing of a research report before the 

intended recipients of such research 

have had a reasonable opportunity to act 

on the information in the research 

report.44 The proposal maintains, as 

minimum standards, the current 

prohibitions on research analysts 

receiving pre-IPO shares in the sector 

they cover and trading against their 

most recent recommendations. 

However, members may define financial 

hardship circumstances, if any, in 

which a research analyst would be 

permitted to trade against his or her 

most recent recommendation.45 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 


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69946 Federal Register / Vol. 79, No. 226 / Monday, November 24, 2014 / Notices 

46See proposed FINRA Rule 2241.10. 

47See Section 501 Sarbanes-Oxley Act, Public 

Law 107–204, 116 Stat. 745 (2002). 

48See proposed FINRA Rule 2241(c)(6). 

49See proposed FINRA Rule 2241(c)(1)(A). 

50See proposed FINRA Rule 2241(c)(1)(B). This is 

substantively the same as NASD Rule 2711(h)(7) but 

in the form of policies and procedures. 

51See proposed FINRA Rule 2241(c)(4). In 

comparing the proposed disclosure provisions to 

those in NASD Rule 2711, FINRA notes that in 

some instances the proposed rule change makes 

minor word or grammatical changes, uses 

streamlined language or has moved some text to 

Supplementary Material, but does not intend to 

change the substantive disclosure requirements. In 

those circumstances, FINRA considers the proposed 

disclosure provisions to be ‘‘substantively the 

same’’ as the current provisions. 

52See proposed FINRA Rule 2241(c)(4)(A). This 

is substantively the same as NASD Rule 2711(h)(1). 

53See proposed FINRA Rule 2241(c)(4)(B). This is 

substantively the same as NASD Rule 

2711(h)(2)(A)(i)a. 

54See proposed FINRA Rule 2241(c)(4)(C). This is 

substantively the same as NASD Rule 

2711(h)(2)(A)(ii). 

55See proposed FINRA Rule 2241(c)(4)(D). This 

provision, together with proposed FINRA Rule 

2241.04, is substantively the same as NASD Rules 

2711(h)(2)(A)(iii)a., (iv) and (v). 

56See proposed FINRA Rule 2241(c)(4)(E). This is 

substantively the same as NASD Rule 

2711(h)(2)(A)(iii)b. 

57See proposed FINRA Rule 2241(c)(4)(G). This is 

substantively the same as NASD Rule 2711(h)(8). 

58See proposed FINRA Rule 2241(c)(4)(H). This 

is substantively the same as NASD Rule 

2711(h)(2)(A)(i)b. 

59For example, FINRA would consider it to be a 

material conflict of interest if the research analyst 

or a member of the research analyst’s household 

serves as an officer, director or advisory board 

member of the subject company. 

60See proposed FINRA Rule 2241(c)(4)(I). 

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.46 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. 

FINRA believes these provisions will 

provide enhanced investor protection, 

while allowing firms to tailor 

management of conflicts related to 

personal trading of subject company 

securities to their particular size and 

business model. The enhanced 

protection results from expanding the 

scope of persons covered by the 

provisions to include not only research 

analyst accounts, but also those of 

supervisors and persons with an ability 

to influence the content of research 

reports. The proposal also preserves the 

key protections of the current rules by 

preventing research analysts from 

trading ahead of their customers and by 

generally requiring consistency between 

personal trading and recommendations 

to customers. 

Content and Disclosure in Research 

Reports 

With a couple of modifications, the 

proposed rule change maintains the 

current disclosure requirements. Thus, 

the proposed rule change maintains the 

mandated Sarbanes-Oxley disclosure 

requirements,47 as well as additional 

disclosure obligations—meanings and 

distribution of ratings and price charts, 

for example—that are designed to 

provide investors with useful 

information on which to base their 

investment decisions. The proposed 

rule change also maintains the 

requirement that disclosures be 

presented on the front page of the 

research report or the front page must 

refer to the page on which the 

disclosures are found. Electronic 

research reports may provide a 

hyperlink directly to the required 

disclosures. All disclosures and 

references to required disclosures must 

be clear, comprehensive and 

prominent.48

The proposed rule change adds a 

requirement that a member must 

establish, maintain and enforce written 

policies and procedures reasonably 

designed to ensure that purported facts 

in its research reports are based on 

reliable information.49 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. The policies and 

procedures also must be reasonably 

designed to ensure that any 

recommendation or rating has a 

reasonable basis in fact 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.50

In addition, the proposed rule change 

would require a member to disclose in 

any research report at the time of 

publication or distribution of the 

report: 51

• If the research analyst or a member 

of the 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; 52

• if the research analyst has received 

compensation based upon (among other 

factors) the member’s investment 

banking revenues; 53

• if the member or any of its affiliates: 

(i) Managed or co-managed a public 

offering of securities for the subject 

company in the past 12 months; (ii) 

received compensation for investment 

banking services from the subject 

company in the past 12 months; or (iii) 

expects to receive or intends to seek 

compensation for investment banking 

services from the subject company in 

the next three months; 54

• if, as of the end of the month 

immediately preceding the date of 

publication or distribution of a research 

report (or the end of the second most 

recent month if the publication or 

distribution 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; 55

• if the subject company is, or over 

the 12-month period preceding the date 

of publication or distribution of the 

research report has been, a client of the 

member, and if so, the types of services 

provided to the issuer. Such services, if 

applicable, must be identified as either 

investment banking services, noninvestment banking services, noninvestment banking securities-related 

services or non-securities services; 56

• if the member was making a market 

in the securities of the subject company 

at the time of publication or distribution 

of the research report; 57 and 

• if the research analyst received any 

compensation from the subject company 

in the previous 12 months.58

The proposal also expands upon the 

current ‘‘catch all’’ disclosure, which 

mandates disclosure of any other 

material conflict of interest of the 

research analyst or member that the 

research analyst knows or has reason to 

know of at the time of the publication 

or distribution of a research report or 

public appearance.59 The proposed rule 

change goes beyond the existing 

provision by requiring 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.’’ 60 In so doing, the 

proposed rule change would capture 


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61See proposed FINRA Rule 2241(c)(4)(F). The 

requirement to disclose beneficial ownership of 1% 

or more of any class of common equity securities 

of the subject company is the same as NASD Rule 

2711(h)(1)(B). 

62See proposed FINRA Rule 2241(c)(5). 

63See proposed FINRA Rule 2241(c)(7). This is 

substantively the same as Rule 2711(h)(11). 64 15 U.S.C 78o–6(b). 65See proposed FINRA Rule 2241(d). 66See NASD Rules 2711(h)(1), (h)(2)(B) and (C), 

(h)(3) and (h)(9). 

67See proposed FINRA Rule 2241.08. 

68See proposed FINRA Rule 2241(d)(3). 

69See proposed FINRA Rule 2241(e). This is 

substantively the same as NASD Rule 2711(h)(9). 

70See proposed FINRA Rule 2241(f). 

71While current Rule 2711(f)(6) does not contain 

the word ‘‘promptly,’’ FINRA has interpreted the 

provision to require prompt notification of 

termination of coverage of a subject company. 

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 research 

analyst or others who can influence the 

content of a research report. Rather, it 

would cover disclosure of those 

conflicts that should reasonably be 

discovered by those persons in the 

ordinary course of discharging their 

functions. 

The proposed rule change also 

modifies the requirement to disclose 

when a member or its affiliates own 

securities of the subject company to 

include any ‘‘significant financial 

interest in the debt or equity of the 

subject company,’’ including, at a 

minimum, beneficial ownership of 1% 

or more of any class of common equity 

securities of the subject company.61

Thus, among other things, the proposal 

delineates the obligation to disclose 

significant debt holdings as a material 

conflict of interest that currently is 

captured by the ‘‘other material conflict 

of interest’’ provision referenced above. 

FINRA believes that an equity research 

report that analyzes the 

creditworthiness of the subject company 

could impact the price of the company’s 

debt securities, and therefore a material 

conflict exists where the member or its 

affiliates maintains significant debt 

holdings in the subject company. The 

determination of beneficial ownership 

would continue to be based upon the 

standards used to compute ownership 

for the purposes of the reporting 

requirements under Section 13(d) of the 

Exchange Act. 

The proposal retains the general 

exception for disclosure that would 

reveal material non-public information 

regarding specific potential future 

investment banking transactions of the 

subject company.62 The proposal also 

continues to permit a member that 

distributes a research report covering six 

or more companies (compendium 

report) to direct the reader in a clear 

manner as to where the applicable 

disclosures can be found. An electronic 

compendium research report may 

hyperlink to the disclosures. A paper 

compendium report must include a tollfree number or a postal address where 

the reader may request the disclosures. 

In addition, paper research reports may 

include a web address where the 

disclosures can be found.63

As detailed in the Joint Report, FINRA 

believes that a web-based disclosure 

approach would be at least as effective 

and a more efficient means to inform 

investors of conflicts of interests. To 

that end, FINRA recommended—and 

eventually proposed in SR–NASD– 

2006–113—to permit members, in lieu 

of publication in the research report 

itself, to disclose their conflicts of 

interest by including a prominent 

warning on the cover of a research 

report that conflicts of interest exist, 

together with information on how the 

reader may obtain more detail about 

these conflicts on the member’s Web 

site. However, FINRA has subsequently 

been informed by SEC staff that it 

believes such a web-based disclosure 

approach would not be consistent with 

the Sarbanes-Oxley requirement ‘‘to 

disclose [conflicts of interest] in each 

report’’; 64 therefore, FINRA has not reproposed it here. 

Disclosures in Public Appearances 

The proposal groups in a separate 

provision the disclosures required when 

a research analyst makes a public 

appearance.65 The required disclosures 

remain substantively the same as under 

the current rules,66 with one exception: 

Consistent with the modification 

referenced above with respect to 

disclosure in research reports, a 

research analyst is similarly required to 

disclose in a public appearance if a 

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, as 

computed in accordance with Section 

13(d) of the Exchange Act. Unlike in 

research reports, the ‘‘catch all’’ 

disclosure requirement in public 

appearances applies only to a conflict of 

interest of the research analyst or 

member that the research analyst knows 

or has reason to know at the time of the 

public appearance and does not extend 

to conflicts that an associated person 

with the ability to influence the content 

of a research report or public 

appearance knows or has reason to 

know. The proposed rule change defines 

a person with the ‘‘ability to influence 

the content of a research report’’ as an 

associated person who, in the ordinary 

course of that person’s duties, has the 

authority to review the research report 

and change that research report prior to 

publication or distribution.67 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 proposal 

also retains the current requirement in 

NASD Rule 2711(h)(12) to maintain 

records of public appearances sufficient 

to demonstrate compliance by research 

analysts with the applicable disclosure 

requirements.68

Disclosure Required by Other Provisions 

With respect to both research reports 

and public appearances, members and 

research analysts would continue to be 

required to comply with applicable 

disclosure provisions of FINRA Rule 

2210, Incorporated NYSE Rule 472 and 

the federal securities laws.69

Termination of Coverage 

The proposal retains with nonsubstantive modifications the provision 

in the current rules that requires a 

member to notify its customers if it 

intends to terminate coverage of a 

subject company.70 Such notification 

must be made promptly 71 using the 

member’s ordinary means to 

disseminate research reports on the 

subject company to its various 

customers. Unless impracticable, the 

notice must be accompanied by a final 

research report, comparable in scope 

and detail to prior research reports, and 

include a final recommendation or 

rating. If impracticable to provide a final 

research report, recommendation or 

rating, a firm must disclose to its 

customers the reason for terminating 

coverage. FINRA expects such 

circumstances to be exceptional, such as 

where a research analyst covering a 

subject company or sector has left the 

member or the member has 

discontinued coverage of the industry or 

sector. FINRA believes this provision, 

which is consistent with the current 

rules, has been effective in achieving its 

original purpose to prevent firms from 

dropping coverage without notice or 

explanation instead of issuing a negative 

report on a current or prospective 

investment banking client. 


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72See proposed FINRA Rule 2241(g). 

73See proposed FINRA Rule 2241.07. 

74NASD Rule 2711(h)(13)(A) currently requires 

the distributing member firm to disclose the 

following, if applicable: (1) If the member owns 1% 

or more of any class of equity securities of the 

subject company; (2) if the member or any affiliate 

has managed or co-managed a public offering of 

securities of the subject company or 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 such services in the next three months; (3) if the 

member makes a market in the subject company’s 

securities; and (4) any other actual, material conflict 

of interest of the research analyst or member of 

which the research analyst knows or has reason to 

know at the time the research report is distributed 

or made available. 

75See proposed FINRA Rule 2241(h)(4). 

76See proposed FINRA Rules 2241(h)(1) and 

(h)(3). 

77See proposed FINRA Rule 2241(h)(2). 

Distribution of Member Research 

Reports 

The proposal codifies an existing 

interpretation of FINRA Rule 2010 and 

provides additional guidance regarding 

selective—or tiered—dissemination of a 

firm’s research reports. In that regard, 

the proposal requires firms to establish, 

maintain and enforce written policies 

and procedures reasonably designed to 

ensure that a research report is not 

distributed selectively to internal 

trading personnel or a particular 

customer or class of customers in 

advance of other customers that the firm 

has previously determined are entitled 

to receive the research report.72 The 

proposal includes further guidance to 

explain that firms may provide different 

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.73

A member, for example, may offer one 

research product for those with a longterm investment horizon (‘‘investor 

research’’) and a different 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. 

Thus, for example, a firm may define a 

‘‘buy’’ rating in investor research to 

mean that a stock will outperform the 

S&P 500 over the next 12 months. The 

same firm may define ‘‘sell’’ in trading 

research to mean a stock will 

underperform its sector index over the 

next month. The firm could maintain a 

‘‘buy’’ in investor research at the same 

time it had a ‘‘sell’’ in trading research 

on the same stock if the firm believed, 

for example, that the company would 

report an earnings shortfall next week 

that would lead to a short-term drop in 

price relative to the sector index, but 

that the stock would recover to 

outperform the S&P 500 over the next 12 

months. However, a member may not 

differentiate a research product based 

on the timing of receipt of a 

recommendation, rating or other 

potentially market moving information, 

nor may a member label a research 

product with substantially the same 

content as a different research product 

as a means to allow certain customers to 

trade in advance of other customers. 

In addition, a member that provides 

different research products and services 

for certain customers must inform its 

other customers that its alternative 

research products and services may 

reach different conclusions or 

recommendations that could impact the 

price of the security. 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 Research 

Reports 

The proposal expands upon the thirdparty research report distribution 

requirements in the current rules. The 

proposal generally maintains the 

existing third-party disclosure 

requirements,74 with one modification. 

Consistent with the proposed disclosure 

requirement discussed above with 

respect to a member’s own research 

reports, a distributing member would be 

required to disclose if the member or its 

affiliates maintain a significant financial 

interest in the debt or equity securities 

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. The proposed rule 

change also would require 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.75 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 research disseminated to 

investors. As is the case in the existing 

Rules, the proposal requires that a 

member establish, maintain and enforce 

written policies and procedures 

reasonably designed to ensure the 

completeness and accuracy of all of the 

applicable disclosures to any third-party 

research it distributes. 

In addition, the proposal continues to 

address qualitative aspects of thirdparty research reports. For example, the 

proposal maintains, but in the form of 

policies and procedures, the existing 

requirement that a registered principal 

or supervisory analyst review and 

approve third-party research reports 

distributed by a member. To that end, 

the proposed rule change requires a 

member to establish, maintain and 

enforce written policies and procedures 

reasonably designed to ensure that any 

third-party research it contains no 

untrue statement of material fact and is 

otherwise not false or misleading. For 

the purpose of this requirement, a 

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

untrue statement of material fact or any 

false or misleading information that 

should be known from reading the 

research report or is known based on 

information otherwise possessed by the 

member.76 The proposal further 

prohibits a member from distributing 

third-party research if it knows or has 

reason to know that such research is not 

objective or reliable.77 FINRA believes 

that, where a member is distributing or 

‘‘pushing-out’’ third-party research, the 

member must have 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 

third-party research is, in fact, objective 

and reliable. 

The proposal maintains the existing 

exceptions for ‘‘independent third-party 

research reports.’’ Specifically, such 


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78See proposed FINRA Rule 2241(h)(5) and (6). 

79See proposed FINRA Rule 2241(h)(7). 

80See NASD Rule 2711(k). 

81See NASD Rule 2711(d)(2). 

82See NASD Rule 2711(d) and (k). 

83See proposed FINRA Rules 2241(b)(2)(E) and 

(i). 

84See proposed NASD Rule 1050(b) and 

proposed Incorporated NYSE Rule 344.10. 

research does not require principal preapproval or, where the third-party 

research is not ‘‘pushed out,’’ the thirdparty disclosures.78 As to the latter, a 

member will not be considered to have 

distributed independent third-party 

research where the research is made 

available by the member: (a) Upon 

request; (b) through a membermaintained Web site; or (c) to a 

customer in connection with a solicited 

order in which the registered 

representative has informed the 

customer, during the solicitation, of the 

availability of independent research on 

the solicited equity security and the 

customer requests such independent 

research. 

Finally, under the proposal, members 

also must ensure that a third-party 

research report is 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 research 

report.79 This requirement codifies 

guidance provided in Notice to 

Members 04–18. 

Exemption for Firms With Limited 

Investment Banking Activity 

The current rule exempts firms with 

limited investment banking activity— 

those that over the previous three years, 

on average per year, have managed or 

co-managed 10 or fewer investment 

banking transactions and generated $5 

million or less in gross revenues from 

those transactions—from the provisions 

that prohibit a research analyst from 

being subject to the supervision or 

control of an investment banking 

department employee because the 

potential conflicts with investment 

banking are minimal.80 However, those 

firms remain subject to the provision 

that requires the compensation of a 

research analyst to be reviewed and 

approved annually by a committee that 

reports to a member’s board of directors, 

or a senior executive officer if the 

member has no board of directors.81

That provision further prohibits 

representation on the committee by 

investment banking department 

personnel and requires the committee to 

consider the following factors when 

reviewing a research analyst’s 

compensation: (1) The research analyst’s 

individual performance, including the 

research analyst’s productivity and the 

quality of research; (2) the correlation 

between the research analyst’s 

recommendations and the performance 

of the recommended securities; and (3) 

the overall ratings received from clients, 

the sales force and peers independent of 

investment banking, and other 

independent ratings services.82 Thus, 

the current exemption provides limited 

relief with respect to research analyst 

compensation determination, even 

where it is permissible for an 

investment banker to supervise and 

control a research analyst. FINRA 

believes it follows logically to allow 

those who supervise research analysts 

under such circumstances also to be 

involved in all aspects of the evaluation 

and determination of those analysts’ 

compensation. Therefore, the proposed 

rule change extends the exemption for 

firms with limited investment banking 

activity so that such firms would not be 

subject to the compensation committee 

provision. FINRA notes that the 

proposal still prohibits these firms from 

compensating a research analyst based 

upon specific investment banking 

services transactions or contributions to 

a member’s investment banking services 

activities.83

The proposed rule change further 

exempts firms with limited investment 

banking activity from the provisions 

restricting or limiting research coverage 

decisions and budget determination. 

While these two provisions are not in 

the current rules, as noted above, FINRA 

interprets NASD Rule 2711(b) to 

prohibit investment banking from 

making any final coverage decisions or 

determination of research budget. As 

such, the current exemption in NASD 

Rule 2711(k) effectively covers these 

two new provisions and so the proposal 

does not represent a substantive change. 

In addition, the proposal exempts 

eligible firms from the requirement to 

establish information barriers or other 

institutional safeguards to insulate 

research analysts from the review or 

oversight by investment banking 

personnel or other persons, including 

sales and trading personnel, who may 

be biased in their judgment or 

supervision. However, those firms still 

are required to establish, maintain and 

enforce written policies and procedures 

reasonably designed to ensure that 

research analysts are insulated from 

pressure by investment banking and 

other non-research personnel who might 

be biased in their judgment or 

supervision. FINRA believes that even 

where research analysts need not be 

structurally separated from investment 

banking or other non-research 

personnel, they should not be subject to 

pressures that could compromise their 

independence and objectivity. 

FINRA reviewed and analyzed deal 

data for calendar years 2009 through 

2011 to determine whether any 

adjustments should be made to these 

exemption standards. The review 

targeted firms that either managed or comanaged 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 co-managed 

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. 

Exemption From Registration 

Requirements for Certain ‘‘Research 

Analysts’’ 

As recommended in the Joint Report, 

the proposed rule change amends the 

definition of ‘‘research analyst’’ for the 

purposes of the registration and 

qualification requirements to limit the 

scope to persons who produce ‘‘research 

reports’’ and whose primary job 

function is to provide investment 

research (e.g. registered representatives 

or traders generally would not be 

included).84 The revised definition is 

not intended to carve out anyone for 

whom the preparation of research is a 

significant component of their job; 

rather, it is intended to provide relief for 

those who produce research reports on 

an occasional basis. The existing 

research rules, in accordance with the 

Sarbanes-Oxley mandates, are 

constructed such that the author of a 

communication that meets the 

definition of a ‘‘research report’’ is a 

‘‘research analyst,’’ irrespective of his or 

her title or primary job. FINRA believes 

that the registration and qualification 

requirements, which are not mandated 

by Sarbanes-Oxley, were intended for 

those individuals whose principal job 

function is to produce research, while 

the balance of the research rules are 

intended to foster objective analysis, 

transparency of certain conflicts and to 

provide beneficial information to 

investors. As such, the proposed 

exemption would extend only to the 


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69950 Federal Register / Vol. 79, No. 226 / Monday, November 24, 2014 / Notices 

85NASD Rules 3010 and 3012 have been adopted 

with changes as consolidated FINRA rules. The new 

rules become effective December 1, 2014. See supra 

note 20. 

86See proposed FINRA Rule 2241.09. FINRA 

Rule 0140(a), among other things, provides that 

persons associated with a member shall have the 

same duties and obligations as a member under the 

Rules. 

87See proposed FINRA Rule 2241(j). 

88 15 U.S.C. 78o–3(b)(6). 89 15 U.S.C. 78o–6. 

registration requirements, while all 

other obligations applicable to the 

production and distribution of research 

reports would remain. 

Attestation Requirement 

The proposal deletes the requirement 

to attest annually that the firm has in 

place written supervisory policies and 

procedures reasonably designed to 

achieve compliance with the applicable 

provisions of the rules, including the 

compensation committee review 

provision. FINRA notes that firms 

already are obligated pursuant to NASD 

Rule 3010 (Supervision) to have a 

supervisory system reasonably designed 

to achieve compliance with all 

applicable securities laws and 

regulations and FINRA rules. Moreover, 

the research rules also are subject to the 

supervisory control rules (NASD Rule 

3012) and the annual certification 

requirement regarding compliance and 

supervisory processes (FINRA Rule 

3130).85 As such, FINRA believes a 

separate attestation requirement for the 

research rules is unnecessary. 

Obligations of Persons Associated With 

a Member 

Supplementary Material .09 clarifies 

the obligations of each associated 

person under those provisions of the 

proposed rule change that require a 

member to restrict or prohibit certain 

conduct by establishing, maintaining 

and enforcing particular written policies 

and procedures. Specifically, the rule 

provides that, consistent with FINRA 

Rule 0140, persons associated with a 

member must comply with such 

member’s policies and procedures as 

established pursuant to proposed 

FINRA Rule 2241.86 Failure of an 

associated person to comply with such 

policies and procedures shall constitute 

a violation of the rule itself. In addition, 

consistent with Rule 0140, the rule 

states 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 

policies and procedures required by 

provisions of Rule 2241, 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 rules. 

Thus, for example, where the 

proposed rule requires a member to 

establish policies and procedures to 

prohibit 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. 

General Exemptive Authority 

The proposed rule change would 

provide FINRA, pursuant to the 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.87 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,88 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 the 

proposed rule change protects investors 

and the public interest by maintaining, 

and in some cases expanding, structural 

safeguards to insulate research analysts 

from influences and pressures that 

could compromise the objectivity of 

research reports and public appearances 

on which investors rely to make 

investment decisions. FINRA further 

believes that the proposed rule change 

prevents fraudulent and manipulative 

acts and practices by requiring firms to 

identify and manage, often with 

extensive disclosure, conflicts of 

interest related to the preparation, 

content and distribution of research. At 

the same time, the proposal furthers the 

public interest by increasing 

information flow to investors in select 

circumstances—e.g., before and after the 

expiration of lock up provisions—where 

FINRA believes the integrity of research 

will not be compromised. 

Moreover, the proposed rule change is 

consistent with Section 15D of the 

Act,89 which requires rules reasonably 

designed to address conflicts of interest 

that can arise when research analysts 

recommend equity securities in research 

reports and public appearances. The 

proposed rule change requires firms to 

establish, maintain and enforce written 

policies and procedures reasonably 

designed to achieve compliance with 

the provisions of Section 15D, 

including: Restricting prepublication 

clearance or approval of research reports 

by investment banking personnel or 

other persons not directly responsible 

for the preparation, content and 

distribution of research reports; 

prohibiting persons engaged in 

investment banking activities from 

supervision or control of research 

analysts, including influence or control 

over research analyst compensation 

evaluation and determination; 

prohibiting retaliation or threat of 

retaliation against research analysts for 

research or public appearances that are 

unfavorable to the member’s business 

interests; establishing quiet periods after 

public offerings during which members 

that have participated in the offering 

may not publish or otherwise distribute 

research; and establishing structural or 

institutional safeguards to protect 

analysts from the review, pressure or 

oversight of investment bankers or other 

non-research personnel that might be 

biased in their judgment or supervision. 

In addition, the proposed rule change 


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90See Joint Report, supra note 6 at 16–26; see 

GAO Report, supra note 7 at 12–23. 

91See GAO Report, supra note 7 at 12–15. 

92Letter from Daniel H. Kolber, to Marcia E. 

Asquith, Corporate Secretary, FINRA, dated 

November 10, 2008 (‘‘Kolber’’); letter from John I. 

Fitzgerald, Leerink Swann LLC, to Marcia E. 

Asquith, Corporate Secretary, FINRA, dated 

November 10, 2008 (‘‘Leerink’’); letter from 

Goodwin Procter LLP, to Marcia E. Asquith, 

Corporate Secretary, FINRA, dated November 11, 

2008 (‘‘NVCA’’); letter from Elliot R. Curzon, 

Dechert LLP, to Marcia E. Asquith, Corporate 

Secretary, FINRA, dated November 14, 2008 

(‘‘Dechert’’); and letter from Amal Aly, Managing 

Director and Associate General Counsel, Securities 

Industry and Financial Markets Association, to 

Marcia E. Asquith, Corporate Secretary, FINRA, 

dated November 14, 2008 (‘‘SIFMA’’). 

requires disclosures consistent with 

Section 15D, including the requirement 

to disclose any material conflict of 

interest of the research analyst or 

member that the research analyst knows 

or has reason to know at the time of 

publication or distribution of a research 

report or during a public appearance. 

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 primarily 

reorganizes and restructures the current 

research rules, while maintaining the 

core provisions that have generally 

proven effective to promote objective 

and reliable research, as detailed 

through academic studies and other 

observations in the Joint Report and the 

GAO Report.90 The GAO Report, for 

example, concluded that empirical 

results suggest the rules have resulted in 

increased analyst independence and 

weakened the influence of conflicts of 

interest on analyst recommendations.91

The proposed rule change also amends 

the current rules to ensure the objectives 

of independent research analysts and 

unbiased research are achieved in the 

most effective manner. 

In some places, the proposed rule 

change reduces regulatory uncertainty 

around the applicability of current 

rules. For example, the new provision 

regarding distribution of member 

research clarifies an existing 

interpretation prohibiting selective 

dissemination of research and provides 

guidance as to how members may 

differentiate research products to 

customers. In other places, the proposed 

rule change extends existing protections 

and adds new protections to fill gaps in 

the rules. Thus, the proposed rule 

change requires members to proactively 

identify and mitigate emerging conflicts 

related to the production and 

distribution of research, as members are 

best situated to spot such conflicts that 

may arise based on their particular 

business models or structures. As 

another example, the proposed rule 

change also extends the obligation to 

disclose material conflicts to associated 

persons with the ability to influence the 

content of a research report. This 

provision would close a gap that exists 

whereby persons who oversee research 

and research analysts could influence 

the recommendation or conclusions in a 

research report without disclosing their 

own material conflicts of interest or 

those of the member of which only they, 

and not the research analyst, know or 

have reason to know. 

The new rules would impose burdens 

primarily arising from establishing, 

maintaining and enforcing new written 

policies and procedures to comply with 

the rule change, as well as a few new 

disclosures to customers to the extent a 

member’s research activities require 

them. FINRA believes the additional 

burdens associated with these new 

provisions are minimal, but necessary to 

ensure the protections of the rules 

cannot be frustrated. At the same time, 

the proposed rule change provides 

increased flexibility for members to 

create compliance programs more 

closely tailored to their businesses and 

organizational structures, without 

diminishing investor protection. For 

example, as detailed in Item 3 of this 

filing, the proposed rule change replaces 

the many current prescriptive 

requirements with respect to personal 

trading by research analyst accounts 

with a more flexible approach that 

requires policies and procedures to 

ensure that such accounts do not benefit 

in their trading from knowledge of the 

content and timing of research before 

the intended recipients have a 

reasonable opportunity to act on the 

information. FINRA believes this 

proposed change will maintain the 

current protection against a research 

analyst putting his or her own financial 

interests ahead of the analyst’s 

customers’ interest, but the increased 

flexibility will reduce costs and create 

fewer impediments to competition. 

The proposed rule change also 

promotes capital formation and lessens 

compliance costs for firms by 

eliminating or reducing quiet periods 

during which research cannot be 

published or otherwise disseminated. 

FINRA further analyzed deal data to 

confirm that the parameters for the 

exemption for firms with limited 

investment banking activity remain 

appropriate and extended the 

exemption to include compensation 

determination provisions, thereby 

relieving eligible firms from an 

appreciable burden. The proposed rule 

change also lessens costs by creating a 

new limited exemption from the 

registration requirements for ‘‘research 

reports’’ produced by persons whose 

primary job function is something other 

than producing research and by 

eliminating the annual attestation 

requirement. 

To help assess and minimize any 

burden on competition resulting from 

the proposal, FINRA consulted with 

several of its advisory committees and 

other industry members to solicit 

suggested changes to the existing rules 

and to obtain feedback on FINRA’s 

proposed changes. Finally, as set forth 

in Item 5 of this filing, FINRA carefully 

considered comments to an earlier 

version of the proposed rule change and 

made several changes in response to 

those comments. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

FINRA solicited comments on an 

earlier iteration of the proposed rule 

change in Regulatory Notice 08–55 

(‘‘Notice Proposal’’). The comment 

deadline expired on November 14, 2008. 

FINRA received five responses to the 

Notice Proposal.92 Commenters 

expressed support for many aspects of 

the proposal, including reductions to 

the quiet period provisions, the 

exemption for members with limited 

investment banking activity and the 

more flexible supervisory approach with 

respect to research analyst account 

trading. SIFMA further expressed 

appreciation for the guidance with 

respect to selective dissemination of 

research products. Commenters 

nevertheless urged several 

modifications to the proposal, some of 

which have been incorporated into the 

proposed rule change. FINRA responds 

to the material comments to the Notice 

Proposal below. 

Policies and Procedures 

Both the Notice Proposal and the 

proposed rule change differ in several 

respects from current NASD Rule 2711, 

perhaps most notably in adopting a 

policies and procedures approach to 

identification and management of equity 

research-related conflicts. FINRA has 

reintroduced several current provisions 

to the proposed rule change to clarify 

certain minimum standards and 

disclosure requirements. However, 

FINRA notes that the proposed rule 

change also establishes new standards 

of conduct. FINRA will provide 


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93See Letter from Philip A. Shaikun, Associate 

General Counsel, NASD, to James A. Brigagliano, 

Assistant Director, Division of Market Regulation, 

SEC, dated July 29, 2003, at page 8. 

94 Id. 

guidance, where appropriate, as to the 

application of the new standards. 

FINRA cautions that members should 

not conclude that, where specific 

conduct prohibitions or disclosure 

requirements that exist in the current 

provisions have not been expressly 

included in the proposed rule change, 

such conduct is now permissible or 

such disclosures are no longer required. 

Firms must apply the new proposed 

standards to make those determinations. 

FINRA notes that some of the new 

standards are intended to require 

thoughtful compliance by members that 

may require them to adapt and change 

their policies and procedures as they 

gain experience and encounter new 

circumstances that may impact on the 

objectivity and reliability of research. 

SIFMA endorsed the principle in the 

Notice Proposal and proposed rule 

change that members must implement 

policies and procedures reasonably 

designed to identify and effectively 

manage conflicts of interest related to 

the preparation, content and 

distribution of research reports and 

public appearances by research analysts. 

Yet SIFMA found ambiguous and 

overbroad the companion principle that 

such policies and procedures should 

promote ‘‘reliable’’ research that reflects 

the ‘‘truly held opinions’’ of research 

analysts and prevent the use of research 

to ‘‘manipulate or condition the market’’ 

or ‘‘favor the interests of the member or 

certain current or prospective clients.’’ 

SIFMA asked FINRA to delete this 

introductory sentence and substitute the 

following alternative: ‘‘a member’s 

policies and procedures must be 

reasonably designed to promote 

independent and objective research that 

reflects the personal views of the 

analyst.’’ Among other things, SIFMA 

asserted that the concept of ‘‘reliable’’ 

research is new and undefined. 

FINRA believes that the term 

‘‘reliable’’ is commonly understood. 

FINRA further believes that the other 

terms referenced above and cited by 

SIFMA as vague are similarly 

unambiguous in describing the conduct 

that a member’s policies and procedures 

must address or guard against. SIFMA 

made similar comments with respect to 

the words ‘‘reliable information’’ in the 

content and disclosure requirements of 

the Notice Proposal. As discussed below 

in response to that comment, that term 

is used in Sarbanes-Oxley without 

definition. 

SIFMA requested that FINRA confirm 

that with respect to the proposed 

prohibitions on analyst compensation, 

consistent with current rules, the 

proposal would not prevent a member 

from compensating analysts for 

engaging in permissible vetting, 

commitment committee participation, 

due diligence, teach-ins, investor 

education, and other permissible 

banking-related activities. SIFMA also 

recommended that the proposal be 

amended so that compensation 

committees are required to consider the 

enumerated factors when reviewing a 

research analyst’s compensation only to 

the extent they are applicable. SIFMA 

suggested adding two new factors that 

are permissible for members to consider 

in determining analyst compensation, 

including the analyst’s seniority and 

experience, and the market for hiring 

and retention of analysts, noting that 

these factors are critical to the proper 

determination of analyst compensation 

and are specifically identified in the 

Global Settlement. 

The proposal prohibits compensation 

based upon specific investment banking 

transactions or contributions to a 

member’s investment banking services 

activities. It also requires the 

compensation review committee to 

consider the research analyst’s 

productivity and quality of research. 

Both of these standards exist in the 

current rules. As SIFMA noted, FINRA 

staff previously stated that ‘‘screening 

potential investment banking clients is 

one of many factors to measure the 

quality of an analyst’s research.’’ 93 As 

such, FINRA concluded that the activity 

could be considered in determining a 

research analyst’s compensation but 

‘‘may not be given undue weight 

relative to evaluating the quality of 

other research work product.’’ FINRA 

further cautioned, however, that ‘‘the 

size of any resultant or excluded 

investment banking deals should be 

irrelevant in assessing the quality of 

research.’’ 94 The same guidance applies 

to the compensation provisions in the 

proposed rule change. FINRA considers 

commitment committee participation to 

be part of the vetting process and further 

views permissible due diligence and 

education of the sales force and 

investors as other legitimate factors to 

consider in measuring the productivity 

and quality of research, with the same 

caveats previously articulated regarding 

undue weight and the size of related 

investment banking services 

transactions. FINRA has amended the 

proposed rule text to clarify that the 

enumerated factors must be considered 

only to the extent applicable. The 

proposed rule change does not preclude 

consideration of additional factors, 

including the analyst’s experience and 

market factors. The proposed rule 

change only sets out requirements and 

prohibitions with respect to 

compensation, and therefore FINRA has 

not included in the rule text the 

suggested permissible factors. 

SIFMA stated its support for ‘‘the 

general principle that members should 

implement policies and procedures 

reasonably designed to prevent market 

manipulation or front running of 

research.’’ However, SIFMA questioned 

the necessity of FINRA’s language in 

proposed Rule 2241(b)(2) that would 

require a firm’s policies and procedures 

to be reasonably designed to prevent the 

use of research reports or research 

analysts to ‘‘manipulate or condition the 

market or favor the interests of the 

member or certain current or 

prospective clients.’’ According to 

SIFMA, that principle is already 

codified in existing SEC antimanipulation rules and FINRA’s front 

running prohibition in FINRA Rule 

5270. Even if true, FINRA believes it is 

entirely appropriate to include that 

important principle as it relates to 

research reports and research analysts in 

a rule that is dedicated to research 

conflicts of interest and the conduct of 

research analysts. Moreover, FINRA 

notes that the proscribed conduct in its 

proposal is not congruent with either 

the SEC anti-manipulation or FINRA 

front running rules. 

The Notice Proposal required 

members to ‘‘establish information 

barriers and other institutional 

safeguards to ensure that research 

analysts are insulated from the review, 

pressure or oversight of persons engaged 

in investment banking services activities 

or other persons who might be biased in 

their judgment or supervision.’’ SIFMA 

suggested that members should be able 

to establish information barriers or other 

institutional safeguards to foster the 

required research analyst objectivity, 

since some information barriers are not 

always the most appropriate or efficient 

means to manage research conflicts. 

FINRA agrees and has amended the 

proposed rule change accordingly. 

SIFMA further urged FINRA to 

replace the phrase ‘‘persons who might 

be biased in their judgment or 

supervision’’ with ‘‘persons within the 

firm who may try to improperly 

influence analysts’ views’’ because 

SIFMA contended that the former might 

sweep in salespeople, traders or subject 

companies that could have biases. 

FINRA notes that the proposed rule text 

came directly from the provisions of 

Sarbanes-Oxley related to management 

of research conflicts. FINRA believes 


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that language is intended to apply only 

to persons within the firm and does not 

extend to subject companies, which 

have no oversight or supervisory role 

with respect to research analysts within 

a broker-dealer. Moreover, FINRA 

believes it’s appropriate for this conflict 

management provision to include 

salespeople or traders to the extent that 

a member employs such individuals in 

an oversight or supervisory capacity and 

has reason to know that some or all of 

those individuals might be biased in 

discharging those obligations. As such, 

FINRA has maintained the provision in 

the proposed rule change. 

The Notice Proposal required 

members to prevent direct or indirect 

retaliation or threat of retaliation against 

research analysts by persons engaged in 

investment banking or other employees 

as the result of content of a research 

report. The proposed rule change 

maintains this requirement, but 

substitutes ‘‘prohibit’’ for ‘‘prevent’’ to 

align with the current rule language. 

SIFMA stated that the proposed 

provision is too broad because it applies 

to all employees, not just those involved 

in the investment banking department, 

and recommended that FINRA retain 

the current anti-retaliation provision in 

NASD Rule 2711(j). FINRA disagrees. 

As stated in the Joint Report, FINRA 

believes that under no circumstances is 

retaliation appropriate against a 

research analyst who expresses his or 

her truly held beliefs about a subject 

company. To the extent a person outside 

the investment banking department is in 

a position to retaliate or threaten to 

retaliate against a research analyst—e.g., 

if the person is the chief executive 

officer, supervises the research analyst 

or is a member of the compensation 

review committee—FINRA believes the 

ban should cover them. 

The Notice Proposal provided a more 

flexible supervisory approach with 

respect to trading by analyst accounts in 

securities of companies covered by the 

research analyst. SIFMA supported the 

proposed approach but asked FINRA to 

confirm that if members have adopted 

internal policies prohibiting analysts 

from owning securities issued by 

companies the analyst covers, members 

may permit an analyst to divest any 

such holdings pursuant to a reasonable 

plan of liquidation within 120 days of 

the effective date of the member’s policy 

even if the sale is inconsistent with the 

analyst’s current recommendation. 

In response, FINRA has included in 

the proposed rule change 

Supplementary Material .10, which 

states that FINRA shall 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 analyst’s coverage 

universe, provided that the member 

establishes a reasonable plan to 

liquidate such holdings consistent with 

the principles that prohibit an analyst 

from benefitting from his or her 

personal trading based on the 

knowledge of the timing or content of a 

research report and that such plan is 

approved by the member’s legal or 

compliance department. 

The Notice Proposal required 

members to establish, maintain and 

enforce policies and procedures that 

prohibit participation by research 

analysts in ‘‘road shows and other 

marketing on behalf of issuers.’’ SIFMA 

asked FINRA to clarify that the 

proscription does not apply to ‘‘investor 

education activities’’ and further is 

limited only to activities in connection 

with investment banking services 

transactions. By way of example, SIFMA 

suggested that the proposal would 

prohibit the practice by research 

analysts to facilitate meetings between 

investors and company management— 

so-called ‘‘non-deal road shows.’’ 

Leerink also questioned the scope of the 

provision and requested clarification 

with respect to whether the proposed 

language intends to eliminate the 

condition in Rule 2711 that the 

prohibition relate to the analyst’s 

participation in the marketing of a 

specific investment banking services 

transaction and, instead, would prohibit 

all participation in marketing by 

research analysts whether or not related 

to investment banking services. Leerink 

noted that not every contact with a 

company should be viewed as 

marketing the investment banking 

services of the analyst’s firm or 

jeopardizing the analyst’s objectivity. 

Leerink further noted that it would 

deprive analysts of important 

information necessary for their role if 

they are prohibited from contacts with 

an issuer in circumstances where the 

issuer may be marketing itself, 

including attendance by a research 

analyst at a research conference or 

investor forum. SIFMA also requested 

that FINRA confirm that consistent with 

existing guidance (NASD Notice to 

Members 07–04 and NYSE Information 

Memo 07–11) analysts may listen to or 

view a live webcast of a transactionrelated 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. 

FINRA agrees that research analysts 

should be able to educate investors, 

provided such education occurs outside 

the presence of investment bankers and 

issuer management and any such 

presentations are done in a fair and 

balanced manner. The proposed rule 

change therefore contains 

Supplementary Material .03 setting forth 

such permissible conduct, thus 

maintaining the current standard. 

As discussed in the Purpose section, 

FINRA believes the primary role of 

research analysts is to function as 

unbiased intermediaries between issuers 

and the investors who buy the issuers’ 

securities. FINRA believes marketing by 

research analysts on behalf of issuers is 

antithetical to promoting objective 

research on such issuers’ securities. 

FINRA is primarily concerned with 

marketing by research analysts in 

connection with an investment banking 

services transaction, and therefore 

FINRA has added that clarification to 

the provision in the proposed rule 

change. 

FINRA notes, however, that the 

overarching requirement to have 

policies and procedures to manage 

conflicts related to the interaction 

between research analysts and, among 

others, subject companies would apply 

to other 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. 

Similarly, to Leerink’s question, FINRA 

does not believe that mere attendance 

by a research analyst at a conference or 

forum where an issuer makes a 

presentation about its business 

prospects constitutes marketing ‘‘on 

behalf of an issuer.’’ Nor would FINRA 

consider it marketing on behalf on an 

issuer for a member to sponsor such a 

conference or forum and permit its 

research analysts to attend or facilitate 

discussion. FINRA believes that there is 

a fundamental distinction between an 

issuer that markets itself and a research 

analyst who markets on behalf of the 

issuer. It is the latter conduct that 

FINRA believes creates a conflict for a 

research analyst that must be prohibited 

or otherwise managed. 

As noted in the Purpose section, the 

existing guidance in Notice to Members 

07–04 would continue to apply to 

research analyst participation in road 

shows. Therefore, a research analyst 

would be able to listen to or view a live 

webcast of a transaction-related road 

show or other widely attended 

presentation by investment banking to 


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95FINRA has since adopted NASD Rule 2110 as 

FINRA Rule 2010 without change. See Securities 

Exchange Act Release No. 58643 (September 25, 

2008), 73 FR 57174 (October 1, 2008) (Order 

Approving File No. SR–FINRA–2008–028). 

96See Securities Exchange Act Release No. 59254 

(January 15, 2009), 74 FR 4271 (January 23, 2009) 

(Order Approving File No. SR–FINRA–2008–054). 

97The remainder of the NVCA letter addressed 

more general matters concerning the strength and 

competitiveness of the U.S. IPO market that were 

not specifically directed at the FINRA proposal. 

98See Section 501 Sarbanes-Oxley Act, Public 

Law 107–204, 116 Stat. 745 (2002). 

investors or the sales force from a 

remote location, or another room if they 

are in the same location. 

Distribution of Member Research 

Reports 

Leerink sought clarification regarding 

the scope of proposed Rule 2241(g) in 

the Notice Proposal, a codification of an 

interpretation to then NASD Rule 

2110 95 that prohibits selective 

dissemination of a research report to 

internal trading personnel or a 

particular customer or class of 

customers in advance of other 

customers that are entitled to receive the 

report. Leerink questioned whether the 

proposed Supplementary Material 

regarding that provision would extend 

the prohibition beyond research reports 

to other services because it refers to 

‘‘research products and services’’ and is 

not limited to ‘‘research reports.’’ 

Leerink requested clarification as to 

how FINRA would define ‘‘research 

products and services’’ and whether it 

would prohibit more generally favoring 

one type of client over another. The 

proposed Supplementary Material 

requires a member that provides 

different research products and services 

to different customers to notify the other 

customers that its alternative research 

products and services may reach 

different conclusions or 

recommendations that could impact the 

price of the equity security. Leerink also 

asked whether there should be a carve 

out from the notification provision for 

institutional clients, and, if not, whether 

an oral notification would be sufficient, 

given the nature of firms’ relationships 

with institutional clients. 

FINRA first notes that Leerink 

mistakenly believed that FINRA was 

proposing to modify its prohibition 

regarding trading ahead of research 

reports found in then NASD IM–2110– 

4. In fact, that Interpretive Material 

referred to similar but distinct conduct 

regarding adjusting a member’s 

inventory based upon non-public 

information regarding the timing or 

content of an impending research 

report. The Commission has since 

approved FINRA Rule 5280, which 

transferred NASD IM–2110–4 into the 

Consolidated FINRA Rulebook with 

changes.96 The proposed rule change 

incorporates the aspect in FINRA Rule 

5280 that the content of a research 

report may not be provided to internal 

trading personnel prior to public 

dissemination, but goes beyond that 

more narrow focus to address 

dissemination of a research report to 

one or more customers prior to other 

customers that the firm has previously 

determined are entitled to that report. 

The provision and accompanying 

Supplementary Material in the proposed 

rule change are limited by their terms to 

the dissemination of research products 

and services and do not address the 

broader question of when a member 

may not favor one client over another. 

FINRA included research ‘‘products and 

services’’ because FINRA understands 

that some customers receive not only 

different types of research reports than 

other customers, but also might receive 

other additional services related to 

research, such as more opportunity to 

interact directly with a research analyst. 

The Supplementary Material explains 

that offering those different services are 

permissible, provided they do not 

include differential timing in the receipt 

of potentially market moving 

information, including oral 

dissemination. 

FINRA believes that the notification 

requirement in the Supplementary 

Material should apply to all customers 

that receive a research product or 

service from the member if the member 

provides different research products to 

different customers. FINRA notes that, 

consistent with Sarbanes-Oxley, the 

other provisions of the current and 

proposed rules do not differentiate 

between retail and institutional 

customers and further notes that not all 

institutional customers have the 

sophistication and experience to know 

without disclosure the nature and 

impact of differing research products 

and services. However, FINRA believes 

firms may put in place any reasonably 

designed notification process, provided 

they can evidence compliance with the 

requirement. 

Quiet Periods 

SIFMA, Leerink and NVCA generally 

supported the provisions in the Notice 

Proposal that would reduce the quiet 

period after IPOs for managers and comanagers from 40 days to 10 days, 

eliminate the quiet period after 

secondary offerings and eliminate the 

quiet periods around the waiver, 

expiration or termination of a lock-up 

agreement. These commenters believed 

that the Notice Proposal struck an 

appropriate balance between addressing 

conflicts and facilitating the flow of 

important information to investors. 

NVCA agreed with FINRA that other 

provisions of the Notice Proposal, 

together with SEC Regulation AC, 

would sufficiently maintain the 

integrity of research issued during what 

are now quiet periods.97 The proposed 

rule change maintains these provisions, 

except that it imposes a minimum threeday quiet period after a secondary 

offering, unless an exception applies. 

FINRA made this change because SEC 

staff determined that Sarbanes-Oxley 

mandates a minimum quiet period for 

underwriters after a secondary offering. 

FINRA believes the proposed three-day 

period will fairly effectuate that 

mandate while minimizing the effect on 

information flow. 

Content and Disclosure in Research 

Reports 

With a couple of modifications, the 

Notice Proposal and the proposed rule 

change maintain the current content and 

disclosure requirements. The proposed 

rule change adds a requirement that a 

member must establish, maintain and 

enforce written policies and procedures 

reasonably designed to ensure that 

purported facts in its research reports 

are based on reliable information. The 

proposed rule change maintains the 

mandated Sarbanes-Oxley disclosure 

requirements,98 as well as additional 

disclosure obligations—meanings and 

distribution of ratings and price charts, 

for example—that are designed to 

provide investors with useful 

information on which to base their 

investment decisions. 

SIFMA was concerned by the use of 

the term ‘‘reliable’’ in the proposed 

provision that would require members 

to ensure that purported facts in their 

research reports are based on reliable 

information. As stated above, FINRA 

believes that term ‘‘reliable’’ is 

commonly understood. We note, for 

example, that the term ‘‘reliable 

information’’ is used in the research 

provisions of Sarbanes-Oxley without 

definition. Furthermore, SIFMA 

recommended the following as an 

alternative to the provision that 

members ensure that purported facts in 

research reports be based on reliable 

information: ‘‘Policies and procedures 

reasonably designed to ensure that facts 

are based on ‘sources believed by the 

member firm to be reliable.’ ’’ (emphasis 

added). SIFMA appears to have 

borrowed the latter phrase from 

Exchange Act Rule 15c2–11(a), which 

also uses the term ‘‘reliable’’ without 

definition. 


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The Notice Proposal required a 

member to ensure that any 

recommendation, rating or price target 

have a ‘‘reasonable basis in fact’’ and be 

accompanied by a ‘‘clear explanation of 

the valuation method utilized and a fair 

presentation of the risks that may 

impede achievement of the 

recommendation, rating or price target.’’ 

SIFMA recommended two changes to 

this provision. First, SIFMA suggested 

that FINRA substitute the term 

‘‘reasonable basis’’ rather than 

‘‘reasonable basis in fact.’’ FINRA 

believes that even judgments and 

estimates on which recommendations, 

ratings and price targets are based must 

be grounded in certain facts, but we also 

believe that the term ‘‘reasonable basis’’ 

implies as much. Therefore, the 

proposed rule change maintains the 

‘‘reasonable basis’’ standard in the 

current rule. SIFMA also noted that not 

all ratings are based on a valuation 

method, so FINRA has modified the 

language in the proposed rule change to 

that effect. 

SIFMA also objected to the 

requirement in the proposal that a 

member must disclose in any research 

report ‘‘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.’’ SIFMA 

contended that the language would 

require members to identify ‘‘all 

possible conflicts (material or 

immaterial) that may be known to 

anyone at the member.’’ SIFMA 

recommended that FINRA revise the 

language to require only the enumerated 

disclosures, including the ‘‘catch-all’’ 

disclosure of ‘‘any other material 

conflict of interest of the research 

analyst or member that the research 

analyst or an associated person of the 

member with the ability to influence the 

content of a research report knows or 

has reason to know at the time of the 

publication or distribution of the 

research report.’’ In addition, SIFMA 

urged FINRA to revise this provision so 

that it is consistent with current 

requirements because the mandate that 

the disclosures be made with respect to 

material conflicts of interest that are 

known not only at the time of 

publication, but also at the time of the 

distribution of a research report, is 

unworkable. 

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.’’ FINRA notes that the term 

‘‘distribution’’ is drawn from the 

provisions of Sarbanes-Oxley 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. 

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. 

SIFMA also labeled as unnecessary 

and burdensome the proposal’s 

requirement to disclose if the member or 

its affiliates maintain a significant 

financial interest in the debt of a subject 

company. It asserted that such 

disclosure has little utility for investors, 

yet would require considerable 

resources to track such information. 

SIFMA also noted that to the extent that 

a member’s ownership interest in a debt 

security presents a material conflict of 

interest, disclosure is already required 

by the ‘‘catch-all’’ provision that 

requires a member to disclose ‘‘any 

other material conflict of interest of the 

research analyst or member that the 

research analyst or a person associated 

with a member with the ability to 

influence the content of a research 

report knows or has reason to know at 

the time of the publication or 

distribution of a research report.’’ 

FINRA believes that a significant debt 

holding in the subject company could 

very well present a material conflict of 

interest that could inform an investor’s 

decision making. For example, a 

negative equity research report that 

discusses a subject company’s ability to 

meet its debt service or certain bond 

covenants could impact the value of 

high yield or other debt held by the 

member. FINRA also notes that the 

proposed disclosure is similar to that 

required by the United Kingdom’s 

Financial Conduct Authority, whose 

rules many of SIFMA’s members with 

global operations are already subject to. 

And while it is true that material 

conflicts can be captured by the ‘‘catchall’’ provision, that should not preclude 

FINRA from delineating specific 

disclosures as it has with several other 

disclosures, including investment 

banking relationships. 

SIFMA stated that it continues to 

believe that web-based disclosure 

promotes efficiency, provides important 

information to investors in a meaningful 

and effective manner, and is consistent 

with important initiatives by the SEC to 

promote the use of electronic media, 

particularly with respect to price charts 

and ratings distribution tables, which 

are often cumbersome and difficult to 

produce in individual research reports. 

SIFMA contended that web-based 

disclosure would greatly ease 

production burdens and streamline the 

research reports themselves if they 

could be provided through Web sites. 

SIFMA also urged FINRA to consider 

permitting a web-based disclosure 

regime for public appearances because it 

would allow investors to consider and 

appreciate more fully the disclosures 

related to these activities. SIFMA states 

that web-based disclosures would allow 

investors to download, review, and 

assess the disclosures (as opposed to 

simply hearing them recited before or 

after an appearance, at which time 

investors may not focus on the 

substance of the disclosures). As stated 

in the Purpose section, FINRA was 

informed by SEC staff that it believes a 

web-based disclosure approach would 

not be consistent with Sarbanes-Oxley; 

therefore, FINRA has not proposed it 

here. 

Third-Party Research 

SIFMA noted that the Notice Proposal 

would impose a new requirement that 

members adopt policies and procedures 

to ensure that third-party research 

distributed by a member ‘‘is reliable and 

objective’’ in addition to the review 

standard in current Rule 2711(h) that 

would also be required by the Notice 

Proposal and proposed rule change. The 

current standard requires a members to 

review non-independent third-party 

research for any ‘‘untrue statement of 

material fact or any false or misleading 

information that: (i) Should be known 

from reading the report; or (ii) is known 

based on information otherwise 

possessed by the member.’’ Independent 

third-party research is excepted from 

the review requirements. SIFMA asked 

FINRA to eliminate the new 

requirement or, at a minimum, allow an 

exception for independent third-party 

research. Also, instead of requiring 

disclosure of the specific points of 

information delineated by the current 

rules, the Notice Proposal and the 


asabaliauskas on DSK5VPTVN1PROD with NOTICES
69956 Federal Register / Vol. 79, No. 226 / Monday, November 24, 2014 / Notices 

99See Letter from Michael D. Udoff, Vice 

President and Associate General Counsel, SIFMA, 

to Nancy M. Morris, Secretary, SEC, dated 

November 14, 2006. 

proposed rule change would include an 

overarching requirement that members 

disclose ‘‘any material conflict of 

interest that can reasonably be expected 

to have influenced the choice of a third 

party research provider or the subject 

company of a third party research 

report.’’ SIFMA believed that the 

existing specific disclosure 

requirements struck the appropriate 

balance and urged FINRA to eliminate 

the proposed new requirement. 

We do not think it unreasonable to 

require screening procedures for thirdparty research to help 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.99

However, FINRA has amended the 

proposal to prohibit a member from 

distributing third-party research that it 

knows or has reason to know is not 

objective or reliable. FINRA believes 

this standard more appropriately 

requires reasonable diligence without a 

duty of inquiry to definitively ascertain 

whether the research is, in fact, 

objective and reliable. As for 

disclosures, FINRA has built back in to 

the proposed rule change the specific 

required third-party disclosures in the 

current rule, but we also think it 

reasonable to overlay a principle to 

require disclosure of any material 

conflict that may have influenced the 

choice of the third-party provider or 

subject company. 

Definitions 

SIFMA and Dechert supported the 

provisions in the Notice Proposal to 

exclude from the definition of ‘‘research 

report’’ any communication on an openend registered investment company that 

is not listed or traded on an exchange 

or a public direct participation program 

(‘‘DPP’’), but strongly urged FINRA to go 

further by carving-out written 

communications covering open-end 

exchange traded funds (‘‘ETFs’’) as well 

as private funds. These commenters 

argued that the same rationale that 

applies to the determination to exclude 

open-end investment companies also 

equally applies to ETFs and private 

funds (e.g., sales materials on ETFs and 

private funds are already subject to an 

extensive regulatory regime). Dechert 

stated that even though private fund 

sales literature is not subject to post-use 

review by FINRA, it does not need to be, 

because unlike open-end registered 

investment companies and public DPPs, 

it is only distributed to sophisticated 

investors. Dechert also believed that 

sales material on private funds are 

clearly prepared for marketing purposes 

and do not contain an analysis and, 

therefore, should not be subject to a 

regulatory regime that is intended to 

preserve the objectivity of analysis. 

Dechert further noted that sales 

literature cannot manipulate the price of 

a private fund because its value is 

calculated as the value of an open-end 

registered investment company using 

the NAV, not by the market. SIFMA also 

recommended that FINRA exclude from 

the definition of ‘‘research report’’ any 

type of periodic report or other 

communication for any managed client 

account, whether such account is 

‘‘discretionary,’’ as the current rule 

provides, or non-discretionary in nature. 

SIFMA believed that the rationale for 

excluding discretionary accounts is 

equally applicable to non-discretionary 

accounts because clients who use these 

accounts, in general, rely on their 

individual money managers, not 

research reports, to make investment 

decisions in line with their goals. 

FINRA believes the carve-out should 

be limited to sales material related to 

mutual funds, which trade at NAV and 

are subject to the filing requirements of 

FINRA’s advertising rules. ETFs, which 

are expanding in number and nature, 

are more susceptible to market-moving 

comments because they trade on an 

exchange and do not always trade at 

NAV, particularly if an ETF holds thinly 

traded securities or securities that are 

traded on a foreign exchange, or if an 

ETF is highly concentrated in a single 

or small number of securities. 

For many of the same reasons, FINRA 

has reconsidered the proposed 

exemption for research on DPPs. FINRA 

has recently become more aware of 

research reports on master limited 

partnerships (‘‘MLPs’’) that technically 

fall under the definition of a DPP due 

to questions that have arisen since 

FINRA’s new Rule 2210 

(Communications with the Public) 

became effective in February 2013. 

MLPs more closely resemble individual 

stocks since they do not invest in an 

underlying portfolio of securities and 

therefore do not have a NAV and, in 

fact, FINRA has observed that research 

on MLPs largely resembles research on 

any other exchange-traded stock. FINRA 

notes, however, that not every 

communication concerning a DPP will 

be a research report—only those that 

include an analysis of the equity 

securities of the issuer and information 

sufficient upon which to base an 

investment decision would meet the 

definition of a research report. Sales 

material on private funds is not subject 

to FINRA’s advertising review filing 

requirements. To the extent that the 

sales material does not, as Dechert 

asserts, contain an analysis, then it 

would not meet the definition of a 

research report. FINRA further notes 

that the rules do not currently except 

research on private securities nor is 

there an institutional carve-out, so to 

except research on hedge funds, for 

example, might set up an inconsistency. 

SIFMA stated that the proposed 

revisions to the definition of 

‘‘investment banking services’’ are 

overly broad and that FINRA should 

retain the current definition for this 

term. SIFMA expressed concern that the 

added language would broaden the 

definition to include personnel and 

departments not traditionally viewed as 

related to investment banking, including 

sales activities. As noted in the Purpose 

section, the current definition includes, 

without limitation, many common types 

of investment banking services. FINRA 

added the language ‘‘or otherwise acting 

in furtherance of’’ in the proposed rule 

change to further emphasize that the 

term should be broadly construed to 

cover all aspects of facilitating a public 

or private offering, as well as other 

investment banking activities. However, 

the new language is not intended to 

capture sales activities. 

Pitch Book Materials 

The proposed rule change requires 

policies and procedures reasonably 

designed to prohibit research analyst 

participation in pitches and other 

solicitation of investment banking 

services transactions. Supplementary 

Material .01 codifies previous guidance 

in Notice to Members 07–04, which sets 

out the principle that pitch materials 

may not contain any information about 

a member’s research capacity in a 

manner that suggests, directly or 

indirectly, that the member might 

provide favorable research coverage. 

The supplementary material specifies 

that members may include the fact of 

coverage and the name of the research 

analyst because such information alone 

does not imply favorable coverage. The 

supplementary material also states 

FINRA’s view that including an 

analyst’s industry ranking in pitch 

materials implies favorable research 

because of the manner in which such 

rankings are compiled; i.e., they are 

voted on by institutional investors that 

tend to benefit from positive coverage of 

their holdings. SIFMA requested that 

FINRA revise the example provided in 


asabaliauskas on DSK5VPTVN1PROD with NOTICES
Federal Register / Vol. 79, No. 226 / Monday, November 24, 2014 / Notices 69957 

100 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. 73266 

(September 30, 2014), 79 FR 60207 (‘‘Notice’’). 

4 15 U.S.C. 78s(b)(2). 

the proposed supplementary material to 

clarify what sort of materials are 

prohibited or provide an alternative 

example of prohibited pitch materials. 

SIFMA also asked that FINRA confirm 

that members may disclose in pitch 

materials the fact that research coverage 

will be provided for a particular issuer. 

FINRA believes the principle is clear 

and has included examples to illustrate 

FINRA’s view of its application. 

Whether other information included in 

pitch materials violate the principle will 

depend on the facts and circumstances. 

Effective Date 

SIFMA requested that FINRA provide 

a 120-day grace period between the 

adoption of the proposal and the 

implementation of the proposed rules 

because some of the proposals will 

require major systems changes to firms’ 

information technology systems, 

research report templates, and policies 

and procedures. FINRA is sensitive to 

the time firms will require to update 

their policies and procedures and 

systems to comply with the proposed 

rule change and will take those factors 

into consideration when establishing an 

implementation date. 

Other Comments 

Kolber supported the proposed 

change to exempt from FINRA’s 

research analyst registration and 

qualification requirements those 

individuals who produce ‘‘research 

reports’’ but whose primary job function 

is something other than to provide 

investment research. The remainder of 

Kolber’s comments with respect to the 

research registration and qualification 

requirements addressed more generally 

the scope and difficulty of the Series 86 

examination, which is not the subject of 

the proposal. Kolber also stated that the 

definition of ‘‘research report’’ can be 

difficult to apply because it sets forth a 

standard and then lists several 

exceptions from the definition. FINRA 

notes that the structure is very similar 

to the definition of research report in 

Regulation AC and is not an uncommon 

drafting method. Kolber’s other 

comments are directed to the difficulty 

of distinguishing between the 

definitions of ‘‘sales literature’’ and 

‘‘advertisement’’ in former NASD Rule 

2210. That rule has since been replaced 

by consolidated FINRA Rule 2210, 

where those definitions no longer exist. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 45 days of the date of 

publication of this notice in the Federal 

Register or within such longer period (i) 

as the Commission may designate up to 

90 days of such date if it finds such 

longer period to be appropriate and 

publishes its reasons for so finding or 

(ii) as to which the self-regulatory 

organization consents, the Commission 

will: 

(A) By order approve or disapprove 

such proposed rule change, or 

(B) institute proceedings to determine 

whether the proposed rule change 

should be disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

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

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

FINRA–2014–047 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–2014–047. 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–2014–047 and 

should be submitted on or before 

December 15, 2014. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.100

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2014–27700 Filed 11–21–14; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–73621; File No. SR– 

NASDAQ–2014–095] 

Self-Regulatory Organizations; The 

NASDAQ Stock Market LLC; Notice of 

Designation of Longer Period for 

Commission Action on Proposed Rule 

Change To Provide a New Optional 

Functionality to Minimum Quantity 

Orders 

November 18, 2014. 

On September 18, 2014, The 

NASDAQ Stock Market LLC 

(‘‘NASDAQ’’ or ‘‘Exchange’’) filed with 

the Securities and Exchange 

Commission (‘‘Commission’’), pursuant 

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

Exchange Act of 1934 (‘‘Act’’) 1 and Rule 

19b–4 thereunder,2 a proposed rule 

change to amend NASDAQ Rule 

4751(f)(5) to provide a new optional 

functionality for Minimum Quantity 

Orders. The proposed rule change was 

published for comment in the Federal 

Register on October 6, 2014.3 The 

Commission received no comment 

letters regarding the proposed rule 

change. 

Section 19(b)(2) of the Act 4 provides 

that within 45 days of the publication of 

notice of the filing of a proposed rule 

change, or within such longer period up 

to 90 days as the Commission may 

designate if it finds such longer period 

to be appropriate and publishes its 

reasons for so finding or as to which the 

self-regulatory organization consents, 

the Commission shall either approve the 

proposed rule change, disapprove the 

proposed rule change, or institute 

proceedings to determine whether these 

proposed rule changes should be 

disapproved. The 45th day for this filing 

is November 20, 2014. 


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