4268 Federal Register / Vol. 74, No. 14 / Friday, January 23, 2009 / Notices 

‘‘ARTICLES THE PRODUCT OF AUSTRIA, BELGIUM, BULGARIA, CYPRUS, CZECH REPUBLIC, DENMARK, ESTONIA, FINLAND, 

FRANCE, GERMANY, GREECE, HUNGARY, IRELAND, ITALY, LATVIA, LITHUANIA, LUXEMBOURG, MALTA, THE NETHERLANDS, POLAND, PORTUGAL, ROMANIA, SLOVAKIA, SLOVENIA, SPAIN OR SWEDEN:—Continued 

Articles the product of Italy: 

9903.02.82 .................. Mineral waters and aerated waters, not containing added sugar or other sweetening matter nor flavored 

(provided for in subheading 2201.10).

100% 

B. Effective with respect to articles entered, 

or withdrawn from warehouse for 

consumption, on or after March 23, 2009, 

subchapter III of chapter 99 of the 

Harmonized Tariff Schedule of the United 

States (HTS) is modified by deleting the 

following HTS subheadings: 9903.02.21, 

9903.02.22, 9903.02.23, 9903.02.24, 

9903.02.25, 9903.02.26, 9903.02.27, 

9903.02.28, 9903.02.29, 9903.02.30, 

9903.02.31, 9903.02.32, 9903.02.33, 

9903.02.34, 9903.02.35, 9903.02.36, 

9903.02.37, 9903.02.38, 9903.02.39, 

9903.02.40, 9903.02.41, 9903.02.42, 

9903.02.43, 9903.02.44, 9903.02.45, 

9903.02.46 and 9903.02.47. 

[FR Doc. E9–1257 Filed 1–22–09; 8:45 am] 

BILLING CODE 3190–W9–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. IC–28603; 812–13552] 

Calamos Convertible Opportunities 

and Income Fund, et al.; Notice of 

Application 

January 14, 2009. 

AGENCY: Securities and Exchange 

Commission (‘‘Commission’’). 

ACTION: Notice of application for an 

order under section 6(c) of the 

Investment Company Act of 1940 

(‘‘Act’’) for an exemption from sections 

18(a)(1)(A) and (B) of the Act. 

APPLICANTS: Calamos Convertible 

Opportunities and Income Fund 

(‘‘CHI’’), Calamos Convertible and High 

Income Fund (‘‘CHY’’), Calamos 

Strategic Total Return Fund (‘‘CSQ’’), 

and Calamos Global Dynamic Income 

Fund (‘‘CHW’’) (each, a ‘‘Fund’’ and 

collectively, ‘‘Funds’’). 

SUMMARY OF APPLICATION: Applicants 

request an order (‘‘Order’’) granting an 

exemption from sections 18(a)(1)(A) and 

(B) of the Act for a period from the date 

of the Order until October 31, 2010. The 

Order would permit each Fund to issue 

or incur debt subject to asset coverage 

of 200% that would be used to refinance 

all of the Fund’s auction rate preferred 

shares (‘‘ARPS’’) issued prior to 

February 1, 2008 that are outstanding at 

the time of the Order. The Order also 

would permit each Fund to declare 

dividends or any other distributions on, 

or purchase, capital stock during the 

term of the Order, provided that any 

such debt has asset coverage of at least 

200% after deducting the amount of 

such transaction. 

FILING DATES: The application was filed 

on July 24, 2008, and amended on 

October 14, 2008, December 18, 2008, 

January 12, and January 14, 2009. 

HEARING OR NOTIFICATION OF HEARING: An 

order granting the application will be 

issued unless the Commission orders a 

hearing. Interested persons may request 

a hearing by writing to the 

Commission’s Secretary and serving 

applicants with a copy of the request, 

personally or by mail. Hearing requests 

should be received by the Commission 

by 5:30 p.m. on February 9, 2009, and 

should be accompanied by proof of 

service on applicants, in the form of an 

affidavit or, for lawyers, a certificate of 

service. Hearing requests should state 

the nature of the writer’s interest, the 

reason for the request, and the issues 

contested. Persons who wish to be 

notified of a hearing may request 

notification by writing to the 

Commission’s Secretary. 

ADDRESSES: Secretary, Securities and 

Exchange Commission, 100 F Street, 

NE., Washington, DC 20549–1090. 

Applicants: c/o James J. Boyne, Calamos 

Advisors LLC, 2020 Calamos Court, 

Naperville, IL 60563. 

FOR FURTHER INFORMATION CONTACT: 

Courtney S. Thornton, Senior Counsel, 

at (202) 551–6812, or Janet M. 

Grossnickle, Assistant Director, at (202) 

551–6821 (Division of Investment 

Management, Office of Investment 

Company Regulation). 

SUPPLEMENTARY INFORMATION: The 

following is a summary of the 

application. The complete application 

may be obtained for a fee at the SEC’s 

Public Reference Room, 100 F Street, 

NE., Washington, DC 20549–1520 (tel. 

202–551–5850). 

Applicants’ Representations 

1. Each of the Funds is organized as 

a Delaware statutory trust and is 

registered under the Act as a diversified, 

closed-end management investment 

company. Each Fund is advised by 

Calamos Advisors LLC (‘‘Calamos’’) and 

has issued and outstanding a class of 

common shares and several series of 

ARPS. 

2. Applicants state that the Funds 

issued their outstanding ARPS for 

purposes of investment leverage to 

augment the amount of investment 

capital available for use in the pursuit 

of their investment objectives. 

Applicants state that, through the use of 

leverage, the Funds seek to enhance the 

investment return available to the 

holders of their common shares by 

earning a rate of portfolio return (which 

includes the return related to 

investments made with proceeds from 

leverage) that exceeds the leverage costs, 

which have been the amount of 

dividends that the Funds paid to 

holders of the ARPS. Applicants 

represent that ARPS shareholders are 

entitled to receive a stated liquidation 

preference amount of $25,000 per share 

(plus any accumulated but unpaid 

dividends) in any liquidation, 

dissolution, or winding up of the 

relevant Fund before any distribution or 

payment to holders of the Fund’s 

common shares. They state that 

dividends declared and payable on 

ARPS have a similar priority over 

dividends declared and payable on the 

Fund’s common shares. In addition, 

applicants state that ARPS are 

‘‘perpetual’’ securities and are not 

subject to mandatory redemption by a 

Fund so long as certain asset coverage 

tests are met. Further, applicants state 

that ARPS are redeemable at each 

Fund’s option. 

3. Applicants state that prior to 

February 2008, dividend rates on the 

ARPS for each dividend period were set 

at the market clearing rate determined 

through an auction process that brought 

together bidders, who sought to buy 

ARPS, and holders of ARPS, who sought 

to sell their ARPS. Applicants explain 

that if an auction failed to clear (because 

of an imbalance of sell orders over bids), 

the dividend payment rate over the next 

dividend period was set at a specified 

maximum applicable rate (the 

‘‘Maximum Rate’’) determined by 

reference to a short-term market interest 

rate (either the LIBOR or ‘‘AA’’ 

commercial paper rate for an equivalent 

period). Applicants state that an 

unsuccessful auction is not a default; 

the relevant Fund continues to pay 

dividends to all holders of ARPS, but at 

the specified Maximum Rate rather than 

a market clearing rate. Prior to February 

2008, the Maximum Rate had never 

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Federal Register / Vol. 74, No. 14 / Friday, January 23, 2009 / Notices 4269 

1CSQ obtained a 180 day rolling margin loan that 

enabled it to redeem 81.5% of its ARPS. CHI and 

CHY redeemed 72.9% and 81.4% of their ARPS, 

respectively, with the proceeds of a renewable 

commercial paper conduit facility with a maturity 

of 364 days. CHW issued extendible notes in a Rule 

144A offering with a term of 364 days and used the 

proceeds of such notes to redeem 85.7% of its 

ARPS. 

2Each Applicant believes that refinancing would 

be appropriate and, over the longer term would 

provide additional investment income net of 

borrowing costs, and thus would be beneficial to its 

common shareholders. 3See, e.g., Eaton Vance Management, SEC NoAction Letter (June 13, 2008) (permitting the 

issuance of ‘‘liquidity protected preferred shares’’ to 

supplement or replace Eaton Vance funds’ auction 

rate preferred stock). 

4Section 18(h) of the Act defines asset coverage 

of a senior security representing indebtedness of an 

issuer as the ratio which the value of the total assets 

of the issuer, less all liabilities and indebtedness 

not represented by senior securities, bears to the 

aggregate amount of senior securities representing 

indebtedness of the issuer. The section defines asset 

coverage of the preferred stock of an issuer as the 

ratio which the value of the total assets of the 

issuer, less all liabilities and indebtedness not 

represented by senior securities, bears to the 

aggregate amount of senior securities representing 

indebtedness of the issuer plus the amount the class 

of senior security would be entitled to on 

involuntary liquidation. 

5An exception is made for the declaration of a 

dividend on a class of preferred stock if the senior 

security representing indebtedness has an asset 

coverage of at least 200% at the time of declaration 

after deduction of the amount of such dividend. See 

section 18(a)(1)(B) of the Act. Further, section 18(g) 

of the Act provides, among other things, that 

‘‘senior security,’’ for purposes of section 

18(a)(1)(B), does not include any promissory note 

or other evidence of indebtedness issued in 

consideration of any loan, extension or renewal 

thereof, made by a bank or other person and 

privately arranged, and not intended to be publicly 

distributed. 

been triggered due to failed auctions for 

any of the Funds. 

4. Applicants state that if investors 

did not purchase all of the ARPS 

tendered for sale at an auction prior to 

the failure of the auction market, dealers 

historically would enter into the auction 

and purchase any excess shares to 

prevent the auction from failing. 

Applicants represent that this auction 

mechanism had generally provided 

readily available liquidity to holders of 

ARPS for more than twenty years. 

Applicants believe that many investors 

invested short-term cash balances in 

ARPS believing they were safe shortterm investments and, in many cases, 

the equivalent of cash. 

5. Applicants state that in February 

2008, the financial institutions that 

historically provided ‘‘back stop’’ 

liquidity to ARPS auctions stopped 

participating in them and the auctions 

began to fail. Applicants state that, 

beginning in February 2008, the Funds 

experienced auction failures due to an 

imbalance between buy and sell orders. 

Applicants believe that there is no 

established secondary market that 

would provide holders of ARPS with 

the liquidation preference of $25,000 

per share. Applicants state that each of 

the Funds to date has secured debt 

financing enabling it to refinance (and 

accordingly redeem) a significant 

portion of its outstanding ARPS.1

Applicants state that CSQ, CHI and 

CHY’s financing arrangements provide a 

commitment level that, if completely 

drawn upon, would allow them to retire 

all (or almost all) of their ARPS. 

However, Applicants represent that 

these Funds have been prohibited from 

utilizing these facilities in their entirety 

to redeem their remaining ARPS 

because they would not have the 300% 

asset coverage required by section 

18(a)(1)(A) of the Act after a full 

redemption of the ARPS. Similarly, 

Applicants state that CHW has obtained 

the authorization of its board of trustees 

(‘‘Board’’) to issue a further $50 million 

in extendible notes and believes there is 

a market for them, but is unable to issue 

additional notes in order to redeem its 

remaining outstanding ARPS because it 

would not have 300% asset coverage 

immediately following the issuance of 

those notes. As a result, applicants state 

that there is currently no reliable 

mechanism for holders of their ARPS to 

obtain liquidity, and believe that, 

industry-wide, the current lack of 

liquidity is causing distress for a 

substantial number of ARPS 

shareholders and creating severe 

hardship for many investors. 

6. Applicants seek relief for a period 

from the date of any Order until October 

31, 2010 (‘‘Exemption Period’’) to 

facilitate temporary borrowings by the 

Funds that would enhance their ability 

to provide a liquidity solution to the 

holders of their ARPS in the near term 2

while they either pay down or seek a 

more permanent form of replacement 

leverage, such as a new type of preferred 

stock that provides liquidity at 

liquidation value.3 Applicants submit 

that the gradual reduction of leverage 

through the use of proceeds of any 

common share issuances or the 

development of an alternative form of 

preferred stock might take several 

months, if at all, after the Order has 

been issued. Applicants state that it is 

uncertain when, or if, the securities and 

capital markets will return to conditions 

that would enable the Funds to achieve 

compliance with the asset coverage 

requirements that would apply in the 

absence of the Order. Given the 

uncertainty and the current and 

continuing unsettled state of the 

securities and capital markets, 

applicants believe that the Exemption 

Period is reasonable and appropriate. 

Each Fund’s refinancing of its ARPS 

would be subject to the approval of the 

refinancing arrangements by the Fund’s 

Board. 

Applicants’ Legal Analysis 

1. Section 18(a)(1)(A) of the Act 

provides that it is unlawful for any 

registered closed-end investment 

company to issue any class of senior 

security representing indebtedness, or to 

sell such security of which it is the 

issuer, unless the class of senior security 

will have an asset coverage of at least 

300% immediately after issuance or 

sale. Section 18(a)(2)(A) of the Act 

provides that it is unlawful for any 

registered closed-end investment 

company to issue any class of senior 

security that is a stock, or to sell any 

such security of which it is the issuer, 

unless the class of senior security will 

have an asset coverage of at least 200% 

immediately after such issuance or 

sale.4

2. Section 18(a)(1)(B) prohibits a 

closed-end fund from declaring a 

dividend or other distribution on, or 

purchasing, its own capital stock unless 

its outstanding indebtedness will have 

an asset coverage of at least 300% 

immediately after deducting the amount 

of such dividend, distribution or 

purchase price.5 Section 18(a)(2)(B) 

prohibits a closed-end fund from 

declaring a dividend or other 

distribution on, or purchasing, its own 

common stock unless its outstanding 

preferred stock will have an asset 

coverage of at least 200% immediately 

after deducting the amount of such 

dividend, distribution or purchase 

price. 

3. Section 6(c) of the Act provides, in 

relevant part, that the Commission, by 

order upon application, may 

conditionally or unconditionally 

exempt any person, security, or 

transaction from any provision of the 

Act if and to the extent necessary or 

appropriate in the public interest and 

consistent with the protection of 

investors and the purposes fairly 

intended by the policy and provisions of 

the Act. 

4. Applicants request that the 

Commission issue an Order under 

section 6(c) of the Act to exempt each 

Fund from the 300% asset coverage 

requirements set forth in sections 

18(a)(1)(A) and (B) of the Act. 

Specifically, the Funds seek relief from 

the section 18 asset coverage 

requirements for senior securities 

representing indebtedness for the 

Exemption Period to permit the Funds 

to refinance any ARPS issued prior to 

mstockstill on PROD1PC66 with NOTICES

4270 Federal Register / Vol. 74, No. 14 / Friday, January 23, 2009 / Notices 

6See supra note 4. 

7Applicants state that a significant portion of 

each Fund’s portfolio is in convertible securities. 

Applicants believe that it is difficult to sell such 

securities in the current market without artificially 

depressing market prices because the liquidity of 

that market has been reduced due to deleveraging 

by hedge funds and as a result of market makers’ 

own impaired capital positions. Applicants believe, 

however, that convertible securities generally 

remain sound even though they are presently 

trading below their intrinsic value. Applicants thus 

believe it would be disadvantageous to sell these 

securities in the current market. 

8Applicants acknowledge that managing any 

portfolio that relies on borrowing for leverage 

entails the risk that, when the borrowing matures 

and must be repaid or refinanced, an economically 

attractive form of replacement leverage may not be 

available in the capital markets. For that reason, any 

portfolio that relies on borrowing for leverage is 

subject to the risk that it may have to forcibly 

deleverage, which could be disadvantageous to the 

portfolio’s common shareholders. Applicants 

therefore state that they regard leveraging through 

borrowing as potentially a temporary, interim step, 

with the issuance of new preferred equity-based 

instruments as a possible longer-term replacement 

source of portfolio leverage. 

February 1, 2008 that are outstanding at 

the time of the Order with debt subject 

to the 200% asset coverage requirement 

for stock, rather than the 300% asset 

coverage that would ordinarily apply 

under section 18 to senior securities 

representing indebtedness, (a) when 

they incur that debt, and (b) when they 

declare dividends or any other 

distributions on, or purchase, their 

capital stock, after deduction of the 

amount of such dividend, distribution 

or purchase price. Applicants state that, 

except as permitted under the requested 

Order, if issued, the Funds would meet 

all of the asset coverage requirements of 

section 18(a) of the Act. In addition, 

applicants state that within the 

Exemption Period each Fund that 

borrows in reliance on the Order will 

either pay down or refinance the debt so 

that the Fund would, then and 

thereafter, comply with the applicable 

asset coverage requirements (200% for 

equity or 300% for debt) under section 

18 of the Act. 

5. Applicants state that section 18 

reflects congressional concerns 

regarding preferential treatment for 

certain classes of shareholders, complex 

capital structures, and the use of 

excessive leverage. Applicants submit 

that another concern was that senior 

securities gave the misleading 

impression of safety from risk. 

Applicants believe that the request for 

temporary relief is necessary, 

appropriate and in the public interest 

and that such relief is consistent with 

the protection of investors and the 

purposes intended by the policy and 

provisions of the Act. 

6. Applicants note that the illiquidity 

of ARPS is a unique, exigent situation 

that is posing urgent, and in some cases 

devastating, hardships on ARPS 

shareholders. Applicants represent that 

the proposed replacement of the ARPS 

with debt would provide liquidity for 

the Funds’ ARPS shareholders while the 

Funds continue their efforts to obtain a 

more permanent form of financing (such 

as through the issuance of preferred 

equity-based instruments) that fully 

complies with the asset coverage 

requirements of section 18.6

7. Applicants represent that the Order 

would help avoid the potential harm to 

common shareholders that could result 

if the Funds were to deleverage their 

portfolios in the current difficult market 

environment 7 or that could result if a 

reduction in investment return reduced 

the market price of common shares. 

Applicants also state that the requested 

Order would permit the Funds to 

continue to provide their common 

shareholders with the enhanced returns 

that leverage may provide. 

8. Applicants believe that the interests 

of both classes of the Funds’ current 

investors would be well served by the 

requested order—the ARPS 

shareholders because they would 

achieve the liquidity that the market 

currently cannot provide (as well as full 

recovery of the liquidation value of their 

shares), and the common shareholders 

because the adverse consequences of 

forced deleveraging would be avoided 

and each Fund’s investment return 

would be enhanced to the extent that 

the cost of the new form of leverage is 

lower than the investment return on the 

capital raised through the borrowings. 

9. Applicants represent that the 

proposed borrowing would be obtained 

from banks, insurance companies or 

qualified institutional buyers (as 

defined in Rule 144(a)(1) under the 

Securities Act of 1933) who would be 

capable of assessing the risk associated 

with the transaction. Applicants also 

state that, to the extent the Act’s asset 

coverage requirements were aimed at 

limiting leverage because of its potential 

to magnify losses as well as gains, they 

believe that the proposal would not 

unduly increase the speculative nature 

of the Funds’ common shares because 

the relief is temporary and the Funds 

would be no more highly leveraged if 

they replace the existing ARPS with 

borrowing.8 Applicants also state that 

the proposed liquidity solution actually 

would simplify the Funds’ capital 

structures, not make them more 

complex, opaque, or hard to understand 

or result in pyramiding or inequitable 

distribution of control. 

10. Applicants state that the current 

state of the credit markets, which has 

affected the ARPS, is an historic event 

of unusual severity, which requires a 

creative and flexible response on the 

part of both the public and private 

sectors. Applicants believe that these 

issues have created an urgent need for 

limited, quick, thoughtful and 

responsive solutions. Applicants believe 

that the request meets the standards for 

exemption under section 6(c) of the Act. 

Applicants’ Conditions 

Applicants agree that any order 

granting the requested relief shall be 

subject to the following conditions: 

1. Each Fund that borrows subject to 

200% asset coverage under the order 

will do so only if such Fund’s Board, 

including a majority of the trustees who 

are not ‘‘interested persons’’ (as defined 

in section 2(a)(19) of the Act) 

(‘‘Independent Trustees’’), shall have 

determined that such borrowing is in 

the best interests of such Fund, its 

common shareholders, and its ARPS 

shareholders. Each Fund shall make and 

preserve for a period of not less than six 

years from the date of such 

determination, the first two years in an 

easily accessible place, minutes 

specifically describing the deliberations 

by the Board and the information and 

documents supporting those 

deliberations, the factors considered by 

the Board in connection with such 

determination, and the basis of such 

determination. 

2. Upon expiration of the Exemption 

Period, each Fund will have asset 

coverage of at least 300% for each class 

of senior security representing 

indebtedness. 

3. The Board of any Fund that has 

borrowed in reliance on the order shall 

receive and review, no less frequently 

than quarterly during the Exemption 

Period, detailed progress reports 

prepared by management (or other 

parties selected by the Independent 

Trustees) regarding and assessing the 

efforts that the Fund has undertaken, 

and the progress that the Fund has 

made, towards achieving compliance 

with the appropriate asset coverage 

requirements under section 18 by the 

expiration of the Exemption Period. The 

Board, including a majority of the 

Independent Trustees, will make such 

adjustments as it deems necessary or 

appropriate to ensure that the applicant 

comes into compliance with section 18 

of the Act within a reasonable period of 

time, not to exceed the expiration of the 

Exemption Period. Each Fund will make 

and preserve minutes describing these 

reports and the Board’s review, 

including copies of such reports and all 

other information provided to or relied 

upon by the Board, for a period of not 

mstockstill on PROD1PC66 with NOTICES

Federal Register / Vol. 74, No. 14 / Friday, January 23, 2009 / Notices 4271 

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

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 58905 

(November 6, 2008), 73 FR 67237 (November 13, 

2008) (SR–FINRA–2008–054) (notice). 

4The 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 FINRA Information 

Notice, March 12, 2008 (Rulebook Consolidation 

Process). 

5 Incorporated NYSE Rule Interpretation 401/01 

includes aspects similar to IM–2110–4. FINRA 

deleted that Interpretation as part of an earlier filing 

to transfer NASD Rule 2110 (Standards of 

Commercial Honor and Principles of Trade) and 

2120 (Use of Manipulative, Deceptive or Other 

Fraudulent Devices) to the Consolidated FINRA 

Rulebook, as the conduct addressed in the 

Interpretation is subsumed by those rules. See 

Securities Exchange Act Release No. 58643 

(September 24, 2008) 73 FR 57174 (October 1, 2008) 

(Order Approving SR–FINRA–2008–028). 

6Letter from Amal Aly, Managing Director and 

Associate General Counsel, Securities Industry and 

Financial Markets Association (‘‘SIFMA’’), 

December 5, 2008; Letter from Peter C. 

Chepucavage, General Counsel, Plexus Consulting, 

LLC, January 12, 2009. 

less than six years from the date of such 

determination, the first two years in an 

easily accessible place. 

For the Commission, by the Division of 

Investment Management, under delegated 

authority. 

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–1299 Filed 1–22–09; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–59254; File No. SR–FINRA– 

2008–054] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Order Approving 

Proposed Rule Change To Adopt 

FINRA Rule 5280 (Trading Ahead of 

Research Reports) in the Consolidated 

FINRA Rulebook 

January 15, 2009. 

I. Introduction 

On October 29, 2008, the Financial 

Regulatory Authority, Inc. (‘‘FINRA’’) (f/ 

k/a National Association of Securities 

Dealers, Inc. (‘‘NASD’’)) filed with the 

Securities and Exchange Commission 

(‘‘SEC’’ or ‘‘Commission’’), pursuant to 

Section 19(b)(1) of the Securities 

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

19b–4 thereunder,2 a proposed rule 

change to adopt NASD Interpretive 

Material 2110–4 (Trading Ahead of 

Research Reports) as a FINRA rule, 

subject to certain amendments. The 

proposed rule change was published for 

comment in the Federal Register on 

November 6, 2008.3 The Commission 

received two comment letters in 

response to the proposed rule change. 

This order approves the proposed rule 

change. 

II. Description of the Proposed Rule 

Change 

As part of the process of developing 

the new consolidated rulebook 

(‘‘Consolidated FINRA Rulebook’’),4

FINRA proposed to adopt in the 

Consolidated FINRA Rulebook NASD 

Interpretive Material (‘‘IM’’) 2110–4 

(Trading Ahead of Research Reports) 

with certain modifications. 

IM–2110–4 states that it is conduct 

inconsistent with just and equitable 

principles of trade for a member to 

establish or adjust an inventory position 

in an exchange-listed security traded 

over-the-counter or a derivative of such 

security in anticipation of the issuance 

of a research report on that security. The 

IM further recommends—but does not 

require—that firms establish policies 

and procedures to develop and 

implement effective internal controls to 

isolate specific information within 

research and other relevant departments 

so as to prevent the trading department 

from utilizing advance knowledge of the 

issuance of research reports. Those 

members that choose not to establish 

such procedures bear the burden to 

show that changes in inventory 

positions in advance of research reports 

were not purposeful.5

The proposed rule change would 

amend the IM in three respects. First, it 

would extend the application of the IM 

to cover inventory positions with 

respect to any security—including 

debt—or derivative thereof, irrespective 

of whether the security is exchangelisted. FINRA believes the purpose of 

the IM—to prevent the manipulation of 

the supply of a security for the benefit 

of a firm and to the detriment of 

investors—applies equally to inventory 

positions in non-exchange-listed 

securities. 

Second, the proposed rule change 

would apply the rule only to 

circumstances where a member 

establishes or adjusts its inventory 

based on non-public advance 

knowledge of the content or timing of a 

research report in that security. As such, 

it would not be a violation of the rule 

for a member to increase or decrease 

inventory of a security based on 

publicly available information regarding 

the likely timing of a research report. By 

way of example, when a member’s 

trading desk adjusts an inventory 

position in anticipation of a research 

report because of a publicly discernible 

trend that a member’s report tends to 

follow an earnings announcement, the 

prohibitions of the rule would not be 

triggered. However, having knowledge 

of a publicly discernible trend is not a 

viable alternative basis for the member’s 

trading desk to adjust its inventory 

position when the trading desk is also 

the recipient of non-public advance 

knowledge of the content or timing of a 

research report in that security. 

Finally, the proposal would eliminate 

the option to establish internal controls 

to manage the flow of information 

between the research and trading 

departments and instead mandate that 

firms establish policies and procedures 

reasonably designed to restrict or limit 

the information flow between research 

department personnel, or other persons 

with knowledge of the content or timing 

of a research report, and trading 

department personnel, so as to prevent 

trading department personnel from 

utilizing non-public advance knowledge 

of the issuance or content of a research 

report for the benefit of the member or 

any other person. 

FINRA believes that a member should 

have an affirmative obligation to manage 

conflicts of interest in its trading of 

securities. Moreover, this approach is 

more consistent with existing and 

proposed rules regarding supervision 

and the requirements of NASD Rule 

2711 and NYSE Rule 472 to eliminate 

conflicts involving the publication and 

distribution of research reports. 

III. Comments 

The SEC received two comment 

letters.6 The commenters’ concerns, as 

well as FINRA’s responses are discussed 

below. 

The first comment letter expressed 

general support for the proposed rule 

change, but requested a few 

clarifications. First, the commenter 

sought clarification that the term 

‘‘research report’’ in the proposed rule 

change has the same definition as that 

in NASD Rule 2711(a)(9). The latter 

defines research report as ‘‘any written 

(including electronic) communication 

that includes an analysis of equity 

securities of individual companies or 

industries, and that provides 

information sufficient upon which to 

base an investment decision.’’ Rule 

2711(a) also includes several exceptions 

to the definition, among them 

communications limited to 

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