Document ID: SEC-2007-1323-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2007-09-26T04:00Z

[Federal Register: September 26, 2007 (Volume 72, Number 186)]
[Notices]               
[Page 54698-54700]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26se07-120]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56480; File No. SR-FINRA-2007-011]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Amend NASD 
Rule 2711 and NYSE Rule 472 Regarding a Member's Disclosure and 
Supervisory Review Obligations When Distributing Third-Party Research

September 20, 2007.
    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 September 12, 2007, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend NASD Rule 2711 and NYSE Rule 472 with 
respect to a member's disclosure and supervisory review obligations 
when it distributes or makes available third-party research reports.
    The text of the proposed rule change is available at FINRA, on 
FINRA's Web site at http://www.finra.org, and in the Commission's 

Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.\3\
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    \3\ The Commission has modified parts of these statements.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    NASD Rule 2711(h)(13) and NYSE Rule 472(k)(4) set forth a member's 
disclosure and supervisory review obligations when the member 
distributes--i.e., ``pushes out''--or makes available a research report 
produced by a third party. A member that distributes a third-party 
research report must accompany the report with certain current 
applicable disclosures (``third-party disclosures''), as they pertain 
to the member: (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. The third-party disclosure requirements do not apply if 
a member makes available to its customers non-affiliate research either 
upon request or through a member-maintained Web site.
    NASD Rule 2711(h)(13) further requires that a registered principal 
(or supervisory analyst approved pursuant to Rule 344 of the New York 
Stock Exchange) must review and approve by signature or initial any 
third-party research distributed by a member. Consistent with NASD Rule 
2210(d)(1)(B), the member must review such research to ensure that the 
applicable disclosures discussed above are complete and accurate 
(``disclosure review'') and the content of the research reports 
contains no untrue statement of material fact or is otherwise not false 
or misleading (``content review''). Similarly, NYSE Rule 472(k)(4) 
requires a supervisory analyst approved pursuant to New York Stock 
Exchange Rule 344 to approve by signature or initial any third-party 
research distributed by a member organization. Additionally, NYSE Rule 
472(k)(4) requires a supervisory analyst or qualified person, 
designated pursuant to NYSE Rule 342(b)(1), to conduct the same 
disclosure and content review as NASD Rule 2711(h)(13).

[[Page 54699]]

    FINRA has interpreted that content review requirement to mean that 
a member's supervisory obligation for review of third-party research 
extends to any untrue statement of material fact or any false or 
misleading information that (1) should be known from a reading of the 
report or (2) is known based on information otherwise possessed by the 
member.\4\ No supervisory review is required under either rule when a 
member makes available non-affiliate research either upon request or 
through a member-maintained Web site.
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    \4\ See Notice to Members 07-04. NYSE Information Memo 07-11, 
which has been incorporated by FINRA, sets out the same standard for 
NYSE Rule 472(k)(4).
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    The proposed rule change would define a ``third-party research 
report'' for the purposes of the rules as a research report that is 
produced by a person or entity other than a member. The proposal 
further would create the subcategory of ``independent third-party 
research'' and eliminate the content review requirement when a member 
distributes or makes available such research. The proposal would define 
``independent third-party research'' for the purposes of the rules to 
mean a third-party research report, in respect of which the person or 
entity producing the report: (1) Has no affiliation or business or 
contractual relationship with the distributing member or that member's 
affiliates that is reasonably likely to inform the content of its 
research reports; and (2) makes coverage and content determinations 
without any input from the distributing member or that member's 
affiliates.
    The proposed rule change would create an exception from the 
disclosure review requirement for independent third-party research 
reports made available by a member either (1) upon request, (2) through 
a member-maintained Web site, or (3) where such report is made 
available by a member to a customer in connection with a solicited 
order in which the registered representative has informed the customer, 
during the course of the solicitation, of the availability of 
independent research on the solicited equity security and the customer 
requests such independent research.
    The proposed rule change would require that current applicable 
third-party disclosures accompany any third-party research report that 
does not meet the definition of ``independent third-party research 
report,'' irrespective of whether it is distributed or made available 
upon request, on a member-maintained Web site or in connection with a 
solicitation, as described above. However, the proposed rule change 
would amend NASD Rule 2711(h)(13) and NYSE 472(k)(4) to allow a member 
to direct a customer to a Web address where such applicable third-party 
disclosures could be found.
    FINRA believes the proposed rule change will promote the 
availability of independent third-party research--a valuable source of 
independent analysis for investors that can be compared with or 
supplement a member's own research. At the same time, the proposal 
would maintain member supervisory review in those circumstances where 
the member's relationship with the research provider is such that the 
research is not wholly free from the control or influence of the 
member. Moreover, the proposed rule change preserves the requirement 
that a member disclose potential conflicts with the subject company 
whenever it ``pushes out'' research to customers.
    The filing includes a statement about when FINRA will announce the 
effective date of the proposed rule change.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Act,\5\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that the proposed rule change is 
consistent with the provisions of the Act noted above in that it will 
promote the availability of independent third-party research reports, 
thereby resulting in more fully informed investment decisions by 
investors.
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    \5\ 15 U.S.C. 78o-3(b)(6).
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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.

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

    Within 35 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 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 
changes are 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 e-mail to rule-comments@sec.gov. Please include 

File Number SR-FINRA-2007-011 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2007-011. This 
file number should be included on the subject line if e-mail 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 inspection 
and copying in the Commission's Public Reference Room, 100 F Street, 
NE., Washington, DC 20549, on official business days

[[Page 54700]]

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-2007-011 and should be submitted on or before October 17, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-18958 Filed 9-25-07; 8:45 am]

BILLING CODE 8010-01-P