Document ID: SEC-2014-1097-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2014-07-02T04:00Z

[Federal Register Volume 79, Number 127 (Wednesday, July 2, 2014)]
[Notices]
[Pages 37796-37798]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-15478]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 72480; File No. SR-FINRA-2014-012]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Filing of a Proposed Rule Change To 
Amend FINRA Rules 2210 (Communications with the Public) and 2214 
(Requirements for the Use of Investment Analysis Tools)

June 26, 2014.

I. Introduction

    The Financial Industry Regulatory Authority, Inc. (``FINRA'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
on March 25, 2014, 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 (i) amend FINRA Rule 2210 (Communications with 
the Public) to exclude from the filing requirements research reports 
concerning only securities listed on a national securities exchange, 
other than research reports which must be filed pursuant to Section 
24(b) of the Investment Company Act of 1940 (``1940 Act'') \3\; (ii) 
amend FINRA Rule 2210 to clarify that free writing prospectuses that 
are exempt from filing with the SEC are not subject to the rule's 
filing or content standards; and (iii) correct a mistaken rule cross-
reference in FINRA Rule 2214 (Requirements for the Use of Investment 
Analysis Tools). The proposed rule change was published for comment in 
the Federal Register on March 31, 2014.\4\ The Commission received four 
comments in response to the proposed rule change.\5\ This order 
approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 80a-24(b).
    \4\ See Securities Exchange Act Release No. 34-71792 (March 31, 
2014), 79 FR 18094 (SR-FINRA-2014-012) (``Notice'').
    \5\ Letters from Jason Doss, President, Public Investors 
Arbitration Bar Association, dated April 15, 2014 (``PIABA''); 
Carrie Devorah, dated April 17, 2014 (``Devorah''); Dorothy Donohue, 
Acting General Counsel, Investment Company Institute, dated April 
21, 2014 (``ICI''); and Stephanie Nicolas, Wilmer Cutler Pickering 
Hale and Dorr LLP, on behalf of Barclays Capital Inc., Citigroup 
Global Markets Inc., Credit Suisse Securities (USA) LLC, Deutsche 
Bank Securities Inc., Goldman, Sachs & Co., J.P. Morgan Securities 
LLC, Merrill Lynch, Pierce Fenner & Smith Incorporated, Morgan 
Stanley & Co. LLC, and RCS Capital Markets, LLC (``WilmerHale'').
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II. Description of the Proposed Rule Change

(a) Filing Exclusion for Research Reports on Exchange-Listed Securities

    As further described in the Notice, FINRA proposed to amend the 
current requirements for members to file certain retail communications 
with the Advertising Regulation Department (the ``Department''). Under 
this amendment, members would no longer be required to file research 
reports that concern only securities listed on a national securities 
exchange. Between the dedicated protections applied to research reports 
by other FINRA and SEC rules, and the increased liquidity and price 
transparency associated with exchange-listed securities, FINRA stated 
its belief that the additional investor protection benefit of 
Department review of those retail communications is minimal in relation 
to the cost of compliance and administration of the filing requirement. 
This exclusion will not apply to research reports that must be filed 
under Section 24(b) of the 1940 Act.

(b) Clarification Regarding Free Writing Prospectuses Exempt from SEC 
Filing

    FINRA proposed to amend FINRA Rule 2210(c)(7)(F) and FINRA Rule 
2210(d)(8) to exclude from the filing and content standards free 
writing prospectuses that are exempt from filing with the SEC. FINRA 
also proposed to clarify that the filing and content requirements apply 
to free-writing prospectuses required to be filed with the SEC pursuant 
to Securities Act Rule 433(d)(1)(ii).\6\
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    \6\ 17 CFR 230.433(d)(1)(ii).
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(c) Correction of Rule Cross-Reference in FINRA Rule 2214

    Paragraph (a) of FINRA Rule 2214 (Requirements for the Use of 
Investment Analysis Tools) mistakenly cross-references FINRA Rule 
2210(c)(3)(D) (the filing requirement for retail communications 
concerning collateralized mortgage obligations).\7\ Rule 2214(a) should 
cross-reference Rule 2210(c)(3)(C) (the filing requirement for any 
template for written reports produced by, or retail communications 
concerning, an investment analysis tool). FINRA proposed to correct 
this rule cross-reference.
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    \7\ See Securities Exchange Act Release No. 66681 (March 29, 
2012), 77 FR 20452 (April 4, 2012) (SR-FINRA-2011-035).
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    FINRA stated that it would 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 
the date of publication of the Regulatory Notice announcing Commission 
approval.

III. Comment Letters

    The SEC received four comment letters.\8\ Two commenters expressed 
support for the proposal \9\ and two opposed it.\10\ The Commission 
also received FINRA's response to comments, which is discussed 
below.\11\
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    \8\ See supra note 5.
    \9\ See ICI and WilmerHale Letters.
    \10\ See PIABA and Devorah Letters.
    \11\ Letter from Joseph P. Savage, FINRA, dated June 18, 2014 
(``FINRA Letter'').
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(a) Overall Support for Proposal

    One commenter agreed with FINRA's assessment that the proposed 
filing exclusion is appropriate based on the fact that research reports 
are already subject to regulation under NASD Rule 2711 (Research 
Analysts and Reports), that securities listed on a national securities 
exchange are less likely to be subject to price manipulation, that 
research reports may only be produced by persons who have passed the 
appropriate qualification examinations, and that the FINRA staff has 
not seen significant problems with research reports on exchange-listed 
securities that have been filed with FINRA.\12\ The commenter also 
stated that the filing

[[Page 37797]]

exclusion may facilitate more timely and efficient dissemination of 
information about closed-end funds to the market.\13\
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    \12\ See ICI Letter.
    \13\ Id.
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    Another commenter similarly supported the proposal based on its 
belief that equity research reports on exchange-listed securities do 
not implicate investor protection concerns.\14\ However, the commenter 
recommended that the proposed exclusion be expanded to cover all other 
equity research materials concerning exchange-listed securities that do 
not meet the definition of ``research report'' under NASD Rule 
2711(a)(9).\15\ The commenter believed that this expanded exclusion 
would be consistent with the approach FINRA has taken for purposes of 
other parts of FINRA Rule 2210, such as the provisions that allow a 
supervisory analyst to approve research communications.\16\
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    \14\ See WilmerHale Letter.
    \15\ Id.
    \16\ Id. (citing FINRA Rule 2210(b)(1)(B)).
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    The commenter also argued that this expansion is appropriate 
because exchange-listed securities are associated with increased 
liquidity and price transparency, and thus research communications 
concerning such securities do not raise the same investor protection 
concerns as communications concerning other more illiquid 
securities.\17\ In addition, the commenter stated that research 
communications--which are not research reports--are still prepared in a 
controlled environment that is designed to reduce the potential for 
conflicts of interest, and research analysts that produce such 
communications are subject to comprehensive independence requirements 
of NASD Rule 2711.\18\
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    \17\ Id.
    \18\ Id.
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    The commenter urged FINRA to consider amending FINRA Rule 2210 to 
provide a comparable filing exclusion for debt research reports if and 
when a FINRA rule regarding debt research is approved.\19\ The 
commenter believed that the requirements and protections of such a rule 
would justify an exclusion from the filing requirements for research 
reports on debt securities.\20\
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    \19\ Id.
    \20\ Id.
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(b) Opposition to Rule Proposal

    One commenter opposed the proposed filing exclusion for research 
reports on exchange-listed securities because its members believe that 
the amendment is misguided and runs counter to FINRA's stated objective 
of investor protection.\21\ The commenter stated that the securities 
industry is not far removed from the research analyst scandals which 
were based in part on misinformation and lack of transparency.\22\ The 
commenter also argued that the costs of filing such reports is a small 
price to pay for the additional protection it gives to investors and 
that the filing requirement is essential for restoring investor 
confidence.\23\
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    \21\ See PIABA Letter.
    \22\ Id.
    \23\ Id.
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    Another commenter submitted a letter that comments on a number of 
provisions of FINRA Rule 2210.\24\ The letter contains a wide variety 
of observations and concerns regarding FINRA rules, including that 
FINRA's regulation of member firm communications should promote 
transparency.\25\ However, the letter does not comment on the proposed 
filing exclusion for research reports concerning exchange-listed 
securities.\26\
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    \24\ See Devorah Letter.
    \25\ Id.
    \26\ Id.
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(c) Response to Comments

    FINRA responded to these comments by stating that it does not 
believe it is appropriate either to withdraw the proposal or to amend 
the proposal as suggested.\27\ FINRA also noted that it does not 
believe it is appropriate to expand the filing exclusion to cover 
research communications that do not meet the definition of research 
report.\28\ FINRA stated that unlike research reports, other research 
communications are not subject to the comprehensive disclosure, content 
and analyst independence provisions of NASD Rule 2711 and SEC 
Regulation Analyst Certification, nor is there any requirement that a 
registered research analyst prepare such communications.\29\ 
Accordingly, FINRA asserted that it does not agree that the same 
investor protections apply to research communications that are not 
research reports.\30\
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    \27\ See FINRA Letter.
    \28\ Id.
    \29\ Id.
    \30\ Id.
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    FINRA also stated that it is premature to commit to an exclusion 
from the filing requirements for research reports concerning debt 
securities in anticipation of FINRA adopting a debt research rule.\31\ 
FINRA noted that it would be more appropriate to consider such a 
proposal if and when a proposed debt research rule is filed with the 
SEC and approved.\32\
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    \31\ Id.
    \32\ Id.
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    In its letter, FINRA disagreed that the benefits to investors of 
requiring firms to file research reports concerning exchange-listed 
securities exceed the costs associated with such filing.\33\ FINRA also 
noted that while it agrees that the research analyst scandals that 
occurred a decade ago raised a number of investor protection concerns, 
FINRA responded to such concerns by adopting NASD Rule 2711, and 
Congress also imposed requirements on firms that produce research 
reports as part of the Sarbanes-Oxley Act.\34\ FINRA responded that its 
experience since Rule 2711 took effect is that it has significantly 
reduced the problems that occurred prior to the adoption of the rule, 
and that also requiring research reports concerning exchange-listed 
securities to be filed with FINRA does not appreciably increase 
investor protection relative to the costs associated with filing.\35\
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    \33\ Id.
    \34\ Id. (citing 15 U.S.C. 15D).
    \35\ See FINRA Letter (citing Joint Report by NASD and the NYSE 
On the Operations and Effectiveness of the Research Analyst Conflict 
of Interest Rules (December 2005), available at www.finra.org; U.S. 
Government Accountability Office, Securities Research: Additional 
Actions Could Improve Regulatory Oversight of Analyst Conflicts of 
Interest (January 2012), available at www.gao.gov).
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    Moreover, FINRA noted that by requiring firms to file research 
reports with FINRA, it is diverting FINRA staff resources that must be 
applied to review of these communications.\36\ FINRA stated that it 
believes such resources would be better spent on higher risk 
communications, and that by re-allocating such resources, FINRA will be 
indirectly increasing the regulatory benefits to investors.\37\
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    \36\ Id.
    \37\ See FINRA Letter (citing Joint Report by NASD and the NYSE 
On the Operations and Effectiveness of the Research Analyst Conflict 
of Interest Rules (December 2005), available at www.finra.org; U.S. 
Government Accountability Office, Securities Research: Additional 
Actions Could Improve Regulatory Oversight of Analyst Conflicts of 
Interest (January 2012), available at www.gao.gov).
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IV. Discussion and Findings

    After careful review of the proposed rule change, the comments, and 
FINRA's response to the comments, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act, 
and the rules and regulations thereunder that are applicable to a 
national securities association.\38\ In particular, the

[[Page 37798]]

Commission finds that the proposal to exclude research reports 
concerning only exchange-listed securities from the filing requirements 
for certain retail communications is consistent with the provisions of 
Section 15A(b)(6) of the Act,\39\ 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. The proposed exclusion should reduce the burdens 
imposed on member firms that would otherwise have to file research 
reports on exchange-listed securities with FINRA, while continuing to 
protect investors through the protections provided by FINRA Rule 2210 
and NASD Rules 1022, 1050 and 2711.
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    \38\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 17c(f).
    \39\ 15 U.S.C. 78o-3(b)(6).
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    The Commission also finds that the proposed clarification 
(consistent with FINRA's current interpretation of Rule 2210) regarding 
the application of Rule 2210's filing and content standards to free 
writing prospectuses that are exempt from filing with the SEC is 
consistent with the provisions of Section 15A(b)(6) of the Act.\40\ The 
Commission further finds that the proposed correction of the rule 
cross-reference in FINRA Rule 2214 is consistent with the provisions of 
Section 15A(b)(6) of the Act.\41\ The correction of the cross-reference 
is consistent with the Rule's intent and purpose and will reduce any 
potential confusion due to the current incorrect cross-reference.
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    \40\ 15 U.S.C. 78o-3(b)(6).
    \41\ 15 U.S.C. 78o-3(b)(6).
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    In general, the Commission believes that FINRA has responded to the 
comments adequately, and has explained how the proposed rule change is 
consistent with the requirements of the Act, and the rules and 
regulations thereunder that are applicable to a national securities 
association.

V. Conclusions

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\42\ that the proposed rule change (SR-FINRA-2014-012) be, and 
hereby is, approved.
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    \42\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\43\
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    \43\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-15478 Filed 7-1-14; 8:45 am]
BILLING CODE 8011-01-P