Document ID: SEC-2015-0466-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2015-03-18T04:00Z

[Federal Register Volume 80, Number 52 (Wednesday, March 18, 2015)]
[Notices]
[Pages 14174-14185]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-06092]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74488; File No. SR-FINRA-2014-047]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendment No. 1 to a Proposed Rule 
Change To Adopt FINRA Rule 2241 (Research Analysts and Research 
Reports) in the Consolidated FINRA Rulebook

March 12, 2015.

I. Introduction

    On November 14, 2014, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule to adopt NASD Rule 2711 (Research 
Analysts and Research Reports) as a FINRA rule, with several 
modifications; amend NASD Rule 1050 (Registration of Research Analysts) 
and Incorporated NYSE Rule 344 to create an exception from the research 
analyst qualification requirement; and renumber NASD Rule 2711 as FINRA 
Rule 2241 in the consolidated FINRA rulebook. The proposal was 
published for comment in the Federal Register on November 24, 2014.\3\ 
The Commission received four comments on the proposal.\4\ On February 
19, 2015, FINRA filed Amendment No. 1 responding to the comments 
received to the proposal as well as to propose amendments in response 
to these comments. On February 20, 2015, the Commission issued an order 
instituting proceedings pursuant to Section 19(b)(2)(B) of the Act \5\ 
to determine whether to approve or disapprove the proposal. The order 
was published for comment in the Federal Register on February 26, 
2015.\6\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Exchange Act Release No. 73622 (Nov. 18, 2014); 79 FR 69939 
(Nov. 24, 2014) (``Notice''). On January 6, 2015, FINRA consented to 
extending the time period for the Commission to either approve or 
disapprove the proposed rule change, or to institute proceedings to 
determine whether to approve or disapprove the proposed rule change, 
to February 20, 2015.
    \4\ See infra note 12.
    \5\ 15 U.S.C. 78s(b)(2)(B).
    \6\ Exchange Act Release No. 74339 (Feb. 20, 2015); 80 FR 10528 
(Feb. 26, 2015). The comment period closes on March 19, 2015.
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    The proposed rule change, as modified by Amendment No. 1, is 
described in Items II and III below, which Items have been 
substantially prepared by FINRA.\7\ The Commission is publishing this 
notice to solicit comments from interested persons on the proposal as 
amended by Amendment No. 1.
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    \7\ For a comparison of the changes of the rule text between the 
proposal as originally noticed and the proposal as amended by 
Amendment No. 1, see Exhibit 4 to SR-FINRA-2014-047.
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II. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing Amendment No. 1 to SR-FINRA-2014-047, a proposed 
rule change 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.

III. 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 V below. FINRA has prepared summaries, set forth in sections A, B, 
and C below, of the most significant aspects of such statements.

[[Page 14175]]

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

1. Purpose
Rule Filing History
    On November 14, 2014, FINRA filed with the Securities and Exchange 
Commission (``Commission'') SR-FINRA-2014-047,\8\ a proposed rule 
change to adopt in the consolidated FINRA rulebook (``Consolidated 
FINRA Rulebook'') \9\ NASD Rule 2711 (Research Analysts and Research 
Reports) with several modifications as FINRA Rule 2241.\10\ 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.
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    \8\ See Securities Exchange Act Release No. 73622 (November 18, 
2014), 79 FR 69939 (November 24, 2014) (Notice of Filing File No. 
SR-FINRA-2014-047) (``Proposing Release''). The comment period 
closed on December 15, 2014.
    \9\ The 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).
    \10\ On the same date, FINRA also filed a companion proposal to 
create FINRA Rule 2242 to address conflicts of interest related to 
the publication and distribution of debt research reports (``debt 
research proposal''). See Securities Exchange Act Release No. 73623 
(November 18, 2014), 79 FR 69905 (November 24, 2014) (Notice of 
Filing File No. SR-FINRA-2014-048).
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    The Commission published the proposed rule change for public 
comment in the Federal Register on November 24, 2014.\11\ The 
Commission received four comment letters directed to the filing.\12\ 
Based on comments received, FINRA is filing this Amendment No. 1 to 
respond to the comments and to propose amendments, where appropriate. 
The amendment also includes a few technical, non-substantive changes.
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    \11\ See Securities Exchange Act Release No. 73622 (November 18, 
2014), 79 FR 69939 (November 24, 2014) (Notice of Filing File No. 
SR-FINRA-2014-047).
    \12\ See Letter from Hugh D. Berkson, Executive Vice President 
and President-Elect, Public Investors Arbitration Bar Association, 
to Brent J. Fields, Secretary, SEC, dated December 15, 2014 (``PIABA 
Equity''); Letter from Kevin Zambrowicz, Associate General Counsel 
and Managing Director, and Sean Davy, Managing Director, Securities 
Industry and Financial Markets Association, to Brent J. Fields, 
Secretary, SEC, dated December 15, 2014 (``SIFMA''); Letter from 
Stephanie R. Nicolas, Wilmer Cutler Pickering Hale and Dorr LLP, to 
Brent J. Fields, Secretary, SEC, dated December 16, 2014 
(``WilmerHale Equity''); and Letter from William Beatty, President, 
North American Securities Administrators Association, Inc., to Brent 
J. Fields, Secretary, SEC, dated December 19, 2014 (``NASAA 
Equity'').
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Proposal
    As described in greater detail in the Proposing Release, 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 where appropriate. The description below is the 
proposal as amended by Amendment No. 1.\13\
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    \13\ See Notice for a description of the original proposal. See 
also Exhibit 4 to SR-FINRA-2014-047 for a comparison of changes made 
in the rule text in Amendment No. 1.
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Definitions
    FINRA is proposing to mostly maintain 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.\14\
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    \14\ See 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.
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     clarification in the definition of ``research analyst 
account'' that the definition does not apply to a registered investment 
company over which a research analyst or member of the research 
analyst's household has discretion or control, provided that the 
research analyst or member of the research analyst's household has no 
financial interest in the investment company, other than a performance 
or management fee.\15\
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    \15\ See proposed FINRA Rule 2241(a)(9).
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     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'').\16\
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    \16\ See proposed FINRA Rule 2241(a)(11).
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     exclusion from the definition of ``research report'' of 
communications that constitute private placement memoranda and 
comparable offering-related documents prepared in connection with 
investment banking services transactions, other than those that purport 
to be research.\17\
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    \17\ See proposed FINRA Rule 2241(a)(11)(D).
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     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 rule.\18\
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    \18\ See proposed FINRA Rules 2241(a)(3) and (14). FINRA 
believes it creates a more streamlined and user friendly rule to 
combine defined terms in a single definitional section.
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     adoption of a definition of ``sales and trading 
personnel'' to include persons in any department or division, whether 
or not identified as such, who perform any sales or trading service on 
behalf of a member.\19\
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    \19\ See proposed FINRA Rule 2241(a)(12).
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Identifying and Managing Conflicts of Interest
    FINRA is proposing to create 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.\20\ The written policies and procedures must 
be reasonably designed to promote objective and reliable research that 
reflects the truly held opinions of research analysts and to 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.\21\ 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.
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    \20\ See proposed FINRA Rule 2241(b)(1).
    \21\ See proposed FINRA Rule 2241(b)(2).
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Prepublication Review
    FINRA is proposing that the required policies and procedures must 
prohibit prepublication review, clearance or approval of research 
reports by persons engaged in investment banking services activities 
and restrict or prohibit such

[[Page 14176]]

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.\22\
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    \22\ See proposed FINRA Rule 2241(b)(2)(A).
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Coverage Decisions
    The proposed rule change would require that the policies and 
procedures restrict or limit input by the investment banking department 
into research coverage decisions to ensure that research management 
independently makes all final decisions regarding the research coverage 
plan.\23\
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    \23\ See proposed FINRA Rule 2241(b)(2)(B).
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Supervision and Control of Research Analysts
    The proposed rule change would require that the policies and 
procedures 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.\24\
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    \24\ See proposed FINRA Rule 2241(b)(2)(C).
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Research Budget Determinations
    The proposed rule change would require that the policies and 
procedures limit determination of the research department budget to 
senior management, excluding senior management engaged in investment 
banking services activities.\25\
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    \25\ See proposed FINRA Rule 2241(b)(2)(D).
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Compensation
    The proposed rule change would require that the policies and 
procedures prohibit compensation based upon specific investment banking 
services transactions or contributions to a member's investment banking 
services activities.\26\ 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.\27\ These provisions are consistent with the requirements 
in current Rule 2711(d).
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    \26\ See proposed FINRA Rule 2241(b)(2)(E).
    \27\ See proposed FINRA Rule 2241(b)(2)(F).
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Information Barriers
    The proposed rule change would require that the policies and 
procedures establish information barriers or other institutional 
safeguards reasonably designed 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 personnel, who might be biased in their judgment or 
supervision.\28\
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    \28\ See proposed FINRA Rule 2241(b)(2)(G).
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Retaliation
    The proposed rule change would require that the policies and 
procedures 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.\29\
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    \29\ See proposed FINRA Rule 2241(b)(2)(H).
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Quiet Periods
    The proposed rule change would require that the policies and 
procedures define quiet periods of a minimum of 10 days after an 
initial public offering (``IPO''), 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 IPO or, with respect to 
the quiet periods after a secondary offering, acted as a manager or co-
manager of that offering.\30\
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    \30\ See 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.
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    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 a minimum of three days after the 
completion of the offering for any member that has acted as a manager 
or co-manager in the secondary offering. The proposed rule change 
maintains exceptions to the quiet periods for research reports or 
public appearances concerning the effects of significant news or a 
significant event on the subject company and, for secondary offerings, 
research reports or public appearances pursuant to SEC Rule 139 
regarding a subject company with ``actively-traded securities.''
    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.
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.\31\ 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.\32\
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    \31\ See proposed FINRA Rule 2241(b)(2)(L).
    \32\ See NASD Notice to Members 07-04 (January 2007) and NYSE 
Information Memo 07-11 (January 2007).
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    The proposed rule change also adds Supplementary Material .01, 
which codifies the existing interpretation that the solicitation 
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.\33\
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    \33\ See proposed FINRA Rule 2241.01 and Notice to Members 07-04 
(January 2007).
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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

[[Page 14177]]

that address the interaction between research analysts and those 
outside of the research department, including investment banking and 
sales and trading personnel, subject companies and customers, to 
prohibit the performance of joint due diligence prior to the selection 
of underwriters for the investment banking services transaction.
    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.\34\ 
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.\35\ 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.
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    \34\ See proposed FINRA Rule 2241(b)(2)(M).
    \35\ See proposed FINRA Rule 2241.03.
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Promises of Favorable Research and Prepublication Review by Subject 
Company
    FINRA is proposing to maintain the current prohibition against 
promises of favorable research, a particular research recommendation, 
rating or specific content as inducement for receipt of business or 
compensation.\36\ The proposed rule further requires policies and 
procedures to prohibit prepublication review of a research report by a 
subject company for purposes other than verification of facts.\37\ 
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 non-investment banking personnel or the subject company for 
factual review, provided that: (1) The draft sections do 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 non-investment 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.\38\
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    \36\ See proposed FINRA Rule 2241(b)(2)(K).
    \37\ See proposed FINRA Rule 2241(b)(2)(N).
    \38\ See proposed FINRA Rule 2241.05.
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Personal Trading Restrictions
    FINRA is proposing to require 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.\39\ 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.\40\ The proposal maintains 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.\41\ The 
proposed rule change includes Supplementary Material .10, which 
provides that FINRA would not consider a research analyst account to 
have traded in a manner inconsistent with a research analyst's 
recommendation where a member has instituted a policy that prohibits 
any research analyst from holding securities, or options on or 
derivatives of such securities, of the companies in the research 
analyst's coverage universe, provided that the member establishes a 
reasonable plan to liquidate such holdings consistent with the 
principles in paragraph (b)(2)(J)(i) and such plan is approved by the 
member's legal or compliance department.\42\
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    \39\ See proposed FINRA Rule 2241(b)(2)(J).
    \40\ See proposed FINRA Rule 2241(b)(2)(J)(i).
    \41\ See proposed FINRA Rule 2241(b)(2)(J)(ii).
    \42\ See proposed FINRA Rule 2241.10.
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Content and Disclosure in Research Reports
    With a couple of modifications, the proposed rule change maintains 
the current 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.\43\ 
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, rating or price target has a reasonable basis and is 
accompanied by a clear explanation of any valuation method used and a 
fair presentation of the risks that may impede achievement of the 
recommendation, rating or price target.\44\
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    \43\ See proposed FINRA Rule 2241(c)(1)(A).
    \44\ See proposed FINRA Rule 2241(c)(1)(B).
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    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: \45\
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    \45\ See proposed FINRA Rule 2241(c)(4).
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     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; \46\
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    \46\ See proposed FINRA Rule 2241(c)(4)(A).
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     if the research analyst has received compensation based 
upon (among other factors) the member's investment banking revenues; 
\47\
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    \47\ See proposed FINRA Rule 2241(c)(4)(B).
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     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; 
\48\
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    \48\ See proposed FINRA Rule 2241(c)(4)(C).
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     if, as of the end of the month immediately preceding the 
date of

[[Page 14178]]

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; \49\
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    \49\ See proposed FINRA Rule 2241(c)(4)(D).
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     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, non-investment 
banking services, non-investment banking securities-related services or 
non-securities services; \50\
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    \50\ See proposed FINRA Rule 2241(c)(4)(E).
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     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; \51\ and
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    \51\ See proposed FINRA Rule 2241(c)(4)(G).
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     if the research analyst received any compensation from the 
subject company in the previous 12 months.\52\
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    \52\ See proposed FINRA Rule 2241(c)(4)(H).
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    The proposed rule change would also expand 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. 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.'' \53\ The proposed rule change defines a 
person with the ``ability to influence the content of a research 
report'' as an associated person who is required to review the content 
of the research report or has exercised authority to review or change 
the research report prior to publication or distribution. This term 
does not include legal or compliance personnel who may review a 
research report for compliance purposes but are not authorized to 
dictate a particular recommendation, rating or price target.\54\ The 
``reason to know'' standard in this provision 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.
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    \53\ See proposed FINRA Rule 2241(c)(4)(I).
    \54\ See proposed FINRA Rule 2241.08.
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    The proposed rule change also maintains the requirement to disclose 
when a member or its affiliates beneficially own 1% or more of any 
class of common equity securities of the subject company.\55\ 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.
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    \55\ See proposed FINRA Rule 2241(c)(4)(F).
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    The proposal modifies the exception for disclosure that would 
reveal material non-public information regarding specific potential 
future investment banking transactions of the subject company to 
include specific potential future investment banking transactions of 
other companies, such as a competitor of the subject company.\56\ 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 toll-free number 
or a postal address where the reader may request the disclosures. In 
addition, paper compendium reports may include a web address where the 
disclosures can be found.\57\
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    \56\ See proposed FINRA Rule 2241(c)(5).
    \57\ See proposed FINRA Rule 2241(c)(7).
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Disclosures in Public Appearances
    The proposal groups in a separate provision the disclosures 
required when a research analyst makes a public appearance.\58\ The 
required disclosures remain substantively the same as under the current 
rules \59\ including 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. FINRA 
understands that supervisors or legal and compliance personnel, who 
otherwise might be captured by the definition of an associated person 
``with the ability to influence,'' 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.\60\
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    \58\ See proposed FINRA Rule 2241(d).
    \59\ See NASD Rules 2711(h)(1), (h)(2)(B) and (C), (h)(3) and 
(h)(9).
    \60\ See proposed FINRA Rule 2241(d)(3).
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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 and the 
federal securities laws.\61\
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    \61\ See proposed FINRA Rule 2241(e).
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Termination of Coverage
    The proposed rule change retains with non-substantive 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.\62\ 
Such notification must be made promptly \63\ 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.
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    \62\ See proposed FINRA Rule 2241(f).
    \63\ While 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.
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Distribution of Member Research Reports
    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.\64\ 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

[[Page 14179]]

discloses its research dissemination practices to all customers that 
receive a research product.\65\
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    \64\ See proposed FINRA Rule 2241(g).
    \65\ See proposed FINRA Rule 2241.07.
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Distribution of Third-Party Research Reports
    The proposal would maintain the existing third-party disclosure 
requirements,\66\ incorporating the change to the ``catch-all'' 
provision to include material conflicts of interest that 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 
distribution of the third-party research report. In addition, the 
proposed rule change 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.\67\
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    \66\ NASD 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.
    \67\ See proposed FINRA Rule 2241(h)(4).
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    In addition, the proposal continues to address qualitative aspects 
of third-party 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 distributes 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 
third-party 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.\68\ 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.\69\
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    \68\ See proposed FINRA Rules 2241(h)(1) and (h)(3).
    \69\ See proposed FINRA Rule 2241(h)(2).
---------------------------------------------------------------------------

    The proposal maintains the existing exceptions for ``independent 
third-party research reports.'' Specifically, such research does not 
require principal pre-approval or, where the third-party research is 
not ``pushed out,'' the third-party disclosures.\70\ 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 member-maintained 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.
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    \70\ See proposed FINRA Rule 2241(h)(5) and (6).
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    Finally, under the proposed rule change, 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.\71\
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    \71\ See proposed FINRA Rule 2241(h)(7).
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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.\72\ 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.\73\ 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.\74\ 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. 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.\75\
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    \72\ See NASD Rule 2711(k).
    \73\ See NASD Rule 2711(d)(2).
    \74\ See NASD Rule 2711(d) and (k).
    \75\ See proposed FINRA Rules 2241(b)(2)(E) and (i).
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    The proposed rule change further exempts firms with limited 
investment banking activity from the provisions restricting or limiting 
research coverage decisions and budget determination. 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 information barriers or other 
institutional safeguards 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.
Exemption From Registration Requirements for Certain ``Research 
Analysts''
    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).\76\ 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

[[Page 14180]]

research rules, in accordance with the mandates of the Sarbanes-Oxley 
Act of 2002 (``Sarbanes-Oxley''), 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.
---------------------------------------------------------------------------

    \76\ See proposed NASD Rule 1050(b) and proposed Incorporated 
NYSE Rule 344.10.
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Attestation Requirement
    The proposed rule change would delete 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.
Obligations of Persons Associated With a Member
    Proposed Supplementary Material .09 would clarify 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 proposal 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.\77\ In addition, consistent with Rule 0140, 
Supplementary Material .09 states that it shall be a violation of 
proposed Rule 2241 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 Rule 
2241, including applicable Supplementary Material.
---------------------------------------------------------------------------

    \77\ See 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.
---------------------------------------------------------------------------

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.\78\
---------------------------------------------------------------------------

    \78\ See proposed FINRA Rule 2241(j).
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Response to Comments
    In connection with Amendment No. 1, FINRA also responded to the 
comments received on the original proposal as proposed in the Notice, 
included below.
General Support
    Three of the four commenters to the proposal expressed general 
support for the proposal.\79\
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    \79\ SIFMA, WilmerHale Equity and PIABA Equity.
---------------------------------------------------------------------------

Definitions and Terms
    One commenter requested that the proposal define the term ``sales 
and trading personnel'' as ``persons who are primarily responsible for 
performing sales and trading activities, or exercising direct 
supervisory authority over such persons.'' \80\ The commenter's 
proposed definition is intended to clarify that the proposed 
restrictions on sales and trading personnel activities should not 
extend to: (1) Senior management who do not directly supervise those 
activities but have a reporting line from such personnel (e.g., the 
head of equity capital markets); or (2) persons who occasionally 
function in a sales and trading capacity. FINRA intends for the sales 
and trading personnel conflict management provisions to apply to 
individuals who perform sales and trading functions, irrespective of 
their job title or the frequency of engaging in the activities. As 
such, FINRA does not intend for the rule to capture as sales and 
trading personnel senior management, such as the chief executive 
officer, who do not engage in or supervise day-to-day sales and trading 
activities. However, FINRA believes the applicable provisions should 
apply to individuals who may occasionally perform or directly supervise 
sales and trading activities; otherwise, investors could be put at risk 
with respect to the research or transactions involved when those 
individuals are functioning in those capacities because the conflict 
management procedures and proscriptions and required disclosures would 
not apply. Therefore, FINRA has proposed to amend the rule to define 
sales and trading personnel to include ``persons in any department or 
division, whether or not identified as such, who perform any sales or 
trading service on behalf of a member.'' FINRA notes that this proposed 
definition is more consistent with the definition of ``investment 
banking department'' in the current and proposed rules.
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    \80\ WilmerHale Equity. For consistency with the debt research 
proposal, FINRA also proposes to amend the proposed rule change to 
use the term ``sales and trading personnel.''
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    One commenter asked FINRA to include an exclusion from the 
definition of ``research report'' for private placement memoranda and 
similar offering-related documents prepared in connection with 
investment banking services transactions.\81\ The commenter noted that 
such offering-related documents typically are prepared by investment 
banking personnel or non-research personnel on behalf of investment 
banking personnel. The commenter asserted that absent an express 
exception, the proposals could turn investment banking personnel into 
research analysts and make the rule unworkable. The commenter noted 
that NASD Rule 2711(a) excludes communications that constitute 
statutory prospectuses that are filed as part of a registration 
statement and contended that the basis for that exception should apply 
equally to private placement memoranda and similar offering-related 
documents.
---------------------------------------------------------------------------

    \81\ WilmerHale Equity.
---------------------------------------------------------------------------

    The definition of ``research report'' is generally understood not 
to include such offering-related documents prepared in connection with 
investment banking services transactions. In the course of 
administering the filing review programs under FINRA Rules 2210 
(Communications with the Public), 5110 (Corporate Financing Rule), 5122 
(Member Private Offerings) and 5123 (Private Placements of Securities), 
FINRA has not received any inquiries or addressed any issues that 
indicate there is confusion regarding the scope of the research analyst 
rules as applied to offering-related documents prepared in connection 
with investment banking activities. Nonetheless, to provide firms with 
greater clarity as to the status of such offering-related documents 
under the proposal, FINRA proposes to amend the proposed rule change to 
exclude private placement memoranda and similar offering-related 
documents prepared in connection with investment banking services 
transactions other than those that purport to be research from the 
definition of ``research report.''
    One commenter asked FINRA to refrain from using the concept of 
``reliable'' research in the proposals as it may inappropriately 
connote accuracy in the context of a research analyst's opinions.\82\ 
However, another commenter supported the requirement to have policies 
and procedures reasonably designed to ensure that research reports are 
based on reliable

[[Page 14181]]

information.\83\ As discussed in detail in Item 5 of the Proposing 
Release, FINRA believes that the term ``reliable'' is commonly 
understood and notes that the term is used in certain research-related 
provisions in Sarbanes-Oxley without definition. FINRA does not believe 
the term connotes accuracy of opinions.
---------------------------------------------------------------------------

    \82\ SIFMA.
    \83\ NASAA.
---------------------------------------------------------------------------

    One commenter asked FINRA to eliminate as redundant the term 
``independently'' from the provisions permitting non-research personnel 
to have input into research coverage, so long as research management 
``independently makes all final decisions regarding the research 
coverage plan.'' \84\ The commenter asserted that inclusion of 
``independently'' is confusing since the proposal would permit input 
from non-research personnel into coverage decisions. FINRA has included 
``independently'' to make clear that research management alone is 
vested with making final coverage decisions. Thus, for example, a firm 
could not have a committee that includes a majority of research 
management personnel but also other individuals make final coverage 
decisions by a vote. As such, FINRA declines to eliminate the term as 
suggested.
---------------------------------------------------------------------------

    \84\ WilmerHale Equity.
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Policies and Procedures
    The rule proposal would adopt a policies and procedures approach to 
identification and management of research-related conflicts of interest 
and require those policies and procedures to prohibit or restrict 
particular conduct. Commenters expressed several concerns with the 
approach.
    Two commenters asserted that the mix of a principles-based approach 
with prescriptive requirements was confusing in places and posed 
operational challenges. In particular, the commenters recommended 
eliminating the minimum standards for the policies and procedures.\85\ 
One of those commenters had previously expressed support for the 
proposed policies-based approach with minimum requirements,\86\ but 
asserted that the proposed rule text requiring procedures to ``at a 
minimum, be reasonably designed to prohibit'' specified conduct is 
either superfluous or confusing. Another commenter opposed a shift to a 
policies and procedures scheme ``without also maintaining the 
proscriptive nature of the current rules.'' The commenter therefore 
favored retaining the proscriptive approach in the current rules and 
also requiring that firms maintain policies and procedures designed to 
ensure compliance.\87\ One commenter questioned the necessity of the 
``preamble'' requiring policies and procedures that ``restrict or limit 
activities by research analysts that can reasonably be expected to 
compromise their objectivity'' that precedes specific prohibited 
activities related to investment banking transactions.\88\ Finally, 
some commenters suggested FINRA eliminate language in the supplementary 
material that provides that the failure of an associated person to 
comply with the firm's policies and procedures constitutes a violation 
of the proposed rule itself.\89\ These commenters argued that because 
members may establish policies and procedures that go beyond the 
requirements set forth in the rule, the provision may have the 
unintended consequence of discouraging firms from creating standards in 
their policies and procedures that extend beyond the rule. One of those 
commenters suggested that the remaining language in the supplementary 
material adequately holds individuals responsible for engaging in 
restricted or prohibited conduct covered by the proposals.\90\
---------------------------------------------------------------------------

    \85\ SIFMA and WilmerHale Equity.
    \86\ Letter from Amal Aly, Managing Director and Associate 
General Counsel, SIFMA, to Marcia E. Asquith, Corporate Secretary, 
FINRA, dated November 14, 2008 regarding Regulatory Notice 08-55 
(Research Analysts and Research Reports).
    \87\ NASAA Equity.
    \88\ WilmerHale Equity.
    \89\ SIFMA and WilmerHale Equity.
    \90\ WilmerHale Equity.
---------------------------------------------------------------------------

    As discussed in more detail in the Proposing Release, FINRA 
believes the framework will maintain the same level of investor 
protection in the current rules while providing both some flexibility 
for firms to align their compliance systems with their business model 
and philosophy and imposing additional obligations to proactively 
identify and manage emerging conflicts. Even under a policies and 
procedures approach, the proposals would effectively maintain, with 
some modifications, the key proscriptions in the current rules--e.g., 
prohibitions on prepublication review, supervision of research analysts 
by investment banking and participation in pitches and road shows. 
FINRA disagrees that the ``preamble'' to some of those prohibitions is 
unnecessary. As with the more general overarching principles-based 
requirement to identify and manage conflicts of interest, the 
introductory principle that requires written policies and procedures to 
restrict or limit activities by research analysts that can reasonably 
be expected to compromise their objectivity recognizes that FINRA 
cannot identify every conflict related to research at every firm and 
therefore requires proactive monitoring and management of those 
conflicts. FINRA does not believe this ``preamble'' language is 
redundant with the broader overarching principle because it applies 
more specifically to the activities of research analysts and, unlike 
the broader principle, would preclude the use of disclosure as a means 
of conflict management for those activities.
    In light of the overarching principle that requires firms to 
establish, maintain and enforce written policies and procedures 
reasonably designed to identify and effectively manage research-related 
conflicts, the ``at a minimum'' language was meant to convey that 
additional conflicts management policies and procedures may be needed 
to address emerging conflicts that may arise as the result of business 
changes, such as new research products, affiliations or distribution 
methods at a particular firm. As discussed in the Proposing Release, 
FINRA intends for firms to proactively identify and manage those 
conflicts with appropriately designed policies and procedures. FINRA's 
inclusion of the ``at a minimum'' language was not intended to suggest 
that firms' written policies and procedures must go beyond the 
specified prohibitions and restrictions in the proposal where no new 
conflicts have been identified. However, FINRA believes the overarching 
requirement for policies and procedures reasonably designed to identify 
and effectively manage research-related conflicts suffices to achieve 
the intended regulatory objective, and therefore to eliminate any 
confusion, FINRA proposes to amend the proposal to delete the ``at a 
minimum'' language.
    FINRA appreciates the commenters' concerns with respect to language 
in the supplementary material that would make a violation of a firm's 
policies a violation of the underlying rule. The supplementary material 
was intended to hold individuals responsible for engaging in the 
conduct that the policies and procedures effectively restrict or 
prohibit. FINRA agrees that purpose is achieved with the language in 
the supplementary material that states that, consistent with FINRA Rule 
0140, ``it shall be a violation of [the Rule] 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 [the Rule] or related Supplementary

[[Page 14182]]

Material.'' Therefore, FINRA proposes to amend the proposed rule change 
to delete the language stating that a violation of a firm's policies 
and procedures shall constitute a violation of the rule itself.
Information Barriers
    The proposed rule would require written policies and procedures to 
``establish information barriers or other institutional safeguards 
reasonably designed 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.'' Some commenters suggested that ``review'' was 
unnecessary in this provision because the review of research analysts 
was addressed sufficiently in other parts of the proposed rule.\91\ One 
commenter further suggested that the terms ``review'' and ``oversight'' 
are redundant.\92\ FINRA does not agree that the terms ``review'' and 
``oversight'' are coextensive, as the former may connote informal 
evaluation, while the latter may signify more formal supervision or 
authority. And while other provisions of the proposed rule change may 
address related conduct--e.g., the provision that prohibits investment 
banking personnel from supervision or control of research analysts--
this provision extends to ``other persons'' who may be biased in their 
judgment or supervision. Finally, FINRA notes that ``review, pressure 
or oversight'' mirrors language in Sarbanes-Oxley. Accordingly, FINRA 
declines to revise the proposed rule.
---------------------------------------------------------------------------

    \91\ SIFMA and WilmerHale Equity.
    \92\ WilmerHale Equity.
---------------------------------------------------------------------------

    One commenter asked FINRA to clarify that the information barriers 
or other institutional safeguards required by the proposed rule are not 
intended to prohibit or limit activities that would otherwise be 
permitted under other provisions of the rule.\93\ That was clearly 
FINRA's intent, and FINRA believes that the rules of statutory 
construction would compel that result.
---------------------------------------------------------------------------

    \93\ WilmerHale Equity.
---------------------------------------------------------------------------

    The commenter also asserted that the terms ``bias'' and 
``pressure'' are broad and ambiguous on their face and requested that 
FINRA clarify that for purposes of the information barriers requirement 
that they are intended to address persons who may try to improperly 
influence research.\94\ As an example, the commenter asked whether a 
bias would be present if an analyst was pressured to change the format 
of a research report to comply with the research department's standard 
procedures or the firm's technology specifications. FINRA believes the 
terms ``pressure'' and ``bias'' are commonly understood, particularly 
in the context of rules intended to promote analyst independence and 
objectivity. To that end, FINRA notes that the terms appear in certain 
research-related provisions of Sarbanes-Oxley without definition. Thus, 
with respect to the commenter's example, FINRA does not believe a bias 
would be present simply because someone insists that a research analyst 
comply with formatting or technology specifications that do not 
otherwise implicate the rules.
---------------------------------------------------------------------------

    \94\ WilmerHale Equity.
---------------------------------------------------------------------------

    One commenter asked FINRA to modify the information barriers or 
other institutional safeguards requirement to conform the provision to 
FINRA's ``reasonably designed'' standard for policies and procedures 
that members must adopt.\95\ FINRA believes the change would be 
consistent with the standard for policies and procedures elsewhere in 
the proposals, and therefore proposes to amend the provision as 
requested.
---------------------------------------------------------------------------

    \95\ WilmerHale Equity.
---------------------------------------------------------------------------

    One commenter opposed as overbroad the proposed expansion of the 
current ``catch-all'' disclosure requirement to include ``any other 
material conflict of interest of the research analyst or member that a 
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 publication or distribution of research 
report.\96\ (emphasis added) The commenter expressed concern about the 
emphasized language. Another commenter supported the proposed expansion 
of the current ``catch-all'' disclosure requirement.\97\
---------------------------------------------------------------------------

    \96\ WilmerHale Equity.
    \97\ NASAA Equity.
---------------------------------------------------------------------------

    FINRA proposed the change to capture material conflicts of interest 
known by persons other than the research analyst (e.g., a supervisor or 
the head of research) who are in a position to improperly influence a 
research report. FINRA defined ``ability to influence the content of a 
research report'' in supplementary material 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.'' The commenter stated that the proposed 
change could capture individuals (especially legal and compliance 
personnel) who might be required to disclose confidential information 
that is not covered by the exception in the proposals that would not 
require disclosure where it would ``reveal material non-public 
information regarding specific potential future investment banking 
transactions of the subject company.'' This is because, according to 
the commenter, legal and compliance may be aware of material conflicts 
of interest relating to the subject company that involve material non-
public information regarding specific future investment banking 
transactions of a competitor of the subject company. The commenter also 
expressed concern the provision would slow down dissemination of 
research to canvass all research supervisors and management for 
conflicts. The commenter suggested that the change was unnecessary 
given other objectivity safeguards in the proposals that would guard 
against improper influence.
    FINRA continues to believe that a potential gap exists in the 
current rules where a supervisor or other person with the authority to 
change the content of a research report knows of a material conflict. 
However, FINRA intended for the provision to capture only those 
individuals who are required to review the content of a particular 
research report or have exercised their authority to review or change 
the research report prior to publication or distribution. In addition, 
FINRA did not intend to capture legal or compliance personnel who may 
review a research report for compliance purposes but are not authorized 
to dictate a particular recommendation, rating or price target. FINRA 
proposes to amend the supplementary material in the proposals 
consistent with this clarification. In addition, FINRA proposes to 
modify the exception in proposed Rules 2241(c)(5) and (d)(2) (applying 
to public appearances) not to require disclosure that would otherwise 
reveal material non-public information regarding specific potential 
future investment banking transactions, whether or not the transaction 
involves the subject company.
    One commenter requested confirmation that members may rely on 
hyperlinked disclosures for research reports that are delivered 
electronically, even if these reports are subsequently printed out by 
customers.\98\ As long as a research report delivered electronically 
contains a hyperlink directly to the required disclosures, the standard 
will be satisfied.
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    \98\ WilmerHale Equity.

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[[Page 14183]]

Research Products With Differing Recommendations
    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. The proposals also include supplementary 
material that explains that firms may provide different research 
products to different classes of customers--e.g., long term fundamental 
research to all customers and short-term trading research to certain 
institutional customers--provided the products are not differentiated 
based on the timing of receipt of potentially market moving information 
and the firm discloses, if applicable, that one product may contain a 
different recommendation or rating from another product.
    One commenter supported the provisions as proposed with general 
disclosure,\99\ while another contended that FINRA should require 
members to disclose when their research products and services do, in 
fact, contain a recommendation contrary to the research product or 
service received by other customers.\100\ The commenter favoring 
general disclosure asserted that disclosure of specific instances of 
contrary recommendations would impose significant burdens unjustified 
by the investor protection benefits. The commenter stated that a 
specific disclosure requirement would require close tracking and 
analysis of every research product or service to determine if a 
contrary recommendation exists. The commenter further stated that the 
difficulty of complying with such a requirement would be exacerbated in 
large firms by the number of research reports published and research 
analysts employed and the differing audiences for research products and 
services.\101\ They asserted that some firms may publish tens of 
thousands of research reports each year and employ hundreds of analysts 
across various disciplines and that a given research analyst or 
supervisor could not reasonably be expected to know of all other 
research products and services that may contain differing views.
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    \99\ WilmerHale Equity.
    \100\ PIABA Equity.
    \101\ WilmerHale Equity.
---------------------------------------------------------------------------

    Importantly, the supplementary material states that products may 
lead to different recommendations or ratings, provided that each is 
consistent with the member's ratings system for each respective 
product. In other words, all differing recommendations or ratings must 
be reconcilable such that they are not truly at odds with one another. 
Since the proposals would not allow inconsistent recommendations that 
could mislead one or more investors, FINRA believes general disclosure 
of alternative products with different objectives and recommendations 
is appropriate relative to its investor protection benefits.
Quiet Periods
    The proposal would eliminate or reduce the quiet periods during 
which a member may not publish or otherwise distribute research reports 
or make a public appearance following its participation in an offering. 
Citing recent enforcement actions in the research area, one commenter 
did not support elimination or reduction of the quiet periods.\102\ As 
discussed in more detail in Item 3 of the Proposing Release, FINRA 
believes that the separation, disclosure and certification requirements 
in the current 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 noted that there is a cost to investors when 
they are deprived of information and analysis during quiet periods. 
FINRA believes that the proposed changes to the quiet periods would 
promote information flow to investors without jeopardizing the 
objectivity of research. FINRA also notes that the enforcement actions 
cited by the commenter that favors retaining the existing quiet periods 
did not involve the quiet period provisions of the rules, nor in 
FINRA's view would maintaining the current quiet periods have deterred 
the conduct in those cases.
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    \102\ NASAA Equity.
---------------------------------------------------------------------------

    Other commenters requested that FINRA retain the exceptions in NASD 
Rule 2711(f) that permits: (i) The publication and distribution of 
research or a public appearance concerning the effects of significant 
news or a significant event on the subject company during the quiet 
period; and (ii) the publication of distribution of research pursuant 
to Rule 139 under the Securities Act of 1933.\103\ FINRA agrees that 
those exceptions should be included and therefore proposes to amend the 
proposed rule change accordingly.
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    \103\ SIFMA, WilmerHale Equity.
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Disclosure Requirements
    Two commenters opposed the requirement in the equity proposal that 
members disclose, in an equity research report, if they or their 
affiliates maintain a significant financial interest in the debt of the 
research company.\104\ The commenters noted that the debt research 
analyst proposal does not contain a dedicated requirement to disclose 
significant debt holdings; rather, it relies on the ``catch-all'' 
provision, which would require disclosure of a firm's debt holdings of 
a subject company only where it rises to an actual material conflict of 
interest. The commenters asserted that the reasoning in the debt 
proposal--e.g., that firms do not have systems to track ownership of 
debt securities and that the number and complexity of bonds and the 
fact that a firm may be both long and short different bonds of the same 
issuer makes real-time disclosure of credit exposure difficult--applies 
equally to equity research. Another commenter supported the requirement 
in the equity proposal that members disclose, in an equity research 
report, if they or their affiliates maintain a significant financial 
interest in the debt of the research company.\105\ One commenter also 
stated that while FINRA correctly noted that the United Kingdom's 
Financial Conduct Authority rules require disclosure of debt holdings 
in equity research reports, that requirement is more akin to the 
``catch-all'' provision because the disclosure is limited to 
circumstances where the holdings ``may reasonably be expected to impair 
the objectivity of research recommendations'' or ``are significant in 
relation to the research recommendations.'' FINRA believes that 
amending the equity proposal to the treat disclosure of debt holdings 
consistent with the debt proposal would promote consistency and 
efficiency while maintaining the same level of investor protection. 
Therefore, FINRA proposes to amend the proposed rule change 
accordingly, including modifying a similar disclosure requirement when 
making public appearances.
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    \104\ SIFMA, WilmerHale Equity.
    \105\ NASAA Equity.
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Impact on Global Settlement
    One commenter asked FINRA to confirm in any Regulatory Notice 
announcing adoption of the proposed rule change that provisions 
relating to research coverage and budget decisions and joint due 
diligence are intended to supersede the corresponding terms of the 
Global Research Analyst Settlement

[[Page 14184]]

(``Global Settlement'').\106\ As discussed in the 2012 United States 
Government Accountability Office (``GAO'') Report on Securities 
Research,\107\ FINRA does not believe that the terms of the Global 
Settlement should be modified through FINRA rulemaking and instead 
should be determined by the court overseeing the enforcement action. 
Therefore, FINRA does not intend for any provisions of the equity 
proposal that may be adopted to supersede provisions of the Global 
Settlement.
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    \106\ WilmerHale Equity.
    \107\ GAO, Securities Research, Additional Actions Could Improve 
Regulatory Oversight of Analyst Conflicts of Interest, January 2012.
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Exemptive Authority
    One commenter opposed the provision that would give FINRA the 
authority to grant, in exceptional or unusual circumstances, an 
exemption from the requirement of the proposed rule for good cause 
shown.\108\ The commenter stated that the provision had not been 
sufficiently justified by, among other things, providing examples of 
where an exemption would be justified. The purpose of exemptive 
authority is to provide a mechanism of relief in unusual factual 
circumstances that cannot be foreseen, where application of the rule 
would frustrate or be inconsistent with its intended purposes. As such, 
it is difficult if not impossible for FINRA to provide examples of 
where it would be appropriate to use the authority. However, as FINRA 
stated in the equity proposal rule filing, the scope of the rule's 
subject matter and the diversity of firm sizes, structures and research 
business and distribution models make it more likely that factual 
circumstances may arise that had not been contemplated by the rule. In 
addition, the authority is limited not only to exceptional 
circumstances, but also to a showing of good cause.
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    \108\ NASAA Equity.
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Implementation Date
    One commenter requested that the implementation date be at least 12 
months after SEC approval of the proposed rule change.\109\ Another 
commenter similarly requested that FINRA provide a ``grace period'' of 
one year or the maximum time permissible, if that is less than one 
year, between the adoption of the proposed rule and the implementation 
date.\110\ FINRA is sensitive to the time firms will require to update 
their policies and procedures and systems to comply with the proposal 
and will take those factors into consideration when establishing 
implementation dates.
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    \109\ SIFMA.
    \110\ WilmerHale Equity.
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    FINRA believes that the foregoing fully responds to the issues 
raised by the commenters.
    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,\111\ 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.
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    \111\ 15 U.S.C. 78o-3(b)(6).
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    Moreover, the proposed rule change is consistent with Section 15D 
of the Act,\112\ 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 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.
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    \112\ 15 U.S.C. 78o-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. FINRA provided a comprehensive 
statement regarding the burden on competition in the Proposing Release. 
FINRA's response to comments and proposed revisions as set forth in 
this Amendment No. 1 do not change FINRA's statement in the Proposing 
Release.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments on the proposed rule change were solicited by the 
Commission in response to the publication of SR-FINRA-2014-047.\113\ 
The Commission received four comment letters, which are summarized 
above.
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    \113\ See Proposing Release, supra note 3.
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IV. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 180 days after the date of publication of the initial notice 
in the Federal Register (i.e., November 24, 2014) or within such longer 
period up to an additional 60 days (i) as the Commission may designate 
if it finds such longer period to be appropriate

[[Page 14185]]

and publishes its reasons for so finding or (ii) as to which the self-
regulatory organization consents, the Commission will issue an order 
approving or disapproving such proposed rule change, as amended.

V. 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: \114\
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    \114\ See supra note 6.
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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 April 8, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\115\
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    \115\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-06092 Filed 3-17-15; 08:45 am]
 BILLING CODE 8011-01-P