Document ID: SEC-2019-0959-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2019-07-08T04:00Z

[Federal Register Volume 84, Number 130 (Monday, July 8, 2019)]
[Notices]
[Pages 32492-32497]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-14402]

[[Page 32492]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86257; File No. SR-FINRA-2019-017]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend 
FINRA Rules 2210 (Communications With the Public) and 2241 (Research 
Analysts and Research Reports)

July 1, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 20, 2019, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend FINRA Rules 2210 (Communications with 
the Public) and 2241 (Research Analysts and Research Reports) to 
conform to the requirements of the Fair Access to Investment Research 
Act of 2017 (``FAIR Act'').\3\ The proposed rule change would eliminate 
the ``quiet period'' restrictions in Rule 2241 on publishing a research 
report or making a public appearance concerning a covered investment 
fund and would create a filing exclusion under FINRA Rule 2210 for 
covered investment fund research reports.
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    \3\ See Fair Access to Investment Research Act of 2017, Public 
Law 115-66, 131 Stat. 1196 (2017).
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    The text of the proposed rule change is available on FINRA's 
website at http://www.finra.org, at the principal office of FINRA and 
at the Commission's Public Reference Room.

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

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

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

1. Purpose
The FAIR Act
    The FAIR Act requires the SEC to propose and adopt rule amendments 
that would extend the current safe harbor under Securities Act of 1933 
(``Securities Act'') Rule 139 \4\ to a ``covered investment fund 
research report'' upon terms and conditions that the SEC determines are 
necessary or appropriate in the public interest, for the protection of 
investors, and for the promotion of capital formation.\5\ In 
implementing the safe harbor for covered investment fund research 
reports, the SEC is required to: (1) Meet specified requirements 
concerning the safe harbor's conditions, (2) prohibit any self-
regulatory organization (``SRO'') from maintaining or enforcing 
specified rules regarding such reports, and (3) provide that a covered 
investment fund research report is not subject to the sales material 
filing requirements in section 24(b) of the Investment Company Act of 
1940 (``Investment Company Act'').\6\ On November 30, 2018, the SEC 
adopted its final rules and rule amendments to implement the mandates 
of the FAIR Act.\7\ These requirements are discussed in more detail 
below.
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    \4\ 17 CFR 230.139.
    \5\ See section 2(a) of the FAIR Act.
    \6\ See section 2(b) of the FAIR Act.
    \7\ See Securities Act Release No. 10580 (November 30, 2018), 83 
FR 64180 (December 13, 2018) (the ``Release'').
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Definition of ``Covered Investment Fund Research Report''
    Under the FAIR Act, a ``research report'' generally has the meaning 
given that term under section 2(a)(3) of the Securities Act.\8\ Under 
section 2(a)(3), ``research report'' means ``a written, electronic or 
oral communication that includes information, opinions, or 
recommendations with respect to securities of an issuer or an analysis 
of a security or an issuer, whether or not it provides information 
reasonably sufficient upon which to base an investment decision.'' \9\ 
In contrast, under FINRA Rule 2241 (Research Analysts and Research 
Reports), the term ``research report'' is defined as ``any written 
(including electronic) communication that includes an analysis of 
equity securities of individual companies or industries (other than an 
open-end investment registered investment company that is not listed or 
traded on an exchange) and that provides information reasonably 
sufficient upon which to base an investment decision.'' \10\
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    \8\ However, the term does not include an oral communication. 
See section 2(f)(6) of the FAIR Act.
    \9\ See section 2(a)(3) of the Securities Act, 15 U.S.C. 
77b(a)(3).
    \10\ The definition includes a number of exclusions, such as for 
communications that are limited to discussions of broad-based 
indices, communications that are distributed to fewer than 15 
persons, and statutory prospectuses that are filed as part of an 
issuer's registration statement. See FINRA Rule 2241(a)(11).
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    Under the FAIR Act, the term ``covered investment fund research 
report'' includes a research report published or distributed by a 
broker-dealer about a ``covered investment fund,'' \11\ or any of the 
covered investment fund's securities. However, a covered investment 
fund research report excludes research published or distributed by the 
covered investment fund itself, any affiliate of a covered investment 
fund, or any broker-dealer that is an investment adviser (or an 
affiliated person of an investment adviser) to the covered investment 
fund.\12\
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    \11\ Section 2(f)(2) of the FAIR Act defines ``covered 
investment fund'' as:
    (A) An investment company registered under, or that has filed an 
election to be treated as a business development company under, the 
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) and that 
has filed a registration statement under the Securities Act of 1933 
(15 U.S.C. 77a et seq.) for the public offering of a class of its 
securities, which registration statement has been declared effective 
by the Commission; and
    (B) a trust or other person--
    (i) issuing securities in an offering registered under the 
Securities Act of 1933 (15 U.S.C. 77a et seq.) and which class of 
securities is listed for trading on a national securities exchange;
    (ii) the assets of which consist primarily of commodities, 
currencies, or derivative instruments that reference commodities or 
currencies, or interests in the foregoing; and
    (iii) that provides in its registration statement under the 
Securities Act of 1933 (15 U.S.C. 77a et seq.) that a class of its 
securities are purchased or redeemed, subject to conditions or 
limitations, for a ratable share of its assets.
    \12\ See section 2(f)(3) of the FAIR Act.
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Rule 139
    Securities Act Rule 139 provides that a broker's or dealer's 
publication or distribution of a research report about an issuer or any 
of its securities shall be deemed for purposes of sections 2(a)(10) and 
5(c) of the Securities Act not to constitute an offer for sale or offer 
to sell a security that is the subject of a registered offering, 
provided that the issuer and its securities meet specified conditions 
in the Rule. Rule 139 is sometimes described as a ``safe harbor'' for 
such research reports, since they are

[[Page 32493]]

not subject to many of the Securities Act's requirements for written 
offers of securities. Prior to the SEC's adoption of rules required by 
the FAIR Act, Rule 139's safe harbor was not available for a broker-
dealer's publication or distribution of research reports pertaining to 
specific registered investment companies or business development 
companies (``BDCs'').
    In implementing the safe harbor, the FAIR Act directs the SEC to 
meet certain requirements concerning covered investment fund research 
reports. For example, the SEC is limited in terms of imposing 
conditions to the safe harbor related to a broker-dealer's initiation 
of research, or related to a covered investment fund's registration 
history or minimum net assets.
    In addition, the SEC must provide that covered investment fund 
research reports will not be subject to the filing requirements of 
section 24(b) of the Investment Company Act, or rules or regulations 
thereunder, except to the extent that such reports are not subject to 
content standards of any SRO rules related to research reports, 
including those governing communications with the public.\13\ However, 
the FAIR Act also specifies that nothing in the Act shall be construed 
as in any way limiting the authority of any SRO to examine or supervise 
a member's practices in connection with covered investment fund 
research reports for compliance with federal law and SRO rules, or to 
require the filing of communications the purpose of which is not to 
provide research and analysis of covered investment funds.\14\
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    \13\ See section 2(b)(4) of the FAIR Act.
    \14\ See section 2(c)(2) of the FAIR Act.
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    The FAIR Act also requires the SEC to provide that SROs may not 
prohibit the ability of a broker-dealer to publish or distribute a 
covered investment fund research report solely because the broker-
dealer is participating in a registered offering or other distribution 
of the fund, and that an SRO may not prohibit the ability of a broker-
dealer to participate in the registered offering or distribution of a 
covered investment fund solely because the broker-dealer has published 
or distributed research about the fund.\15\
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    \15\ See section 2(b)(3) of the FAIR Act.
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SEC Final Rules Under the FAIR Act
    On November 30, 2018, the SEC adopted its final rules and rule 
amendments to implement the mandates of the FAIR Act.\16\ First, the 
SEC adopted new Rule 139b under the Securities Act, which expanded the 
Rule 139 safe harbor to include covered investment fund research 
reports, subject to specified conditions. Rule 139b adopts the FAIR 
Act's definitions of ``covered investment fund,'' ``covered investment 
fund research report,'' and ``research report,'' subject to minor non-
substantive revisions.\17\
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    \16\ See Release, supra note 7.
    \17\ See 17 CFR 230.139b(c).
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    Among other things, in order to qualify for the Rule 139b safe 
harbor with respect to an issuer-specific research report, the covered 
investment fund that is the subject of the report must have been 
subject to relevant reporting requirements under the Investment Company 
Act and the Exchange Act for at least 12 calendar months prior to the 
reliance on the safe harbor, and these reports must have been filed in 
a timely manner.\18\ In addition, the covered investment fund must 
satisfy a minimum public market threshold at the date of reliance on 
Rule 139b (the ``float'' requirement), which is currently $75 
million.\19\ In addition, the safe harbor requires that a broker-
dealer's publication or distribution of research reports be ``in the 
regular course of its business.'' \20\ Rule 139b also contains other 
conditions for industry reports, and with regard to the presentation of 
performance information of a registered open-end management investment 
company or a trust account.\21\
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    \18\ See 17 CFR 230.139b(a)(1)(i)(A).
    \19\ See 17 CFR 230.139b(a)(1)(i)(B). The required float value 
does not include shares held by affiliates of the fund, and is based 
on General Instruction I.B.1 to Form S-3.
    \20\ See 17 CFR 230.139b(a)(1)(ii).
    \21\ See 17 CFR 230.139b(a)(2) and (a)(3).
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    In addition, Rule 139b provides that an SRO may not maintain or 
enforce any rule that would prohibit the ability of a member to publish 
or distribute a covered investment fund research report solely because 
the member is participating in a registered offering or distribution of 
securities of a covered investment fund, or to participate in a 
registered offering or other distribution of such securities solely 
because the member has published or distributed a covered investment 
fund research report about the fund or its securities.\22\
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    \22\ See 17 CFR 230.139b(b).
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    The SEC also adopted new Rule 24b-4 under the Investment Company 
Act, which specifies that a covered investment fund research report as 
defined in Rule 139b that concerns a fund registered under the 
Investment Company Act shall not be subject to section 24(b) of the Act 
or any rules or regulations thereunder, unless the report is not 
subject to SRO rules relating to research reports, including rules 
governing communications with the public.\23\ Section 24(b) of the 
Investment Company Act generally requires certain registered investment 
companies and their underwriters to file sales material concerning 
those funds with the SEC within 10 days of use.\24\
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    \23\ See 17 CFR 270.24b-4.
    \24\ See 15 U.S.C. 80a-24(b). This filing requirement applies to 
sales material concerning any registered open-end management 
investment company, any registered unit investment trust (``UIT''), 
or any registered face-amount certificate company (``FACC'').
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Changes to FINRA Rules Required by the FAIR Act
    FINRA interprets the FAIR Act as requiring it to make two changes 
to FINRA Rules. First, FINRA is proposing to amend Rule 2241 to 
eliminate the quiet period restrictions on publishing a research report 
or making a public appearance concerning a covered investment fund that 
is the subject of such a report. Second, FINRA is proposing to amend 
Rule 2210 to create a filing exclusion for covered investment fund 
research reports that qualify for the Securities Act Rule 139b safe 
harbor.
FINRA Equity Research Rules
    FINRA Rule 2241 governs the publication of research reports 
concerning equity securities and the analysts that produce such 
research. Under Rule 2241, members must 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.\25\ Among other things, these policies and 
procedures must define periods during which the member must not publish 
or otherwise distribute research reports, and research analysts must 
not make public appearances, related to the issuer (``quiet periods'').
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    \25\ See FINRA Rule 2241(b)(1).
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    These quiet periods restrict a member that has participated as an 
underwriter or dealer in an initial public offering (``IPO'') from 
publishing research or having its research analysts make public 
appearances for a minimum of 10 days following the date of an IPO. They 
also restrict a member that has acted as a manager or co-manager of a 
secondary offering from publishing research or having its research 
analysts make personal appearances for a minimum of three days 
following the date of the offering.\26\
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    \26\ See FINRA Rule 2241(b)(2)(I). This provision contains 
specified exceptions to the quiet periods for research reports and 
public appearances following an offering of securities of an 
Emerging Growth Company, for reports or appearances that discuss 
significant news or events concerning a subject company, and for 
reports and appearances regarding subject companies with ``actively 
traded securities'' as defined in SEC Regulation M.

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[[Page 32494]]

    While Rule 2241 excludes from its definition of ``research report'' 
communications related to mutual funds, the Rule applies to 
communications that meet the definition of ``research report'' under 
Rule 2241 concerning other covered investment funds, including closed-
end funds (``CEFs''), exchange-traded funds (``ETFs''), BDCs, UITs, and 
commodity or currency funds, to the extent such research reports are 
published by an underwriter or dealer in the IPO or manager or co-
manager of a secondary offering.\27\ Accordingly, such research reports 
(as defined under Rule 2241) on covered investment funds (other than 
mutual funds) are subject to Rule 2241's quiet periods.
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    \27\ See FINRA Rule 2241(a)(11).
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    As discussed above, the FAIR Act requires the SEC to prohibit any 
SRO from maintaining or enforcing any rule that would prohibit the 
ability of a member to:
     Publish or distribute a covered investment fund research 
report solely because the member is also participating in a registered 
offering or other distribution of the fund; or
     Participate in a registered offering or other distribution 
of securities of a covered investment fund solely because the member 
has published or distributed a covered investment fund research report 
about the fund or its securities.\28\
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    \28\ See section 2(b)(3) of the FAIR Act. The SEC implemented 
this requirement in Securities Act Rule 139b(b).
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    Accordingly, FINRA is proposing to amend Rule 2241 to add a new 
exception from the Rule's quiet period requirements for the publication 
or distribution of research reports and research analysts' public 
appearances if the member has participated in the offering of the 
subject company's securities.\29\ Under this new exception, the quiet 
period requirements shall not apply to a research report or a public 
appearance following any offering of the securities of a covered 
investment fund that is the subject of a covered investment fund 
research report.\30\ Although the FAIR Act does not address quiet 
periods for public appearances by research analysts, FINRA also 
proposes to eliminate quiet periods for public appearances concerning a 
covered investment fund. Under Rule 2241, quiet periods for both 
research reports and public appearances are the same, and FINRA 
believes elimination of those quiet periods would advance the policy 
objectives of the FAIR Act.\31\
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    \29\ As discussed above, because the definition of ``research 
report'' under Rule 2241 is narrower than the definition of 
``research report'' under the FAIR Act, not all covered investment 
fund research reports are subject to Rule 2241. Nevertheless, to the 
extent that a covered investment fund research report is also a 
research report subject to Rule 2241, the publication and 
distribution of such reports will not be subject to the rule's quiet 
periods.
    \30\ FINRA also proposes to define the terms ``covered 
investment fund'' and ``covered investment fund research report'' as 
having the same meanings as in Securities Act Rule 139b. See 
proposed FINRA Rules 2241(a)(15) and (16) in Exhibit 5.
    \31\ FINRA rules do not prohibit a member from participating in 
a registered offering or other distribution of securities of a 
covered investment fund solely because the member has published 
research about the fund. Accordingly, there is no need to amend any 
FINRA rule to meet this requirement of section 2(b)(3) of the FAIR 
Act or Securities Act Rule 139b(b).
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Elimination of Filing Requirement
    As discussed above, section 24(b) of the Investment Company Act 
requires registered open-end management investment companies, 
registered UITs, registered FACCs, and their underwriters to file sales 
material for the funds with the SEC within 10 days of first use. 
Investment Company Act Rule 24b-3 provides that any sales material 
shall be deemed filed with the SEC for purposes of section 24(b) upon 
filing with a registered national securities association that has 
adopted rules providing standards for the investment company 
advertising practices of its members and has established and 
implemented procedures to review that advertising.\32\
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    \32\ FINRA is currently the only national securities association 
registered under the Exchange Act that has adopted such rules and 
procedures.
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    Accordingly, virtually all principal underwriters of mutual funds, 
ETFs, UITs and FACCs satisfy the section 24(b) requirement by filing 
their sales material with FINRA. Rule 2210 requires members to file 
within 10 business days of first use or publication retail 
communications that promote or recommend a specific registered 
investment company or family of registered investment companies 
(including mutual funds, ETFs, variable insurance products, CEFs and 
UITs), as well as retail communications that concern any other 
registered security that is derived from or based on a single security, 
a basket of securities, an index, a commodity, a debt issuance or a 
foreign currency.\33\
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    \33\ See FINRA Rules 2210(c)(3)(A) and (D). For a one-year 
period beginning on the date reflected in FINRA's Central 
Registration Depository (CRD[supreg]) system as the date that FINRA 
membership became effective, a member also must file with FINRA at 
least 10 business days prior to first use any broadly disseminated 
retail communication, regardless of whether it concerns a registered 
investment company. See FINRA Rule 2210(c)(1)(A). In addition, a 
member must file at least 10 business days prior to first use any 
retail communication concerning registered investment companies that 
includes performance rankings or comparisons that are not generally 
published, or that were created by the investment company, its 
underwriter, or an affiliate. See FINRA Rule 2210(c)(2)(A).
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    As discussed above, pursuant to section 2(b)(4) of the FAIR Act, 
the SEC has adopted Investment Company Act Rule 24b-4, which provides 
that a covered investment fund research report, as defined in 
Securities Act Rule 139b(c)(3), of a covered investment fund registered 
as an investment company under the Investment Company Act, shall not be 
subject to section 24(b) of the Act. However, a covered investment fund 
research report is still subject to the section 24(b) filing 
requirement if the report is not subject to the content standards of 
any SRO rules related to research reports, including those contained in 
the SRO's communications rules regarding investment companies or 
substantially similar standards.\34\
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    \34\ See 17 CFR 270.24b-4.
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    As discussed above, section 2(c)(2) of the FAIR Act provides that 
nothing in the Act shall be construed as in any way limiting the 
authority of any SRO to examine or supervise a member's practices in 
connection with the member's publication or distribution of a covered 
investment fund research report for compliance with applicable 
provisions of the Federal securities laws or SRO rules related to 
research reports, including those contained in rules governing 
communications with the public, or to ``require the filing of 
communications with the public the purpose of which is not to provide 
research and analysis of covered investment funds.'' \35\ Accordingly, 
FINRA interprets the FAIR Act as requiring FINRA to create a filing 
exclusion in Rule 2210 for covered investment fund research reports, 
but permits FINRA to require the filing of a covered investment fund 
research report if the purpose of the report is not to provide research 
and analysis of covered investment funds.
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    \35\ See section 2(c)(2) of the FAIR Act.
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    In the Release, the SEC made clear that, even if the exclusion of 
covered investment fund research reports from the provisions of section 
24(b) affects the applicability of FINRA Rule 2210's filing 
requirements or exclusions, ``it would not affect FINRA's authority to 
require the filing of a communication that is included in the FAIR Act

[[Page 32495]]

definition of `covered investment fund research report' but whose 
purpose is not to provide research and analysis.'' \36\
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    \36\ See Release, supra note 7, at 64196.
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    The SEC also discussed in the Release industry comments 
recommending that FINRA modify its rules in light of the FAIR Act. One 
commenter recommended that FINRA harmonize its research rules with SEC 
Rule 139b and that broker-dealers relying on Rule 139b be exempted from 
FINRA's filing requirements with respect to covered investment fund 
research reports. Another commenter suggested that the FAIR Act be 
interpreted as limiting FINRA's authority to require the filing of 
covered investment fund research reports only if a report provides 
``information'' that a user would not be able to use for research and 
analysis, since such information would be for promotional rather than 
research purposes. In addition, one commenter argued that because the 
definition of ``research report'' under the FAIR Act is broader than 
FINRA's definition of ``research report'' in Rule 2241, this difference 
may cause confusion and conflicting interpretive views on what 
communications are deemed research for purposes of the safe harbor and 
filing exclusion.\37\
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    \37\ See supra note 36.
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    FINRA believes that it would be inconsistent with the requirements 
of Section 15D of the Exchange Act to modify the definition of 
``research report'' under FINRA Rule 2241 to match the definition of 
``research report'' under the FAIR Act and Rule 139b. Section 15D of 
the Exchange Act, which was enacted as part of the Sarbanes-Oxley Act, 
required FINRA to adopt rules reasonably designed to address research 
analyst conflict of interests, and specifically defined ``research 
report'' using language similar to that used in FINRA Rule 2241.\38\ 
FINRA further notes that SEC Regulation Analyst Certification (``Reg 
AC'') also uses a substantially similar definition of ``research 
report.'' FINRA Rule 2241 and Reg AC have different regulatory 
objectives than the research report provisions of the FAIR Act, and 
Congress could have--but chose not to--harmonize the statutory 
definitions of ``research report'' in the FAIR Act.
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    \38\ See Section 15D(d)(2) of the Exchange Act, 15 U.S.C. 78o-
6(d)(2).
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    FINRA intends to create a rule that furthers the purposes of the 
FAIR Act, protects investors, and is relatively straightforward for 
broker-dealers to implement. These objectives can best be achieved if 
the filing exclusion applies to any ``covered investment fund research 
report'' as defined by Rule 139b that qualifies for the Rule 139b safe 
harbor. The SEC has determined which research reports should be subject 
to the safe harbor, and FINRA sees no policy reason to create a filing 
exclusion for covered investment fund research reports that differs 
from this standard.
    The FAIR Act authorizes FINRA to require members to file any 
covered investment fund research report the purpose of which is not to 
provide research and analysis of covered investment funds. FINRA could 
simply amend Rule 2210 by adding a filing exclusion for covered 
investment fund research reports, but qualifying the filing exclusion 
as not applying to reports the purpose of which is not to provide 
research and analysis of covered investment funds. While this approach 
would adhere to the text of the FAIR Act, FINRA believes such an 
approach would be difficult to apply in practice and would be 
inconsistent with the purpose and spirit of the FAIR Act and Rule 139b.
    For example, if FINRA took this approach, members would have to 
first determine whether a covered investment fund research report 
qualifies for the Rule 139b safe harbor, and then determine if it is 
for the purpose of providing research and analysis of covered 
investment funds. This approach could create regulatory uncertainty for 
members, and also require more compliance resources to process reports. 
FINRA believes that the intent of the FAIR Act and Rule 139b is to 
increase the volume and publication of research reports on covered 
investment funds subject to appropriate conditions, and thus believes 
that its filing exclusion should be consistent with this approach. 
Moreover, FINRA believes that Rule 139b's requirements reflect the 
Commission's careful consideration of balancing the need for more fund 
research with investor protection.\39\ For these reasons, FINRA 
proposes to exclude from filing all covered investment fund research 
reports that qualify for the Rule 139b safe harbor. Of course, FINRA 
may still review such reports through examinations, targeted sweeps, or 
spot checks, and such reports will remain subject to the content 
standards of FINRA rules governing communications with the public.\40\
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    \39\ See generally Release, supra note 7, at 64183-64193.
    \40\ See section 2(c)(2) of the FAIR Act; see also Release, 
supra note 7, at 64194 and fn. 185.
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    Accordingly, FINRA proposes to create a new filing exclusion under 
Rule 2210 for ``any covered investment fund research report that is 
deemed for purposes of sections 2(a)(10) and 5(c) of the Securities Act 
not to constitute an offer for sale or offer to sell a security under 
Securities Act Rule 139b.'' \41\ FINRA also proposes to define 
``covered investment fund research report'' as having the same meaning 
given that term in paragraph (c)(3) of Securities Act 139b.\42\
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    \41\ See proposed FINRA Rule 2210(c)(7)(P) in Exhibit 5.
    \42\ See proposed FINRA Rule 2210(a)(7) in Exhibit 5.
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Affiliated Research Reports
    The FAIR Act and Securities Act Rule 139b define ``covered 
investment fund research report'' to exclude a research report to the 
extent that the report is published or distributed by the covered 
investment fund, any affiliate of the covered investment fund, or any 
broker or dealer that is an investment adviser (or an affiliated person 
of an investment adviser) for the covered investment fund.\43\ Thus, 
research reports published or distributed by a covered investment fund, 
its affiliate, or any broker-dealer that is an investment adviser (or 
an affiliate of the investment adviser) for the covered investment fund 
will still have to be filed under Investment Company Act section 24(b) 
and FINRA Rule 2210.\44\
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    \43\ See section 2(f)(3) of the FAIR Act and Securities Act Rule 
139b(c)(3).
    \44\ If a research report concerns both a covered investment 
fund that is an affiliate of the member that is publishing or 
distributing the research report, as well as a third-party fund that 
is not affiliated with the member publishing or distributing the 
report, the research report would not qualify as a covered 
investment fund research report. See Release, supra note 7, at 64191 
(``[w]e believe extending the rule 139b safe harbor to affiliated 
funds in industry research reports (whether industry representation 
or comprehensive list reports) would not be consistent with the 
intent and plain language of section 2(f)(3) of the FAIR Act'').
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    In some cases an investment adviser or another affiliate of a 
registered investment company will enter into an agreement with an 
unaffiliated broker-dealer to act as the principal underwriter for the 
fund (``third-party distributor''). Third-party distributors provide a 
variety of services pursuant to their distribution agreements with 
investment companies. Typically, these funds' investment advisers or 
the funds themselves prepare the retail communications concerning the 
funds, and then submit the communications to the third-party 
distributor for compliance review and filing with FINRA. These 
communications typically are published on the website for the fund or 
its investment adviser, or

[[Page 32496]]

the investment adviser or another fund affiliate requests that it be 
published or distributed through other media.
    As the SEC noted in the Release, one factor to consider in 
evaluating whether a research report has been published or distributed 
by a person covered by the affiliate exclusion from the definition of 
covered investment fund research report is the extent of such person's 
involvement in the preparation of the research report.\45\ These 
determinations would be based on the extent to which a person covered 
by the affiliate exclusion, or any person acting on its behalf, has 
been involved in preparing the information or explicitly or implicitly 
endorsed or approved the information. The Commission refers to such 
affiliate involvement or endorsement as ``the entanglement or adoption 
theory, respectively.'' \46\
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    \45\ See Release, supra note 7, at 64182.
    \46\ See supra note 45.
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    Thus, FINRA will not consider research reports on covered 
investment funds to be excluded from filing under the proposed changes 
to Rule 2210 if personnel of the covered investment fund, any affiliate 
of the fund, or any broker-dealer that is the investment adviser or an 
affiliated person of the investment adviser were entangled with the 
preparation of the report, or had adopted its contents after it had 
been prepared.\47\ For example, if a third-party distributor publishes 
or distributes research concerning a fund that was written by personnel 
of the fund's investment adviser, the report still would be subject to 
filing under Rule 2210.
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    \47\ See Release, supra note 7, at 64181-64183 (discussion of 
affiliate exclusion).
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    If the Commission approves the proposed rule change, FINRA will 
announce the approval 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 Commission approval of 
the proposed rule change.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\48\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that the FAIR Act mandates the proposed 
changes to the FINRA Rule 2241 quiet periods around publication of 
covered investment fund research reports. FINRA believes the additional 
proposed change to eliminate quiet periods around public appearances 
involving an offering of covered investment fund securities furthers 
the policies underlying the statutory mandate by improving information 
flow to investors regarding such funds. FINRA believes that the 
proposed filing exclusion under FINRA Rule 2210 for covered investment 
fund research reports that qualify for the SEC Rule 139b safe harbor is 
consistent with the FAIR Act's intent to increase the volume and 
publication of research reports on covered investment funds subject to 
appropriate conditions. FINRA also believes that the proposed rule 
change will improve efficiency and reduce regulatory burden without 
diminishing investor protection. As discussed above, FINRA retains 
other methods to review covered investment fund research reports.
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    \48\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. FINRA has undertaken an 
economic impact assessment, as set forth below, to analyze the 
regulatory need for the proposed rulemaking, its potential economic 
impacts, including anticipated costs and benefits, and the alternatives 
FINRA considered in assessing how to best meet its regulatory 
objectives.
Economic Impact Assessment
    FINRA interprets the FAIR Act as requiring it to make two changes 
to its rules regarding quiet periods for covered investment funds and 
communications filings of covered investment fund research reports. The 
Economic Impact Assessment considers only the impacts of the specific 
aspects of the proposed rule changes over which FINRA has used its 
discretion. The economic implications for the other aspects of the 
proposed rule change that are mandated by the FAIR Act can be deemed 
assessed as part of the Act.
    In this proposal, FINRA used its discretion in two areas. First, 
FINRA has chosen to include research analysts' public appearances as 
part of the proposed exception to Rule 2241's quiet period 
requirements. Second, FINRA has chosen to create a new filing exclusion 
under 2210 for all covered investment fund research reports that 
qualify for the Rule 139b safe harbor rather than just the reports that 
are for research and analysis purposes.
Regulatory Need
    Consistent with requirements in the FAIR Act, FINRA is proposing to 
amend Rule 2241 to eliminate the Rule's quiet periods for the 
publication of research reports concerning covered investment funds 
where the member is also participating in a registered offering or 
other distribution of the fund. Although not specifically addressed by 
the FAIR Act, quiet periods for public appearances by research analysts 
that are responsible for covered investment fund research reports will 
also be eliminated. FINRA believes that including public appearances in 
the proposed amendments is consistent with how FINRA has traditionally 
viewed them vis-[agrave]-vis research reports and is in accordance with 
the spirit of the FAIR Act.
    FINRA is also proposing to amend Rule 2210 to create a new filing 
exclusion for any covered investment fund research report that 
qualifies for the Rule 139b safe harbor. The FAIR Act authorizes FINRA 
to continue to require members to file any covered investment fund 
research reports whose purpose is for something other than research and 
analysis of covered investment funds. FINRA has chosen to exclude from 
Rule 2210 filing requirements all covered investment fund research 
reports that qualify for the safe harbor under Rule 139b regardless of 
their purpose.
Economic Baseline and Impact
Quiet Period
    Currently under Rule 2241, members must establish policies and 
procedures that prohibit research analysts that produce ``research 
reports'' as defined under that rule from making public appearances 
during specified quiet periods following the offering of an equity 
security. As Rule 2241 does not apply to research reports concerning 
mutual funds, this proposed change will only affect public appearances 
by analysts responsible for reports concerning other types of equity 
securities, including covered investment funds such as BDCs, commodity 
or currency funds.
    The proposed rule change will create a new exception from the 
Rule's quiet period requirements for the publication or distribution of 
research reports and research analysts' public appearances. Elimination 
of the quiet period for research analysts' public appearances will 
allow analysts to provide the same information contemporaneously 
through both research reports and public

[[Page 32497]]

appearances. However, the elimination of the quiet period could 
increase the risk that research analysts make misleading statements in 
public appearances at an earlier date. This risk is mitigated by the 
other aspects of Rule 2241, including identifying and managing 
conflicts of interest, with which members are still required to comply.
Communications Filings
    Currently Rule 2210 requires members to file within 10 business 
days of first use or publication certain retail communications 
including covered investment fund research reports that would qualify 
under the Rule 139b safe harbor. FINRA is proposing to create a new 
filing exclusion under Rule 2210 for all covered investment fund 
research reports that qualify for the safe harbor under Rule 139b 
regardless of their purpose.
    Between 2016 and 2018, approximately 381 covered investment fund 
research reports were filed by members unaffiliated with the covered 
investment fund. Over 90 percent of these reports were filed by three 
member firms. FINRA does not know how many of the filings were for 
purposes other than research and analysis. Members that currently file 
these types of reports will benefit through savings on the 
administrative costs associated with tracking filing deadlines for the 
communications and with the time and effort to put together the filings 
as well as fees associated with filing the reports. Alternatively, the 
exclusion of these reports from filing requirements could increase 
risks to investors. Lower costs could increase the number of non-
research related reports on unaffiliated covered investment funds 
published by members. Further, members may risk including more biased 
or misleading statements in the reports given the lack of immediate 
FINRA oversight.
    This risk to investors is mitigated by two factors. First, only 
reports published or distributed by a member unaffiliated with the 
covered investment fund qualify for the exclusion. Members unaffiliated 
with the covered investment fund have a lower incentive to provide 
misleading information than those affiliated with the fund. Second, 
FINRA continues to have the ability to review these communications as 
part of the examination process or through a sweep or spot checks.
Alternatives Considered
    FINRA considered excluding from the Rule's filing requirements only 
those covered investment fund research reports whose purpose is to 
provide research and analysis of the covered investment funds. If FINRA 
carved out of the proposed exclusion non-research related reports, 
members would be required to first evaluate whether the report was 
covered under the safe harbor and then determine whether its purpose 
was for research and analysis or something else. This additional 
evaluation criterion could lead to higher compliance costs and greater 
regulatory uncertainty, especially for those members that publish or 
distribute a high number of covered investment fund research reports. 
While this requirement could reduce risks to investors, FINRA believes 
that the reduced risk is not commensurate with the increased costs to 
members in complying with the rule and would be inconsistent with the 
purpose and spirit of the FAIR Act and Rule 139b.

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

    Comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2019-017 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2019-017. 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 website (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 website 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. Persons submitting comments are cautioned that 
we do not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
FINRA-2019-017 and should be submitted on or before July 29, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\49\
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    \49\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-14402 Filed 7-5-19; 8:45 am]
 BILLING CODE 8011-01-P