Document ID: SEC-2008-0234-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-02-12T05:00Z

[Federal Register: February 12, 2008 (Volume 73, Number 29)]
[Notices]               
[Page 8086-8089]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12fe08-71]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57278; File No. SR-FINRA-2007-010]

 
Self-Regulatory Organizations: Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting 
Accelerated Approval of Proposed Rule Change as Modified by Amendment 
No. 1 To Amend an Exemption to NASD Rule 1050 and NYSE Rule 
Interpretation 344/02 for Certain Research Analysts Employed By a 
Member's Foreign Affiliate Who Contribute to the Preparation of a 
Member's Research Report

February 6, 2008.

I. Introduction

    On September 12, 2007, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') a proposed rule change pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 
19b-4 thereunder.\2\ Notice of the proposal was published for comment 
in the Federal Register on September 26, 2007.\3\ The Commission 
received two comment letters in response to the proposed rule 
change.\4\ On January 16, 2008, FINRA filed Amendment No. 1 to the 
proposed rule change to make certain modifications to the original rule 
filing. This order provides notice of the proposed rule change, as 
modified by Amendment No. 1, and approves the proposed rule change as 
amended on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 56481 (September 20, 
2007), 72 FR 54700 (September 26, 2007).
    \4\ Securities Industry and Financial Markets Association 
(``SIFMA'') letter dated October 17, 2007; and WilmerHale 
(``WilmerHale'') letter dated October 19, 2007 on behalf of Credit 
Suisse Securities (USA), LLC; Goldman, Sachs & Co.; J.P. Morgan 
Securities Inc.; Lehman Brothers Inc.; Merrill Lynch, Pierce, Fenner 
& Smith Incorporated; and UBS Securities LLC.
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II. Description

    On September 12, 2007, FINRA filed with the Commission a proposed 
rule change to amend an exemption to NASD Rule 1050 and New York Stock

[[Page 8087]]

Exchange (``NYSE'') Rule Interpretation 344/02 for certain research 
analysts employed by a member's foreign affiliate who contribute to the 
preparation of a member's research report. The Commission received two 
comment letters concerning the proposed rule change.\5\ FINRA responded 
to those comments in a letter dated January 16, 2008.\6\ In accordance 
with that response to comments, FINRA amended the proposed rule change.
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    \5\ Id.
    \6\ The comments and responses thereto are discussed in greater 
detail in FINRA's Response to Comments. See letter from Philip 
Shaikun to Nancy M. Morris dated January 16, 2008.
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    NASD Rule 1050 and NYSE 344 (``Rules'') require an associated 
person who functions as a research analyst to register as such with 
FINRA and pass a qualification examination (the Series 86/87). The 
Rules currently provide a number of exemptions from the Series 86 
examination, including certain research analysts who are employed by a 
member's foreign affiliate and contribute to the preparation of a 
member's research report. The proposed rule change would modify this 
exemption.

A. Current Exemption

    FINRA and the NYSE consider a ``research report'' to be 
attributable to the member if (1) the report appears to be the product 
of the member or (2) a ``research analyst'' (as defined by FINRA rules) 
associated with a member is involved in producing the research 
report.\7\ If either of these factors are present, the research report 
and any ``research analyst'' involved in its production must meet all 
of the applicable requirements of NASD Rules 1050 and 2711 and NYSE 
Rules 344 and 472.
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    \7\ See NASD Notice to Members 04-18 and NYSE Information Memo 
04-10. The New York Stock Exchange memo applies to its Rule 472. 
FINRA has incorporated both Rule 472 and the applicable interpretive 
guidance.
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    Since the Rules require any ``research analyst'' who contributes to 
the preparation of a member's research report or whose name appears on 
such report to be registered, certain foreign analysts who contribute 
to the production of a member's ``globally-branded'' research or 
``mixed-team'' research report could be required to meet the 
qualification requirements, but only if they are associated persons of 
the member.\8\ Thus, FINRA proposed an exemption from the research 
analyst qualification requirements for certain research analysts 
employed by foreign entities in certain jurisdictions approved by FINRA 
and the NYSE, and subject to certain conditions. The Commission 
approved the proposed exemption in May 2005.\9\
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    \8\ FINRA Notice to Members 04-25 (March 2004).
    \9\ See Securities Exchange Act Release No. 51644 (May 2, 2005), 
70 FR 24148 (May 6, 2005) (File No. SR-NYSE-2005-25 and SR-NASD-
2005-043).
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    Current exemptive relief for foreign analysts from the registration 
and qualification provisions requires compliance with other standards 
in foreign jurisdictions that reflect a recognition of principles that 
are consonant with FINRA qualification standards and the research 
analyst conflict of interest rules. Foreign research analysts in 
jurisdictions that do not have approved standards are still required to 
pass the Series 86 and 87 examinations if they are ``associated 
persons'' and participate in the preparation of a member's research 
report.

B. Amended Proposal

    The proposed rule change would create a superseding exemption from 
the research analyst qualification requirements that would cover 
research analysts residing anywhere outside of the United States. More 
specifically, the requirements of NASD Rule 1050(a) and NYSE Rule 
344.10 would not apply to an associated person who (1) is an employee 
of a non-member foreign affiliate of a member (``foreign research 
analyst''), (2) resides outside the United States and (3) contributes, 
partially or entirely, to the preparation of globally-branded or 
foreign affiliate research reports but does not contribute to the 
preparation of a member's research, including a mixed-team report, that 
is not globally-branded.\10\ Eligibility for the exemption would 
further be conditioned on the member meeting certain supervisory, 
disclosure and recordkeeping requirements.
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    \10\ When used in reference to NYSE Rule 344.10, the term 
``member'' refers to both a natural person and ``member 
organization.''
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C. Supervisory Requirement

    Members that publish or otherwise distribute globally-branded 
research reports partially or entirely prepared by a foreign research 
analyst would be required to subject such research to pre-use review 
and approval by a registered principal or supervisory analyst in 
accordance with NASD Rule 1022(a)(5) and NYSE Rule 344.11 and 
interpretations thereto.\11\ In addition, the member would be required 
to ensure that such research reports comply with NASD Rule 2711 and 
NYSE Rule 472, as applicable.
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    \11\ See NASD Notice to Members 04-81 and 07-04.
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D. Disclosure Requirement

    In publishing or otherwise distributing globally-branded research 
reports partially or entirely prepared by a foreign research analyst, a 
member would be required to prominently disclose on the research report 
(1) each affiliate contributing to the research report, (2) the names 
of the foreign research analysts employed by each contributing 
affiliate, (3) that such research analysts are not registered/qualified 
as research analysts with FINRA, and (4) that such research analysts 
may not be associated persons of the member and therefore may not be 
subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on 
communications with a subject company, public appearances and trading 
securities held by a research analyst account. The amended proposal, as 
discussed below, would require that this disclosure be presented on the 
front page of the research report or the front page must refer to the 
page on which the disclosures can be found. For electronic research 
reports, a member could hyperlink to the disclosure.

E. Recordkeeping Requirement

    Members would be required to establish and maintain records that 
identify those individuals who have availed themselves of the 
exemption, the basis for such exemption, and evidence of compliance 
with the conditions of the exemption. Failure to establish and maintain 
such records would create an inference of a violation of NASD Rule 1050 
and NYSE Rule 344. Members also would be required to establish and 
maintain records that evidence compliance with the applicable content, 
disclosure, and supervision provisions of NASD Rule 2711 and NYSE Rule 
472. Members must maintain these records in accordance with the 
supervisory requirements of NYSE Rule 342 and NASD Rule 3010, and in 
addition to such requirement, the failure to establish and maintain 
such records would create an inference of a violation of the applicable 
content, disclosure, and supervision provisions of NYSE Rule 472 and 
NASD Rule 2711.
    The proposed rule change would have no impact on the obligation of 
any person or broker-dealer, including a foreign broker-dealer, to 
comply with the applicable provisions of the federal securities laws, 
rules and regulations and self-regulatory organization rules. And the 
fact that a foreign research analyst avails herself or himself of this 
exemption would not be probative of whether that individual is an

[[Page 8088]]

``associated person'' for other purposes, including whether the foreign 
research analyst is subject to the NASD Rule 2711 and NYSE Rule 472 
restrictions on communications with a subject company, public 
appearances and trading securities held by a research analyst account.
    As noted in the original filing, the proposed rule change would 
apply prospectively only and is not intended to abate any enforcement 
actions for failure to comply with the existing exemption. 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 the date of publication of the 
Regulatory Notice announcing Commission approval.

III. Comment Letters

    The Commission received two comment letters in response to the 
proposed rule change.\12\ Both commenters objected to the requirement 
that the proposed disclosures that are a condition for the exemption 
for foreign research analysts appear on the front page of the research 
report as originally proposed by FINRA. The commenters noted that, with 
respect to other important disclosures required by current NASD 
research analyst conflict of interest rules, FINRA permits members to 
direct investors in a clear and prominent manner on the front page of 
the report to the page where the disclosures can be found. And with 
respect to electronic research reports, members may provide a hyperlink 
to the disclosures. The commenters argued that the same standard should 
apply with respect to the disclosures required as a condition of the 
proposed exemption from the research analyst registration and 
qualification requirements.
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    \12\ See supra note 4.
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    FINRA agreed that the disclosures required by the proposed 
exemption should be treated in the same manner as existing disclosures 
required by NASD Rule 2711 and NYSE Rule 472 and therefore amended the 
proposed rule change with Amendment No. 1. The amended rule text would 
provide that the disclosures required under the foreign analyst 
exemption be presented on the front page of the research report or the 
front page must refer to the page on which the disclosures can be 
found. In electronic research reports, a member could hyperlink to the 
disclosures. All references and disclosures would be required to be 
clear, comprehensive and prominent.
    Both commenters also objected to the provision of the rule which 
would create an inference of a violation if the records required to be 
kept to be able to rely on the exception are not maintained by the 
member. The commenters believe that it would be unfair that a failure 
to maintain the records in support of an exemption should infer a 
violation of the substantive underlying rules, particularly where the 
failure may be accidental. FINRA responded that it believes that the 
inference language is necessary because much of the documentation (and 
potential testimonial evidence) needed by FINRA to establish a 
violation of the underlying rules likely resides with entities or 
individuals that may be beyond FINRA's jurisdiction and thus may be the 
only means for FINRA to enforce the conditions of the exception. FINRA 
further asserted that an inference does not shift the burden of proof 
in an enforcement case and would simply permit (not compel) a trier of 
fact to infer from the lack of documentation that certain facts 
probative of whether a violation of the underlying rule has occurred.
    One commenter sought clarification on two points.\13\ The commenter 
asked whether a globally-branded (but mixed-team) research report 
qualifies for the exception if all of the conditions are met. FINRA has 
stated that it would, but a mixed-team report that is not globally-
branded would not be eligible for the exception. The commenter also 
asked whether a member that distributes a globally-branded research 
report of its foreign affiliates may treat such as third-party research 
in accordance with NASD Rule 2711(h)(13) and NYSE Rule 472(k)(4). FINRA 
responded that a globally-branded research report is considered to be a 
member's research report (and therefore subject to all of the 
provisions of NASD Rule 2711 and NYSE Rule 472) unless the member makes 
it clear and unambiguous to recipients that the research being 
distributed is wholly the product of a third party.\14\ The fact that a 
member avails itself of the proposed exemption from the registration 
requirements of NASD Rule 1050 and NYSE Rule Interpretation 344/02 in 
connection with a particular globally-branded research report has no 
bearing on whether the research report is considered third-party 
research for purposes of NASD Rule 2711 and NYSE Rule 472. Thus, if the 
member is not extremely clear in identifying the report as being the 
product solely of its foreign affiliate, FINRA will continue to treat 
the research report as being that of the member, rather than third-
party research.
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    \13\ WilmerHale.
    \14\ NASD and NYSE Joint Memorandum, NASD Notice to Members 04-
18 and NYSE Information Memo 04-10 (March 2004).
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IV. Discussion

    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
association.\15\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Act,\16\ which 
requires, among other things, that FINRA rules be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, and, in general, to protect investors 
and the public interest. The Commission believes that the proposed rule 
change will promote dissemination of globally-branded and foreign 
research to investors and ensure that such research has investor 
protection safeguards that might not otherwise be required.
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    \15\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
    \16\ 15 U.S.C. 78o-3(b)(6).
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    The Commission also finds good cause to approve Amendment No. 1 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing of the amendment in the Federal 
Register. The proposed rule change was published in the Federal 
Register on September 26, 2007.\17\ FINRA submitted Amendment No. 1 in 
response to comments received on the proposed rule change. The 
Commission believes that Amendment No. 1 simplifies the obligations of 
FINRA member firms but not at the expense of investor protection. 
Amendment No. 1 does not contain major modifications that are more 
restrictive than the scope of the proposed rule change as published in 
the Federal Register. The Commission believes that approving Amendment 
No. 1 will simplify compliance, and is consistent with the public 
interest and the investor protection goals of the Act. Finally, the 
Commission finds that it is in the public interest to approve the 
proposed rule change as soon as possible to expedite its 
implementation.
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    \17\ See supra note 3.
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    Accordingly, the Commission believes good cause exists, consistent 
with Sections 15A(b)(6) and 19(b) of the Act,\18\ to approve Amendment 
No. 1 to

[[Page 8089]]

the proposed rule change on an accelerated basis.
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    \18\ 15 U.S.C. 78o-3(b)(6), and 78s(b).
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V. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-FINRA-2007-010 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-FINRA-2007-010. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, 

all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 am and 3 pm. Copies of such filing also will be available for 
inspection and copying at the principal office of FINRA. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2007-010 and should be 
submitted on or before March 4, 2008.

VI. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular Section 15A of the Act and the rules and regulations 
thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (File No. SR-FINRA-2007-010), as 
modified by Amendment No. 1, be, and hereby is, approved on an 
accelerated basis. 
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    \19\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-2515 Filed 2-11-08; 8:45 am]

BILLING CODE 8011-01-P