Document ID: SEC-2015-0350-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2015-02-26T05:00Z

[Federal Register Volume 80, Number 38 (Thursday, February 26, 2015)]
[Notices]
[Pages 10528-10536]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-03962]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74339; File No. SR-FINRA-2014-047]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Instituting Proceedings To Determine Whether To 
Approve or Disapprove a Proposed Rule Change To Adopt FINRA Rule 2241 
(Research Analysts and Research Reports) in the Consolidated FINRA 
Rulebook

    February 20, 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'') \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\ This order institutes proceedings 
under Section 19(b)(2)(B) of the Act \5\ to determine whether to 
approve or disapprove the proposed rule change.
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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 Letter from Kevin Zambrowicz, Associate General Counsel 
& Managing Director and Sean Davy, Managing Director, SIFMA, dated 
Dec. 15, 2014 (``SIFMA''), Letter from Hugh D. Berkson, President-
Elect, Public Investors Arbitration Bar Association, dated Dec. 15, 
2014 (``PIABA Equity''), Letter from Stephanie R. Nicholas, 
WilmerHale, dated Dec. 16, 2014 (``WilmerHale Equity''), and Letter 
from William Beatty, President and Washington (State) Securities 
Administrator, North American Securities Administrators Association, 
Inc., dated Dec. 19, 2014 (``NASAA Equity'').
    \5\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change

    As described more fully in the Notice, FINRA proposed to adopt in 
the

[[Page 10529]]

Consolidated FINRA Rulebook NASD Rule 2711 (Research Analysts and 
Research Reports) with several modifications as FINRA Rule 2241. 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.
    FINRA believes that 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, FINRA believes 
that the proposed rule change reduces burdens where appropriate.
    As stated above, the Commission received four comments on the 
proposal. Of these, three expressed general support for the 
proposal,\6\ but one objected to the general formulation of the 
proposal as a principles-based rule.\7\
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    \6\ SIFMA, PIABA Equity, and WilmerHale Equity.
    \7\ NASAA Equity.
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A. Definitions

    FINRA proposed to generally maintain the definitions in current 
NASD Rule 2711, with a few modifications. These modifications included 
(1) 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; \8\ (2) 
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,\9\ (3) 
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); \10\ and (4) moving 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.\11\
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    \8\ See proposed FINRA Rule 2241(a)(5). The current definition 
includes, without limitation, many common types of investment 
banking services. FINRA proposed 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.
    \9\ See proposed FINRA Rule 2241(a)(9).
    \10\ See proposed FINRA Rule 2241(a)(11).
    \11\ 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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    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.'' \12\ 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.
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    \12\ WilmerHale Equity.
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    This commenter also 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.\13\ 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.
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    \13\ WilmerHale Equity.
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B. Identifying and Managing Conflicts of Interest

    FINRA proposed 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.\14\ 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.\15\ These provisions, FINRA asserted, 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. The proposed rule 
change then set forth minimum requirements for those written policies 
and procedures. According to FINRA, this approach would allow for some 
flexibility to manage identified conflicts, with some specified 
prohibitions and restrictions where disclosure does not adequately 
mitigate them. FINRA asserted that most of the minimum requirements 
have been experience tested and found effective.
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    \14\ See proposed FINRA Rule 2241(b)(1).
    \15\ See proposed FINRA Rule 2241(b)(2).
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    The rule proposal thus 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 
this 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.\16\ 
One of those commenters had previously expressed support for the 
proposed policies-based approach with minimum requirements,\17\ 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

[[Page 10530]]

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.\18\ 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.\19\
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    \16\ SIFMA and WilmerHale Equity.
    \17\ 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).
    \18\ NASAA Equity.
    \19\ WilmerHale Equity.
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    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.\20\ 
However, another commenter supported the requirement to have policies 
and procedures reasonably designed to ensure that research reports are 
based on reliable information.\21\
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    \20\ SIFMA.
    \21\ NASAA Equity.
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1. Prepublication Review
    As proposed, the first of these minimum requirements would require 
that the policies and procedures prohibit prepublication review, 
clearance or approval of research reports by persons engaged in 
investment banking services activities and restrict or prohibit such 
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\ No specific comments 
were received on this provision.
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    \22\ See proposed FINRA Rule 2241(b)(2)(A).
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2. 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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    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.'' \24\ The commenter asserted that inclusion of 
``independently'' is confusing since the proposal would permit input 
from non-research personnel into coverage decisions.
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    \24\ WilmerHale Equity.
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3. 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.\25\ No specific comments were received on this 
provision.
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    \25\ See proposed FINRA Rule 2241(b)(2)(C).
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4. 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.\26\ No specific comments were received on 
this provision.
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    \26\ See proposed FINRA Rule 2241(b)(2)(D).
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5. 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.\27\ The policies and procedures further would 
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 would not be permitted to have representation 
from a member's investment banking department. The committee would be 
required to 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.\28\ FINRA 
stated that these provisions are consistent with the requirements in 
current Rule 2711(d). No specific comments were received on this 
provision.
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    \27\ See proposed FINRA Rule 2241(b)(2)(E).
    \28\ See proposed FINRA Rule 2241(b)(2)(F).
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6. Information Barriers
    The proposed rule change would require that the policies and 
procedures establish information barriers or other institutional 
safeguards 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.\29\
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    \29\ See proposed FINRA Rule 2241(b)(2)(G).
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    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.\30\ One commenter 
further suggested that the terms ``review'' and ``oversight'' are 
redundant.\31\ 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.\32\ 
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.\33\ 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. 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.\34\
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    \30\ SIFMA and WilmerHale Equity.
    \31\ WilmerHale Equity.
    \32\ WilmerHale Equity.
    \33\ WilmerHale Equity.
    \34\ WilmerHale Equity.
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7. 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.\35\ No specific comments were received 
on this provision.
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    \35\ See proposed FINRA Rule 2241(b)(2)(H).

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[[Page 10531]]

8. 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.\36\
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    \36\ 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, as that term is defined in Section 3(a)(80) 
of the Act.
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    With respect to these quiet-period provisions, the proposed rule 
change would reduce 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 also 
eliminates the current quiet periods 15 days before and after the 
expiration, waiver or termination of a lock-up agreement.
    Citing recent enforcement actions in the research area, one 
commenter did not support elimination or reduction of the quiet 
periods.\37\ 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.\38\
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    \37\ NASAA Equity.
    \38\ SIFMA, WilmerHale Equity.
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9. Solicitation and Marketing
    In addition, the proposed rule change would require firms to adopt 
written policies and procedures to restrict or limit activities by 
research analysts that can reasonably be expected to compromise their 
objectivity.\39\ This would include 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 noted 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.\40\
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    \39\ See proposed FINRA Rule 2241(b)(2)(L).
    \40\ 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 would add Supplementary Material .01, 
which would codify FINRA's 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.\41\
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    \41\ See proposed FINRA Rule 2241.01 and Notice to Members 07-04 
(January 2007).
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    No specific comments were received on this provision.
10. Joint Due Diligence and Other Interactions With Investment Banking
    The proposed rule would establish 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 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 would continue 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.\42\ 
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 would be prohibited by this 
provision.\43\ 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 would also retain 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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    \42\ See proposed FINRA Rule 2241(b)(2)(M).
    \43\ See proposed FINRA Rule 2241.03.
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    No specific comments were received on this provision.
11. Promises of Favorable Research and Prepublication Review by Subject 
Company
    FINRA proposed 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.\44\ The proposed rule would further require policies and 
procedures to prohibit prepublication review of a research report by a 
subject company for purposes other than verification of facts.\45\ 
Supplementary Material .05 would maintain the current guidance 
applicable to the prepublication submission of a research report to a 
subject company. Specifically, sections of a draft research report 
would be permitted to 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 would be required to 
retain copies of any draft and the final version of the report for 
three years.\46\ No specific comments were received on this provision.
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    \44\ See proposed FINRA Rule 2241(b)(2)(K).
    \45\ See proposed FINRA Rule 2241(b)(2)(N).
    \46\ See proposed FINRA Rule 2241.05.

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[[Page 10532]]

12. Personal Trading Restrictions
    FINRA proposed 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.\47\ Such policies and procedures would 
be required to 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.\48\ The proposal 
would maintain the current prohibitions on research analysts receiving 
pre-IPO shares in the sector they cover and trading against their most 
recent recommendations. However, members would be permitted to define 
financial hardship circumstances, if any, in which a research analyst 
would be permitted to trade against his or her most recent 
recommendation.\49\ The proposed rule change includes Supplementary 
Material .10, which would provide 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.\50\ No specific 
comments were received on this provision.
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    \47\ See proposed FINRA Rule 2241(b)(2)(J).
    \48\ See proposed FINRA Rule 2241(b)(2)(J)(i).
    \49\ See proposed FINRA Rule 2241(b)(2)(J)(ii).
    \50\ See proposed FINRA Rule 2241.10.
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C. Content and Disclosure in Research Reports

    With a couple of modifications, the proposed rule change would 
maintain the current disclosure requirements. The proposed rule change 
would add 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.\51\ FINRA stated that it 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.\52\
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    \51\ See proposed FINRA Rule 2241(c)(1)(A).
    \52\ 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: \53\
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    \53\ 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; \54\
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    \54\ 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; 
\55\
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    \55\ 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; 
\56\
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    \56\ 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 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; \57\
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    \57\ 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; \58\
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    \58\ See proposed FINRA Rule 2241(c)(4)(E).
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     If the member or its affiliates maintain a significant 
financial interest in the debt or equity securities of the subject 
company including, at a minimum, if the member or its affiliates 
beneficially own 1% or more of any class of common equity securities of 
the subject company; \59\
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    \59\ See proposed FINRA Rule 2241(c)(4)(F). FINRA stated that 
the requirement to disclose beneficial ownership of 1% or more of 
any class of common equity securities of the subject company is the 
same as NASD Rule 2711(h)(1)(B).
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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; \60\ and
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    \60\ 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.\61\
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    \61\ 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 would go 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.'' \62\ The proposed rule change 
defines a person with the ``ability to influence the content of a 
research report'' 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.\63\ FINRA stated that 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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    \62\ See proposed FINRA Rule 2241(c)(4)(I).
    \63\ See proposed FINRA Rule 2241.08.
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    The proposal would retain the general exception for disclosure that 
would reveal material non-public information regarding specific 
potential future investment banking transactions of the

[[Page 10533]]

subject company.\64\ 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 may 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.\65\
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    \64\ See proposed FINRA Rule 2241(c)(5).
    \65\ See proposed FINRA Rule 2241(c)(7).
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    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.\66\ (emphasis added) The commenter expressed concern about the 
emphasized language. Another commenter supported the proposed expansion 
of the current ``catch-all'' disclosure requirement.\67\
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    \66\ WilmerHale Equity.
    \67\ NASAA Equity.
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    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.\68\ 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.\69\ 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.''
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    \68\ SIFMA, WilmerHale Equity.
    \69\ NASAA Equity.
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    One commenter also 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.\70\
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    \70\ WilmerHale Equity.
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D. Disclosures in Public Appearances

    The proposal groups in a separate provision the disclosures 
required when a research analyst makes a public appearance.\71\ The 
required disclosures would remain substantively the same as under the 
current rules,\72\ with one exception: consistent with the modification 
referenced above with respect to disclosure in research reports, a 
research analyst is similarly required to disclose in a public 
appearance if a member or its affiliates maintain a ``significant 
financial interest in the debt or equity of the subject company,'' 
including, at a minimum, 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. 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.\73\ No specific comments were received on this provision 
not already discussed in connection with the disclosures that would be 
required in research reports.
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    \71\ See proposed FINRA Rule 2241(d).
    \72\ See NASD Rules 2711(h)(1), (h)(2)(B) and (C), (h)(3), and 
(h)(9).
    \73\ See proposed FINRA Rule 2241(d)(3).
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E. 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.\74\ No specific comments were received on this 
provision.
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    \74\ See proposed FINRA Rule 2241(e).
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F. 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.\75\ 
Such notification would need to be made promptly \76\ using the 
member's ordinary means to disseminate research reports on the subject 
company to its various customers. Unless impracticable, the notice 
would be required to 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 would be required to 
disclose to its customers the reason for terminating coverage. No 
specific comments were received on this provision.
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    \75\ See proposed FINRA Rule 2241(f).
    \76\ 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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G. Distribution of Member Research Reports

    The proposal would require 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.\77\ The proposal includes further guidance 
to explain that firms would be permitted to 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 discloses its 
research dissemination practices to all customers that receive a 
research product.\78\
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    \77\ See proposed FINRA Rule 2241(g).
    \78\ See proposed FINRA Rule 2241.07.
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    One commenter supported the provisions regarding different research 
products and services as proposed with general disclosure,\79\ while 
another

[[Page 10534]]

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.\80\ 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 
commenters 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.\81\ 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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    \79\ WilmerHale Equity.
    \80\ PIABA Equity.
    \81\ WilmerHale Equity.
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H. Distribution of Third-Party Research Reports

    The proposal would maintain the existing third-party disclosure 
requirements,\82\ 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.\83\
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    \82\ 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.
    \83\ See proposed FINRA Rule 2241(h)(4).
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    FINRA stated that the proposal would continue to address 
qualitative aspects of third-party research reports. For example, the 
proposal would maintain, 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 would require 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 would 
extend 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.\84\ The proposal further would prohibit a member from 
distributing third-party research if it knows or has reason to know 
that such research is not objective or reliable.\85\
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    \84\ See proposed FINRA Rules 2241(h)(1) and (h)(3).
    \85\ See proposed FINRA Rule 2241(h)(2).
---------------------------------------------------------------------------

    The proposal would maintain the existing exceptions for 
``independent third-party research reports.'' Specifically, such 
research would not require principal pre-approval or, where the third-
party research is not ``pushed out,'' the third-party disclosures.\86\ 
As to the latter, a member would 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.
---------------------------------------------------------------------------

    \86\ See proposed FINRA Rule 2241(h)(5) and (6).
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    Finally, under the proposed rule change, members would be required 
to 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.\87\
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    \87\ See proposed FINRA Rule 2241(h)(7).
---------------------------------------------------------------------------

    No specific comments were received on this provision.

I. 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.\88\ 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.\89\ 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.\90\ The proposed rule change 
would extend the exemption for firms with limited investment banking 
activity so that such firms would not be subject to the compensation 
committee provision. The proposal would still prohibit these firms from 
compensating a research analyst based upon specific investment banking 
services transactions or contributions to a member's investment banking 
services activities.\91\
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    \88\ See NASD Rule 2711(k).
    \89\ See NASD Rule 2711(d)(2).
    \90\ See NASD Rule 2711(d) and (k).
    \91\ See proposed FINRA Rules 2241(b)(2)(E) and (i).
---------------------------------------------------------------------------

    The proposed rule change would further exempt firms with limited 
investment banking activity from the provisions restricting or limiting 
research coverage decisions and budget determination. In addition, the 
proposal would exempt 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,

[[Page 10535]]

including sales and trading personnel, who may be biased in their 
judgment or supervision. However, those firms would still be 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.
    No specific comments were received on this provision.

J. Exemption From Registration Requirements for Certain ``Research 
Analysts''

    The proposed rule change would amend 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).\92\ FINRA stated that 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 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.
---------------------------------------------------------------------------

    \92\ See proposed NASD Rule 1050(b) and proposed Incorporated 
NYSE Rule 344.10.
---------------------------------------------------------------------------

    No specific comments were received on this provision.

K. 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. No specific comments were received on this 
provision.

L. Obligations of Persons Associated With a Member

    Supplementary Material .09 clarifies 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 rule provides that, consistent with FINRA 
Rule 0140, persons associated with a member would be required to comply 
with such member's policies and procedures as established pursuant to 
proposed FINRA Rule 2241.\93\ Failure of an associated person to comply 
with such policies and procedures would constitute a violation of the 
rule itself. In addition, consistent with Rule 0140, the rule states 
that it would be a rule violation 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 provisions of Rule 2241, including applicable Supplementary 
Material, that embed in the policies and procedures specific 
obligations on individuals.
---------------------------------------------------------------------------

    \93\ 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.
---------------------------------------------------------------------------

    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.\94\ 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.\95\
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    \94\ SIFMA and WilmerHale Equity.
    \95\ WilmerHale Equity.
---------------------------------------------------------------------------

M. 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.\96\
---------------------------------------------------------------------------

    \96\ See proposed FINRA Rule 2241(j).
---------------------------------------------------------------------------

    One commenter opposed this provision.\97\ The commenter stated that 
the provision had not been sufficiently justified by, among other 
things, providing examples of where an exemption would be justified.
---------------------------------------------------------------------------

    \97\ NASAA Equity.
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N. Other General Comments

    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 (``Global Settlement'').\98\
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    \98\ WilmerHale Equity.
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    Also, one commenter requested that the implementation date be at 
least 12 months after Commission approval of the proposed rule 
change.\99\ 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.\100\
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    \99\ SIFMA.
    \100\ WilmerHale Equity.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-
FINRA-2014-047

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act to determine whether the proposals should be 
approved or disapproved.\101\ Institution of such proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the proposal. Institution of proceedings does not indicate that the 
Commission has reached any conclusions with respect to any of the 
issues involved. Rather, as described below, the Commission seeks and 
encourages interested persons to comment on the proposed rule change.
---------------------------------------------------------------------------

    \101\ 15 U.S.C. 78s(b)(2). Section 19(b)(2)(B) of the Act 
provides that proceedings to determine whether to disapprove a 
proposed rule change must be concluded within 180 days of the date 
of publication of notice of the filing of the proposed rule change. 
The time for conclusion of the proceedings may be extended for up to 
an additional 60 days if the Commission finds good cause for such 
extension and publishes its reasons for so finding or if the self-
regulatory organization consents to the extension.
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Act,\102\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 
15A(b)(9) of the Act,\103\ which requires that FINRA's rules be 
designed to, among other things, promote just and

[[Page 10536]]

equitable principles of trade, remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest, and Section 
15D of the Act,\104\ 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.
---------------------------------------------------------------------------

    \102\ 15 U.S.C. 78s(b)(2).
    \103\ 15 U.S.C. 78o-3(b)(6).
    \104\ 15 U.S.C. 78o-6.
---------------------------------------------------------------------------

IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
concerns identified above, as well as any others they may have with the 
proposed rule change. In particular, the Commission invites the written 
views of interested persons concerning whether the proposed rule change 
is inconsistent with Sections 15A(b)(9) and 15D, or any other provision 
of the Act, or the rules and regulation thereunder. Although there do 
not appear to be any issues relevant to approval or disapproval which 
would be facilitated by an oral presentation of views, data, and 
arguments, the Commission will consider, pursuant to Rule 19b-4, any 
request for an opportunity to make an oral presentation.\105\
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    \105\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Pub. L. 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule changes should be 
approved or disapproved by March 19, 2015. Any person who wishes to 
file a rebuttal to any other person's submission must file that 
rebuttal by April 2, 2015.
    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-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 March 19, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\106\
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    \106\ 17 CFR 200.30-3(a)(57).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-03962 Filed 2-25-15; 8:45 am]
BILLING CODE 8011-01-P