Document ID: SEC-2007-1319-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2007-09-26T04:00Z

[Federal Register: September 26, 2007 (Volume 72, Number 186)]
[Notices]               
[Page 54700-54702]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26se07-121]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56481; File No. SR-FINRA-2007-010]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change 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

September 20, 2007.
    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 September 12, 2007, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) 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 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.
    The text of the proposed rule change is available at FINRA, on 
FINRA's Web site at http://www.finra.org., and in 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.\3\
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    \3\ The Commission has modified part of these statements.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Background
    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. In the context of this 
requirement, the Rules define ``research analyst'' as ``an associated 
person who is primarily responsible for the preparation of the 
substance of a research report or whose name appears on a research 
report.'' The term ``research report'' in the Rules have the meaning as 
defined in NASD Rule 2711(a)(8) and NYSE Rule 472.10(2): A written or 
electronic communication that includes an analysis of equity securities 
of individual companies or industries, and that provides information 
reasonably sufficient upon which to base an investment decision.
    Pursuant to the Rules, FINRA has implemented the Research Analyst 
Qualification Examination (Series 86/87). The examination consists of 
an analysis part (Series 86) and a regulatory part (Series 87). Prior 
to taking either the Series 86 or 87, a candidate also must have passed 
the General Securities Registered Representative Examination (Series 
7), the Limited Registered Representative (Series 17), or the Canada 
Module of Series 7 (Series 37 or 38). Persons who were functioning as 
research analysts on the effective date of March 30, 2004, and 
submitted a registration application to NASD by June 1, 2004, had until 
April 4, 2005, to meet the registration requirements. The Rules 
currently provide exemptions from the Series 86 examination for certain 
applicants who have passed Levels I and II of the Chartered Financial 
Analyst examination or have passed Levels I and II of the Chartered 
Market Technician Examination and produce only ``technical research 
reports'' as that term is defined in the Rules. The Rules further 
exempt 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 latter exemption.
Current Exemption
    In March 2004, FINRA and the New York Stock Exchange issued joint 
guidance on the determination of whether a research report is 
considered the product of a member or that of a third party, including 
a foreign affiliate.\4\ The guidance explained that FINRA considers 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. Where either of the two factors pertain, 
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. Thus, for example, a 
``globally-branded'' research report that is not clearly labeled to the 
reader as being wholly the product of a foreign affiliate would be 
deemed the member's research. Similarly, FINRA considers a research 
report prepared by a ``mixed-team'' that includes at least one research 
analyst associated with the member to be a member's report for the 
purpose of application of NASD Rule 2711 and NYSE Rule 472.
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    \4\ See NASD Notice to Members 04-18 and New York Stock Exchange 
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. FINRA affirmed this interpretation in announcing the

[[Page 54701]]

Research Analyst Qualification Examination in a March 2004 Notice to 
Members 04-25.
    Subsequently, some members requested an exemption from the Rules 
for certain research analysts associated with a member who reside in 
certain foreign jurisdictions. FINRA was concerned that absent the safe 
harbor for certain foreign analysts, members might have had a pragmatic 
incentive, although not a defensible basis, for construing associated 
person status on an unduly narrow basis. To alleviate these issues, 
while maintaining--and in some cases, extending--the safeguards in 
FINRA rules that ensure objective and quality research, 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 New York Stock Exchange, and 
subject to certain conditions.
    The Commission approved the proposed exemption in May 2005.\5\ 
FINRA recognized as the basis for exemptive relief from the 
registration and qualification requirements compliance with other 
standards in foreign jurisdictions that reflect recognition of 
principles that are consonant with FINRA qualification standards and 
the research analyst conflict of interest rules. These principles 
generally include a combination of (1) rules that govern research 
analysts and firm conflicts of interest in the preparation and 
distribution of research reports; (2) a requirement that research 
analysts be registered or licensed by a regulatory authority; or (3) a 
testing or experience requirement that demonstrates research analysts' 
skills and/or knowledge of rules and regulations applicable to research 
analysts and their firms in the preparation and distribution of 
research reports. 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. FINRA and the New 
York Stock Exchange approved seven jurisdictions that met the 
applicable standard: the United Kingdom, Thailand, China, Hong Kong, 
Singapore, Malaysia and Japan.\6\
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    \5\ 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).
    \6\ See NASD Notice to Members 05-24 and New York Stock Exchange 
Information Memo 05-23.
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    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.\7\ Eligibility for the exemption would further 
be conditioned on the member meeting certain supervisory, disclosure 
and recordkeeping requirements.
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    \7\ 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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Supervisory Review
    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.\8\ 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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    \8\ See NASD Notice to Members 04-81 and 07-04.
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Disclosure
    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 front page of 
each such 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.
Recordkeeping
    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 
``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.
    FINRA views the proposed rule change as an iteration of the 
existing exemption that will better encourage dissemination to 
investors of globally-branded and foreign research where determination 
of FINRA's jurisdiction can be doubtful. At the same time, FINRA 
believes the proposal balances investor protection concerns by ensuring 
that all research produced by foreign research analysts who avail 
themselves of the exemption are subject to supervision, disclosure and 
other beneficial safeguards, even where the foreign research analyst 
may not be an associated person of the member and therefore not subject 
to FINRA regulatory oversight.
    The proposed rule change would apply prospectively only and is not 
intended to abate any enforcement

[[Page 54702]]

actions for failure to comply with the existing exemption.
    The filing includes a statement about when FINRA will announce the 
effective date of the proposed rule change.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of section 15A of the Act, including section 15A(b)(6) of 
the Act,\9\ in that it is designed to prevent fraudulent and 
manipulative acts and practices, promote just and equitable principles 
of trade and, in general, to protect investors and the public interest. 
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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    \9\ 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.

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

    Written comments were neither solicited nor received.

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

    Within 35 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 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 
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 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-2007-010 and should be 
submitted on or before October 17, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-18954 Filed 9-25-07; 8:45 am]

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