[Federal Register Volume 80, Number 52 (Wednesday, March 18, 2015)]
[Notices]
[Pages 14174-14185]
[FR Doc No: 2015-06092]

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SECURITIES AND EXCHANGE COMMISSION

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

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

March 12, 2015.

I. Introduction

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

    FINRA is proposing Amendment No. 1 to SR-FINRA-2014-047, a proposed
rule change to adopt NASD Rule 2711 (Research Analysts and Research
Reports) as a FINRA rule, with several modifications. The proposed rule
change also would amend NASD Rule 1050 (Registration of Research
Analysts) and Incorporated NYSE Rule 344 to create an exception from
the research analyst qualification requirement. The proposed rule
change would renumber NASD Rule 2711 as FINRA Rule 2241 in the
consolidated FINRA rulebook.
    The text of the proposed rule change is available on FINRA's Web
site at http://www.finra.org, at the principal office of FINRA and at
the Commission's Public Reference Room.

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

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

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

1. Purpose
Rule Filing History
    On November 14, 2014, FINRA filed with the Securities and Exchange
Commission (``Commission'') SR-FINRA-2014-047,\8\ a proposed rule
change to adopt in the consolidated FINRA rulebook (``Consolidated
FINRA Rulebook'') \9\ NASD Rule 2711 (Research Analysts and Research
Reports) with several modifications as FINRA Rule 2241.\10\ The
proposed rule change also would amend NASD Rule 1050 (Registration of
Research Analysts) and Incorporated NYSE Rule 344 (Research Analysts
and Supervisory Analysts) to create an exception from the research
analyst qualification requirements.
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    \8\ See Securities Exchange Act Release No. 73622 (November 18,
2014), 79 FR 69939 (November 24, 2014) (Notice of Filing File No.
SR-FINRA-2014-047) (``Proposing Release''). The comment period
closed on December 15, 2014.
    \9\ The current FINRA rulebook includes, in addition to FINRA
Rules, (1) NASD Rules and (2) rules incorporated from NYSE
(``Incorporated NYSE Rules'') (together, the NASD Rules and
Incorporated NYSE Rules are referred to as the ``Transitional
Rulebook''). While the NASD Rules generally apply to all FINRA
members, the Incorporated NYSE Rules apply only to those members of
FINRA that are also members of the NYSE (``Dual Members''). For more
information about the rulebook consolidation process, see
Information Notice, March 12, 2008 (Rulebook Consolidation Process).
    \10\ On the same date, FINRA also filed a companion proposal to
create FINRA Rule 2242 to address conflicts of interest related to
the publication and distribution of debt research reports (``debt
research proposal''). See Securities Exchange Act Release No. 73623
(November 18, 2014), 79 FR 69905 (November 24, 2014) (Notice of
Filing File No. SR-FINRA-2014-048).
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    The Commission published the proposed rule change for public
comment in the Federal Register on November 24, 2014.\11\ The
Commission received four comment letters directed to the filing.\12\
Based on comments received, FINRA is filing this Amendment No. 1 to
respond to the comments and to propose amendments, where appropriate.
The amendment also includes a few technical, non-substantive changes.
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    \11\ See Securities Exchange Act Release No. 73622 (November 18,
2014), 79 FR 69939 (November 24, 2014) (Notice of Filing File No.
SR-FINRA-2014-047).
    \12\ See Letter from Hugh D. Berkson, Executive Vice President
and President-Elect, Public Investors Arbitration Bar Association,
to Brent J. Fields, Secretary, SEC, dated December 15, 2014 (``PIABA
Equity''); Letter from Kevin Zambrowicz, Associate General Counsel
and Managing Director, and Sean Davy, Managing Director, Securities
Industry and Financial Markets Association, to Brent J. Fields,
Secretary, SEC, dated December 15, 2014 (``SIFMA''); Letter from
Stephanie R. Nicolas, Wilmer Cutler Pickering Hale and Dorr LLP, to
Brent J. Fields, Secretary, SEC, dated December 16, 2014
(``WilmerHale Equity''); and Letter from William Beatty, President,
North American Securities Administrators Association, Inc., to Brent
J. Fields, Secretary, SEC, dated December 19, 2014 (``NASAA
Equity'').
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Proposal
    As described in greater detail in the Proposing Release, the
proposed rule change would retain the core provisions of the current
rules, broaden the obligations on members to identify and manage
research-related conflicts of interest, restructure the rules to
provide some flexibility in compliance without diminishing investor
protection, extend protections where gaps have been identified, and
provide clarity to the applicability of existing rules. Where
consistent with protection of users of research, the proposed rule
change reduces burdens where appropriate. The description below is the
proposal as amended by Amendment No. 1.\13\
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    \13\ See Notice for a description of the original proposal. See
also Exhibit 4 to SR-FINRA-2014-047 for a comparison of changes made
in the rule text in Amendment No. 1.
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Definitions
    FINRA is proposing to mostly maintain the definitions in current
NASD Rule 2711, with the following modifications:
     Minor changes to the definition of ``investment banking
services'' to clarify that such services include all acts in
furtherance of a public or private offering on behalf of an issuer.\14\
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    \14\ See proposed FINRA Rule 2241(a)(5). The current definition
includes, without limitation, many common types of investment
banking services. FINRA is proposing to add the language ``or
otherwise acting in furtherance of'' either a public or private
offering to further emphasize that the term ``investment banking
services'' is meant to be construed broadly.
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     clarification in the definition of ``research analyst
account'' that the definition does not apply to a registered investment
company over which a research analyst or member of the research
analyst's household has discretion or control, provided that the
research analyst or member of the research analyst's household has no
financial interest in the investment company, other than a performance
or management fee.\15\
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    \15\ See proposed FINRA Rule 2241(a)(9).
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     exclusion from the definition of ``research report'' of
communications concerning open-end registered investment companies that
are not listed or traded on an exchange (``mutual funds'').\16\
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    \16\ See proposed FINRA Rule 2241(a)(11).
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     exclusion from the definition of ``research report'' of
communications that constitute private placement memoranda and
comparable offering-related documents prepared in connection with
investment banking services transactions, other than those that purport
to be research.\17\
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    \17\ See proposed FINRA Rule 2241(a)(11)(D).
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     move into the definitional section the definitions of
``third-party research report'' and ``independent third-party research
report'' that are now in a separate provision of the rule.\18\
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    \18\ See proposed FINRA Rules 2241(a)(3) and (14). FINRA
believes it creates a more streamlined and user friendly rule to
combine defined terms in a single definitional section.
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     adoption of a definition of ``sales and trading
personnel'' to include persons in any department or division, whether
or not identified as such, who perform any sales or trading service on
behalf of a member.\19\
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    \19\ See proposed FINRA Rule 2241(a)(12).
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Identifying and Managing Conflicts of Interest
    FINRA is proposing to create a new section entitled ``Identifying
and Managing Conflicts of Interest.'' This section contains an
overarching provision that requires members to establish, maintain and
enforce written policies and procedures reasonably designed to identify
and effectively manage conflicts of interest related to the
preparation, content and distribution of research reports and public
appearances by research analysts and the interaction between research
analysts and persons outside of the research department, including
investment banking and sales and trading personnel, the subject
companies and customers.\20\ The written policies and procedures must
be reasonably designed to promote objective and reliable research that
reflects the truly held opinions of research analysts and to prevent
the use of research or research analysts to manipulate or condition the
market or favor the interests of the member or a current or prospective
customer or class of customers.\21\ These provisions, therefore, set
out the fundamental obligation for a member to establish and maintain a
system to identify and mitigate conflicts to foster integrity and
fairness in its research products and services.
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    \20\ See proposed FINRA Rule 2241(b)(1).
    \21\ See proposed FINRA Rule 2241(b)(2).
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Prepublication Review
    FINRA is proposing that the required policies and procedures must
prohibit prepublication review, clearance or approval of research
reports by persons engaged in investment banking services activities
and restrict or prohibit such

review, clearance or approval by other persons not directly responsible
for the preparation, content and distribution of research reports,
other than legal and compliance personnel.\22\
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    \22\ See proposed FINRA Rule 2241(b)(2)(A).
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Coverage Decisions
    The proposed rule change would require that the policies and
procedures restrict or limit input by the investment banking department
into research coverage decisions to ensure that research management
independently makes all final decisions regarding the research coverage
plan.\23\
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    \23\ See proposed FINRA Rule 2241(b)(2)(B).
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Supervision and Control of Research Analysts
    The proposed rule change would require that the policies and
procedures prohibit persons engaged in investment banking activities
from supervision or control of research analysts, including influence
or control over research analyst compensation evaluation and
determination.\24\
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    \24\ See proposed FINRA Rule 2241(b)(2)(C).
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Research Budget Determinations
    The proposed rule change would require that the policies and
procedures limit determination of the research department budget to
senior management, excluding senior management engaged in investment
banking services activities.\25\
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    \25\ See proposed FINRA Rule 2241(b)(2)(D).
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Compensation
    The proposed rule change would require that the policies and
procedures prohibit compensation based upon specific investment banking
services transactions or contributions to a member's investment banking
services activities.\26\ The policies and procedures further must
require a committee that reports to the member's board of directors--or
if none exists, a senior executive officer--to review and approve at
least annually the compensation of any research analyst who is
primarily responsible for preparation of the substance of a research
report. The committee may not have representation from a member's
investment banking department. The committee must consider, among other
things, the productivity of the research analyst and the quality of his
or her research and must document the basis for each research analyst's
compensation.\27\ These provisions are consistent with the requirements
in current Rule 2711(d).
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    \26\ See proposed FINRA Rule 2241(b)(2)(E).
    \27\ See proposed FINRA Rule 2241(b)(2)(F).
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Information Barriers
    The proposed rule change would require that the policies and
procedures establish information barriers or other institutional
safeguards reasonably designed to ensure that research analysts are
insulated from the review, pressure or oversight by persons engaged in
investment banking services activities or other persons, including
sales and trading personnel, who might be biased in their judgment or
supervision.\28\
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    \28\ See proposed FINRA Rule 2241(b)(2)(G).
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Retaliation
    The proposed rule change would require that the policies and
procedures prohibit direct or indirect retaliation or threat of
retaliation against research analysts employed by the member or its
affiliates by persons engaged in investment banking services activities
or other employees as the result of an adverse, negative, or otherwise
unfavorable research report or public appearance written or made by the
research analyst that may adversely affect the member's present or
prospective business interests.\29\
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    \29\ See proposed FINRA Rule 2241(b)(2)(H).
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Quiet Periods
    The proposed rule change would require that the policies and
procedures define quiet periods of a minimum of 10 days after an
initial public offering (``IPO''), and a minimum of three days after a
secondary offering, during which the member must not publish or
otherwise distribute research reports, and research analysts must not
make public appearances, relating to the issuer if the member has
participated as an underwriter or dealer in the IPO or, with respect to
the quiet periods after a secondary offering, acted as a manager or co-
manager of that offering.\30\
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    \30\ See proposed FINRA Rule 2241(b)(2)(I). Consistent with the
Jumpstart Our Business Startups Act (``JOBS Act''), those quiet
periods do not apply following the IPO or secondary offering of an
Emerging Growth Company (``EGC''), as that term is defined in
Section 3(a)(80) of the Exchange Act.
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    With respect to these quiet-period provisions, the proposed rule
change reduces the current 40-day quiet period for IPOs to a minimum of
10 days after the completion of the offering for any member that
participated as an underwriter or dealer, and reduces the 10-day
secondary offering quiet period to a minimum of three days after the
completion of the offering for any member that has acted as a manager
or co-manager in the secondary offering. The proposed rule change
maintains exceptions to the quiet periods for research reports or
public appearances concerning the effects of significant news or a
significant event on the subject company and, for secondary offerings,
research reports or public appearances pursuant to SEC Rule 139
regarding a subject company with ``actively-traded securities.''
    The proposed rule change also eliminates the current quiet periods
15 days before and after the expiration, waiver or termination of a
lock-up agreement.
Solicitation and Marketing
    In addition, the proposed rule change requires firms to adopt
written policies and procedures to restrict or limit activities by
research analysts that can reasonably be expected to compromise their
objectivity.\31\ This includes the existing prohibitions on
participation in pitches and other solicitations of investment banking
services transactions and road shows and other marketing on behalf of
issuers related to such transactions. FINRA notes that consistent with
existing guidance analysts may listen to or view a live webcast of a
transaction-related road show or other widely attended presentation by
investment banking to investors or the sales force from a remote
location, or another room if they are in the same location.\32\
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    \31\ See proposed FINRA Rule 2241(b)(2)(L).
    \32\ See NASD Notice to Members 07-04 (January 2007) and NYSE
Information Memo 07-11 (January 2007).
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    The proposed rule change also adds Supplementary Material .01,
which codifies the existing interpretation that the solicitation
provision prohibits members from including in pitch materials any
information about a member's research capacity in a manner that
suggests, directly or indirectly, that the member might provide
favorable research coverage.\33\
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    \33\ See proposed FINRA Rule 2241.01 and Notice to Members 07-04
(January 2007).
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Joint Due Diligence and Other Interactions With Investment Banking
    The proposed rule establishes a new proscription with respect to
joint due diligence activities--i.e., due diligence by the research
analyst in the presence of investment banking department personnel--
during a specified time period. Specifically, proposed Supplementary
Material .02 states that FINRA interprets the overarching principle
requiring members to, among other things, establish, maintain and
enforce written policies and procedures

that address the interaction between research analysts and those
outside of the research department, including investment banking and
sales and trading personnel, subject companies and customers, to
prohibit the performance of joint due diligence prior to the selection
of underwriters for the investment banking services transaction.
    The proposed rule continues to prohibit investment banking
department personnel from directly or indirectly directing a research
analyst to engage in sales or marketing efforts related to an
investment banking services transaction, and directing a research
analyst to engage in any communication with a current or prospective
customer about an investment banking services transaction.\34\
Supplementary Material .03 clarifies that three-way meetings between
research analysts and a current or prospective customer in the presence
of investment banking department personnel or company management about
an investment banking services transaction are prohibited by this
provision.\35\ FINRA believes that the presence of investment bankers
or issuer management could compromise a research analyst's candor when
talking to a current or prospective customer about a deal.
Supplementary Material .03 also retains the current requirement that
any written or oral communication by a research analyst with a current
or prospective customer or internal personnel related to an investment
banking services transaction must be fair, balanced and not misleading,
taking into consideration the overall context in which the
communication is made.
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    \34\ See proposed FINRA Rule 2241(b)(2)(M).
    \35\ See proposed FINRA Rule 2241.03.
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Promises of Favorable Research and Prepublication Review by Subject
Company
    FINRA is proposing to maintain the current prohibition against
promises of favorable research, a particular research recommendation,
rating or specific content as inducement for receipt of business or
compensation.\36\ The proposed rule further requires policies and
procedures to prohibit prepublication review of a research report by a
subject company for purposes other than verification of facts.\37\
Supplementary Material .05 maintains the current guidance applicable to
the prepublication submission of a research report to a subject
company. Specifically, sections of a draft research report may be
provided to non-investment banking personnel or the subject company for
factual review, provided that: (1) The draft sections do not contain
the research summary, research rating or price target; (2) a complete
draft of the report is provided to legal or compliance personnel before
sections are submitted to non-investment banking personnel or the
subject company; and (3) any subsequent proposed changes to the rating
or price target are accompanied by a written justification to legal or
compliance and receive written authorization for the change. The member
also must retain copies of any draft and the final version of the
report for three years.\38\
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    \36\ See proposed FINRA Rule 2241(b)(2)(K).
    \37\ See proposed FINRA Rule 2241(b)(2)(N).
    \38\ See proposed FINRA Rule 2241.05.
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Personal Trading Restrictions
    FINRA is proposing to require that firms establish written policies
and procedures that restrict or limit research analyst account trading
in securities, any derivatives of such securities and funds whose
performance is materially dependent upon the performance of securities
covered by the research analyst.\39\ Such policies and procedures must
ensure that research analyst accounts, supervisors of research analysts
and associated persons with the ability to influence the content of
research reports do not benefit in their trading from knowledge of the
content or timing of a research report before the intended recipients
of such research have had a reasonable opportunity to act on the
information in the research report.\40\ The proposal maintains the
current prohibitions on research analysts receiving pre-IPO shares in
the sector they cover and trading against their most recent
recommendations. However, members may define financial hardship
circumstances, if any, in which a research analyst would be permitted
to trade against his or her most recent recommendation.\41\ The
proposed rule change includes Supplementary Material .10, which
provides that FINRA would not consider a research analyst account to
have traded in a manner inconsistent with a research analyst's
recommendation where a member has instituted a policy that prohibits
any research analyst from holding securities, or options on or
derivatives of such securities, of the companies in the research
analyst's coverage universe, provided that the member establishes a
reasonable plan to liquidate such holdings consistent with the
principles in paragraph (b)(2)(J)(i) and such plan is approved by the
member's legal or compliance department.\42\
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    \39\ See proposed FINRA Rule 2241(b)(2)(J).
    \40\ See proposed FINRA Rule 2241(b)(2)(J)(i).
    \41\ See proposed FINRA Rule 2241(b)(2)(J)(ii).
    \42\ See proposed FINRA Rule 2241.10.
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Content and Disclosure in Research Reports
    With a couple of modifications, the proposed rule change maintains
the current disclosure requirements. The proposed rule change adds a
requirement that a member must establish, maintain and enforce written
policies and procedures reasonably designed to ensure that purported
facts in its research reports are based on reliable information.\43\
FINRA has included this provision because it believes members should
have policies and procedures to foster verification of facts and
trustworthy research on which investors may rely. The policies and
procedures also must be reasonably designed to ensure that any
recommendation, rating or price target has a reasonable basis and is
accompanied by a clear explanation of any valuation method used and a
fair presentation of the risks that may impede achievement of the
recommendation, rating or price target.\44\
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    \43\ See proposed FINRA Rule 2241(c)(1)(A).
    \44\ See proposed FINRA Rule 2241(c)(1)(B).
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    In addition, the proposed rule change would require a member to
disclose in any research report at the time of publication or
distribution of the report: \45\
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    \45\ See proposed FINRA Rule 2241(c)(4).
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     If the research analyst or a member of the research
analyst's household has a financial interest in the debt or equity
securities of the subject company (including, without limitation,
whether it consists of any option, right, warrant, future, long or
short position), and the nature of such interest; \46\
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    \46\ See proposed FINRA Rule 2241(c)(4)(A).
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     if the research analyst has received compensation based
upon (among other factors) the member's investment banking revenues;
\47\
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    \47\ See proposed FINRA Rule 2241(c)(4)(B).
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     if the member or any of its affiliates: (i) Managed or co-
managed a public offering of securities for the subject company in the
past 12 months; (ii) received compensation for investment banking
services from the subject company in the past 12 months; or (iii)
expects to receive or intends to seek compensation for investment
banking services from the subject company in the next three months;
\48\
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    \48\ See proposed FINRA Rule 2241(c)(4)(C).
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     if, as of the end of the month immediately preceding the
date of

publication or distribution of a research report (or the end of the
second most recent month if the publication or distribution date is
less than 30 calendar days after the end of the most recent month), the
member or its affiliates have received from the subject company any
compensation for products or services other than investment banking
services in the previous 12 months; \49\
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    \49\ See proposed FINRA Rule 2241(c)(4)(D).
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     if the subject company is, or over the 12-month period
preceding the date of publication or distribution of the research
report has been, a client of the member, and if so, the types of
services provided to the issuer. Such services, if applicable, must be
identified as either investment banking services, non-investment
banking services, non-investment banking securities-related services or
non-securities services; \50\
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    \50\ See proposed FINRA Rule 2241(c)(4)(E).
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     if the member was making a market in the securities of the
subject company at the time of publication or distribution of the
research report; \51\ and
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    \51\ See proposed FINRA Rule 2241(c)(4)(G).
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     if the research analyst received any compensation from the
subject company in the previous 12 months.\52\
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    \52\ See proposed FINRA Rule 2241(c)(4)(H).
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    The proposed rule change would also expand upon the current
``catch-all'' disclosure, which mandates disclosure of any other
material conflict of interest of the research analyst or member that
the research analyst knows or has reason to know of at the time of the
publication or distribution of a research report. The proposed rule
change goes beyond the existing provision by requiring disclosure of
material conflicts known not only by the research analyst, but also by
any ``associated person of the member with the ability to influence the
content of a research report.'' \53\ The proposed rule change defines a
person with the ``ability to influence the content of a research
report'' as an associated person who is required to review the content
of the research report or has exercised authority to review or change
the research report prior to publication or distribution. This term
does not include legal or compliance personnel who may review a
research report for compliance purposes but are not authorized to
dictate a particular recommendation, rating or price target.\54\ The
``reason to know'' standard in this provision would not impose a duty
of inquiry on the research analyst or others who can influence the
content of a research report. Rather, it would cover disclosure of
those conflicts that should reasonably be discovered by those persons
in the ordinary course of discharging their functions.
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    \53\ See proposed FINRA Rule 2241(c)(4)(I).
    \54\ See proposed FINRA Rule 2241.08.
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    The proposed rule change also maintains the requirement to disclose
when a member or its affiliates beneficially own 1% or more of any
class of common equity securities of the subject company.\55\ The
determination of beneficial ownership would continue to be based upon
the standards used to compute ownership for the purposes of the
reporting requirements under Section 13(d) of the Exchange Act.
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    \55\ See proposed FINRA Rule 2241(c)(4)(F).
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    The proposal modifies the exception for disclosure that would
reveal material non-public information regarding specific potential
future investment banking transactions of the subject company to
include specific potential future investment banking transactions of
other companies, such as a competitor of the subject company.\56\ The
proposal also continues to permit a member that distributes a research
report covering six or more companies (compendium report) to direct the
reader in a clear manner as to where the applicable disclosures can be
found. An electronic compendium research report may hyperlink to the
disclosures. A paper compendium report must include a toll-free number
or a postal address where the reader may request the disclosures. In
addition, paper compendium reports may include a web address where the
disclosures can be found.\57\
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    \56\ See proposed FINRA Rule 2241(c)(5).
    \57\ See proposed FINRA Rule 2241(c)(7).
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Disclosures in Public Appearances
    The proposal groups in a separate provision the disclosures
required when a research analyst makes a public appearance.\58\ The
required disclosures remain substantively the same as under the current
rules \59\ including if the member or its affiliates beneficially own
1% or more of any class of common equity securities of the subject
company, as computed in accordance with Section 13(d) of the Exchange
Act. Unlike in research reports, the ``catch all'' disclosure
requirement in public appearances applies only to a conflict of
interest of the research analyst or member that the research analyst
knows or has reason to know at the time of the public appearance. FINRA
understands that supervisors or legal and compliance personnel, who
otherwise might be captured by the definition of an associated person
``with the ability to influence,'' typically do not have the
opportunity to review and insist on changes to public appearances, many
of which are extemporaneous in nature. The proposal also retains the
current requirement in NASD Rule 2711(h)(12) to maintain records of
public appearances sufficient to demonstrate compliance by research
analysts with the applicable disclosure requirements.\60\
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    \58\ See proposed FINRA Rule 2241(d).
    \59\ See NASD Rules 2711(h)(1), (h)(2)(B) and (C), (h)(3) and
(h)(9).
    \60\ See proposed FINRA Rule 2241(d)(3).
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Disclosure Required by Other Provisions
    With respect to both research reports and public appearances,
members and research analysts would continue to be required to comply
with applicable disclosure provisions of FINRA Rule 2210 and the
federal securities laws.\61\
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    \61\ See proposed FINRA Rule 2241(e).
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Termination of Coverage
    The proposed rule change retains with non-substantive modifications
the provision in the current rules that requires a member to notify its
customers if it intends to terminate coverage of a subject company.\62\
Such notification must be made promptly \63\ using the member's
ordinary means to disseminate research reports on the subject company
to its various customers. Unless impracticable, the notice must be
accompanied by a final research report, comparable in scope and detail
to prior research reports, and include a final recommendation or
rating. If impracticable to provide a final research report,
recommendation or rating, a firm must disclose to its customers the
reason for terminating coverage.
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    \62\ See proposed FINRA Rule 2241(f).
    \63\ While current Rule 2711(f)(6) does not contain the word
``promptly,'' FINRA has interpreted the provision to require prompt
notification of termination of coverage of a subject company.
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Distribution of Member Research Reports
    The proposal requires firms to establish, maintain and enforce
written policies and procedures reasonably designed to ensure that a
research report is not distributed selectively to internal trading
personnel or a particular customer or class of customers in advance of
other customers that the firm has previously determined are entitled to
receive the research report.\64\ The proposal includes further guidance
to explain that firms may provide different research products and
services to different classes of customers, provided the products are
not differentiated based on the timing of receipt of potentially market
moving information and the firm

discloses its research dissemination practices to all customers that
receive a research product.\65\
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    \64\ See proposed FINRA Rule 2241(g).
    \65\ See proposed FINRA Rule 2241.07.
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Distribution of Third-Party Research Reports
    The proposal would maintain the existing third-party disclosure
requirements,\66\ incorporating the change to the ``catch-all''
provision to include material conflicts of interest that an associated
person of the member with the ability to influence the content of a
research report knows or has reason to know at the time of the
distribution of the third-party research report. In addition, the
proposed rule change would require members to disclose any other
material conflict of interest that can reasonably be expected to have
influenced the member's choice of a third-party research provider or
the subject company of a third-party research report.\67\
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    \66\ NASD Rule 2711(h)(13)(A) currently requires the
distributing member firm to disclose the following, if applicable:
(1) If the member owns 1% or more of any class of equity securities
of the subject company; (2) if the member or any affiliate has
managed or co-managed a public offering of securities of the subject
company or received compensation for investment banking services
from the subject company in the past 12 months, or expects to
receive or intends to seek compensation for such services in the
next three months; (3) if the member makes a market in the subject
company's securities; and (4) any other actual, material conflict of
interest of the research analyst or member of which the research
analyst knows or has reason to know at the time the research report
is distributed or made available.
    \67\ See proposed FINRA Rule 2241(h)(4).
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    In addition, the proposal continues to address qualitative aspects
of third-party research reports. For example, the proposal maintains,
but in the form of policies and procedures, the existing requirement
that a registered principal or supervisory analyst review and approve
third-party research reports distributed by a member. To that end, the
proposed rule change requires a member to establish, maintain and
enforce written policies and procedures reasonably designed to ensure
that any third-party research it distributes contains no untrue
statement of material fact and is otherwise not false or misleading.
For the purpose of this requirement, a member's obligation to review a
third-party research report extends to any untrue statement of material
fact or any false or misleading information that should be known from
reading the research report or is known based on information otherwise
possessed by the member.\68\ The proposal further prohibits a member
from distributing third-party research if it knows or has reason to
know that such research is not objective or reliable.\69\
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    \68\ See proposed FINRA Rules 2241(h)(1) and (h)(3).
    \69\ See proposed FINRA Rule 2241(h)(2).
---------------------------------------------------------------------------

    The proposal maintains the existing exceptions for ``independent
third-party research reports.'' Specifically, such research does not
require principal pre-approval or, where the third-party research is
not ``pushed out,'' the third-party disclosures.\70\ As to the latter,
a member will not be considered to have distributed independent third-
party research where the research is made available by the member: (a)
Upon request; (b) through a member-maintained Web site; or (c) to a
customer in connection with a solicited order in which the registered
representative has informed the customer, during the solicitation, of
the availability of independent research on the solicited equity
security and the customer requests such independent research.
---------------------------------------------------------------------------

    \70\ See proposed FINRA Rule 2241(h)(5) and (6).
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    Finally, under the proposed rule change, members also must ensure
that a third-party research report is clearly labeled as such and that
there is no confusion on the part of the recipient as to the person or
entity that prepared the research report.\71\
---------------------------------------------------------------------------

    \71\ See proposed FINRA Rule 2241(h)(7).
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Exemption for Firms With Limited Investment Banking Activity
    The current rule exempts firms with limited investment banking
activity--those that over the previous three years, on average per
year, have managed or co-managed 10 or fewer investment banking
transactions and generated $5 million or less in gross revenues from
those transactions--from the provisions that prohibit a research
analyst from being subject to the supervision or control of an
investment banking department employee because the potential conflicts
with investment banking are minimal.\72\ However, those firms remain
subject to the provision that requires the compensation of a research
analyst to be reviewed and approved annually by a committee that
reports to a member's board of directors, or a senior executive officer
if the member has no board of directors.\73\ That provision further
prohibits representation on the committee by investment banking
department personnel and requires the committee to consider the
following factors when reviewing a research analyst's compensation: (1)
The research analyst's individual performance, including the research
analyst's productivity and the quality of research; (2) the correlation
between the research analyst's recommendations and the performance of
the recommended securities; and (3) the overall ratings received from
clients, the sales force and peers independent of investment banking,
and other independent ratings services.\74\ The proposed rule change
extends the exemption for firms with limited investment banking
activity so that such firms would not be subject to the compensation
committee provision. The proposal still prohibits these firms from
compensating a research analyst based upon specific investment banking
services transactions or contributions to a member's investment banking
services activities.\75\
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    \72\ See NASD Rule 2711(k).
    \73\ See NASD Rule 2711(d)(2).
    \74\ See NASD Rule 2711(d) and (k).
    \75\ See proposed FINRA Rules 2241(b)(2)(E) and (i).
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    The proposed rule change further exempts firms with limited
investment banking activity from the provisions restricting or limiting
research coverage decisions and budget determination. In addition, the
proposal exempts eligible firms from the requirement to establish
information barriers or other institutional safeguards to insulate
research analysts from the review or oversight by investment banking
personnel or other persons, including sales and trading personnel, who
may be biased in their judgment or supervision. However, those firms
still are required to establish information barriers or other
institutional safeguards reasonably designed to ensure that research
analysts are insulated from pressure by investment banking and other
non-research personnel who might be biased in their judgment or
supervision.
Exemption From Registration Requirements for Certain ``Research
Analysts''
    The proposed rule change amends the definition of ``research
analyst'' for the purposes of the registration and qualification
requirements to limit the scope to persons who produce ``research
reports'' and whose primary job function is to provide investment
research (e.g., registered representatives or traders generally would
not be included).\76\ The revised definition is not intended to carve
out anyone for whom the preparation of research is a significant
component of their job; rather, it is intended to provide relief for
those who produce research reports on an occasional basis. The existing

research rules, in accordance with the mandates of the Sarbanes-Oxley
Act of 2002 (``Sarbanes-Oxley''), are constructed such that the author
of a communication that meets the definition of a ``research report''
is a ``research analyst,'' irrespective of his or her title or primary
job.
---------------------------------------------------------------------------

    \76\ See proposed NASD Rule 1050(b) and proposed Incorporated
NYSE Rule 344.10.
---------------------------------------------------------------------------

Attestation Requirement
    The proposed rule change would delete the requirement to attest
annually that the firm has in place written supervisory policies and
procedures reasonably designed to achieve compliance with the
applicable provisions of the rules, including the compensation
committee review provision.
Obligations of Persons Associated With a Member
    Proposed Supplementary Material .09 would clarify the obligations
of each associated person under those provisions of the proposed rule
change that require a member to restrict or prohibit certain conduct by
establishing, maintaining and enforcing particular written policies and
procedures. Specifically, the proposal provides that, consistent with
FINRA Rule 0140, persons associated with a member must comply with such
member's policies and procedures as established pursuant to proposed
FINRA Rule 2241.\77\ In addition, consistent with Rule 0140,
Supplementary Material .09 states that it shall be a violation of
proposed Rule 2241 for an associated person to engage in the restricted
or prohibited conduct to be addressed through the establishment,
maintenance and enforcement of policies and procedures required by Rule
2241, including applicable Supplementary Material.
---------------------------------------------------------------------------

    \77\ See proposed FINRA Rule 2241.09. FINRA Rule 0140(a), among
other things, provides that persons associated with a member shall
have the same duties and obligations as a member under the Rules.
---------------------------------------------------------------------------

General Exemptive Authority

    The proposed rule change would provide FINRA, pursuant to the Rule
9600 Series, with authority to conditionally or unconditionally grant,
in exceptional and unusual circumstances, an exemption from any
requirement of the proposed rule for good cause shown, after taking
into account all relevant factors and provided that such exemption is
consistent with the purposes of the rule, the protection of investors,
and the public interest.\78\
---------------------------------------------------------------------------

    \78\ See proposed FINRA Rule 2241(j).
---------------------------------------------------------------------------

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

Definitions and Terms
    One commenter requested that the proposal define the term ``sales
and trading personnel'' as ``persons who are primarily responsible for
performing sales and trading activities, or exercising direct
supervisory authority over such persons.'' \80\ The commenter's
proposed definition is intended to clarify that the proposed
restrictions on sales and trading personnel activities should not
extend to: (1) Senior management who do not directly supervise those
activities but have a reporting line from such personnel (e.g., the
head of equity capital markets); or (2) persons who occasionally
function in a sales and trading capacity. FINRA intends for the sales
and trading personnel conflict management provisions to apply to
individuals who perform sales and trading functions, irrespective of
their job title or the frequency of engaging in the activities. As
such, FINRA does not intend for the rule to capture as sales and
trading personnel senior management, such as the chief executive
officer, who do not engage in or supervise day-to-day sales and trading
activities. However, FINRA believes the applicable provisions should
apply to individuals who may occasionally perform or directly supervise
sales and trading activities; otherwise, investors could be put at risk
with respect to the research or transactions involved when those
individuals are functioning in those capacities because the conflict
management procedures and proscriptions and required disclosures would
not apply. Therefore, FINRA has proposed to amend the rule to define
sales and trading personnel to include ``persons in any department or
division, whether or not identified as such, who perform any sales or
trading service on behalf of a member.'' FINRA notes that this proposed
definition is more consistent with the definition of ``investment
banking department'' in the current and proposed rules.
---------------------------------------------------------------------------

    \80\ WilmerHale Equity. For consistency with the debt research
proposal, FINRA also proposes to amend the proposed rule change to
use the term ``sales and trading personnel.''
---------------------------------------------------------------------------

    One commenter asked FINRA to include an exclusion from the
definition of ``research report'' for private placement memoranda and
similar offering-related documents prepared in connection with
investment banking services transactions.\81\ The commenter noted that
such offering-related documents typically are prepared by investment
banking personnel or non-research personnel on behalf of investment
banking personnel. The commenter asserted that absent an express
exception, the proposals could turn investment banking personnel into
research analysts and make the rule unworkable. The commenter noted
that NASD Rule 2711(a) excludes communications that constitute
statutory prospectuses that are filed as part of a registration
statement and contended that the basis for that exception should apply
equally to private placement memoranda and similar offering-related
documents.
---------------------------------------------------------------------------

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

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

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

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

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

    \84\ WilmerHale Equity.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

    One commenter opposed as overbroad the proposed expansion of the
current ``catch-all'' disclosure requirement to include ``any other
material conflict of interest of the research analyst or member that a
research analyst or an associated person of the member with the ability
to influence the content of a research report knows or has reason to
know'' at the time of publication or distribution of research
report.\96\ (emphasis added) The commenter expressed concern about the
emphasized language. Another commenter supported the proposed expansion
of the current ``catch-all'' disclosure requirement.\97\
---------------------------------------------------------------------------

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

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

    \98\ WilmerHale Equity.

---------------------------------------------------------------------------

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

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

    \102\ NASAA Equity.
---------------------------------------------------------------------------

    Other commenters requested that FINRA retain the exceptions in NASD
Rule 2711(f) that permits: (i) The publication and distribution of
research or a public appearance concerning the effects of significant
news or a significant event on the subject company during the quiet
period; and (ii) the publication of distribution of research pursuant
to Rule 139 under the Securities Act of 1933.\103\ FINRA agrees that
those exceptions should be included and therefore proposes to amend the
proposed rule change accordingly.
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    \103\ SIFMA, WilmerHale Equity.
---------------------------------------------------------------------------

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

(``Global Settlement'').\106\ As discussed in the 2012 United States
Government Accountability Office (``GAO'') Report on Securities
Research,\107\ FINRA does not believe that the terms of the Global
Settlement should be modified through FINRA rulemaking and instead
should be determined by the court overseeing the enforcement action.
Therefore, FINRA does not intend for any provisions of the equity
proposal that may be adopted to supersede provisions of the Global
Settlement.
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    \106\ WilmerHale Equity.
    \107\ GAO, Securities Research, Additional Actions Could Improve
Regulatory Oversight of Analyst Conflicts of Interest, January 2012.
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Exemptive Authority
    One commenter opposed the provision that would give FINRA the
authority to grant, in exceptional or unusual circumstances, an
exemption from the requirement of the proposed rule for good cause
shown.\108\ The commenter stated that the provision had not been
sufficiently justified by, among other things, providing examples of
where an exemption would be justified. The purpose of exemptive
authority is to provide a mechanism of relief in unusual factual
circumstances that cannot be foreseen, where application of the rule
would frustrate or be inconsistent with its intended purposes. As such,
it is difficult if not impossible for FINRA to provide examples of
where it would be appropriate to use the authority. However, as FINRA
stated in the equity proposal rule filing, the scope of the rule's
subject matter and the diversity of firm sizes, structures and research
business and distribution models make it more likely that factual
circumstances may arise that had not been contemplated by the rule. In
addition, the authority is limited not only to exceptional
circumstances, but also to a showing of good cause.
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    \108\ NASAA Equity.
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Implementation Date
    One commenter requested that the implementation date be at least 12
months after SEC approval of the proposed rule change.\109\ Another
commenter similarly requested that FINRA provide a ``grace period'' of
one year or the maximum time permissible, if that is less than one
year, between the adoption of the proposed rule and the implementation
date.\110\ FINRA is sensitive to the time firms will require to update
their policies and procedures and systems to comply with the proposal
and will take those factors into consideration when establishing
implementation dates.
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    \109\ SIFMA.
    \110\ WilmerHale Equity.
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    FINRA believes that the foregoing fully responds to the issues
raised by the commenters.
    FINRA will announce the effective date of the proposed rule change
in a Regulatory Notice to be published no later than 60 days following
Commission approval. The effective date will be no later than 180 days
following publication of the Regulatory Notice announcing Commission
approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\111\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade and, in general, to protect investors and the
public interest. FINRA believes the proposed rule change protects
investors and the public interest by maintaining, and in some cases
expanding, structural safeguards to insulate research analysts from
influences and pressures that could compromise the objectivity of
research reports and public appearances on which investors rely to make
investment decisions. FINRA further believes that the proposed rule
change prevents fraudulent and manipulative acts and practices by
requiring firms to identify and manage, often with extensive
disclosure, conflicts of interest related to the preparation, content
and distribution of research. At the same time, the proposal furthers
the public interest by increasing information flow to investors in
select circumstances--e.g., before and after the expiration of lock up
provisions--where FINRA believes the integrity of research will not be
compromised.
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    \111\ 15 U.S.C. 78o-3(b)(6).
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    Moreover, the proposed rule change is consistent with Section 15D
of the Act,\112\ which requires rules reasonably designed to address
conflicts of interest that can arise when research analysts recommend
equity securities in research reports and public appearances. The
proposed rule change requires firms to establish, maintain and enforce
written policies and procedures reasonably designed to achieve
compliance with the provisions of Section 15D, including: restricting
prepublication clearance or approval of research reports by investment
banking personnel or other persons not directly responsible for the
preparation, content and distribution of research reports; prohibiting
persons engaged in investment banking activities from supervision or
control of research analysts, including influence or control over
research analyst compensation evaluation and determination; prohibiting
retaliation or threat of retaliation against research analysts for
research or public appearances that are unfavorable to the member's
business interests; establishing quiet periods after public offerings
during which members that have participated in the offering may not
publish or otherwise distribute research; and establishing structural
or institutional safeguards to protect analysts from the review,
pressure or oversight of investment bankers or other non-research
personnel that might be biased in their judgment or supervision. In
addition, the proposed rule change requires disclosures consistent with
Section 15D, including the requirement to disclose any material
conflict of interest of the research analyst or member that the
research analyst knows or has reason to know at the time of publication
or distribution of a research report or during a public appearance.
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    \112\ 15 U.S.C. 78o-6.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. FINRA provided a comprehensive
statement regarding the burden on competition in the Proposing Release.
FINRA's response to comments and proposed revisions as set forth in
this Amendment No. 1 do not change FINRA's statement in the Proposing
Release.

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

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

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

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

V. Solicitation of Comments

    Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods: \114\
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    \114\ See supra note 6.
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Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-FINRA-2014-047 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2014-047. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of FINRA. All comments
received will be posted without change; the Commission does not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File Number SR-FINRA-2014-047 and should be
submitted on or before April 8, 2015.

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