[Federal Register Volume 80, Number 140 (Wednesday, July 22, 2015)]
[Notices]
[Pages 43482-43497]
[FR Doc No: 2015-17971]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75471; File No. SR-FINRA-2014-047]

Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change, as Modified by
Amendment No. 1 Thereto, To Adopt FINRA Rule 2241 (Research Analysts
and Research Reports) in the Consolidated FINRA Rulebook

July 16, 2015.

I. Introduction

    On November 14, 2014, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission''), pursuant to section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule to adopt NASD Rule 2711 (Research Analysts and Research
Reports) as a FINRA rule, with several modifications, amend NASD Rule
1050 (Registration of Research Analysts) and Incorporated NYSE Rule 344
to create an exception from the research analyst qualification
requirement, and renumber NASD Rule 2711 as FINRA Rule 2241 in the
consolidated FINRA rulebook. The proposal was published for comment in
the Federal Register on November 24, 2014.\3\ The Commission received
four comments on the original proposal.\4\ On February 19, 2015, FINRA
filed Amendment No. 1 responding to these original comments received to
the proposal as well as to propose amendments in response to these
comments. The proposal, as amended by Amendment No. 1, was published
for comment in the Federal Register on March 18, 2015.\5\ On February
20, 2015, the Commission issued an order instituting proceedings
pursuant to section 19(b)(2)(B) of the Act \6\ to determine whether to
approve or disapprove the proposal. This order was published for
comment in the Federal Register on February 26, 2015.\7\ The Commission
received a further three comments regarding the proceedings or in
response to Amendment No. 1,\8\ to which FINRA responded via letter on
May 5, 2015.\9\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Exchange Act Release No. 73622 (Nov. 18, 2014); 79 FR 69939
(Nov. 24, 2014) (``Notice''). On January 6, 2015, FINRA consented to
extending the time period for the Commission to either approve or
disapprove the proposed rule change, or to institute proceedings to
determine whether to approve or disapprove the proposed rule change,
to February 20, 2015.
    \4\ See Letter from Kevin Zambrowicz, Associate General Counsel
& Managing Director and Sean Davy, Managing Director, SIFMA, dated
Dec. 15, 2014 (``SIFMA''), Letter from Hugh D. Berkson, President-
Elect, Public Investors Arbitration Bar Association, dated Dec. 15,
2014 (``PIABA Equity''), Letter from Stephanie R. Nicholas,
WilmerHale, dated Dec. 16, 2014 (``WilmerHale Equity One''), and
Letter from William Beatty, President and Washington (State)
Securities Administrator, North American Securities Administrators
Association, Inc., dated Dec. 19, 2014 (``NASAA Equity One'').
    \5\ Exchange Act Release No. 74488 (Mar. 12, 2015); 80 FR 14174
(Mar. 18, 2015) (``Amendment Notice'').
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ Exchange Act Release No. 74339 (Feb. 20, 2015); 80 FR 10528
(Feb. 26, 2015).
    \8\ Letter from Egidio Mogavero, Managing Director and Chief
Compliance Officer, JMP Securities, dated Mar. 19, 2015 (``JMP''),
Letter from Stephanie R. Nicholas, WilmerHale, dated Apr. 6, 2015
(``WilmerHale Equity Two''), and Letter from William Beatty,
President and Washington (State) Securities Administrator, North
American Securities Administrators Association, Inc., dated Apr. 17,
2015 (``NASAA Equity Two'').
    \9\ Letter from Philip Shaikun, Vice President and Associate
General Counsel, FINRA, dated May 5, 2015 (``FINRA Response'').
---------------------------------------------------------------------------

    This order approves the proposed rule change.

II. Description of the Proposed Rule Change

    As described more fully in the Notice, FINRA proposed to adopt, in
the Consolidated FINRA Rulebook, NASD Rule 2711 (Research Analysts and
Research Reports), with several modifications, as FINRA Rule 2241. The
proposed rule change also would amend NASD Rule 1050 (Registration of
Research Analysts) and Incorporated NYSE Rule 344 (Research Analysts
and Supervisory Analysts) to create an exception from the research
analyst qualification requirements.
    FINRA believes that the proposed rule change would retain the core
provisions of the current rules, broaden the obligations on members to
identify and manage research-related conflicts of interest, restructure
the rules to provide some flexibility in compliance without diminishing
investor protection, extend

protections where gaps have been identified, and provide clarity to the
applicability of existing rules. Where consistent with protection of
users of research, FINRA believes that the proposed rule change reduces
burdens where appropriate. The description below is the proposal as
amended by Amendment No. 1.\10\
---------------------------------------------------------------------------

    \10\ 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.
---------------------------------------------------------------------------

    As stated above, the Commission originally received four comments
on the proposal. Of these, three expressed general support for the
proposal,\11\ but one objected to the general formulation of the
proposal as a principles-based rule.\12\ Of the three comments received
in regards to the proceedings or Amendment No. 1, one had comments
limited to specific provisions of the proposal,\13\ one was supportive
of the proposal as amended by Amendment No. 1 with certain specific
comments,\14\ and one reiterated prior concerns regarding the
principles-based nature of the proposal.\15\
---------------------------------------------------------------------------

    \11\ SIFMA, PIABA Equity, and WilmerHale Equity One.
    \12\ NASAA Equity One.
    \13\ JMP.
    \14\ WilmerHale Equity Two.
    \15\ NASAA Equity Two.
---------------------------------------------------------------------------

A. Definitions

    FINRA proposed to mostly maintain the definitions in current NASD
Rule 2711, with certain modifications. Specifically, FINRA made 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.\16\ FINRA also would clarify,
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.\17\ FINRA proposed
to exclude from the definition of ``research report'' communications
concerning open-end registered investment companies that are not listed
or traded on an exchange (i.e., mutual funds).\18\ FINRA further
proposed to exclude from the definition of ``research report''
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.\19\ FINRA sought to move the definitions of ``third-
party research report'' and ``independent third-party research report''
into the definitional section of the proposed rule that are, in NASD
Rule 2711, in a different section of that rule.\20\ Lastly, FINRA would
adopt 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.\21\
---------------------------------------------------------------------------

    \16\ See proposed FINRA Rule 2241(a)(5). The current definition
includes, without limitation, many common types of investment
banking services. FINRA proposed to add the language ``or otherwise
acting in furtherance of'' either a public or private offering to
further emphasize that the term ``investment banking services'' is
meant to be construed broadly.
    \17\ See proposed FINRA Rule 2241(a)(9).
    \18\ See proposed FINRA Rule 2241(a)(11). In the Notice, FINRA
explained that it was proposing this change because ``sales material
regarding mutual funds is already subject to a separate regulatory
regime . . . [t]he extensive content standards of these rules,
combined with the filing and review of mutual fund sales material by
FINRA staff, substantially reduce the likelihood that such material
will include materially misleading information about the funds.''
FINRA also stated their belief that because these products are
pooled investment vehicles, ``it is much less likely that a report
on a mutual fund would affect the fund's NAV to the same extent that
a research report on a single stock might impact its share price.''
    \19\ See proposed FINRA Rule 2241(a)(11)(D).
    \20\ See proposed FINRA Rules 2241(a)(3) and (14). FINRA stated
it believes this change would create a more streamlined and user
friendly rule to combine defined terms in a single definitional
section.
    \21\ See proposed FINRA Rule 2241(a)(12).
---------------------------------------------------------------------------

B. Identifying and Managing Conflicts of Interest

    FINRA proposed to create a new section entitled ``Identifying and
Managing Conflicts of Interest.'' This section contains an overarching
provision that requires members to establish, maintain, and enforce
written policies and procedures reasonably designed to identify and
effectively manage conflicts of interest related to the preparation,
content, and distribution of research reports and public appearances by
research analysts and the interaction between research analysts and
persons outside of the research department, including investment
banking and sales and trading personnel, the subject companies, and
customers.\22\ The written policies and procedures would be required to
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.\23\ These provisions, FINRA asserted,
set out the fundamental obligation for a member to establish and
maintain a system to identify and mitigate conflicts and to foster
integrity and fairness in its research products and services. The
proposed rule change then sets forth the requirements for those written
policies and procedures. According to FINRA, this approach would allow
for some flexibility to manage identified conflicts, with some
specified prohibitions and restrictions where disclosure does not
adequately mitigate them. FINRA asserted that most of these
requirements have been experience tested and found effective.\24\
---------------------------------------------------------------------------

    \22\ See proposed FINRA Rule 2241(b)(1).
    \23\ See proposed FINRA Rule 2241(b)(2).
    \24\ See, e.g.,Joint Report by NASD and the NYSE on the
Operation and Effectiveness of the Research Analyst Conflict of
Interest Rules (December 2005), available at http://www.finra.org/web/groups/industry/@ip/<EMAIL_ADDRESS>---------------------------------------------------------------------------

1. Prepublication Review
    As proposed, the first of these minimum requirements would require
that the policies and procedures prohibit prepublication review,
clearance, or approval of research reports by persons engaged in
investment banking services activities and restrict or prohibit such
review, clearance, or approval by other persons not directly
responsible for the preparation, content, and distribution of research
reports, other than legal and compliance personnel.\25\
---------------------------------------------------------------------------

    \25\ See proposed FINRA Rule 2241(b)(2)(A).
---------------------------------------------------------------------------

2. Coverage Decisions
    The proposed rule change would require that the policies and
procedures restrict or limit input by the investment banking department
into research coverage decisions to ensure that research management
independently makes all final decisions regarding the research coverage
plan.\26\
---------------------------------------------------------------------------

    \26\ See proposed FINRA Rule 2241(b)(2)(B).
---------------------------------------------------------------------------

3. Supervision and Control of Research Analysts
    The proposed rule change would require that the policies and
procedures prohibit persons engaged in investment banking activities
from supervision or control of research analysts, including influence
or control over research analyst compensation evaluation and
determination.\27\
---------------------------------------------------------------------------

    \27\ See proposed FINRA Rule 2241(b)(2)(C).
---------------------------------------------------------------------------

4. Research Budget Determinations
    The proposed rule change would require that the policies and
procedures

limit determination of the research department budget to senior
management, excluding senior management engaged in investment banking
services activities.\28\
---------------------------------------------------------------------------

    \28\ See proposed FINRA Rule 2241(b)(2)(D).
---------------------------------------------------------------------------

5. Compensation
    The proposed rule change would require that the policies and
procedures prohibit compensation based upon specific investment banking
services transactions or contributions to a member's investment banking
services activities.\29\ The policies and procedures further would
require a committee that reports to the member's board of directors--or
if none exists, a senior executive officer--to review and approve at
least annually the compensation of any research analyst who is
primarily responsible for preparation of the substance of a research
report. The committee would not be permitted to have representation
from a member's investment banking department. The committee would be
required to consider, among other things, the productivity of the
research analyst and the quality of his or her research and would also
be required to document the basis for each research analyst's
compensation.\30\ FINRA stated that these provisions are consistent
with the requirements in current Rule 2711(d).
---------------------------------------------------------------------------

    \29\ See proposed FINRA Rule 2241(b)(2)(E).
    \30\ See proposed FINRA Rule 2241(b)(2)(F).
---------------------------------------------------------------------------

6. 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.\31\
---------------------------------------------------------------------------

    \31\ See proposed FINRA Rule 2241(b)(2)(G).
---------------------------------------------------------------------------

7. Retaliation
    The proposed rule change would require that the policies and
procedures prohibit direct or indirect retaliation or threat of
retaliation against research analysts employed by the member or its
affiliates by persons engaged in investment banking services activities
or other employees as the result of an adverse, negative, or otherwise
unfavorable research report or public appearance written or made by the
research analyst that may adversely affect the member's present or
prospective business interests.\32\
---------------------------------------------------------------------------

    \32\ See proposed FINRA Rule 2241(b)(2)(H).
---------------------------------------------------------------------------

8. Quiet Periods
    The proposed rule change would require that the policies and
procedures define quiet periods of a minimum of ten 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.\33\
---------------------------------------------------------------------------

    \33\ 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 Act.
---------------------------------------------------------------------------

    With respect to these quiet-period provisions, the proposed rule
change would reduce the current forty day quiet period for IPOs to a
minimum of ten days after the completion of the offering for any member
that participated as an underwriter or dealer, and reduces the ten 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 would
maintain exceptions to these 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 Rule 139 under the
Securities Act of 1933 regarding a subject company with ``actively-
traded securities.''
    The proposed rule change also eliminates the current quiet periods
of fifteen days before and after the expiration, waiver or termination
of a lock-up agreement.
9. Solicitation and Marketing
    In addition, the proposed rule change would require firms to adopt
written policies and procedures to restrict or limit activities by
research analysts that can reasonably be expected to compromise their
objectivity.\34\ This would include the existing prohibitions on
participation in pitches and other solicitations of investment banking
services transactions as well as road shows and other marketing on
behalf of issuers related to such transactions. We understand these to
be a non-exhaustive list of the types of activities that can violate
this provision.\35\ FINRA noted that, consistent with existing
guidance, analysts may listen to or view a live webcast of a
transaction-related road show or other widely attended presentation by
investment banking to investors or the sales force from a remote
location, or another room if they are in the same location.\36\
---------------------------------------------------------------------------

    \34\ See proposed FINRA Rule 2241(b)(2)(L).
    \35\ See id. (requiring procedures that ``restrict or limit
activities by research analysts that can reasonably be expected to
compromise their objectivity, including prohibiting [participation
in pitches and other solicitations and participation in certain road
shows]'') (emphasis added).
    \36\ See NASD Notice to Members 07-04 (January 2007) and NYSE
Information Memo 07-11 (January 2007).
---------------------------------------------------------------------------

    The proposed rule change also would add Supplementary Material .01,
which would codify FINRA's existing interpretation that the
solicitation provision prohibits members from including in pitch
materials any information about a member's research capacity in a
manner that suggests, directly or indirectly, that the member might
provide favorable research coverage.\37\
---------------------------------------------------------------------------

    \37\ See proposed FINRA Rule 2241.01 and Notice to Members 07-04
(January 2007).
---------------------------------------------------------------------------

10. Joint Due Diligence and Other Interactions With Investment Banking
    The proposed rule would establish a new proscription with respect
to joint due diligence activities--i.e., due diligence by the research
analyst in the presence of investment banking department personnel--
during a specified time period. Specifically, proposed Supplementary
Material .02 states that FINRA interprets the overarching principle
requiring members to, among other things, establish, maintain and
enforce written policies and procedures that address the interaction
between research analysts and those outside of the research department,
including investment banking and sales and trading personnel, subject
companies and customers, to prohibit the performance of joint due
diligence prior to the selection of underwriters for the investment
banking services transaction. FINRA clarified that, in response to a
comment that this provision may interfere with the JOBS Act,\38\ they
``would interpret the provision to apply only to the extent it is not
contrary to the JOBS Act'' and ``[t]hus, for example, would not
interpret the joint due diligence prohibition to apply where the joint
due diligence activities involve a communication with the management of
an EGC that is attended by both the

research analyst and an investment banker.'' \39\
---------------------------------------------------------------------------

    \38\ JMP.
    \39\ FINRA Response.
---------------------------------------------------------------------------

    The proposed rule would continue to prohibit investment banking
department personnel from directly or indirectly directing a research
analyst to engage in sales or marketing efforts related to an
investment banking services transaction, and directing a research
analyst to engage in any communication with a current or prospective
customer about an investment banking services transaction.\40\
Supplementary Material .03 clarifies that three-way meetings between
research analysts and a current or prospective customer in the presence
of investment banking department personnel or company management about
an investment banking services transaction would be prohibited by this
provision.\41\ FINRA believes that the presence of investment bankers
or issuer management could compromise a research analyst's candor when
talking to a current or prospective customer about a deal.
Supplementary Material .03 would also retain the current requirement
that any written or oral communication by a research analyst with a
current or prospective customer or internal personnel related to an
investment banking services transaction must be fair, balanced, and not
misleading, taking into consideration the overall context in which the
communication is made.
---------------------------------------------------------------------------

    \40\ See proposed FINRA Rule 2241(b)(2)(M).
    \41\ See proposed FINRA Rule 2241.03.
---------------------------------------------------------------------------

11. Promises of Favorable Research and Prepublication Review by Subject
Company
    FINRA proposed to maintain the current prohibition against promises
of favorable research, a particular research recommendation, rating, or
specific content as inducement for receipt of business or
compensation.\42\ The proposed rule would further require policies and
procedures to prohibit prepublication review of a research report by a
subject company for purposes other than verification of facts.\43\
Supplementary Material .05 would maintain the current guidance
applicable to the prepublication submission of a research report to a
subject company. Specifically, sections of a draft research report
would be permitted to be provided to non-investment banking personnel
or the subject company for factual review, provided that: (1) The draft
sections do not contain the research summary, research rating, or price
target; (2) a complete draft of the report is provided to legal or
compliance personnel before sections are submitted to non-investment
banking personnel or the subject company; and (3) any subsequent
proposed changes to the rating or price target are accompanied by a
written justification to legal or compliance and receive written
authorization for the change. The member also would be required to
retain copies of any draft and the final version of the report for
three years.\44\
---------------------------------------------------------------------------

    \42\ See proposed FINRA Rule 2241(b)(2)(K).
    \43\ See proposed FINRA Rule 2241(b)(2)(N).
    \44\ See proposed FINRA Rule 2241.05.
---------------------------------------------------------------------------

12. Personal Trading Restrictions
    FINRA proposed to require that firms establish written policies and
procedures that restrict or limit research analyst account trading in
securities, any derivatives of such securities and funds whose
performance is materially dependent upon the performance of securities
covered by the research analyst.\45\ Such policies and procedures would
be required to ensure that research analyst accounts, supervisors of
research analysts, and associated persons with the ability to influence
the content of research reports do not benefit in their trading from
knowledge of the content or timing of a research report before the
intended recipients of such research have had a reasonable opportunity
to act on the information in the research report.\46\ The proposal
would maintain the current prohibitions on research analysts receiving
pre-IPO shares in the sector they cover and trading against their most
recent recommendations. However, members would be permitted to define
financial hardship circumstances, if any, in which a research analyst
would be permitted to trade against his or her most recent
recommendation.\47\ The proposed rule change includes Supplementary
Material .10, which would provide that FINRA would not consider a
research analyst account to have traded in a manner inconsistent with a
research analyst's recommendation where a member has instituted a
policy that prohibits any research analyst from holding securities, or
options on or derivatives of such securities, of the companies in the
research analyst's coverage universe, provided that the member
establishes a reasonable plan to liquidate such holdings consistent
with the principles in paragraph (b)(2)(J)(i) and such plan is approved
by the member's legal or compliance department.\48\
---------------------------------------------------------------------------

    \45\ See proposed FINRA Rule 2241(b)(2)(J).
    \46\ See proposed FINRA Rule 2241(b)(2)(J)(i).
    \47\ See proposed FINRA Rule 2241(b)(2)(J)(ii).
    \48\ See proposed FINRA Rule 2241.10.
---------------------------------------------------------------------------

C. Content and Disclosure in Research Reports

    With some modification, the proposed rule change would maintain the
current disclosure requirements. The proposed rule change would add a
requirement that a member must establish, maintain and enforce written
policies and procedures reasonably designed to ensure that purported
facts in its research reports are based on reliable information.\49\
FINRA stated that it has included this provision because it believes
members should have policies and procedures to foster verification of
facts and trustworthy research on which investors may rely. The
policies and procedures would also be required to 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.\50\
---------------------------------------------------------------------------

    \49\ See proposed FINRA Rule 2241(c)(1)(A).
    \50\ See proposed FINRA Rule 2241(c)(1)(B).
---------------------------------------------------------------------------

    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: \51\
---------------------------------------------------------------------------

    \51\ See proposed FINRA Rule 2241(c)(4).
---------------------------------------------------------------------------

     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; \52\
---------------------------------------------------------------------------

    \52\ See proposed FINRA Rule 2241(c)(4)(A).
---------------------------------------------------------------------------

     If the research analyst has received compensation based
upon (among other factors) the member's investment banking revenues;
\53\
---------------------------------------------------------------------------

    \53\ See proposed FINRA Rule 2241(c)(4)(B).
---------------------------------------------------------------------------

     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;
\54\
---------------------------------------------------------------------------

    \54\ See proposed FINRA Rule 2241(c)(4)(C).
---------------------------------------------------------------------------

     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; \55\
---------------------------------------------------------------------------

    \55\ See proposed FINRA Rule 2241(c)(4)(D).
---------------------------------------------------------------------------

     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; \56\
---------------------------------------------------------------------------

    \56\ See proposed FINRA Rule 2241(c)(4)(E).
---------------------------------------------------------------------------

     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; \57\ and
---------------------------------------------------------------------------

    \57\ See proposed FINRA Rule 2241(c)(4)(G).
---------------------------------------------------------------------------

     If the research analyst received any compensation from the
subject company in the previous 12 months.\58\
---------------------------------------------------------------------------

    \58\ See proposed FINRA Rule 2241(c)(4)(H).
---------------------------------------------------------------------------

    The proposed rule change would also expand upon the current
``catch-all'' disclosure, which mandates disclosure of any other
material conflict of interest of the research analyst or member that
the research analyst knows or has reason to know of at the time of the
publication or distribution of a research report. The proposed rule
change would go beyond the existing provision by requiring disclosure
of material conflicts known not only by the research analyst, but also
by any ``associated person of the member with the ability to influence
the content of a research report.'' \59\ 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.\60\ FINRA
stated that the ``reason to know'' standard in this provision would not
impose a duty of inquiry on the research analyst or others who can
influence the content of a research report. Rather, it would cover
disclosure of those conflicts that should reasonably be discovered by
those persons in the ordinary course of discharging their functions.
---------------------------------------------------------------------------

    \59\ See proposed FINRA Rule 2241(c)(4)(I).
    \60\ See proposed FINRA Rule 2241.08.
---------------------------------------------------------------------------

    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.\61\ 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.
---------------------------------------------------------------------------

    \61\ See proposed FINRA Rule 2241(c)(4)(F).
---------------------------------------------------------------------------

    The proposal would modify the exception for disclosure that would
reveal material non-public information regarding specific potential
future investment banking transactions of the subject company to also
include specific potential future investment banking transactions of
other companies, such as a competitor of the subject company.\62\ 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.\63\
---------------------------------------------------------------------------

    \62\ See proposed FINRA Rule 2241(c)(5).
    \63\ See proposed FINRA Rule 2241(c)(7).
---------------------------------------------------------------------------

D. Disclosures in Public Appearances

    The proposal would group in a separate provision the disclosures
required when a research analyst makes a public appearance.\64\ The
required disclosures would remain substantively the same as under the
current rules,\65\ 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 would apply 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 stated it 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
would also retain 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.\66\
---------------------------------------------------------------------------

    \64\ See proposed FINRA Rule 2241(d).
    \65\ See NASD Rules 2711(h)(1), (h)(2)(B) and (C), (h)(3) and
(h)(9).
    \66\ See proposed FINRA Rule 2241(d)(3).
---------------------------------------------------------------------------

E. Disclosure Required by Other Provisions

    With respect to both research reports and public appearances,
members and research analysts would continue to be required to comply
with applicable disclosure provisions of FINRA Rule 2210 and the
federal securities laws.\67\
---------------------------------------------------------------------------

    \67\ See proposed FINRA Rule 2241(e).
---------------------------------------------------------------------------

F. Termination of Coverage

    The proposed rule change would retain, 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.\68\ Such notification would need to be made
promptly,\69\ using the member's ordinary means to disseminate research
reports on the subject company to its various customers. Unless
impracticable, the notice would be required to be accompanied by a
final research report, comparable in scope and detail to prior research
reports, and include a final recommendation or rating. If impracticable
to provide a final research report, recommendation, or rating, a firm
would be required to disclose to its customers the reason for
terminating coverage. FINRA clarified in the Notice that it ``expects
such circumstances to be exceptional, such as where a research analyst
covering a subject company or sector has left the member or the member
has discontinued coverage of the industry or sector.''
---------------------------------------------------------------------------

    \68\ See proposed FINRA Rule 2241(f).
    \69\ 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.
---------------------------------------------------------------------------

G. Distribution of Member Research Reports

    The proposal would require firms to establish, maintain and enforce
written policies and procedures reasonably designed to ensure that a
research report is not distributed selectively to internal trading
personnel or a particular customer or class of customers in advance of
other customers that the firm has previously determined are entitled to
receive the research report.\70\ The

proposal includes further guidance to explain that firms would be
permitted to provide different research products and services to
different classes of customers, provided the products are not
differentiated based on the timing of receipt of potentially market
moving information and the firm discloses its research dissemination
practices to all customers that receive a research product.\71\
---------------------------------------------------------------------------

    \70\ See proposed FINRA Rule 2241(g).
    \71\ See proposed FINRA Rule 2241.07.
---------------------------------------------------------------------------

H. Distribution of Third-Party Research Reports

    The proposal would maintain the existing third-party disclosure
requirements,\72\ while incorporating a 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.\73\
---------------------------------------------------------------------------

    \72\ 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.
    \73\ See proposed FINRA Rule 2241(h)(4).
---------------------------------------------------------------------------

    FINRA stated that the proposal would continue to address
qualitative aspects of third-party research reports. For example, the
proposal would maintain, but in the form of policies and procedures,
the existing requirement that a registered principal or supervisory
analyst review and approve third-party research reports distributed by
a member. To that end, the proposed rule change would require a member
to establish, maintain, and enforce written policies and procedures
reasonably designed to ensure that any third-party research it
distributes contains no untrue statement of material fact and is
otherwise not false or misleading. For the purpose of this requirement,
a member's obligation to review a third-party research report would
extend to any untrue statement of material fact or any false or
misleading information that should be known from reading the research
report or is known based on information otherwise possessed by the
member.\74\ The proposal further would prohibit a member from
distributing third-party research if it knows or has reason to know
that such research is not objective or reliable.\75\
---------------------------------------------------------------------------

    \74\ See proposed FINRA Rules 2241(h)(1) and (h)(3).
    \75\ See proposed FINRA Rule 2241(h)(2).
---------------------------------------------------------------------------

    The proposal would maintain the existing exceptions for
``independent third-party research reports.'' Specifically, such
research would not require principal pre-approval or, where the third-
party research is not ``pushed out,'' the third-party disclosures.\76\
As to the latter, a member would not be considered to have distributed
independent third-party research where the research is made available
by the member: (a) Upon request; (b) through a member-maintained Web
site; or (c) to a customer in connection with a solicited order in
which the registered representative has informed the customer, during
the solicitation, of the availability of independent research on the
solicited equity security and the customer requests such independent
research.
---------------------------------------------------------------------------

    \76\ See proposed FINRA Rule 2241(h)(5) and (6).
---------------------------------------------------------------------------

    Finally, under the proposed rule change, members would be required
to ensure that a third-party research report is clearly labeled as such
and that there is no confusion on the part of the recipient as to the
person or entity that prepared the research report.\77\
---------------------------------------------------------------------------

    \77\ See proposed FINRA Rule 2241(h)(7).
---------------------------------------------------------------------------

I. Exemption for Firms With Limited Investment Banking Activity

    The current rule exempts firms with limited investment banking
activity--those that over the previous three years, on average per
year, have managed or co-managed 10 or fewer investment banking
transactions and generated $5 million or less in gross revenues from
those transactions--from the provisions that prohibit a research
analyst from being subject to the supervision or control of an
investment banking department employee because the potential conflicts
with investment banking are minimal.\78\ 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.\79\ 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.\80\ The proposed rule change
would extend the exemption for firms with limited investment banking
activity so that such firms would not be subject to the compensation
committee provision. The proposal would still prohibit these firms from
compensating a research analyst based upon specific investment banking
services transactions or contributions to a member's investment banking
services activities.\81\
---------------------------------------------------------------------------

    \78\ See NASD Rule 2711(k).
    \79\ See NASD Rule 2711(d)(2).
    \80\ See NASD Rule 2711(d) and (k).
    \81\ See proposed FINRA Rules 2241(b)(2)(E) and (i).
---------------------------------------------------------------------------

    The proposed rule change would further exempt firms with limited
investment banking activity from the provisions restricting or limiting
research coverage decisions and budget determinations. In addition, the
proposal would exempt eligible firms from the requirement to establish
information barriers or other institutional safeguards to insulate
research analysts from the review or oversight by investment banking
personnel or other persons, including sales and trading personnel, who
may be biased in their judgment or supervision. However, those firms
would still be required to establish information barriers or other
institutional safeguards reasonably designed to ensure that research
analysts are insulated from pressure by investment banking and other
non-research personnel who might be biased in their judgment or
supervision.

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

    The proposed rule change would amend the definition of ``research
analyst'' for the purposes of the registration and qualification
requirements to limit the scope to persons who produce ``research
reports'' and whose primary job function is to provide investment
research (e.g., registered representatives or traders

generally would not be included).\82\ FINRA stated that the revised
definition is not intended to carve out anyone for whom the preparation
of research is a significant component of their job. Rather, it is
intended to provide relief for those who produce research reports on an
occasional basis. The existing research rules, in accordance with the
mandates of the Sarbanes-Oxley Act of 2002 (``Sarbanes-Oxley''), are
constructed such that the author of a communication that meets the
definition of a ``research report'' is a ``research analyst,''
irrespective of his or her title or primary job.
---------------------------------------------------------------------------

    \82\ See proposed NASD Rule 1050(b) and proposed Incorporated
NYSE Rule 344.10.
---------------------------------------------------------------------------

K. Attestation Requirement

    The proposed rule change would delete the requirement to attest
annually that the firm has in place written supervisory policies and
procedures reasonably designed to achieve compliance with the
applicable provisions of the rules, including the compensation
committee review provision. As FINRA explained in the Notice, firms
already are obligated pursuant to NASD Rule 3010 (Supervision) to have
a supervisory system reasonably designed to achieve compliance with all
applicable securities laws and regulations and FINRA rules. Moreover,
the research rules also are subject to the supervisory control rules
(NASD Rule 3012) and the annual certification requirement regarding
compliance and supervisory processes (FINRA Rule 3130).\83\ As such,
FINRA did not believe that a separate attestation requirement for the
research rules was unnecessary.

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

    \83\ NASD Rules 3010 and 3012 have been adopted with changes as
consolidated FINRA rules. The new rules become effective December 1,
2014. See supra note 20.
---------------------------------------------------------------------------

L. 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 would be required to
comply with such member's policies and procedures as established
pursuant to proposed FINRA Rule 2241.\84\ 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.
---------------------------------------------------------------------------

    \84\ 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.
---------------------------------------------------------------------------

M. General Exemptive Authority

    The proposed rule change would provide FINRA, pursuant to the Rule
9600 Series, with authority to conditionally or unconditionally grant,
in exceptional and unusual circumstances, an exemption from any
requirement of the proposed rule for good cause shown, after taking
into account all relevant factors and provided that such exemption is
consistent with the purposes of the rule, the protection of investors,
and the public interest.\85\
---------------------------------------------------------------------------

    \85\ See proposed FINRA Rule 2241(j).
---------------------------------------------------------------------------

III. Summary of Comment Letters, Discussion, and Commission Findings

    In response to the proposal as originally proposed by FINRA, the
Commission received four comments.\86\ Of these, three expressed
general support for the proposal,\87\ but one objected to the general
formulation of the proposal as a principles-based rule.\88\ The
specifics of these comments were summarized when the Commission
instituted proceedings and again when the Commission noticed Amendment
No. 1.\89\ FINRA filed Amendment No. 1 as a response to these earlier
comments as discussed when the amendment was noticed.\90\ In the time
since Amendment No. 1 was filed, the Commission has received three
comment letters on the proposal.\91\ FINRA submitted a letter in
response to these comments.\92\
---------------------------------------------------------------------------

    \86\ See note 4, supra.
    \87\ SIFMA, PIABA Equity, and WilmerHale Equity One.
    \88\ NASAA Equity One.
    \89\ Exchange Act Release No. 74339 (Feb. 20, 2015); 80 FR 10528
(Feb. 26, 2015) and Amendment Notice.
    \90\ Id.
    \91\ JMP, WilmerHale Equity Two, and NASAA Equity Two.
    \92\ FINRA Response.
---------------------------------------------------------------------------

    Three of the four commenters to the original proposal,\93\ and one
of the three commenters to the proposal in connection with instituting
proceedings or with regards to Amendment No. 1,\94\ expressed general
support for the proposal. The Commission notes this support.
---------------------------------------------------------------------------

    \93\ SIFMA, WilmerHale Equity One, and PIABA Equity.
    \94\ WilmerHale Equity Two.
---------------------------------------------------------------------------

A. Comments and Discussion Regarding the Principles-Based Approach of
the Proposed Rule Change

    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 both to the original proposal and after
it was amended by Amendment No. 1 expressed several concerns with the
approach.
    Two commenters, with regards to the original proposal, 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.\95\ One of those commenters
had previously expressed support for the proposed policies-based
approach with minimum requirements,\96\ but asserted that the proposed
rule text requiring procedures to ``at a minimum, be reasonably
designed to prohibit'' specified conduct is 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.\97\ One
commenter to the original proposal 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.\98\ Finally,
some commenters to the original proposal 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.\99\
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.\100\
---------------------------------------------------------------------------

    \95\ SIFMA and WilmerHale Equity One.
    \96\ 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).
    \97\ NASAA Equity One.
    \98\ WilmerHale Equity One.
    \99\ SIFMA and WilmerHale Equity One.
    \100\ WilmerHale Equity One.
---------------------------------------------------------------------------

    FINRA stated that it 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, FINRA believes that 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 stated it
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 stated it 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.
    One commenter, with regards to the proposal as amended by Amendment
No. 1, reiterated its earlier comments regarding their concerns
relating to the principles-based nature of the proposal. This commenter
stated that the historical mismanagement of the conflicts of interest
inherent to equity research by firms necessitates a proscriptive,
rather than principles-based approach. The commenter noted that
violations in this area are ``recent and continued'' and that they and
other commenters noted that the proposal seemed ``unclear and likely to
result in confusion.'' \101\ FINRA disagreed with the commenter noting
that ``the proposed framework effectively maintains, with a few
modifications, the key proscriptions in the current rules . . . because
the proposals require policies and procedures that must prohibit or
restrict specified conduct, such as research analyst participation in
soliciting investment banking business or road shows.'' \102\
---------------------------------------------------------------------------

    \101\ NASAA Equity Two. See also NASAA Equity One, SIFMA, and
WilmerHale Equity One.
    \102\ FINRA Response.
---------------------------------------------------------------------------

    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. FINRA stated it intends for firms to
proactively identify and manage those conflicts with appropriately
designed policies and procedures. Thus, 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 stated it 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 proposed in Amendment No. 1 to amend the proposal to
delete the ``at a minimum'' language.
    One commenter regarding the proposal as amended by Amendment No. 1
specifically took issue with this action of removing the ``at a
minimum'' requirement as ``this language was helpful in maintaining the
prescriptive nature of the current rules by ensuring that a firm's
policies and procedures met at least a minimum standard.'' \103\
Another noted its approval.\104\ FINRA responded that this change ``was
meant to clarify that FINRA did not expect firms' written policies and
procedures to go beyond the specified prohibitions and restrictions in
the proposals where no new conflicts had been identified . . .
[h]owever . . . removing that language did not change the overarching
requirement for written policies and procedures reasonably designed to
identify and effectively manage emerging conflicts--a significant
additional obligation that does not exist in the current rules.'' \105\
---------------------------------------------------------------------------

    \103\ NASAA Equity Two.
    \104\ WilmerHale Equity Two.
    \105\ FINRA Response.
---------------------------------------------------------------------------

    FINRA clarified in Amendment No. 1 that it 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. According to FINRA, the supplementary material
was intended to hold individuals responsible for engaging in the
conduct that the policies and procedures effectively restrict or
prohibit. FINRA stated that it 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 proposed in Amendment No. 1 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.
    One commenter responding to the proposal as amended by Amendment
No. 1 objected to this change.\106\ Another noted its approval for the
change.\107\ FINRA responded that the change would not affect the
ability of FINRA to ``hold individuals responsible for engaging in
conduct that the policies and procedures effectively restrict or
prohibit.'' FINRA further suggested that it did not believe that
individuals should be punished by FINRA where those individuals violate
procedures members instituted voluntarily that go beyond the minimum
requirements of the rule.\108\
---------------------------------------------------------------------------

    \106\ NASAA Equity Two.
    \107\ WilmerHale Equity Two.
    \108\ FINRA Response. See also WilmerHale Equity One (suggesting
the change).
---------------------------------------------------------------------------

    Lastly, one commenter regarding the institution of proceedings
sought leeway or guidance regarding examiners' interpretation of
FINRA's rules, specifically, what constitutes ``reasonable,'' with
regards to small firms who have only institutional

clients.\109\ FINRA stated that the proposal is principles-based and is
designed to allow some flexibility, but will consider providing
additional guidance, as appropriate, where questions arise.\110\
---------------------------------------------------------------------------

    \109\ JMP.
    \110\ FINRA Response.
---------------------------------------------------------------------------

B. Comments and Discussion Regarding Definitions and Terms Used in the
Proposal

    One commenter requested that the original 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.'' \111\ The commenter's
proposed definition was 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 stated it 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 clarified it 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 stated it 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 proposed in
Amendment No. 1 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 it believes that this proposed
definition is more consistent with the definition of ``investment
banking department'' in the current and proposed rules.
---------------------------------------------------------------------------

    \111\ WilmerHale Equity One. For consistency with the debt
research proposal, FINRA also proposed in Amendment No. 1 to amend
the proposed rule change to use the term ``sales and trading
personnel.''
---------------------------------------------------------------------------

    One commenter to the original proposal 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.\112\ 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.
---------------------------------------------------------------------------

    \112\ WilmerHale Equity One.
---------------------------------------------------------------------------

    FINRA clarified that 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 stated it 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.
Regardless, FINRA proposed in Amendment No. 1 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'' to provide firms
with greater clarity as to the status of such offering-related
documents under the proposal. The commenter noted its approval in its
comment letter regarding Amendment No. 1.\113\
---------------------------------------------------------------------------

    \113\ WilmerHale Equity Two.
---------------------------------------------------------------------------

    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.\114\
However, another commenter supported the requirement to have policies
and procedures reasonably designed to ensure that research reports are
based on reliable information.\115\ FINRA pointed to their discussion
in Item 5 of the Proposing Release and stated it 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 stated that it did not believe the term connotes
accuracy of opinions.
---------------------------------------------------------------------------

    \114\ SIFMA.
    \115\ 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.'' \116\ The commenter asserted that inclusion of
``independently'' is confusing since the proposal would, in the
commenter's view, permit input from non-research personnel into
coverage decisions.\117\ One commenter who responded to the order
instituting proceedings expressed support for this comment as
well.\118\ FINRA stated it 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
declined to eliminate the term as suggested.
---------------------------------------------------------------------------

    \116\ WilmerHale Equity One.
    \117\ Proposed FINRA Rule 2241(b)(2)(B) specifically states that
the policies and procedures must ``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.'' Presumably, the
commenter believes this permits investment banking input so long as
the final decisions are made by research management.
    \118\ JMP.
---------------------------------------------------------------------------

    One commenter to the institution of proceedings suggested that the
terms ``manager'' and ``co-manager'' used with regards to the quiet
period provisions in the proposal were unclear.\119\ FINRA responded
that the terms used in the proposal are commonly understood and there
had been no previous comments about uncertainty in the terms. FINRA
further pointed out that the terms mentioned by the commenter as those
used in the industry, ``lead manager'' and ``book-running manager,''
are both

``managers'' for these purposes and that, for secondary offerings, both
managers and co-managers have the same treatment.\120\
---------------------------------------------------------------------------

    \119\ Id.
    \120\ FINRA Response.
---------------------------------------------------------------------------

C. Comments and Discussion Regarding 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 to the original proposal suggested that
``review'' was unnecessary in this provision because the review of
research analysts was addressed sufficiently in other parts of the
proposed rule.\121\ One of these commenters further suggested that the
terms ``review'' and ``oversight'' are redundant.\122\ FINRA stated
that it 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. 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--FINRA stated that this
provision extends to ``other persons'' who may be biased in their
judgment or supervision. Finally, FINRA noted that ``review, pressure
or oversight'' mirrors language in Sarbanes-Oxley. Accordingly, FINRA
declined to revise the proposed rule.
---------------------------------------------------------------------------

    \121\ SIFMA and WilmerHale Equity One.
    \122\ WilmerHale Equity One.
---------------------------------------------------------------------------

    One commenter to the original proposal 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.\123\
FINRA stated that was their intent and believed that the rules of
statutory construction would compel that result.
---------------------------------------------------------------------------

    \123\ Id.
---------------------------------------------------------------------------

    This commenter stated in their comment in response to Amendment No.
1 that they interpreted this to mean that the proposal would permit
members to allow persons engaged in sales and trading activities to
provide informal and formal feedback on research analysts as one factor
to be considered by research management for the purposes of the
evaluation of the analyst.\124\ FINRA stated that, in general, it
agreed with the commenter's interpretation.\125\
---------------------------------------------------------------------------

    \124\ WilmerHale Equity Two.
    \125\ FINRA Response.
---------------------------------------------------------------------------

    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.\126\ 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 stated that
it 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 noted that the
terms appear in certain research-related provisions of Sarbanes-Oxley
without definition. Thus, with respect to the commenter's example,
FINRA stated it 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.
---------------------------------------------------------------------------

    \126\ WilmerHale Equity One.
---------------------------------------------------------------------------

    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.\127\ FINRA stated it believed the change would
be consistent with the standard for policies and procedures elsewhere
in the proposals, and therefore proposed to amend the provision as
requested in Amendment No. 1. The commenter noted its approval in its
comment regarding Amendment No. 1.\128\
---------------------------------------------------------------------------

    \127\ Id.
    \128\ WilmerHale Equity Two.
---------------------------------------------------------------------------

    One commenter to the original proposal 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.\129\ (emphasis added) The commenter
expressed concern about the emphasized language. Another commenter
supported the proposed expansion of the current ``catch-all''
disclosure requirement.\130\
---------------------------------------------------------------------------

    \129\ WilmerHale Equity One.
    \130\ NASAA Equity One.
---------------------------------------------------------------------------

    FINRA stated that it 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 that 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 stated it 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 stated it 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 stated it 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 proposed in Amendment No. 1 to amend the
supplementary material in the proposals consistent with this
clarification. In addition, FINRA proposed in Amendment No. 1 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.
    This commenter in their comment in response to Amendment No. 1,
while expressing their support for these changes, asked FINRA to make a
modification of the parties who trigger disclosure of any other
material conflict of interest. Specifically, the commenter asked FINRA
to limit this disclosure to only be required when someone has authority
to dictate a particular recommendation, rating, or price target.\131\
The commenter was seeking to extend this authority requirement to other
parities that can trigger the disclosure, specifically persons who
review the report and persons who have exercised authority to review or
change the report generally. FINRA declined to make further changes,
noting that the change in Amendment No. 1 ``was meant to limit
application of the provision where there is a discrete review by [legal
or compliance personnel] outside of the research department who do not
have primary content review responsibilities'' and that ``those
individuals that a firm requires to review research reports (e.g., a
Supervisory Analyst) or who exercise their authority to change a
research report (e.g., a Director of Research) by definition have the
ability to influence the content of a research report.'' \132\
---------------------------------------------------------------------------

    \131\ WilmerHale Equity Two.
    \132\ FINRA Response.
---------------------------------------------------------------------------

    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.\133\ As long as a research report delivered electronically
contains a hyperlink directly to the required disclosures, FINRA stated
that the standard will be satisfied.
---------------------------------------------------------------------------

    \133\ WilmerHale Equity One.
---------------------------------------------------------------------------

D. Comments and Discussion Regarding 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,\134\ 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.\135\ 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.\136\ 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.
---------------------------------------------------------------------------

    \134\ WilmerHale Equity One.
    \135\ PIABA Equity.
    \136\ WilmerHale Equity One.
---------------------------------------------------------------------------

    The opposing commenter stated that they believed that permitting
contrary opinions while only disclosing the possibility of this
contrary research to investors was insufficient to adequately protect
investors because the use of ``may'' in a disclosure is not the same as
disclosing that there actually are opposing opinions. Further, they
questioned whether such disclosure was consistent with the Act in that
it may be contrary to Rule 10b-5 by permitting the omission of a
material fact in the research report. This commenter did not believe
that the disclosure of actual opposing views would be burdensome on
members as they should be aware of contrasting opinions. As a result,
they argue that FINRA should require specific disclosures.\137\
---------------------------------------------------------------------------

    \137\ PIABA Equity.
---------------------------------------------------------------------------

    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 stated that it believes general
disclosure of alternative products with different objectives and
recommendations is appropriate relative to its investor protection
benefits. The commenter who supported this approach noted FINRA's
position with approval in its comment regarding Amendment No. 1.\138\
---------------------------------------------------------------------------

    \138\ WilmerHale Equity Two.
---------------------------------------------------------------------------

E. Comments and Discussion Regarding 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.\139\
FINRA stated it 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 stated it believes that the proposed
changes to the quiet periods would promote information flow to
investors without jeopardizing the objectivity of research. FINRA also
noted 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.
---------------------------------------------------------------------------

    \139\ NASAA Equity One.
---------------------------------------------------------------------------

    This commenter restated its objection to the shortened quiet
periods mandated by the proposal in its comments regarding Amendment
No. 1. The commenter noted that ``[t]he current quiet periods allow
firms to `cool off' after the completion of certain activities before
their research departments can offer coverage on the subject securities
or issuers'' and that the commenter had concerns that the shortened
periods would lead to more promises of favorable research due to the
research being distributed more quickly.\140\ FINRA stated its belief
that the shorter periods were adequate,\141\ noting prior statements
that, in their view, the remainder of the proposal as well as
Regulation AC \142\ will be or is effective in deterring biased
research without the need for the longer periods called for in NASD
Rule 2711.\143\
---------------------------------------------------------------------------

    \140\ NASAA Equity Two.
    \141\ FINRA Response.
    \142\ 17 CFR 242.500-505.
    \143\ See Notice.
---------------------------------------------------------------------------

    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.\144\ FINRA agreed that
those exceptions should be included and therefore amended the proposed
rule change in Amendment No. 1. One of these commenters noted its
approval of this change in its comment regarding Amendment No. 1.\145\
---------------------------------------------------------------------------

    \144\ SIFMA and WilmerHale Equity One.
    \145\ WilmerHale Equity Two.
---------------------------------------------------------------------------

F. Comments and Discussion Regarding Other Institutional Separation
Issues

    One commenter with regards to the institution of proceedings
suggested that FINRA clarify that the proposal would not interfere with
senior managers who oversee research departments along with other non-
research departments as they represent is the practice at a number of
smaller firms, including pre-publication review by such managers.\146\
FINRA responded that, while there is no express exception for managers
who manage multiple departments in this way, the rule excepts firms
with limited investment banking authority. Further, FINRA stated it did
not intend to cover with this rule sales and trading or investment
banking personnel who do not engage in or directly supervise day-to-day
trading or investment banking activities.\147\ The implication of
FINRA's response seems to be that, to the extent that the commenter's
activities can fall within either of these concepts, it should be
permitted under the proposed rule.
---------------------------------------------------------------------------

    \146\ JMP.
    \147\ FINRA Response.
---------------------------------------------------------------------------

    This commenter also suggested that FINRA interpret selling
concessions from public financings be permitted to be included in
compensation decisions for research analysts. This commenter stated
that this is because ``[b]eing that analysts take part in these [sic]
sale efforts, they should be permitted to be compensated from these
specific sources of revenue.'' \148\ FINRA noted that such an
interpretation ``would reintroduce the very conflict that FINRA
believes the provision [prohibiting analyst compensation based on
specific investment banking revenue] has, in combination with other
provisions, effectively alleviated'' and declined to agree with the
commenter's interpretation.\149\
---------------------------------------------------------------------------

    \148\ JMP.
    \149\ FINRA Response.
---------------------------------------------------------------------------

G. Comments and Discussion Regarding Disclosure Requirements

    Two commenters opposed the requirement in the 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.\150\ The commenters noted that the debt research analyst
proposal does not contain a dedicated requirement to disclose
significant debt holdings. Rather, that proposal 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.\151\ 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 as far as a member's debt
holdings. 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.\152\ 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 further 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.'' \153\ FINRA stated it 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 proposed to amend the proposed rule change in
Amendment No. 1 accordingly, including modifying a similar disclosure
requirement when making public appearances.
---------------------------------------------------------------------------

    \150\ SIFMA and WilmerHale Equity One.
    \151\ See Exchange Act Release No. 73623 (Nov. 18, 2014); 79 FR
69905 (Nov. 24, 2014).
    \152\ NASAA Equity One.
    \153\ WilmerHale Equity One.
---------------------------------------------------------------------------

    One commenter regarding the institution of proceedings had concerns
that the provision in the proposal requiring disclosure of when a
member ``expects to receive or intends to seek'' investment banking
compensation provides no meaningful disclosure, could mandate
disclosure of material, non-public information, and is overly
burdensome to track.\154\ FINRA noted that this is a disclosure
currently required of members under NASD Rule 2711, an exception exists
(in that rule and would be retained in the proposal) that does not
mandate disclosure to the extent such disclosure would result in
disclosure of material, non-public information regarding specific
future transactions, and it provides investors with meaningful
information regarding the member's objectivity that justify the burdens
that it may create.\155\
---------------------------------------------------------------------------

    \154\ JMP.
    \155\ FINRA Response.
---------------------------------------------------------------------------

H. Comments and Discussion Regarding 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'').\156\ FINRA reiterated its position, as
discussed in the 2012 United States Government Accountability Office
(``GAO'') Report on Securities Research,\157\ that it 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 stated it does not
intend for any provisions of the equity proposal that may be adopted to
supersede provisions of the Global Settlement. One commenter supported
this position.\158\
---------------------------------------------------------------------------

    \156\ WilmerHale Equity One.
    \157\ GAO, Securities Research, Additional Actions Could Improve
Regulatory Oversight of Analyst Conflicts of Interest, January 2012.
    \158\ NASAA Equity Two.
---------------------------------------------------------------------------

I. Comments and Discussion Regarding FINRA's 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.\159\ The commenter stated that the provision had not been
sufficiently justified by, among other things, providing examples of
where an exemption would be justified. FINRA stated that 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, FINRA believes that it is difficult if not impossible for it to
provide examples of where it would be appropriate to use the authority.
However, as FINRA stated in the proposal, it believes that 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, FINRA notes that the authority is limited not only
to unusual and exceptional circumstances, but also to a showing of good
cause. The Commission notes that the proposal is consistent with other
FINRA proposals \160\ and expects FINRA to consult with Commission
staff prior to issuing such relief, and to discuss whether the proposed
exception may be considered a proposed rule change pursuant to section
19(b)(1) of the Act and Rule 19b-4 thereunder.\161\
---------------------------------------------------------------------------

    \159\ NASAA Equity One.
    \160\ See FINRA Rule 5131(f).
    \161\ 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4.
---------------------------------------------------------------------------

J. Comments and Discussion Regarding Implementation Date

    One commenter requested that the implementation date be at least 12
months after Commission approval of the proposed rule change.\162\
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.\163\ FINRA stated it is sensitive to the time
firms may require to update their policies and procedures and systems
to comply and will take those factors into consideration when
establishing implementation dates.
---------------------------------------------------------------------------

    \162\ SIFMA.
    \163\ WilmerHale Equity.
---------------------------------------------------------------------------

K. The Proposal Meets the Requirements of Section 15D of the Act

    Section 15D requires the Commission, or upon the authorization and
direction of the Commission, a registered securities association or
national securities exchange to have adopted, not later than July 30,
2003, rules reasonably designed to address conflicts of interest that
can arise when securities analysts recommend equity securities in
research reports and public appearances, in order to improve the
objectivity of research and provide investors with more useful and
reliable information, including rules designed to address certain
specific requirements.\164\ NASD Rule 2711 and NYSE Rule 472 were
adopted to meet this statutory mandate.\165\ As the proposed rule
change would replace NASD Rule 2711, we considered whether the proposed
rule continues to fulfill the mandates of section 15D and, in general,
we believe that the proposal does.
---------------------------------------------------------------------------

    \164\ 15 U.S.C. 78o-6(a).
    \165\ See Exchange Act Release No. 48252 (Jul. 29, 2003); 68 FR
45875 (Aug. 4, 2003).
---------------------------------------------------------------------------

    Section 15D requires a number of specific provisions, all of which
are present in the proposed rule change in the form of required
policies and procedures of members. Specifically, the proposed rule
change will include rules designed (1) to foster greater public
confidence in securities research, and to protect the objectivity and
independence of securities analysts, by (a) restricting the
prepublication clearance or approval of research reports by persons
employed by the broker or dealer who are engaged in investment banking
activities, or persons not directly responsible for investment
research, other than legal or compliance staff,\166\ (b) limiting the
supervision and compensatory evaluation of securities analysts to
officials employed by the broker or dealer who are not engaged in
investment banking activities,\167\ and (c) requiring that a broker or
dealer and persons employed by a broker or dealer who are involved with
investment banking activities may not, directly or indirectly,
retaliate against or threaten to retaliate against any securities
analyst employed by that broker or dealer or its affiliates as a result
of an adverse, negative, or otherwise unfavorable research report that
may adversely affect the present or prospective investment banking
relationship of the broker or dealer with the issuer that is the
subject of the research report, except that such rules may not limit
the authority of a broker or dealer to discipline a securities analyst
for causes other than such research report in accordance with the
policies and procedures of the firm; \168\ (2) to define periods during
which brokers or dealers who have participated, or are to participate,
in a public offering of securities as underwriters or dealers should
not publish or otherwise distribute research reports relating to such
securities or to the issuer of such securities; \169\ and (3) establish
structural and institutional safeguards within brokers or dealers to
assure that securities analysts are separated by appropriate
informational partitions within the firm from the review, pressure, or
oversight of those whose involvement in investment banking activities
might potentially bias their judgment or supervision.\170\
---------------------------------------------------------------------------

    \166\ 15 U.S.C. 78o-6(a)(1)(A) and proposed FINRA Rule
2241(b)(2)(A).
    \167\ 15 U.S.C. 78o-6(a)(1)(B) and proposed FINRA Rule
2241(b)(2)(C).
    \168\ 15 U.S.C. 78o-6(a)(1)(C) and proposed FINRA Rule
2241(b)(2)(H).
    \169\ 15 U.S.C. 78o-6(a)(2) and proposed FINRA Rule
2241(b)(2)(I).
    \170\ 15 U.S.C. 78o-6(a)(3) and proposed FINRA Rule
2241(b)(2)(G).
---------------------------------------------------------------------------

    Further, the proposed rule change mandates the disclosures required
by section 15D. Specifically, the proposed rule change requires
disclosure of (1) the extent to which the securities analyst has debt
or equity investments in the issuer that is the subject of the
appearance or research report; \171\ (2) whether any compensation has
been received by the broker or dealer, or any affiliate thereof,
including the securities analyst, from the issuer that is the subject
of the appearance or research report, subject to such exemptions as the
Commission may determine as appropriate and necessary to prevent

disclosure by virtue of this paragraph of material non-public
information regarding specific potential future investment banking
transactions of such issuer, as is appropriate in the public interest
and consistent with the protection of investors; \172\ (3) whether an
issuer, the securities of which are recommended in the appearance or
research report, currently is, or during the 1-year period preceding
the date of the appearance or date of distribution of the report has
been, a client of the broker or dealer, and if so, stating the types of
services provided to the issuer; \173\ and (4) whether the securities
analyst received compensation with respect to a research report, based
upon (among any other factors) the investment banking revenues (either
generally or specifically earned from the issuer being analyzed) of the
broker or dealer.\174\
---------------------------------------------------------------------------

    \171\ 15 U.S.C. 78o-6(b)(1) and proposed FINRA Rule
2241(c)(4)(A).
    \172\ 15 U.S.C. 78o-6(b)(2) and proposed FINRA Rule
2241(c)(4)(B)-(D), (H), and (c)(5).
    \173\ 15 U.S.C. 78o-6(b)(3) and proposed FINRA Rule
2241(c)(4)(E).
    \174\ 15 U.S.C. 78o-6(b)(4) and proposed FINRA Rule
2241(c)(4)(B).
---------------------------------------------------------------------------

L. The Proposal Is Not Inconsistent With the JOBS Act

    The JOBS Act prohibits certain rules by national securities
associations with regards to research reports regarding EGCs.
Specifically, section 105(b) of the JOBS Act amended section 15D of the
Act to prohibit the Commission or a national securities association
registered under section 15A of the Act from adopting or maintaining
any rule or regulation in connection with an IPO of the common equity
of an EGC that either (1) restricts, based on functional role, which
associated persons of a broker, dealer, or member of a national
securities association, may arrange for communications between an
analyst and a potential investor; \175\ or (2) restricts an analyst
from participating in any communications with the management of an EGC
that is also attended by any other associated person of a broker,
dealer, or member of a national securities association whose functional
role is other than as an analyst.\176\ Section 105(d) further prohibits
the Commission or any national securities association registered under
section 15A of the Act from adopting or maintaining any rule or
regulation that prohibits any broker, dealer, or member of a national
securities association from publishing or distributing any research
report or making a public appearance, with respect to the securities of
an EGC, either within any prescribed period of time following the IPO
date of the EGC, or within any prescribed period of time prior to the
expiration date of any agreement between the broker, dealer, or member
of a national securities association and the EGC or its shareholders
that restricts or prohibits the sale of securities held by the EGC or
its shareholders after the IPO date. The proposal is not inconsistent
with these requirements.
---------------------------------------------------------------------------

    \175\ 15 U.S.C. 78o-6(c)(1).
    \176\ 15 U.S.C. 78o-6(c)(2).
---------------------------------------------------------------------------

    One commenter noted that, because joint meetings are permitted by
the JOBS Act, the provision in the proposal prohibiting joint due
diligence conferences should be clarified.\177\ As explained above in
the description of the joint due diligence provision, FINRA clarified
that it ``would interpret the provision to apply only to the extent it
is not contrary to the JOBS Act'' and ``[t]hus, for example, would not
interpret the joint due diligence prohibition to apply where the joint
due diligence activities involve a communication with the management of
an EGC that is attended by both the research analyst and an investment
banker.'' \178\ We believe that, as a result, the joint due diligence
provision in the proposal cannot be seen as contrary to section
15D(c)(2) of the Act.\179\
---------------------------------------------------------------------------

    \177\ JMP.
    \178\ FINRA Response.
    \179\ The staff notes that the proposal is consistent with FAQs
issued by the staff concerning the analyst conflicts of interest
provisions of the JOBS Act. Specifically, in FAQ 4, the staff
provided three examples of purely ministerial statements that an
analyst might provide at a pitch meeting for an ECG before the firm
is formally retained to underwrite an offering and three examples of
purely ministerial statements that an analyst might provide after
the firm is formally retained to underwrite an offering, provided
such statements are also in compliance with FINRA rules prohibiting
promises of favorable research and solicitation. Thus, for instance,
the FAQs suggest that an analyst may ask follow up questions in
order to understand factual matters being presented provided such
questions do not imply that the analyst is soliciting investment
banking business or otherwise promising favorable research. The FAQs
also suggest that firms should institute and enforce appropriate
controls with regards to such pitch meetings to prevent violations
of FINRA rules prohibiting solicitations or promises of favorable
research, including analysts that may try to imbed such
solicitations or promises in follow-up questions, during their
introductions, or in outlining their research program and factors
the analyst would consider in analyzing the company. Therefore, when
taken in context with the entirety of the FAQ, the staff notes that
the examples provided in the FAQs did not and were not intended to
permit otherwise impermissible activities solely because they are
conducted via the ministerial examples given in the FAQ.
---------------------------------------------------------------------------

J. Summary of Findings and Conclusion

    The Commission has carefully considered the proposed rule change,
all of the comments received, and FINRA's responses to the comments.
Based on its review of the record, the Commission finds that the
proposed rule change, as amended by Amendment No. 1, is consistent with
the requirements of the Act and the rules and regulations thereunder
applicable to a national securities association.\180\ In particular,
the Commission finds that the proposed rule change, as amended by
Amendment No. 1, is consistent with section 15A(b)(6) of the Act, which
requires, among other things, that FINRA's rules be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, and, in general, to protect investors
and the public interest.\181\ Further, the Commission finds that the
proposed rule change, as amended by Amendment No. 1, is consistent with
Section 15D of the Act which requires, among other things, that the
Commission, or upon the authorization and direction of the Commission,
a registered securities association or national securities exchange,
adopt rules reasonably designed to address conflicts of interest that
can arise when securities analysts recommend equity securities in
research reports and public appearances, in order to improve the
objectivity of research and provide investors with more useful and
reliable information.\182\
---------------------------------------------------------------------------

    \180\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
    \181\ 15 U.S.C. 78o-3(b)(6).
    \182\ 15 U.S.C. 78o-6.
---------------------------------------------------------------------------

    FINRA stated in their proposal that it ``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'' and ``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.'' \183\ FINRA also noted that ``[a]t 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.'' \184\
---------------------------------------------------------------------------

    \183\ Notice.
    \184\ Id.
---------------------------------------------------------------------------

    The Commission generally agrees with these assertions. The
Commission

found NASD Rule 2711 (and NYSE Rule 472) to meet the standards of
sections 15A(b)(6) and 15D of the Act when adopted and as they have
been amended since their original adoption.\185\ While the proposed
rule change, as amended, is not an exact copy of these earlier
provisions, it retains the vast majority of these rules as minimum
standards required of members. The Commission believes that the vital
elements of NASD Rule 2711 designed to address research analyst
conflicts of interest--prohibitions on pre-publication review,\186\
institutional separations between investment banking and research,\187\
prohibitions on research analyst compensation based on investment
banking results,\188\ prohibitions on research analysts participating
in investment banking efforts,\189\ prohibitions on promises of
favorable research coverage,\190\ and important disclosures,\191\ to
name a few examples--are carried over to new FINRA Rule 2241.
---------------------------------------------------------------------------

    \185\ See, e.g., Exchange Act Release No. 48252 (Jul. 29, 2003);
68 FR 45875 (Aug. 4, 2003).
    \186\ NASD Rule 2711(b)(2) and proposed FINRA Rule
2241(b)(2)(A).
    \187\ E.g., NASD Rule 2711(b)(1) and proposed FINRA Rule
2241(b)(2)(C).
    \188\ NASD Rule 2711(d) and proposed FINRA Rule 2241(b)(2)(E)-
(F).
    \189\ E.g., NASD Rule 2711(c)(5)-(6) and proposed FINRA Rule
2241(b)(2)(L)-(M).
    \190\ NASD Rule 2711(e) and proposed FINRA Rule 2241(b)(2)(K).
    \191\ NASD Rule 2711(h) and proposed FINRA Rule 2241(c) and (d).
---------------------------------------------------------------------------

    Further, the proposed rule change includes new provisions that help
ensure investor protection. For example, the proposed rule would
require research management make independent decisions regarding
research coverage,\192\ information barriers or other institutional
safeguards between research and investment banking, sales and trading,
and other persons who might be biased in their judgment or supervision
including, for certain members, requiring physical separation,\193\ and
ensure that purported facts in research reports are based on reliable
information.\194\ Also, where provisions have been altered, FINRA has
generally kept the important element of the provision but required
members to establish reasonable policies and procedures tailored to a
member's business. For example, NASD Rule 2711(g)(2) prohibits
``research analyst accounts'' from purchasing or selling securities
issued by a company that the analyst covers for a period beginning
thirty calendar days before and ending five calendar days after the
publication of a research report, subject to certain exceptions. Under
proposed FINRA Rule 2241(b)(2)(J), the same general principal applies
(analysts and accounts they control should not trade in a security in
such a way that the analyst benefits from knowledge of the content or
timing of a research report ahead of its intended audience) without
setting strict numerical timelines that may or may not be appropriate
in every circumstance. Members may set periods that are longer or
shorter than the current thirty/five day paradigm, but could be subject
to liability if they are not reasonably designed to prevent the
unwanted conduct.
---------------------------------------------------------------------------

    \192\ Proposed FINRA Rule 2241(b)(2)(B).
    \193\ Proposed FINRA Rule 2241(b)(2)(G) and Notice (``Among the
structural safeguards, FINRA believes separation between investment
banking and research is of particular importance. As such, while the
proposed rule change does not mandate physical separation between
the research and investment banking departments (or other person who
might seek to influence research analysts), FINRA would expect such
physical separation except in extraordinary circumstances where the
costs are unreasonable due to a firm's size and resource
limitations. In those instances, a firm must implement written
policies and procedures, including information barriers, to
effectively achieve and monitor separation between research and
investment banking personnel.'')
    \194\ Proposed FINRA Rule 2241(c)(1)(A).
---------------------------------------------------------------------------

    Regarding concerns raised by commenters regarding the principles-
based structure of the proposal, we note the proposed rule change
retains the key provisions of NASD Rule 2711 and includes a number of
new protections for investors including the requirement that research
management make independent decisions regarding research coverage,\195\
maintenance of information barriers or other institutional safeguards
between research and investment banking, sales and trading, and other
persons who might be biased in their judgment or supervision including,
for certain members, requiring physical separation,\196\ and ensure
that purported facts in research reports are based on reliable
information.\197\ Further, FINRA's responses to interpretive questions
posed by the commenters to the original proposal in the Amendment
Notice seem to have helped reduce uncertainty or confusion regarding
how the proposal will operate in light of the principles-based
structure. For example, one commenter noted with approval the
clarification regarding the ``at a minimum'' requirement, which seemed
to be the source of the commenter's confusion.\198\ FINRA also provided
guidance in response to comments on other issues in the FINRA Response.
For example, FINRA responded to an assertion by a commenter,\199\
agreeing that, consistent with the current rule and subject to controls
regarding evaluation based on improper or inappropriate reviews, sales
and trading personnel can provide feedback for purposes of evaluating
an analyst. With regards to the context provided by FINRA, we
particularly support the clarification that physical separation is
expected except in extraordinary situations where the costs are
unreasonable due to a firm's size or resources and that, even then,
that the firm must establish written policies and procedures, including
information barriers, to effectively achieve and monitor separation
between research and investment banking personnel.\200\
---------------------------------------------------------------------------

    \195\ Proposed FINRA Rule 2241(b)(2)(B).
    \196\ Proposed FINRA Rule 2241(b)(2)(G) and Notice (``Among the
structural safeguards, FINRA believes separation between investment
banking and research is of particular importance. As such, while the
proposed rule change does not mandate physical separation between
the research and investment banking departments (or other person who
might seek to influence research analysts), FINRA would expect such
physical separation except in extraordinary circumstances where the
costs are unreasonable due to a firm's size and resource
limitations. In those instances, a firm must implement written
policies and procedures, including information barriers, to
effectively achieve and monitor separation between research and
investment banking personnel.'')
    \197\ Proposed FINRA Rule 2241(c)(1)(A).
    \198\ WilmerHale Equity Two.
    \199\ Id.
    \200\ Notice.
---------------------------------------------------------------------------

    In approving this proposal, however, we expect that FINRA will
continue to monitor the effectiveness of the rule proposal and modify
the rule, or issue further guidance as promised, should it prove to be
unworkable or fail to provide the same level of protection to investors
as provided NASD Rule 2711.\201\
---------------------------------------------------------------------------

    \201\ We note that, as one commenter suggested, the
interpretation of what constitutes ``reasonableness'' may prove
difficult for FINRA and member alike. See JMP.
---------------------------------------------------------------------------

    For the reasons stated above, the Commission finds that the
proposed rule change is consistent with the Act and the rules and
regulations thereunder.

IV. Conclusion

    IT IS THEREFORE ORDERED, pursuant to section 19(b)(2) of the
Act,\202\ that the proposed rule change (SR-FINRA-2014-047), as
modified by Amendment No. 1 thereto, be, and it hereby is, approved.
---------------------------------------------------------------------------

    \202\ 15 U.S.C. 78s(b)(2).

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

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\203\
---------------------------------------------------------------------------

    \203\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Brent J. Fields,
Secretary.
[FR Doc. 2015-17971 Filed 7-21-15; 8:45 am]
BILLING CODE 8011-01-P