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

    \316\ The regular course of business requirement generically
would require ``research reports'' to be published or distributed in
the regular course of a broker-dealer's business and would not be
limited to covered investment fund research reports. We request
comment about what the regular course of business requirement means
in the context of covered investment fund research reports. See
supra section II.B.1.c (requests for comments).
    \317\ See supra notes 250-251 and accompanying text.
---------------------------------------------------------------------------

    Due to the aforementioned distinctions in the information
environment and business rationale, we believe that the regular-course-
of-business requirement in the context of proposed rule 139b may be
more challenging to apply in practice than the regular-course-of-
business requirement in the context of rule 139. Accordingly, the
potential benefits of this requirement in proposed rule 139b may be
limited. The effects of the regular-course-of-business requirement
would be clearer in cases where, in the case of issuer-specific
research reports, the proposed bright-line ``initiation or
reinitiation'' requirement applies (i.e., where the covered investment
fund does not have a class of securities in substantially continuous
distribution). For such cases, the regular-course-of-business
requirement as proposed would condition the availability of the safe
harbor on the research report not representing the initiation or
reinitiate of coverage by the broker-dealer publishing or distributing
said research report. As the universe of covered investment funds is
dominated by funds with a class of securities that could be considered
to be in substantially continuous distribution,\318\ the bright-line
test of the regular course of business requirement would impact only a
small subset of funds.
---------------------------------------------------------------------------

    \318\ See supra note 98 and accompanying text.
---------------------------------------------------------------------------

    We are also seeking commenters' views on our analysis:
     Is our assessment of the difficulties associated with
establishing whether research reports about covered investment funds
are published in the regular course of business accurate? If not, what
factors will be indicative of the regular-course-of-business
requirement having been satisfied?
     Are there additional benefits associated with this
requirement that we have not considered?
     Are there additional costs associated with this
requirement that we have not considered?
c. Reporting History and Minimum Market Value Requirements for Issuers
Appearing in Issuer-Specific Research Reports
    Under proposed rule 139b, a broker-dealer's publication or
distribution of issuer-specific research reports would not qualify for
the safe harbor unless the covered investment fund included in the
report satisfies a minimum public market value threshold of $75
million.\319\ Issuers would also be required to have been subject to
the reporting requirements of the Investment Company Act (for covered
investment funds that are registered investment companies) or the
reporting requirements under section 13 or 15(d) of the Exchange Act
(for covered investment funds that are not registered investment
companies) for a period of at least 12 calendar months prior to
reliance on the proposed rule as well as to have timely filed all
required reports during the preceding 12 months.\320\
---------------------------------------------------------------------------

    \319\ See proposed rule 139b(a)(1)(i)(B).
    \320\ Including Forms N-CSR, N-SAR, N-Q, N-PORT, N-MFP, and N-
CEN as applicable for registered investment companies, and Forms 10-
K, 10-Q, and 20-F as applicable for covered investment funds that
are not registered investment companies. See proposed rule
139b(a)(1)(i)(A).
---------------------------------------------------------------------------

    The covered investment funds market is dynamic.\321\ In 2016, more
than six hundred covered investment funds entered the market, while
more than seven hundred exited. The entry and exit of covered
investment funds creates a situation in which a younger covered
investment fund may not be widely followed by market participants.\322\

Thus, for covered investment funds, the universe of young--and
potentially less-followed--issuers is large. Moreover, securities
issued by covered investment funds may not be subject to significant
levels of market scrutiny. Unlike securities issued by operating
companies (that generally have diverse groups of investors, including
institutional investors, money managers, arbitrageurs, activist
investors, and short sellers), covered investment funds are primarily
held by retail investors.\323\ As covered investment fund shares are
not a major component of institutional investors' portfolios, we
believe that they are less likely to garner wide-spread attention from
the types of sophisticated institutional investors most capable of
subjecting them to scrutiny.\324\
---------------------------------------------------------------------------

    \321\ See supra section III.B.1.a.
    \322\ In contrast, there were fewer than one hundred U.S. IPOs
for operating companies in 2016. See Jay Ritter, Initial Public
Offerings: Updated Statistics (Aug. 8, 2017), available at https://site.warrington.ufl.edu/ritter/files/2017/08/IPOs2016Statistics.pdf.
    \323\ See supra section III.B.1.a.
    \324\ See supra note 290.
---------------------------------------------------------------------------

    We believe that in the context of covered investment funds, where
we expect limited market discipline from institutional investors and
where large numbers of new funds are created each year, the information
available to investors could be sparse. In such an environment, a
single ``research report'' about a covered investment fund could have a
disproportionate effect on retail investors' beliefs about the fund
and--in the case of a biased research reports--have a negative effect
on investor welfare. We believe that conditioning the availability of
the safe harbor on the aforementioned reporting history and market
valuation requirements would help restrict the availability of the safe
harbor in situations where we expect the information environment to be
most limited: for new funds and for funds with niche markets. Moreover,
we believe modeling the reporting history and minimum public market
valuation requirements on those in rule 139 reduces regulatory
complexity and opportunities for investor confusion.
    Because young and small covered investment funds are relatively
common, the costs associated with these conditions on the availability
of a safe harbor may be significant. In particular, as shown in Table
1, the $75 million minimum public market valuation condition would
limit the availability of the safe harbor with respect to broker-
dealers' publication or distribution of research reports for
approximately one-third of all covered investment funds.\325\ Research
reports about nearly half of extant ETFs, ETPs and BDCs would not
qualify for the safe harbor.\326\ Availability of the safe harbor would
be least impacted for research reports on open end-mutual funds and
closed-end funds.\327\
---------------------------------------------------------------------------

    \325\ 31% of all covered investment funds have public market
valuations less than $75 million.
    \326\ 41% of ETF and ETPs and 42% of BDCs have public market
valuations less than $75 million. See Table 1.
    \327\ 30% of open-end mutual funds and 12% of closed-end funds
have public market valuations less than $75 million. See Table 1.
---------------------------------------------------------------------------

    Although young and small funds represent a very small fraction of
covered investment fund assets, they are relatively large in
number.\328\ Because nearly one-third of covered investment funds would
not satisfy the eligibility criteria for the proposed safe harbor, we
believe that those funds would be less likely to receive coverage by
broker-dealers insofar as the inability to rely on the proposed safe
harbor reduces broker-dealers' willingness to publish and distribute
research reports.
---------------------------------------------------------------------------

    \328\ See Table 1.

Table 1--Covered Investment Funds With Public Market Value Less Than $75
   Million, and the Fraction of Covered Investment Fund Assets Held by
    These Funds. For Each Covered Investment Fund Type, We Report the
  Percentage of Funds of That Type With a Public Market Value Below $75
  Million and the Percentage of Covered Investment Fund Assets Held in
Funds With Public Market Values Below $75 million. Mutual Fund, ETF, and
  ETP Statistics Based on Data From CRSP Mutual Fund Database (2017Q3).
  Closed-end Fund Statistics Based on Data From CRSP Monthly Stock File
 (Dec. 2017). BDC Statistics Based on Commission's Listing of Registered
   BDCs, and Regulatory Filings (2016) Compiled by Compustat and Audit
                                Analytics
------------------------------------------------------------------------
                                                Funds with public market
                                                   value <$75 million
         Covered investment fund type          -------------------------
                                                 Number of   Fund assets
                                                 funds (%)       (%)
------------------------------------------------------------------------
Open-end......................................           30           <1
Closed-end....................................           12           <1
ETFs and ETPs.................................           41           <1
BDC...........................................           42            1
                                               -------------------------
    Total.....................................           31           <1
------------------------------------------------------------------------

    We are also seeking commenters' views on our analysis:
     Are there additional benefits associated with these
requirements that we have not considered?
     Are there additional costs associated with these
requirements that we have not considered?
d. Reporting Requirement for Issuers Appearing in Industry Reports
    Under proposed rule 139b an industry research report could only
include covered investment funds that are required to file reports
pursuant to section 30 of the Investment Company Act (or, for covered
investment funds that are not registered investment companies under the
Investment Company Act, required to file reports pursuant to section 13
or section 15(d) of the Exchange Act).\329\ As discussed above, these
proposed conditions generally track parallel conditions under rule 139,
but have been modified so that they would be applicable with respect to
covered investment fund issuers. We do not expect these conditions to
have economic effects beyond marginally improving economic efficiency
by more closely aligning regulations with their intended context.
---------------------------------------------------------------------------

    \329\ Proposed rule 139b(a)(2)(i). As discussed previously, each
issuer included in an issuer-specific research report also would be
required to be subject to these reporting requirements, as well as
the requirement to have filed in a timely manner all of the periodic
reports required to be filed during the preceding 12 months. See
supra section II.B.1.a. We note that this condition limits industry
reports published or distributed in reliance on rule 139b to covered
investment funds that file their reports pursuant to section 30 of
the Investment Company Act or section 13 or section 15(d) of the
Exchange Act.
---------------------------------------------------------------------------

    We are also seeking commenters' views on our analysis:
     Are there additional benefits associated with these
requirements that we have not considered?
     Are there additional costs associated with these
requirements that we have not considered?
e. Content and Presentation Requirements for Industry Research Reports
    Under proposed rule 139b, the content and presentation standards
for industry research reports of rule 139 would be tailored to the
context of covered investment funds. Under proposed rule 139b (and rule
139), issuers appearing in industry research reports are subject to
fewer conditions than issuers that are subjects of issuer-specific
research reports.\330\ We believe that in the absence of content and
presentation requirements such as those

we propose today, an industry research report could be used to
circumvent the conditions associated with the safe harbor available for
issuer-specific research reports. We therefore believe that the
proposed content and presentation standards have benefits similar to
those of the parallel content and presentation requirements in rule
139, and provide meaningful limits for issuer-specific research
reports.\331\
---------------------------------------------------------------------------

    \330\ See supra section II.B.2.
    \331\ See supra notes 118-119, and paragraph accompanying note
136.
---------------------------------------------------------------------------

    We believe the compliance costs imposed by these requirements on
the production of industry research reports would be low, particularly
as broker-dealers are already familiar with similar conditions in rule
139, making implementation of presentation conditions for industry
research reports on covered investment funds less burdensome.
    We are also seeking commenters' views on our analysis:
     Do commenters believe that there are there additional
benefits associated with the content and presentation standards that we
have not considered?
     Do commenters believe that there additional costs
associated with content and presentation requirements that we have not
considered?
     Do commenters agree with our assessment of the compliance
costs? Are there certain types of broker-dealers for which these
compliance costs will be higher (or lower)?
3. Proposed Rule 24b-4
    Proposed rule 24b-4 would exclude a covered investment fund
research report from the coverage of section 24(b) of the Investment
Company Act and the rules and regulations thereunder, except to the
extent that such report is not subject to the content provisions of SRO
rules related to research reports, including those contained in the
rules governing communications with the public regarding investment
companies or substantially similar standards. As discussed above, this
proposed rule is meant to implement section 2(b)(4) of the FAIR Act,
which we interpret to exclude covered investment fund research reports
from section 24(b) of the Investment Company Act so long as they
continue to be subject to the general content standards in FINRA rule
2210(d)(1).\332\ For covered investment fund research reports that are
published or distributed by FINRA member firms, all such research
reports would be subject to the content standards of FINRA rule
2210(d)(1), and thus we would interpret these research reports to be
excluded from the Commission's filing requirements under the proposed
rule.\333\
---------------------------------------------------------------------------

    \332\ See supra note 174 and accompanying text.
    \333\ See id.
---------------------------------------------------------------------------

    As discussed above, where covered investment fund research reports
would no longer be required to be filed with the Commission pursuant to
section 24(b), proposed rule 24b-4 could have the effect of narrowing
the types of communications regarding registered investment companies
that would be filed with FINRA (under current FINRA rule 2210).\334\
However, we believe that administrative processes related to handling
regulatory reviews of communications subject to filing requirements
impose costs on broker-dealers, which in turn can reduce their
willingness to publish and distribute such communications.
Consequently, although we do not believe that limiting these filing
requirements as required by the FAIR Act represents a first-order
economic effect of the proposed rules, we believe that doing so will
reduce administrative costs for broker-dealers publishing or
distributing covered investment fund research reports. At the same
time, as discussed above, we believe that eliminating these filing
requirements may have the result that some communications that are
currently subject to FINRA's filing requirements would no longer be
subject to routine review.\335\ While these communications may still be
reviewed by FINRA--for example, through examinations, targeted sweeps,
or spot-checks--we believe that an effect of the FAIR Act, as
implemented through proposed rule 24b-4, may be to reduce the
monitoring by FINRA and the Commission of broker-dealers'
communications with customers for compliance with the applicable rules
and regulations.\336\
---------------------------------------------------------------------------

    \334\ See id.
    \335\ See supra section II.D.1.
    \336\ But see supra note 188 and accompanying text (noting that
the FAIR Act's rules of construction provide that the Act shall not
be construed as limiting the authority of an SRO to require the
filing of communications with the public if the purpose of such
communications ``is not to provide research and analysis of covered
investment funds''); see also section 2(c)(2) of the FAIR Act.
---------------------------------------------------------------------------

    We are seeking comments on the costs and benefits of proposed rule
24b-4:
     Do commenters agree with our characterization of the costs
and benefits? Are there additional costs and benefits that we should
consider?
     Do commenters expect non-FINRA member firms to publish or
distribute covered investment fund research reports that would not be
subject to the content standards of FINRA rule 2210(d)(1)?
4. Proposed Amendment to Rule 101 of Regulation M
    As discussed above, rule 101 of Regulation M prohibits a person who
participates in a distribution from attempting to induce others to
purchase securities covered by the rule during a specified period.\337\
However, rule 101 provides an exception for research activities that
satisfy the conditions of Securities Act rule 138 or rule 139. The
proposed conforming amendment would expand this exception to include
research activities that satisfy the conditions of proposed rule 139b.
We believe that broker-dealers would generally be unable to make use of
the proposed rule 139b safe harbor absent the proposed conforming
amendment. Consequently, we do not consider its effects separately.
---------------------------------------------------------------------------

    \337\ See supra section II.E.
---------------------------------------------------------------------------

5. Effects on Efficiency, Competition, and Capital Formation
    The primary effects on economic efficiency and capital formation
resulting from proposed rules 139b and 24b-4 obtain from the statutory
mandates of the FAIR Act. Because financial intermediaries such as
broker-dealers are generally assumed to possess some comparative
advantage in the production of information about securities, efficiency
considerations would--in the absence of significant market
imperfections--dictate that broker-dealers should be active in the
production of such information. To the extent that the increase in
broker-dealers' production of research reports about covered investment
funds--that we expect to occur as a result of the FAIR Act's statutory
mandates \338\--is valuable to investors, we expect it to increase
allocative efficiency, with attendant positive consequences on capital
formation. As noted earlier, the existence of the safe harbor could
provide increased opportunities for broker-dealers to publish and
distribute research on funds from which they derive financial
benefits.\339\ To the extent that this could limit the value investors
derive from research reports that broker-dealers publish and
distribute, any potential gains to efficiency and improvements to
capital formation could be reduced (or eliminated).
---------------------------------------------------------------------------

    \338\ See supra section III.C.1.a.
    \339\ See supra section III.C.1.b.
---------------------------------------------------------------------------

    Beyond the aforementioned broader effects on efficiency and capital
formation resulting from the FAIR Act's statutory mandates, we believe
that the specific conditions on the availability of the safe harbor in
proposed rule 139b

will generally further economic efficiency and facilitate capital
formation by reducing the potential for retail investors to receive
research reports whose publication or distribution may be motivated by
these financial incentives that could cause a conflict of interest. We
believe that the affiliate exclusion and related guidance will have the
largest impact because it addresses the greatest conflicts of interests
in this context: Those arising from broker-dealers in investment
advisory relationships.\340\ In addition, we believe that the
Commission's various tailoring of the proposed rules to the covered
investment fund context will yield marginal efficiency improvements
from reductions in regulatory ambiguity.
---------------------------------------------------------------------------

    \340\ See supra section III.C.2.a.
---------------------------------------------------------------------------

    With respect to competition, we believe that expansion of the rule
139 safe harbor will increase competition in the market for research
reports on covered investment funds. Under the baseline, the market for
research reports on covered investment funds is dominated by a small
number of independent research firms, with few broker-dealers producing
original research about such funds.\341\ We believe that the
availability of the safe harbor will encourage some broker-dealers to
publish proprietary research on covered investment funds. However, due
to the high costs associated with maintaining research departments
capable of covering the large covered investment fund universe,\342\ we
believe that most broker-dealers will continue to rely on content
licensed from independent firms.\343\ We also believe that there are
competitive implications stemming from the guidance we have given to
address possible circumvention of the proposed affiliate
exclusion.\344\ This guidance may have the effect of placing smaller
broker-dealers-- who may not operate at a scale large enough to sustain
a research department--at a competitive disadvantage. These smaller
broker-dealers may find that they are unable to compete with larger
broker-dealers in the provision of ``original'' research about covered
investment funds.
---------------------------------------------------------------------------

    \341\ See supra section III.B.1.c.
    \342\ See supra section III.B.1.a.
    \343\ We expect that broker-dealers that choose to publish
research on covered investment funds will generally not license it
to their competitors.
    \344\ See supra section III.C.2.a.
---------------------------------------------------------------------------

    We are seeking comments on our analysis of the proposed rules'
effects on efficiency, competition, and capital formation:
     Are there other significant effects on efficiency,
competition, or capital formation that we have not considered?
     What competitive effects, if any, would the proposed
reporting history and minimum market value requirements have on smaller
covered investment funds? Do commenters believe these requirements
would adversely affect the type and amount of analysis available to
investors on these funds?
6. Alternatives Considered
    We considered several alternative approaches to implementing the
FAIR Act mandates that could satisfy the requirements of the FAIR Act.
We summarize these here.
a. Conditions on Issuers Appearing in Issuer-Specific Research Reports
    As discussed above, we believe that conditioning the availability
of the safe harbor on the proposed $75 million minimum public market
value requirement would promote investor protection by limiting
research reports to issuers that have a demonstrated market
following.\345\ However, we acknowledge that it would mean that
research reports about significant numbers of smaller covered
investment funds would not qualify for inclusion in research reports
under the safe harbor. We believe that this will reduce the effect of
the proposed rules on the availability of research reports about
smaller covered investment funds.\346\
---------------------------------------------------------------------------

    \345\ See supra section II.B.1.b.
    \346\ See supra section III.C.2.c.
---------------------------------------------------------------------------

    Depending on the distribution of covered investment funds' public
market values, a somewhat lower threshold could significantly increase
the number of covered investment funds that qualify for inclusion in
research reports without materially increasing the number of qualifying
funds without a demonstrated market following and thus undermining
investor protection. Conversely, a significantly higher threshold could
further promote investor protection without significantly decreasing
the number of qualifying funds (however, as discussed below, we did not
consider this alternative because the FAIR Act prevents us from
conditioning the availability of the safe harbor on a minimum public
market value requirement that is greater than what is required under
rule 139).
BILLING CODE 8011-01-P

[GRAPHIC] [TIFF OMITTED] TP08JN18.004

    We have considered a range of alternative minimum public market
values thresholds. Figure 5 plots the percentage of covered investment
funds whose public market valuations would fall under each alternative
threshold. As shown in the figure, material increases in the
availability of the safe harbor are only achievable through large
reductions to the threshold. This is due to large numbers of funds
being very small: as shown in Figure 6, over 600 covered investment
funds have a public market valuation of $5 million or less. However, we
do not believe that a significantly lower threshold would be effective
at promoting investor protection because, as discussed above in section
III.C.2.c, we expect the information environment to be more limited for
smaller funds than for larger funds.

[GRAPHIC] [TIFF OMITTED] TP08JN18.005

BILLING CODE 8011-01-C
    The FAIR Act prevents us from conditioning the availability of the
safe harbor on a minimum public market value requirement that is
greater than what is required under rule 139.\347\ This effectively
prevents us from conditioning the availability of the safe harbor for
research reports on the subject covered investment fund having a public
float of more than $75 million. Consequently, we do not consider higher
minimum public market value thresholds. We seek information from
commenters to assist us in assessing the economic impacts of a lower
minimum threshold.
---------------------------------------------------------------------------

    \347\ See supra note 25 and accompanying text.
---------------------------------------------------------------------------

     Would a public float threshold of less than $75 million
for covered investment funds appropriately exclude those funds with a
market following that is too small to permit investors to evaluate
covered investment fund research reports? What factors should govern
such an alternative threshold and where should it be set?
b. Conditions on Issuers Appearing in Industry Research Reports
(1) Applying Uniform Conditions on Issuers Appearing in Issuer-Specific
and Industry Research Reports
    With respect to conditions affecting the availability of the safe
harbor for industry research reports, we considered applying to
industry research reports the same requirements as would apply to
issuer-specific research reports. As with the restrictions on issuer-
specific research reports, similarly restricting industry research
reports could help ensure that funds included in research reports are
well-followed, and could restrict the availability of the safe harbor
in situations where we expect the information environment to be most
limited: for new funds and for funds with niche markets.
    In the context of research reports about covered investment funds,
cost-benefit considerations for including additional conditions on
industry reports differ slightly from those that apply in the context
of traditional research reports about equity and debt securities. In
the context of research reports about equity and debt securities,
analysis of an industry, in the case of operating companies, may
require the discussion of specific firms within that industry. For
example, a discussion about a mature industry (e.g., automobiles) may
require discussion of a disruptive new entrant (e.g., autonomous
vehicle start-up). In the context of the rule 139 safe harbor, the new
entrant may not satisfy the

reporting history and minimum float requirements. This would reasonably
prevent an issuer-specific research report about the new entrant from
qualifying for the safe harbor. However, it would not further the goal
of facilitating coverage of the industry to limit the safe harbor for
industry reports to reports that do not discuss the new entrant:
analysis of the industry may require discussion of specific issuers
that would not qualify for inclusion in issuer-specific research
reports.
    In the context of covered investment funds, a similar rationale
would not apply as broadly. The proposed rule 139b content requirements
for industry research reports would reference covered investment fund
issuers of the same ``type or investment focus,'' rather than the
issuers' ``industry or sub-industry'' (i.e., a broad category of
similar businesses).\348\ Although it is clear that an industry
research report about some covered investment fund types (e.g.,
emerging growth bonds) may have reasons to include a discussion of
issuers that may not be eligible for inclusion in issuer-specific
reports (e.g., best-performing new fund), it is not clear that such
reasons would rise to the level of requiring the discussion of such
issuers. Unlike the effects of an operating company issuer's on its
``industry,'' the effects of a covered investment fund issuer on its
fund ``type'' is very limited.
---------------------------------------------------------------------------

    \348\ See supra section II.B.2.c.
---------------------------------------------------------------------------

(2) Allowing Affiliates To Appear in Comprehensive List of Recommended
Issuers
    We considered providing that a comprehensive list of recommended
issuers may include issuers that are affiliates of the broker-dealer
that is publishing or distributing the research report under certain
circumstances, including: If affiliates were identified; if disclosure
about the affiliated issuers were limited; or if any performance
information included in a list that includes affiliated issuers were
presented in accordance with rule 482.\349\ Generally, we believe that
including such provisions would benefit broker-dealers that play a
significant role both as investment advisers to, and as distributors
of, covered investment funds. However, as discussed above, we believe
that broker-dealers publishing or distributing research reports about
affiliated funds would have the potential for the most significant
conflicts of interest.\350\ Moreover, permitting affiliated funds to be
included in such comprehensive lists could result in confusion: broker-
dealers would be able to offer recommendations for affiliated funds in
industry research reports, but there would be no safe harbor enabling
them to publish or distribute issuer-specific research reports (which
could provide the basis for such recommendations) as a result of the
affiliate exclusion.
---------------------------------------------------------------------------

    \349\ See id.
    \350\ See supra section III.C.1.b.
---------------------------------------------------------------------------

    In proposed rule 139b, we have chosen not to incorporate these
alternative conditions on issuers appearing in industry research
reports. As discussed above, we are proposing that a comprehensive list
of recommended issuers appearing in an industry research report could
not include any covered investment fund that is an affiliate of the
broker-dealer, or for which the broker-dealer serves as investment
adviser (or is an affiliated person of the investment adviser), as this
could implicate the proposed affiliate exclusion.\351\ However we are
seeking comment on the economic effects of such alternative conditions.
---------------------------------------------------------------------------

    \351\ See supra note 130 and accompanying text.
---------------------------------------------------------------------------

     Do commenters believe that the value of industry research
reports about covered investment funds would be adversely affected if
discussion of funds not satisfying the conditions applicable to issuer-
specific research reports was precluded? If so, under what
circumstances?
     Do commenters believe that the value of industry research
reports about covered investment funds would be improved if different
conditions were applied to issuers appearing in such reports? If so,
which conditions?
     Do commenters believe that allowing affiliated funds to
appear in comprehensive lists of recommended issuers would have
additional costs or benefits?
     Do commenters believe that conflicts of interests
resulting from an advisory relationship would be likely to affect
industry research reports featuring a comprehensive list?
     Do commenters believe that allowing the inclusion of
affiliated funds in industry research reports featuring a comprehensive
list, when proposed rule 139b would not permit a broker-dealer relying
on the safe harbor to publish or distribute an issuer-specific research
report about an affiliated fund, would result in investor confusion?
c. Approach to Regular-Course-of-Business Requirement
    As discussed in section III.B.3.b, in principle we expect a
regular-course-of-business requirement to reduce opportunities for the
safe harbor to be used in ways that lead to investor confusion.
However, we also believe that in the context of covered investment
funds, establishing whether a report is published in the ``regular
course of business'' could present more challenges than in the rule 139
context of research reports about the securities of operating
companies.\352\ Thus, we considered various alternative approaches to
the proposed regular-course-of-business requirements.\353\
Specifically, we have considered that this requirement be defined more
specifically to address, for example, circumstances in which a broker-
dealer has not previously published or distributed research
reports.\354\ For example, we considered whether rule 139b should
provide a ``start-up'' period to allow broker-dealers to establish a
regular course of business of publishing research reports.\355\ We have
also considered requiring that the regular-course-of-business
requirement incorporate more specific requirements regarding the
persons preparing such reports (e.g., that they must be employed by a
broker-dealer to prepare such research in the regular course of his or
her duties).\356\
---------------------------------------------------------------------------

    \352\ See supra section II.B.2.b.
    \353\ See supra section II.B.1.c (requests for comments).
    \354\ See id.
    \355\ See id.
    \356\ See id.
---------------------------------------------------------------------------

    Conditioning availability of the safe harbor on a broker-dealer's
having published research reports for a given period of time, or on the
broker-dealer having operated for some amount of time, could lead to
the publication of reports that are more likely to be recognized as
research.\357\ Moreover, we believe that broker-dealers with a longer
operating history and those who have published research reports--
relying on the existing rule 139 safe harbor or otherwise without
relying on the safe harbor--will have made greater investments in their
reputations. Such investments increase the reputational costs
associated with the publication of research reflecting conflicts of
interest, which as discussed above could mitigate the effects of
conflicts of interest on research reports.\358\
---------------------------------------------------------------------------

    \357\ See id.
    \358\ See Chemmanur and Fulghieri Article, supra note 282; see
also supra section III.C.1.b. However, we note that the efficacy of
an institutional reputation mechanism has not found empirical
support in related settings. See Fang and Yasuda Article, supra note
281 (where sell-side research analysts' reputation mitigates
manifestation of conflicts of interest from underwriting
relationships, while institutional reputation does not).

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

    In proposed rule 139b, we have chosen not to incorporate these
alternative approaches to the regular-course-of-business requirement.
While we note the potential benefits of the approaches outlined above
in enhancing the value that covered investment fund research reports
may provide investors, we also understand that these alternatives may
restrict the flow of relevant information to investors, and we are not
proposing more prescriptive approaches to the regular-course-of-
business requirement at this time. However, we are seeking comment on
the economic effects of such alternative conditions.
     Do commenters believe that these alternative approaches to
the regular-course-of-business requirement would result in additional
costs and benefits that we have not considered? What is the magnitude
of these costs and benefits?
d. Presentation of Performance Information
    Given the definition of ``research report'' under the FAIR Act (and
the definition of ``research report'' that we propose under rule 139b),
certain communications by broker-dealers that historically have been
treated as advertisements for registered investment companies under
rule 482 now could be distributed as covered investment fund research
reports under the proposed rule 139b safe harbor.\359\ Rule 482 imposes
restrictions on the presentation of performance data included in
registered open-end investment company advertisements.\360\ A covered
investment fund research report that is published or distributed by a
broker-dealer in reliance on the proposed rule 139b safe harbor would
not need to adhere to rule 482's requirements.
---------------------------------------------------------------------------

    \359\ See supra note 141 and accompanying text. Similarly,
``research reports'' regarding covered investment funds that broker-
dealers today might publish or distribute as ``supplemental sales
literature'' under Investment Company Act rule 34b-1 (which must be
preceded or accompanied by a statutory prospectus) could be
distributed as covered investment fund research reports under
proposed rule 139b. See supra note 144 and accompanying text.
    \360\ As discussed above, rule 482 requires standardized
presentation of performance data that is included in registered
open-end fund advertisements. Alternatively, if other performance
measures are presented, they must be accompanied by certain
standardized performance data. See supra notes 142-143 and
accompanying text.
     Research reports that are published or distributed as rule 34b-
1 supplemental sales literature also would be subject to
requirements relating to the standardized presentation of
performance information, because rule 34b-1 incorporates many of the
rule 482 requirements relating to performance disclosure. See supra
note 145 and accompanying text.
---------------------------------------------------------------------------

    The above shift in the regulatory treatment of communications about
registered investment companies could result in investors receiving
communications about covered investment funds where the character of
the communication (i.e., bona fide research versus advertising) is
unclear and presentation of performance data is not subject to the
restrictions of rule 482. Conflicts of interest resulting from broker-
dealers' financial incentives could affect the manner in which
performance data is presented in research reports, potentially leading
to misleading presentation of performance data. In addition, investors
could be confused if performance is presented differently in an
advertisement and in a research report, particularly if the research
report doesn't adequately disclose the methodologies used to produce
the performance that could explain the differences. Retail investors,
in particular, may be unable to assess the non-standardized performance
figures when considering their investment decisions.
    While proposed rule 139b does not require that the performance of
issuers included in covered investment fund research reports be
presented in any particular fashion, we believe that certain guidance
factors would assist a broker-dealer in evaluating whether any
presentation of registered investment company performance in research
reports could be misleading.\361\ These include consideration of the
factors discussed in rule 156.\362\ We also note above that, if a
covered investment fund research report were to substantially resemble
a rule 482 advertisement, but present performance information in a
manner inconsistent with the provisions of rule 482, retail investors
may not be able to readily discern what constitutes a research report
and what constitutes an advertisement.\363\
---------------------------------------------------------------------------

    \361\ See supra section II.C.
    \362\ See id.
    \363\ See id.
---------------------------------------------------------------------------

    We have also considered the alternative approach of incorporating
certain performance presentation standards of rule 482 and/or the
guidance factors of rule 156 (concerning misleading statements in
investment company sales literature) in the text of rule 139b.\364\ We
also considered incorporating certain performance presentation
requirements for when other performance measures that are not subject
to any prescribed method of communication appear in covered investment
fund research reports.\365\ We also considered requiring that the
methodology used to calculate the registered investment company's total
return or yield be disclosed if these performance measures are not
presented in a research report in a manner that is consistent with the
requirements in rule 482. We also considered requirements relating to
nonrecurring fees,\366\ and requirements on the timeliness of
performance data,\367\ similar to the requirements for these items in
rule 482.\368\ In addition, we considered incorporating the factors set
forth in rule 156 (or a subset thereof) into the rule.\369\
---------------------------------------------------------------------------

    \364\ See rule 482(d)(1)-(4).
    \365\ See rule 482(d)(5).
    \366\ See rule 482(b)(3)(ii).
    \367\ See rule 482(g).
    \368\ See, e.g., rules 482(b)(3)(ii) and (g).
    \369\ See supra section II.C (request for comments).
---------------------------------------------------------------------------

    We also considered a requirement in proposed rule 139b to
incorporate general narrative disclosure into a research report about a
registered investment company, aimed at reducing potential investor
confusion. For example, we could have required such research reports to
incorporate a legend stating that the document is a research report and
is not subject to the Commission's regulations applicable to sales and
advertising. We also could have required such a research report to
incorporate similar disclosure without requiring that it be structured
as a legend (which would require the disclosure of similar concepts but
would not require any particular wording).
    A main benefit associated with an alternative incorporating some or
all of the aforementioned provisions into proposed rule 139b is reduced
potential for confusion between (i) registered investment company
advertisements and selling materials covered by rule 482 and (ii)
advertisements or selling materials being recast as research
reports.\370\ Additionally, incorporating some or all of the
aforementioned provisions into proposed rule 139b would reduce
potential for investor confusion resulting from divergent standards in
the presentation of performance data.
---------------------------------------------------------------------------

    \370\ See supra note 150 and accompanying text.
---------------------------------------------------------------------------

    Because fees can represent a significant drag on investment
returns,\371\ because different performance measures may be more or
less favorable at different times, and because retail investors are
known to be sensitive to past performance data,\372\

we believe that the manner in which past performance data is presented
can be an important factor driving investors' investment decisions. As
discussed above, even unaffiliated broker-dealers may have incentives,
stemming from funds' distribution arrangements, to promote a covered
investment fund, or to promote certain funds over others.\373\ When
broker-dealers publish or distribute research reports on covered
investment funds, their choices with respect to how fees are disclosed,
which performance measures are quoted, and for what time periods could
be affected by these considerations. This in turn can adversely affect
investors, particularly non-sophisticated investors. To the extent that
any of the alternative approaches discussed above would limit
opportunities for selective performance disclosure, this would curtail
opportunities to circumvent the requirements of rule 482.
---------------------------------------------------------------------------

    \371\ See, e.g., Mark M. Carhart, On Persistence in Mutual Fund
Performance, 52 The Journal of Finance 1, 57-82 (Mar. 1997).
    \372\ See Erik R. Sirri & Peter Tufano, Costly Search and Mutual
Fund Flows, 53 The Journal of Finance 5, 1589-1622 (Oct. 1, 1998).
    \373\ See supra section III.C.1.b.
---------------------------------------------------------------------------

    If opportunities for selective performance disclosure were limited,
this also could reduce investor confusion, because there would be fewer
opportunities for the performance disclosure in registered investment
company advertisements and research reports to diverge. There also
could be less potential for investor confusion when comparing research
reports about different covered investment funds, or obtained from
different broker-dealers. These results would benefit investors. The
extent of the benefit would depend on these measures' effectiveness in
ensuring consistent disclosure and/or alerting investors to factors
that could influence their understanding of the disclosure in a
research report. The extent of the benefit also would depend on the
audience who will be reading research reports about registered
investment companies. As discussed above, we assume that retail
investors would generally be less likely to be able to identify sources
of bias (and disregard or discount bias) in communications about
covered investment funds than institutional investors and therefore
could benefit from limitations on selective performance
disclosure.\374\
---------------------------------------------------------------------------

    \374\ But see discussion infra in this section III.C.6.d,
discussing the potential benefits of allowing non-standardized
information in the total mix of information available to investors,
particularly for sophisticated investors.
---------------------------------------------------------------------------

    The most significant costs associated with this alternative would
likely result from its effect on the content of broker-dealers'
research reports. An alternative that limits the prominence afforded to
performance measures that are calculated using a methodology that
differs from that required under rule 482 could adversely affect
broker-dealers' ability to provide valuable analysis. For example, a
broker-dealer who wishes to center its analysis on a fund's risk-
adjusted returns would be limited in how such information could be
presented in the report even though certain audiences for research
reports could consider this information to be particularly relevant.
Investors' access to potentially relevant and useful analysis could be
limited by alternatives such as those discussed in this section.
    We believe that broker-dealers' direct compliance costs under these
alternative provisions would generally be minimal. For example, if we
were to incorporate rule 482's requirements on the presentation of
performance data into proposed rule 139b, we expect that broker-dealers
that publish research reports would have processes and systems that
could produce charts and tables of the rule-specified performance
measures using timely data.\375\
---------------------------------------------------------------------------

    \375\ We believe that most broker-dealers that would publish
such reports are currently distributing advertisement under rule
482, which are subject to similar requirements. See supra section
II.D.1.
---------------------------------------------------------------------------

    In proposed rule 139b, we have chosen not to incorporate additional
provisions relating to the presentation of performance data, as this
approach promotes flexibility for broker-dealers to make different
types of information and analysis available to investors. We are
seeking commenters' views on these alternative provisions.
     Do commenters believe that the safe harbor under proposed
rule 139b would be used to publish or distribute communications that
have traditionally been considered registered investment company
advertisements or sales materials subject to rule 482? To what extent?
If not, why not? Would this practice to be more prevalent for certain
types of broker-dealers or research reports about certain types of
registered investment companies? Do commenters believe that imposing
additional requirements on the presentation of performance information
in research reports that are published or distributed in reliance on
the proposed rule 139b safe harbor would result in additional costs and
benefits that we have not considered? What is the magnitude of these
costs and benefits? If we were to issue guidance relating to the
presentation of performance in research reports about registered
investment companies that are published or distributed in reliance on
the proposed rule 139b safe harbor, would this result in additional
costs and benefits that we have not considered? What is the magnitude
of these costs and benefits?

IV. Paperwork Reduction Act

    We do not believe that the proposed rules would impose any new
``collections of information'' as defined by the Paperwork Reduction
Act of 1995 (``PRA''), 44 U.S.C. 3501 et seq.; nor would they create
any new filing, reporting, recordkeeping, or disclosure reporting
requirements.\376\ Accordingly, we are not submitting the proposed
rules to the Office of Management and Budget for review under the
PRA.\377\ We request comment on whether our conclusion that there are
no collections of information is correct.
---------------------------------------------------------------------------

    \376\ As discussed above, certain communications that previously
would have been treated as rule 482 advertising prospectuses or rule
34b-1 supplemental sales literature could be considered covered
investment fund research reports subject to the proposed rule 139b
safe harbor, which could result in a reduction in the information
collection burdens for rules 482 and 34b-1. In connection with an
extension of a currently approved collection for rules 482 and 34b-
1, the Commission will adjust the burdens associated with these
collections of information, as appropriate.
    \377\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

V. Regulatory Flexibility Act Analysis

    This Initial Regulatory Flexibility Act Analysis has been prepared
in accordance with section 3 of the Regulatory Flexibility Act
(``RFA'').\378\ It relates to proposed rule 139b, proposed rule 24b-4,
and proposed revisions to the rules under the Securities Act and the
Exchange Act to implement the FAIR Act.
---------------------------------------------------------------------------

    \378\ See 5 U.S.C. 603.
---------------------------------------------------------------------------

A. Reasons for, and Objectives of, the Proposed Action

    Proposed rule 139b provides that, if certain conditions are
satisfied, a broker-dealer's publication or distribution of a covered
investment fund research report would be deemed for purposes of
sections 2(a)(10) and 5(c) of the Securities Act not to constitute an
offer for sale or offer to sell a security that is the subject of an
offering of the covered investment fund, even if the broker-dealer is
participating or may participate in a registered offering of the
covered investment fund's securities. Proposed rule 24b-4 provides that
a covered investment fund research report about a registered investment
company will not be subject to section 24(b) of the Investment Company
Act (or the rules and regulations thereunder), except to the extent the
research report is otherwise not subject to the content standards in
SRO rules related to research reports, including those contained in the
rules governing communications with the public regarding investment
companies or substantially similar standards. The

proposed revision to paragraph (a) of rule 139 would clarify that rule
139 does not affect the availability of any other exemption or
exclusion from sections 2(a)(10) or 5(c) of the Securities Act that may
be available to a broker-dealer (as provided, for example, by the
provisions of rule 139a or proposed 139b). The proposed revision to
rule 101 under Regulation M would be a conforming amendment intended to
harmonize treatment of research under the Securities Act and Exchange
Act rules by permitting distribution participants under Regulation M,
such as brokers-dealers, to publish or disseminate any information,
opinion, or recommendation relating to a covered security if the
conditions of rule 138, rule 139, or proposed rule 139b under the
Securities Act are met. The proposed rules and proposed rule revisions
would implement the directives under the FAIR Act to extend the current
safe harbor available under rule 139 to broker-dealers' publication or
distribution of covered investment fund research reports. The reasons
for, and objectives of, the proposed rules and proposed rule revisions
are discussed in more detail in section II above.

B. Legal Basis

    We are proposing the rules contained in this document under the
authority set forth in the Securities Act, particularly sections 6, 7,
8, 10, 17(a), 19(a), and 28 thereof [15 U.S.C. 77a et seq.]; the
Exchange Act, particularly, sections 2, 3, 9(a), 10, 11A(c), 12, 13,
14, 15, 17(a), 23(a), 30, and 36 thereof [15 U.S.C. 78a et seq.]; the
Investment Company Act, particularly, sections 6, 23, 24, 30, and 38
thereof [15 U.S.C. 80a et seq.]; and the FAIR Act, particularly,
section 2 thereof.

C. Small Entities Subject to the Proposed Rules

    The proposed rules would affect broker-dealers that publish or
distribute covered investment fund research reports. As such, broker-
dealers that are small entities would be affected by the proposed
rules. A broker-dealer is a small entity if it has total capital (net
worth plus subordinated liabilities) of less than $500,000 on the date
in the prior fiscal year as of which its audited financial statements
were prepared pursuant to Sec.  240.17a-5(d),\379\ and it is not
affiliated with any person (other than a natural person) that is not a
small business or small organization.\380\ As of December 31, 2017, the
Commission estimates that there were approximately 1,042 broker-dealers
that would be considered small entities as defined above.\381\ To the
extent a small broker-dealer would participate in the activity of
publishing or distributing covered investment fund research reports and
would seek to rely on the proposed rule 139b safe harbor, it may be
affected by our proposal. Generally, we believe larger broker-dealers
engage in these activities, but we request comment on whether and how
the rules we are proposing today would affect small broker-dealers. We
also request comment on the number of small entities that would be
impacted by our proposal, including any available empirical data.
---------------------------------------------------------------------------

    \379\ See rule 0-10(c)(1) under the Exchange Act [17 CFR 240.0-
10(c)(1)]. Alternatively, if a broker-dealer is ``not required to
file such statements, a broker or dealer that had total capital (net
worth plus subordinated liabilities) of less than $500,000 on the
last business day of the preceding fiscal year (or in the time that
it has been in business, if shorter).'' See id.
    \380\ See rule 0-10(c)(2) under the Exchange Act [17 CFR 240.0-
10(c)(2)].
    \381\ This estimate is derived from an analysis of data for the
period ending Dec. 31, 2017 obtained from FOCUS Reports (``Financial
and Operational Combined Uniform Single'' Reports) that broker-
dealers generally are required to file with the Commission and/or
SROs pursuant to rule 17a-5 under the Exchange Act [17 CFR 240.17a-
5].
---------------------------------------------------------------------------

D. Reporting, Recordkeeping and Other Compliance Requirements

    We believe that there are no reporting, recordkeeping and other
compliance requirements with respect to proposed rule 139b and the
proposed revision to Regulation M. As such, we believe that there are
no attendant costs and administrative burdens for small entities
associated with these activities, as they relate to proposed rule 139b
and the proposed revision to Regulation M.
    Proposed rule 139b would extend the safe harbor under current rule
139 to broker-dealers' publication or distribution of covered
investment fund research reports. As discussed above, rule 139
currently is not available for a broker-dealer's publication or
distribution of research reports about registered investment companies
and business development companies.\382\ Instead, we understand that a
research report or other communication about a covered investment fund
that is a registered investment company would ordinarily have to comply
with the requirements of Securities Act rule 482.\383\ As a result of
the FAIR Act, however, communications that historically have been
treated as covered investment fund advertisements under rule 482 now
could fall under the proposed rule 139b definition of ``research
report.''
---------------------------------------------------------------------------

    \382\ See supra note 100 and accompanying text.
    \383\ See supra note 101 and accompanying text.
---------------------------------------------------------------------------

    As discussed above, section 24(b) of the Investment Company Act
requires registered open-end investment companies to file sales
literature addressed to or intended for distribution to prospective
investors with the Commission.\384\ Section 2(b)(4) of the FAIR Act
directs the Commission to provide that a covered investment fund
research report shall not be subject to section 24(b) of the Investment
Company Act or the rules and regulations thereunder, except that such
report may still be subject to 24(b) and the rules and regulations
thereunder if it is otherwise not subject to the content standards in
the rules of any SRO related to research reports, including those
contained in the rules governing communications with the public
regarding investment companies or substantially similar standards.\385\
Today, registered investment company sales literature, including rule
482 advertisements, are required to be filed with the Commission under
section 24(b) of the Investment Company Act.\386\ These filings are
typically done by broker-dealers' compliance staff. The Commission
proposes to implement section 2(b)(4) of the FAIR Act via proposed rule
24b-4, which provides that a covered investment fund research report
about a registered investment company shall not be subject to section
24(b) of the Investment Company Act (or the rules and regulations
thereunder), unless the research report is not otherwise subject to the
content standards in SRO rules related to research reports, including
those contained in the rules governing communications with the public
regarding investment companies or substantially similar standards.\387\
We interpret section 2(b)(4) of the FAIR Act as excluding covered
investment fund research reports from section 24(b) of the Investment
Company Act so long as they continue to be subject to the general
content standards in FINRA rule 2210(d)(1), described above (or
substantially similar SRO rules).\388\ Thus, covered investment fund
research reports, by operation of proposed rule 24b-4, would no longer
be subject to

filing requirements under section 24(b) because they would be subject
to the general content standards of FINRA rule 2210(d)(1).\389\
Proposed rule 24b-4 would affect broker-dealers that, in lieu of a safe
harbor such as that proposed to be provided by rule 139b, would have
published or distributed communications styled as ``research reports''
in compliance with rule 482, which communications would be required to
be filed with the Commission subject to section 24(b) of the Investment
Company Act. As such, we believe that the administrative costs of
broker-dealers that previously filed these communications pursuant to
section 24(b) of the Investment Company Act would be reduced. However,
large and small broker-dealers would not be affected differently by
proposed rule 24b-4.
---------------------------------------------------------------------------

    \384\ See 15 U.S.C. 80a-24(b); 17 CFR 270.24b-3; supra section
II.D.1.
    \385\ See supra note 167 and accompanying text.
    \386\ See supra note 29. Rule 24b-3 under the Investment Company
Act deems these materials to have been filed with the Commission if
filed with FINRA. See id.
    \387\ See proposed rule 24b-4; see also discussion accompanying
supra notes 170-174.
    \388\ See supra paragraph accompanying notes 174-176.
    \389\ See supra section II.D.1.
---------------------------------------------------------------------------

    We encourage written comments regarding this analysis. We solicit
comments as to whether the proposed regulation could have an effect
that we have not considered. We request that commenters describe the
nature of any impact on small entities and provide empirical data to
support the extent of the impact.

E. Duplicative, Overlapping, or Conflicting Federal Rules

    Although broker-dealers would be unable to rely on the rule 139
safe harbor in publishing or distributing certain communications that
could be considered covered investment fund research reports,\390\ the
existing rule 139 safe harbor may be available for their publication or
distribution of research reports for certain covered investment funds,
such as commodity- or currency-based trusts or funds that have a class
of securities registered under the Exchange Act.\391\ As discussed
above, the FAIR Act directs us to propose and adopt rule amendments
that would extend the current safe harbor available under rule 139 to
``covered investment fund research reports.'' \392\ Proposed rule 139b,
which is intended to implement the FAIR Act's directives, includes all
of the entities in the definition of ``covered investment fund'' that
are specified in the FAIR Act's parallel definition (including some
types of entities where, if a broker-dealer were to publish or
distribute a research report about that entity, the rule 139 safe
harbor could already be available).\393\ As a result, in certain
circumstances, a broker-dealer publishing or distributing a covered
investment fund research report could rely either on rule 139 or
proposed rule 139b. In light of this, we have clarified in proposed
rule 139b that it provides a non-exclusive safe harbor, and we propose
to amend rule 139 to include similar language regarding the non-
exclusivity of the safe harbor available under rule 139.\394\ Thus, a
broker-dealer would be able to rely on proposed rule 139b to publish or
distribute a covered investment fund research report, or could choose
to rely instead on any other available exemption or exclusion from
sections 2(a)(10) or 5(c) of the Securities Act, including those
provided by rules 137, 138, and 139, so long as the applicable
conditions are satisfied.
---------------------------------------------------------------------------

    \390\ See supra notes 11-15 and accompanying text.
    \391\ See supra section II.A.4.
    \392\ See supra section I.B.
    \393\ See supra section II.A.3.
    \394\ See supra section II.A.4.
---------------------------------------------------------------------------

F. Significant Alternatives

    The RFA directs us to consider significant alternatives that would
accomplish the Commission's stated objectives, while minimizing any
significant adverse impact on small entities. In connection with the
proposals, we considered the following alternatives: (i) Establishing
different compliance or reporting requirements that take into account
the resources available to small entities; (ii) exempting broker-
dealers that are small entities from certain proposed conditions that
must be satisfied in order for the proposed rule 139b safe harbor to be
available (e.g., the extent to which the proposed regular-course-of-
business requirements would apply to small broker-dealers); (iii)
clarifying, consolidating, or simplifying the conditions that must be
satisfied for the proposed rule 139b safe harbor to be available for
broker-dealers that are small entities; and (iv) using performance
rather than design standards.
    We do not believe that establishing different compliance and
reporting requirements or timetables for broker-dealers that are small
entities, or exempting broker-dealers that are small entities from
certain proposed conditions, would permit us to achieve our stated
objectives. We have considered a variety of approaches to achieve our
regulatory objectives and the directives of the FAIR Act. We do not
believe that the proposed rules would impose any significant new
compliance obligations, because the proposed rules generally reduce the
restrictions regarding communications that would be considered covered
investment fund research reports.
    As discussed above, the FAIR Act directs us to extend the current
safe harbor available under rule 139 to broker-dealers' publication or
distribution of covered investment fund research reports, and thus
proposed rule 139b's framework, including its scope and conditions, is
modeled after and generally tracks rule 139.\395\ Rule 139 does not
incorporate conditions that would affect the availability of the rule's
safe harbor differently for broker-dealers that are small (versus
large) entities. We likewise do not believe it is necessary or
appropriate that proposed rule 139b incorporate conditions that would
affect the availability of the proposed rule's safe harbor differently
based on whether a broker-dealer is a small entity. We have considered
whether a different regular-course-of-business requirement would help
mitigate investor confusion in the case of covered investment fund
research reports about registered investment companies, as discussed in
more detail above.\396\ This could have had the effect of limiting the
availability of the proposed rule 139b safe harbor to certain broker-
dealers, which in turn could have direct or indirect effects on the
availability of the safe harbor to smaller broker-dealers. However, for
the reasons discussed above,\397\ we are not proposing a regular-
course-of-business requirement, in either the proposed rule 139b
provisions on issuer-specific research reports or the proposed
provisions on industry reports, other than a requirement that tracks
the provisions of rule 139 (modified as directed by the FAIR Act).
---------------------------------------------------------------------------

    \395\ See supra paragraph accompanying notes 32-34.
    \396\ See supra section III.C.6.c.
    \397\ See id.
---------------------------------------------------------------------------

    Nor do we believe that clarifying, consolidating, or simplifying
the proposed amendments for small entities would satisfy those
objectives. Because proposed rule 139b's framework (including its scope
and conditions) is modeled after and generally tracks rule 139,
proposed rule 139b like rule 139 does not treat small broker-dealers
differently than large broker-dealers, including by clarifying,
consolidating, or simplifying any conditions. Our proposal includes
specific requests for comment on whether clarifications to certain
proposed rule provisions are necessary or appropriate, and the comments
we receive in response could, in certain circumstances, indirectly
affect our approach to small entities.\398\ For example, we request
comment about whether the proposed regular-course-of-business
requirement should be

modified to address newly-established broker-dealers (which are likely
to be small entities).\399\ We also recognize that the guidance that we
provide in this release--which is meant to clarify certain of the
provisions of the proposed rule--could indirectly affect small
entities, and we request comment on the effects of this guidance on
small entities. For example, we request comment about whether smaller
broker-dealers, or broker-dealers without significant research
departments, be most impacted by our guidance on the proposed affiliate
exclusion.\400\
---------------------------------------------------------------------------

    \398\ See generally supra section II.
    \399\ See supra section II.B.1.c; see also supra section
II.B.2.b.
    \400\ See requests for comment at supra section III.C.2.a.
---------------------------------------------------------------------------

    Further, with respect to using performance rather than design
standards, the proposed rule generally uses performance standards for
all broker-dealers relying on the proposed rule, regardless of size. We
believe that providing broker-dealers with the flexibility with respect
to the design of covered investment fund research reports that they may
publish or distribute in reliance on the proposed safe harbor is
appropriate in light of the diversity of entities included in the
universe of covered investment funds. We also believe that this
approach is appropriate in light of the diverse methodologies that
might be taken with respect to research about these entities
(particularly because the term ``research report'' in the FAIR Act and
the proposed rule is defined broadly, as discussed above \401\).
However, we note that the proposed rule also uses design standards with
respect to certain of its conditions (e.g., the conditions relating to
reporting history and minimum public market value that apply to issuers
that could appear in an issuer-specific research report). These are
substantially similar to design standards used in rule 139, and they
would apply with respect to the research reports published or
distributed by all broker-dealers relying on the proposed rule,
regardless of their size.\402\ For the reasons discussed above, we
believe that this use of design standards is appropriate for the
furtherance of investor protection, and to help ensure that the
proposed rule is not used to circumvent the prospectus requirements of
the Securities Act.\403\
---------------------------------------------------------------------------

    \401\ See supra note 11.
    \402\ See, e.g., supra sections II.B.1.a (Reporting History and
Timeliness Requirements) and II.B.1.b (Minimum Public Market Value
Requirement).
    \403\ See supra notes 57-58 and accompanying text.
---------------------------------------------------------------------------

    As we consider the comments we receive on our proposal, we will
consider the available information to determine whether greater
flexibility is warranted, consistent with investor protections.

G. General Request for Comment

    The Commission requests comments regarding this analysis. We
request comment on the number of small entities that would be subject
to the proposed rules and whether the proposed rules would have any
effects that have not been discussed. We request that commenters
describe the nature of any effects on small entities subject to the
proposed rules and provide empirical data to support the nature and
extent of such effects.

VI. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA''),\404\ the Commission must advise OMB whether a
proposed regulation constitutes a ``major'' rule. Under SBREFA, a rule
is considered ``major'' where, if adopted, it results in or is likely
to result in:
---------------------------------------------------------------------------

    \404\ Pub. L. 104-121, Title II, 110 Stat. 857 (1996) (codified
in various sections of 5 U.S.C., 15 U.S.C., and as a note to 5
U.S.C. 601).
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more;
     A major increase in costs or prices for consumers or
individual industries; or
     Significant adverse effects on competition, investment, or
innovation.
    We request comment on whether our proposal would be a ``major
rule'' for purposes of SBREFA. We solicit comment and empirical data
on:
     The potential effect on the U.S. economy on an annual
basis;
     Any potential increase in costs or prices for consumers or
individual industries; and
     Any potential effect on competition, investment, or
innovation.
    Commenters are requested to provide empirical data and other
factual support for their views to the extent possible.

VII. Statutory Authority

    We are proposing the rules contained in this document under the
authority set forth in the Securities Act, particularly sections 6, 7,
8, 10, 17(a), 19(a), and 28 thereof [15 U.S.C. 77a et seq.]; the
Exchange Act, particularly, sections 2, 3, 9(a), 10, 11A(c), 12, 13,
14, 15, 17(a), 23(a), 30, and 36 thereof [15 U.S.C. 78a et seq.]; the
Investment Company Act, particularly, sections 6, 23, 24, 30, and 38
thereof [15 U.S.C. 80a et seq.]; and the FAIR Act, particularly,
section 2 thereof.

List of Subjects

17 CFR Part 230

    Advertising, Confidential business information, Investment
companies, Reporting and recordkeeping requirements, Securities.

17 CFR Part 242

    Brokers, Fraud, Reporting and recordkeeping requirements,
Securities.

17 CFR Part 270

    Confidential business information, Fraud, Investment companies,
Life insurance, Reporting and recordkeeping requirements, Securities.

Text of Proposed Rules and Amendments

    For the reasons set out in the preamble, title 17, chapter II of
the Code of the Federal Regulations is proposed to be amended as
follows.

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

0
1. The authority citation for part 230 continues to read, in part, as
follows:

    Authority:  15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h,
77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, and Pub. L. 112-106, sec. 201(a), sec. 401, 126
Stat. 313 (2012), unless otherwise noted.
* * * * *
0
2. Amend Sec.  230.139 by revising the introductory text of paragraph
(a) to read as follows:

Sec.  230.139   Publications or distributions of research reports by
brokers or dealers distributing securities.

    (a) Registered offerings. Under the conditions of paragraph (a)(1)
or (2) of this section, a broker's or dealer's publication or
distribution of a research report about an issuer or any of its
securities shall be deemed for purposes of sections 2(a)(10) and 5(c)
of the Act not to constitute an offer for sale or offer to sell a
security that is the subject of an offering pursuant to a registration
statement that the issuer proposes to file, or has filed, or that is
effective, even if the broker or dealer is participating or will
participate in the registered offering of the issuer's securities. For
purposes of the Fair Access to Investment Research Act of 2017 [Pub. L.
115-66, 131 Stat. 1196 (2017)], a safe harbor has been established for
covered investment fund research reports, and the specific terms of
that safe harbor are set forth in Sec.  230.139b.
* * * * *

0
3. Add Sec.  230.139b to read as follows:

Sec.  230.139b   Publications or distributions of covered investment
fund research reports by brokers or dealers distributing securities.

    (a) Registered offerings. Under the conditions of paragraph (a)(1)
or (2) of this section, the publication or distribution of a covered
investment fund research report by a broker or dealer that is not an
investment adviser to the covered investment fund and is not an
affiliated person of the investment adviser to the covered investment
fund shall be deemed for purposes of sections 2(a)(10) and 5(c) of the
Act not to constitute an offer for sale or offer to sell a security
that is the subject of an offering pursuant to a registration statement
of the covered investment fund that is effective, even if the broker or
dealer is participating or may participate in the registered offering
of the covered investment fund's securities. This section does not
affect the availability of any other exemption or exclusion from
sections 2(a)(10) or 5(c) of the Act available to the broker or dealer.
    (1) Issuer-specific research reports. (i) At the date of reliance
on this section:
    (A) The covered investment fund:
    (1) Has been subject to the reporting requirements of section 30 of
the Investment Company Act of 1940 (the ``Investment Company Act'') (15
U.S.C. 80a-29) for a period of at least 12 calendar months and has
filed in a timely manner all of the reports required, as applicable, to
be filed for the immediately preceding 12 calendar months on Forms N-
CSR (Sec. Sec.  249.331 and 274.128 of this chapter), N-SAR (Sec. Sec.
249.330 and 274.101 of this chapter), N-Q (Sec. Sec.  249.332 and
274.130 of this chapter), N-PORT (Sec.  274.150 of this chapter), N-MFP
(Sec.  274.201 of this chapter), and N-CEN (Sec. Sec.  249.330 and
274.101 of this chapter) pursuant to section 30 of the Investment
Company Act; or
    (2) If the covered investment fund is not a registered investment
company under the Investment Company Act, has been subject to the
reporting requirements of section 13 or section 15(d) of the Securities
Exchange Act of 1934 (the ``Exchange Act'') (15 U.S.C. 78m or 78o(d))
for a period of at least 12 calendar months and has filed in a timely
manner all of the reports required to be filed for the immediately
preceding 12 calendar months on Forms 10-K (Sec.  249.310 of this
chapter) and 10-Q (Sec.  249.308a of this chapter), or 20-F (Sec.
249.220f of this chapter) pursuant to section 13 or section 15(d) of
the Exchange Act; and
    (B) The aggregate market value of voting and non-voting common
equity held by non-affiliates of the covered investment fund, or, in
the case of a registered open-end investment company (other than an
exchange-traded fund) its net asset value (subtracting the value of
shares held by affiliates), equals or exceeds the aggregate market
value specified in General Instruction I.B.1 of Form S-3; and
    (ii) The broker or dealer publishes or distributes research reports
in the regular course of its business and, in the case of a research
report regarding a covered investment fund that does not have a class
of securities in substantially continuous distribution, such
publication or distribution does not represent the initiation of
publication of research reports about such covered investment fund or
its securities or reinitiation of such publication following
discontinuation of publication of such research reports.
    (2) Industry reports. (i) The covered investment fund is subject to
the reporting requirements of section 30 of the Investment Company Act
(15 U.S.C. 80a-29) or, if the covered investment fund is not a
registered investment company under the Investment Company Act, is
subject to the reporting requirements of section 13 or section 15(d) of
the Exchange Act (15 U.S.C. 78m or 78o(d));
    (ii) The research report:
    (A) Includes similar information with respect to a substantial
number of covered investment fund issuers of the issuer's type (e.g.,
money market fund, bond fund, balanced fund, etc.), or investment focus
(e.g., primarily invested in the same industry or sub-industry, or the
same country or geographic region); or
    (B) Contains a comprehensive list of covered investment fund
securities currently recommended by the broker or dealer (other than
securities of a covered investment fund that is an affiliate of the
broker or dealer, or for which the broker or dealer serves as
investment adviser (or for which the broker or dealer is an affiliated
person of the investment adviser));
    (iii) The analysis regarding the covered investment fund issuer or
its securities is given no materially greater space or prominence in
the publication than that given to other covered investment fund
issuers or securities; and
    (iv) The broker or dealer publishes or distributes research reports
in the regular course of its business and, at the time of the
publication or distribution of the research report (in the case of a
research report regarding a covered investment fund that does not have
a class of securities in substantially continuous distribution), is
including similar information about the issuer or its securities in
similar reports.
    (b) Self-regulatory organization rules. A self-regulatory
organization shall not maintain or enforce any rule that would prohibit
the ability of a member to publish or distribute a covered investment
fund research report solely because the member is also participating in
a registered offering or other distribution of any securities of such
covered investment fund; or to participate in a registered offering or
other distribution of securities of a covered investment fund solely
because the member has published or distributed a covered investment
fund research report about such covered investment fund or its
securities. For purposes of section 19(b) of the Exchange Act (15
U.S.C. 78s(b)), this paragraph (b) shall be deemed a rule under that
Act.
    (c) Definitions. For purposes of this section:
    (1) ``Affiliated person'' has the meaning given the term in section
2(a) of the Investment Company Act.
    (2) ``Covered investment fund'' means:
    (i) An investment company (or a series or class thereof) registered
under, or that has filed an election to be treated as a business
development company under, the Investment Company Act and that has
filed a registration statement under the Act for the public offering of
a class of its securities, which registration statement has been
declared effective by the Commission; or
    (ii) A trust or other person:
    (A) Issuing securities in an offering registered under the Act and
which class of securities is listed for trading on a national
securities exchange;
    (B) The assets of which consist primarily of commodities,
currencies, or derivative instruments that reference commodities or
currencies, or interests in the foregoing; and
    (C) That provides in its registration statement under the Act that
a class of its securities are purchased or redeemed, subject to
conditions or limitations, for a ratable share of its assets.
    (3) ``Covered investment fund research report'' means a research
report published or distributed by a broker or dealer about a covered
investment fund or any securities issued by the covered investment
fund, but does not include a research report to the extent that the
research report is published or distributed by the covered investment

fund or any affiliate of the covered investment fund, or any research
report published or distributed by any broker or dealer that is an
investment adviser (or any affiliated person of an investment adviser)
for the covered investment fund.
    (4) ``Exchange-traded fund'' has the meaning given the term in
General Instruction A to Form N-1A (Sec. Sec.  239.15A and 274.11A of
this chapter).
    (5) ``Investment adviser'' has the meaning given the term in
section 2(a) of the Investment Company Act.
    (6) ``Research report'' means a written communication, as defined
in Sec.  230.405 that includes information, opinions, or
recommendations with respect to securities of an issuer or an analysis
of a security or an issuer, whether or not it provides information
reasonably sufficient upon which to base an investment decision.
0
4. Effective May 1, 2020, amend Sec.  230.139b by removing ``N-Q
(Sec. Sec.  249.332 and 274.130 of this chapter),'' in paragraph
(a)(1)(i)(A)(1).

PART 242--REGULATIONS M, SHO, ATS, AC, NMS, AND SBSR AND CUSTOMER
MARGIN REQUIREMENTS FOR SECURITY FUTURES

0
5. The authority citation for part 242 continues to read as follows:

    Authority:  15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2),
78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g),
78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, and
80a-37.

0
6. Section 242.101 is amended by revising paragraph (b)(1) to read as
follows:

Sec.  242.101.   Activities by distribution participants.

* * * * *
    (b) * * *
    (1) Research. The publication or dissemination of any information,
opinion, or recommendation, if the conditions of Sec.  230.138, Sec.
230.139, or Sec.  230.139b of this chapter are met; or
* * * * *

PART 270--RULE AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

0
7. The authority citation for part 270 continues to read, in part, as
follows:

    Authority:  15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39,
and Pub. L. 111-203, sec. 939A, 124 Stat. 1376 (2010), unless
otherwise noted.
* * * * *
0
8. Add Sec.  270.24b-4 to read as follows:

Sec.  270.24b-4   Filing copies of covered investment fund research
reports.

    A covered investment fund research report, as defined in paragraph
(c)(3) of Sec.  230.139b of this chapter under the Securities Act of
1933 (15 U.S.C. 77a et seq.), of a covered investment fund registered
as an investment company under the Investment Company Act, shall not be
subject to section 24(b) of the Act or the rules and regulations
thereunder, except that such report shall be subject to such section
and the rules and regulations thereunder to the extent that it is
otherwise not subject to the content standards in the rules of any
self-regulatory organization related to research reports, including
those contained in the rules governing communications with the public
regarding investment companies or substantially similar standards.

    By the Commission.

    Dated: May 23, 2018.
Brent J. Fields,
Secretary.
[FR Doc. 2018-11497 Filed 6-7-18; 8:45 am]
 BILLING CODE 8011-01-P


[Federal Register Volume 78, Number 128 (Wednesday, July 3, 2013)]
[Notices]
[Pages 40263-40264]
[FR Doc No: 2013-16063]

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DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

Agency Information Collection Activities: Requests for Comments;
Clearance of Renewed Approval of Information Collection: Aging Aircraft
Program (Widespread Fatigue Damage)

AGENCY: Federal Aviation Administration (FAA), DOT.

ACTION: Notice and request for comments.

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

SUMMARY: In accordance with the Paperwork Reduction Act of 1995, FAA
invites public comments about our intention to request the Office of
Management and Budget (OMB) approval to renew an information
collection. The ``Aging Aircraft Program (Widespread Fatigue Damage)''
final rule (75 FR 69745) amended FAA regulations pertaining to
certification and operation of transport category airplanes to preclude
widespread fatigue damage in those airplanes.

DATES: Written comments should be submitted by September 3, 2013.

FOR FURTHER INFORMATION CONTACT: Kathy DePaepe at<PHONE_NUMBER>, or by
email at<EMAIL_ADDRESS>
SUPPLEMENTARY INFORMATION:

    OMB Control Number: 2120-0743.
    Title: Aging Aircraft Program (Widespread Fatigue Damage).
    Form Numbers: There are no FAA forms associated with this
collection of information.
    Type of Review: Renewal of an information collection.
    Background: The rule requires that type certificate and
supplemental type certificate holders use documentation to demonstrate
to their FAA Oversight Office that they have complied with the rule by
establishing limits of validity of the engineering data that supports
the maintenance program (LOVs). Operators would submit the LOV to their
Principal Maintenance Inspectors to demonstrate that they are compliant
with the rule.
    Respondents: Approximately 30 type certificate holders,
supplemental type certificate holders, and operators.
    Frequency: Information is collected annually.
    Estimated Average Burden per Response: 20 hours.
    Estimated Total Annual Burden: 167 hours.

ADDRESSES: Send comments to the FAA at the following address: Ms. Kathy
DePaepe, Room 126B, Federal Aviation Administration, AES-200, 6500 S.
MacArthur Blvd., Oklahoma City, OK 73169.
    Public Comments Invited: You are asked to comment on any aspect of
this information collection, including (a) Whether the proposed
collection of information is necessary for FAA's performance; (b) the
accuracy of the estimated burden; (c) ways for FAA to enhance the
quality, utility and clarity of the information collection; and (d)
ways that the burden could be minimized without reducing the quality of
the collected information. The agency will summarize and/or include
your comments in the request for OMB's clearance of this information
collection.

    Issued in Washington, DC, on June 25, 2013.
Albert R. Spence,
FAA Assistant Information Collection Clearance Officer, IT Enterprises
Business Services Division, AES-200.
[FR Doc. 2013-16063 Filed 7-2-13; 8:45 am]
BILLING CODE 4910-13-P