interests and that the firm trades the securities covered in the report
for its own account and on a discretionary basis on behalf of certain
customers, and such trading interests may be contrary to the
recommendation in the report.\114\ Thus, the second and third
disclosures described above would be required only if the member
produces both retail and institutional debt research reports that
sometimes differ in their views or if the member maintains a
proprietary trading desk or trades on a discretionary basis on behalf
of some customers and those interests sometimes are contrary to
recommendations in institutional debt research reports. Although FINRA
typically favors specific disclosure e.g., that a view or
recommendation does, in fact, differ or is contrary to the member's
trading interests--FINRA believes that the cost to track and identify a
specific conflict with respect to institutional debt research reports
exceeds the value that specific disclosure would provide to
sophisticated institutional investors, particularly since those
investors value timely analysis and trade ideas that could be
diminished due to the burdens associated with a specific disclosure
requirement.
---------------------------------------------------------------------------

    \114\ See proposed FINRA Rule 2242(j)(3). With respect to the
disclosure requirement, if applicable, that the views in the
institutional debt research report may differ from views in retail
debt research, FINRA notes institutional debt research is not
subject to Supplementary Material .06, which otherwise requires a
member to inform its customers of the existence of a different
research product offered to other customers that may reach different
conclusions or recommendations that could impact the price of the
debt security.
---------------------------------------------------------------------------

    FINRA believes that this approach will maintain the flow of
institutional debt research to most institutional investors and allow
firms to leverage existing compliance efforts, while ensuring that
those investors who receive institutional debt research through
negative consent have a high level of experience in evaluating
transactions involving debt securities, and that certain protections
remain in place to manage potential conflicts of interest. In addition,
FINRA believes that this approach appropriately acknowledges the arm's-
length nature of transactions between trading desk personnel and
institutional buyers. Finally, FINRA notes that no institutional
investor will be exposed to this less-protected institutional research
without either negative or affirmative consent, as applicable.
    The proposed rule change would require members to establish,
maintain and enforce written policies and procedures reasonably
designed to ensure that institutional debt research is made available
only to eligible institutional investors.\115\ A member may not rely on
the proposed exemption with respect to a debt research report that the
member has reason to believe will be redistributed to a retail
investor. The proposed rule change also states that the proposed
exemption does not relieve a member of its obligations to comply with
the antifraud provisions of the federal securities laws and FINRA
rules.\116\
---------------------------------------------------------------------------

    \115\ See proposed FINRA Rule 2242(j)(4).
    \116\ See proposed FINRA Rule 2242(j)(5).
---------------------------------------------------------------------------

General Exemptive Authority
    The proposed rule change would provide FINRA, pursuant to the FINRA
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.\117\ Given the scope of the rule's subject
matter and the diversity of firm sizes, structures and research
business and distribution models, FINRA believes it would be useful and
appropriate to have the ability to provide relief from a particular
provision of the proposed rules under specific factual circumstances.
---------------------------------------------------------------------------

    \117\ See proposed FINRA Rule 2242(k).
---------------------------------------------------------------------------

    FINRA will announce the effective date of the proposed rule change
in a Regulatory Notice to be published no later than 60 days following
Commission approval. The effective date will be no later than 180 days
following publication of the Regulatory Notice announcing Commission
approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\118\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. FINRA believes that the proposed rule change would
promote increased quality, objectivity and transparency of debt
research distributed to investors by requiring firms to identify and
mitigate conflicts in the preparation and distribution of such
research. FINRA further believes the rule will provide investors with
more reliable information on which to base investment decisions in debt
securities, while maintaining timely flow of information important to
institutional market participants and providing those institutional
investors with appropriate safeguards.
---------------------------------------------------------------------------

    \118\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. The proposed rule change
largely adopts provisions that have proven effective to promote
objective and reliable research in the equity research space, as
detailed through academic studies and other observations in the Joint
Report and the GAO Report.\119\ The GAO report, for example, concluded
that empirical studies suggest the rules have resulted in increased
analyst independence and weakened the influence of conflicts of
interest on analyst recommendations.\120\
---------------------------------------------------------------------------

    \119\ See Joint Report, supra note 8 at 12-23.
    \120\ See GAO Report, supra note 9 at 11-15.
---------------------------------------------------------------------------

    The proposed rule change would adopt a policies and procedures
approach that allows members to implement a compliance system that

aligns with their particular structure and business models, without
diminishing investor protection. FINRA believes that this proposed
approach imposes less cost on members without reducing investor
protections than does a purely prescriptive approach or ``one size fits
all'' approach with respect to compliance. In addition, the proposed
rule adopts a substantial portion of the equity research rules. FINRA
believes that many of the same conflicts of interest are present in the
publication and distribution of equity and debt research and that
consistency among the debt and equity research rules will further
minimize the burdens to members to comply with the proposed rule
change.
    As set forth in Item II.C., FINRA elicited comment on proposed debt
research rules in two separate Regulatory Notices. In each instance,
FINRA carefully considered the commenters' concerns and amended the
proposal to address issues with respect to costs and burdens raised by
commenters. Even before the two proposals, FINRA issued a concept
proposal in Regulatory Notice 11-11 to gather information and identify
provisions of the equity research rules that would not be efficient or
effective in a debt research proposal. For example, the concept
proposal included a parallel provision to the equity rules that would
have required a firm to promptly notify its customers if it intends to
terminate coverage in a debt security and include with the notice a
final research report. If it were impracticable to provide such final
report, the concept proposal would have required a firm to disclose to
customers its reason for terminating coverage. FINRA recognized that
firms may have an extensive coverage universe of debt securities that
may only be the subject of episodic research coverage. As such, FINRA
determined that the termination of coverage provision in the debt
context would be overly burdensome to firms relative to its investor
protection value and therefore eliminated the provision from this
revised proposal.
    In addition, and as detailed below in Item II.C., FINRA considered
numerous iterations of an institutional exemption for debt research.
Several commenters raised issues regarding an earlier provision that
would have required affirmative consent for all institutional
investors. In response to comments that the proposal was overly
burdensome and may exclude a significant number of institutional
investors from receiving the debt research that they receive today,
FINRA is now proposing a higher tier of institutional investors that
may receive institutional debt research based on negative consent. As
set forth in Regulatory Notice 12-42, FINRA also made several other
changes and clarifications in response to comments, including to the
definition of ``debt research report,'' the standard for disclosure of
conflicts and the permissible interactions between debt research
analysts and sales and trading personnel.
    FINRA also considered an alternative suggested by commenters to
exempt all trader commentary from the protections of the proposed rule.
FINRA did not adopt this alternative because it would create an avenue
through which firms could funnel debt research to retail investors
without objectivity and reliability safeguards or disclosure of
conflicts. FINRA reviewed examples of trader commentary and believes
that many of those communications either do not meet the definition of
a research report or are subject to exceptions from that definition.
For those that are debt research reports, FINRA believes retail
recipients should be entitled to the same protections, irrespective of
the author or department of origin. FINRA further understands that most
trader commentary is intended for sophisticated institutional
investors, and to the extent a firm limits distribution to eligible
institutional investors, most of the provisions of the proposed rule
change would not apply. Therefore, FINRA believes its institutional
exemption approach strikes the appropriate balance between protecting
retail investors and maintaining timely information flow to more
sophisticated investors.
    FINRA also sought comment and engaged in data analysis, as
described in Item II.A.1., to fashion exemptions for firms with limited
investment banking activity and limited principal trading activity. In
combination with the institutional investor exemption, FINRA believes
the proposed rule change is narrowly tailored to achieve its regulatory
objectives.
    Finally, FINRA notes that it solicited comment in Regulatory Notice
12-42 on the economic impact of the proposed rule change, including
quantified costs and the anticipated effects on competition, but
received little or no feedback.

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

    Earlier iterations of the proposed rule change were published for
comment in Regulatory Notice 12-09 (``Regulatory Notice 12-09 Proposal)
and Regulatory Notice 12-42 (''Regulatory Notice 12-42 Proposal'')
(together, the ``Notice Proposals''). Copies of the Regulatory Notices
are attached as Exhibit 2a. A list of the commenters and copies of the
comment letters received in response to the Notice Proposals are
attached as Exhibits 2b and 2c, respectively.
    The Regulatory Notice 12-09 Proposal sought comment on a proposed
rule to govern the preparation and distribution of debt research
pursuant to a tiered approach based on whether debt research is
distributed to retail or institutional investors. Under the proposal,
debt research distributed to retail investors would carry most of the
same protections provided to recipients of equity research, while
institutional investors could affirmatively opt in to a framework that
would exempt such research from many of those provisions. FINRA
received seven comments in response to the proposal.\121\ Commenters
suggested significant changes to the proposal, most notably with
respect to the definitions of ``debt security'' and ``debt research
report,'' the opt-in requirement for institutional investors, and the
restrictions on input into debt research budget and compensation
determinations by those involved in principal trading activities.
---------------------------------------------------------------------------

    \121\ See Letter from Joseph R.V. Romano, President, Romano
Brothers & Co., to Marcia E. Asquith, Corporate Secretary, FINRA,
dated March 31, 2012 (``Romano''); letter from Ryan K. Bakhtiari,
President, Public Investors Arbitration Bar Association, to Marcia
E. Asquith, Corporate Secretary, FINRA, dated April 2, 2012
(``PIABA''); letter from Ira D. Hammerman, Senior Managing Director,
General Counsel and Secretary, Securities Industry and Financial
Markets Association, to Marcia E. Asquith, Corporate Secretary,
FINRA, dated April 2, 2012 (``SIFMA''); letter from Michael
Nicholas, CEO, Bond Dealers of America, to Marcia E. Asquith,
Corporate Secretary, FINRA, dated April 2, 2012 (``BDA''); letter
from Lee A. Pickard and William D. Edick, Pickard and Djinis LLP, to
Marcia E. Asquith, Corporate Secretary, FINRA, dated April 2, 2012
(``ASIR''); letter from Chris Charles, President, Wulff, Hansen &
Co., to Marcia E. Asquith, Corporate Secretary, FINRA, dated April
5, 2012 (``Wulff''); and letter from Amy Natterson Kroll, Bingham
McCutchen LLP, to Marcia E. Asquith, Corporate Secretary, FINRA,
dated April 10, 2012 (``Morgan Stanley'').
---------------------------------------------------------------------------

    FINRA addressed several of the commenters' concerns in the
Regulatory Notice 12-42 Proposal, which included, among other things,
amended exemptions for research distributed to certain institutional
investors and for firms with limited principal debt trading activity.
The amended exemption for institutional investors added a higher tier
of institutional investor that could receive institutional debt
research by negative consent. FINRA received five comment letters on

the proposal.\122\ The comments focused on two primary issues: The
higher tier definition of institutional investor and the restrictions
on input by principal trading personnel into research budget and
evaluation and compensation determinations. Despite specific requests
in the Regulatory Notice, FINRA received little or no comment on the
economic impact of the proposal or any particular provisions.
---------------------------------------------------------------------------

    \122\ See Letter from Kurt N. Schacht, Managing Director, and
Linda L. Rittenhouse, Director, CFA Institute, to Marcia E. Asquith,
Corporate Secretary, FINRA, dated December 7, 2012 (``CFA''); letter
from Michael Nicholas, CEO, Bond Dealers of America, to Marcia E.
Asquith, Corporate Secretary, FINRA, dated December 20, 2012
(``BDA''); letter from Lee A. Pickard and William D. Edick, Pickard
and Djinis LLP, to Marcia E. Asquith, Corporate Secretary, FINRA,
dated December 20, 2012 (``ASIR''); letter from Roberts J. Stracks,
Counsel, BMO Capital Markets GKST Inc., to Marcia E. Asquith,
Corporate Secretary, FINRA, dated December 20, 2012 (``BMO''); and
letter from Kevin A. Zambrowicz, Managing Director, Associate
General Counsel, Securities Industry and Financial Markets
Association, to Marcia E. Asquith, Corporate Secretary, FINRA, dated
January 4, 2013 (``SIFMA'').
---------------------------------------------------------------------------

    A summary of the comments received on the Notice Proposals and
FINRA's responses are set forth below.
Definitions
    The Regulatory Notice 12-09 Proposal defined ``debt security'' to
mean any ``security'' as defined in Section 3(a)(10) of the Exchange
Act, except for any ``equity security,'' ``municipal security'' or
``security-based swap'' as defined in Section 3(a) of the Exchange Act,
or any U.S. Treasury Security as defined in FINRA Rule 6710(p). SIFMA
and BDA urged FINRA to expand the exceptions to the definition to
include U.S. agency securities and investment grade foreign government
securities. BDA again urged FINRA to exclude U.S. agency securities in
response to the Regulatory Notice 12-42 Proposal. SIFMA further asked
FINRA to clarify that ``derivatives,'' as defined in the CFTC conflict
rules are excluded from the definition of ``debt security'' because
they are subject to a separate federal regulatory regime. PIABA, on the
other hand, thought FINRA should include municipal securities and
security-based swaps within the definition.
    FINRA did not believe it was appropriate to expand the exceptions
to the definition of ``debt security'' to include agency securities or
foreign sovereign debt securities and did not propose these changes to
the definition. FINRA has not provided these exclusions in the proposed
rule change for a variety of reasons. First, commenters did not provide
a rationale to exclude other non-equity securities. Second, treasury
securities are excluded because FINRA is reticent to interfere with the
markets involving direct obligations of the United States. In contrast,
FINRA already has reporting schemes around agency securities and does
not think it appropriate to carve out Fannie Mae and Freddie Mac
securities, for example. Municipal securities were excluded from the
proposal in part due to FINRA's jurisdictional limitations with respect
to those securities, so suggestions to exclude other securities as
analogous to municipals are misplaced.
    FINRA believes an exclusion for foreign sovereign debt of other G-
20 countries is too broad, as the conflicts the rules address are
similarly present with respect to research on such securities, and
therefore retail investors would benefit from the proposal's
protections. Alternatively, commenters asked for greater flexibility
with respect to disclosure of compensation on foreign sovereign issues,
in large part due to tracking difficulties given the many and diverse
relationships that firms' affiliates have with governments. In
response, FINRA amended the proposal to permit firms, in lieu of
disclosing investment banking compensation received by a non-U.S.
affiliate from foreign sovereigns, to instead implement information
barriers between that affiliate and the debt research department to
prevent direct or indirect receipt of such information.\123\ However,
the proposed rule change would still require disclosure if the debt
research analyst has actual knowledge of receipt of investment banking
compensation by the non-U.S. affiliate.
---------------------------------------------------------------------------

    \123\ See proposed FINRA Rule 2242. 04 (Disclosure of
Compensation Received by Affiliates).
---------------------------------------------------------------------------

    As stated in Item II.A. above, the proposed rule excludes security-
based swaps from the definition of debt security given the nascent and
evolving nature of security-based swaps regulation. FINRA intends to
monitor regulatory developments with respect to security-based swaps
and may determine to later include such securities in the definition of
debt security.
    The Regulatory Notice 12-09 proposal defined ``debt research
report'' as any written (including electronic) communication that
includes an analysis of debt securities and that provides information
sufficient upon which to base an investment decision. The term excluded
the same communications excepted from the definition of ``research
report'' in NASD Rule 2711. Morgan Stanley and SIFMA suggested that the
definition should be amended to conform to the definition of ``research
report'' in Regulation AC, which defines ``research report'' as a
``written communication . . . that includes an analysis of a security
or issuer . . . .'' They further suggested that FINRA should include an
exception from the definition of ``research report'' similar to
interpretive guidance found in the Commission's adopting release about
the general characteristics of that term as it is used in Regulation AC
for ``reports commenting on or analyzing particular types of debt
securities or characteristics of debt securities'' that do not include
an analysis of, or recommend or rate individual securities or
companies. In response to comments to both of the Notice Proposals,
FINRA agreed that the definition of ``debt research report'' should be
consistent with the definition in Regulation AC and therefore amended
the proposal to achieve that regulatory harmony, including the
exception for reports on classes of debt securities. This amendment is
reflected in the proposed rule change.
    In response to a suggestion by BDA to the Regulatory Notice 12-09
Proposal, FINRA included the exceptions to the definition of ``debt
research report'' in the rule text rather than by reference to the
exceptions in NASD Rule 2711. BDA, BMO, Morgan Stanley, SIFMA, and
Wulff, in response to one or both of the Notice Proposals, suggested
that FINRA should exclude from the definition desk communications,
including trader commentary, if such communications are sent only to
institutional investors. Among other arguments, these commenters
asserted that trader commentary is common in the debt markets, that
institutions don't rely on it as the sole basis for their investment
decisions and that inclusion of trader commentary within the definition
of ``debt research report'' is unduly burdensome and costly and could
reduce available market information to investors without ``commensurate
policy returns.'' BDA asserted that the proposal would categorically
eliminate an entire segment of analysis for retail investors without
providing evidence that it is a harmful or abusive practice. In
response to Regulatory Notice 12-42, BDA also stated that the
definition should exclude offering documents for unregistered
transactions and securities and any document prepared by or at the
request of the issuer or obligor of a security.
    FINRA continues to believe it imprudent to create a broad exception
from the definition of ``debt research report'' based on the author or

department of origin. As explained in Regulatory Notice 12-09, such an
approach creates a potential loophole through which biased and non-
transparent research could be disseminated to investors, including
retail investors. FINRA notes that the Sarbanes-Oxley Act declined to
adopt such an approach in the equity context. Furthermore, Regulation
AC has no such exception, so the regulatory consistency that commenters
seek would be undermined. If, as commenters maintain, trader commentary
is mostly provided only to institutions, then the institutional
research exemption could exclude these communications from most of the
provisions of the rule that otherwise apply to retail debt research for
institutions that opt in. While FINRA understands that institutions may
be more attuned to conflicts, FINRA believes it appropriate that even
institutional debt research should retain certain minimum standards of
independence and transparency, including restrictions on prepublication
review by investment banking and the issuer, prohibitions on promises
of favorable research as an inducement for receipt of business or
compensation and general disclosure alerting recipients of the lesser
standards and potential conflicts of interest attendant to the research
report.
    FINRA declined BDA's suggestion to exclude from the definition of
``debt research report'' offering documents for unregistered
transactions or any document prepared by or at the request of the
issuer or obligor of a security. BDA offered no rationale for the
exclusions, which would be inconsistent with Regulation AC. Moreover,
FINRA believes an exception for any document requested by an issuer
would seriously undermine the regulatory purpose of the proposed rule
change because it would allow a broker-dealer to distribute to retail
investors a communication that contains all of the elements of a debt
research report but none of the protections where the issuer, a
conflicted party, requested it be created.
Prepublication Review
    The proposed rule change maintains provisions in the Notice
Proposals that would prohibit prepublication review, clearance or
approval of debt research reports by investment banking, principal
trading and sales and trading personnel. In response to the Regulatory
Notice 12-09 Proposal, SIFMA contended that the rule should permit
investment banking and sales and trading to review debt research
reports prior to publication for factual accuracy, subject to
appropriate supervision. As an example, SIFMA cited research on new
complex structured products, suggesting analysts need to verify with
investment banking or sales and trading that the basic facts about the
products are correct and to corroborate the accuracy of the analyst's
statements regarding trading activity, prevailing market prices or
yields. SIFMA also pointed out that current NASD Rule 2711 permits such
factual review of research reports by investment banking and other non-
research personnel.
    First, FINRA notes that it has proposed to eliminate any
prepublication review by investment banking or other persons not
directly responsible for the preparation, content and distribution of
equity research reports, other than legal and compliance personnel.
FINRA believes that review of facts in a report by investment banking
and other non-research personnel is unnecessary in light of the
numerous other sources available to verify factual information,
including the subject company. FINRA notes that such review may invite
pressure on a research analyst that could be difficult to monitor.
FINRA further notes that such factual review is not permitted under the
terms of the Global Settlement \124\ and that FINRA staff has seen no
evidence that the factual accuracy of research produced by Global
Settlement firms has suffered. Second, with respect to debt research,
the proposal delineates certain permissible communications between debt
research analysts and sales and trading and principal trading personnel
necessary for each to effectively discharge their responsibilities and
facilitate debt market trading. Among the allowable communications, a
debt research analyst may seek information from sales and trading and
principal trading personnel regarding a ``particular bond instrument,
current prices, spreads, liquidity and similar market information
relevant to the debt research analyst's valuation of a particular
security.'' In light of these permissible communications, and the other
reasons stated above, FINRA sees no compelling reason why a debt
research analyst needs further factual review from sales and trading or
principal trading personnel by sharing portions of a draft research
report. FINRA believes that any incremental improvement in accuracy by
permitting factual review by investment banking, principal trading or
sales and trading personnel is outweighed by the increased risk of
pressure on a research analyst and the prospect that the perceived
objectivity of the research may be undermined. Therefore, the proposed
rule change does not incorporate the commenter's suggestion.
---------------------------------------------------------------------------

    \124\ See Letter from James A. Brigagliano, Assistant Director,
SEC Division of Trading and Markets, to Dana G. Fleischman, Clearly,
Gottlieb, Steen & Hamilton, dated Nov. 2, 2004.
---------------------------------------------------------------------------

Research Department Budget
    The Regulatory Notice 12-09 Proposal limited determination of the
research department budget to senior management, other than persons
engaged in investment banking or principal trading activities, and
without regard to specific revenues or results derived from those
activities. However, the proposal noted that revenues and results of
the firm as a whole may be considered in determining the debt research
department budget and allocation of research department expenses.
Moreover, the proposal permitted all persons within the firm to provide
senior management input regarding the demand for and quality of debt
research, including product trends and customer interests.
    In response to that proposal, SIFMA commented that senior
management should be permitted to consider principal trading and other
business revenues in making budget decisions, else senior management
cannot accurately marry research funding to customer needs. SIFMA
further contended that the proposal's other provisions adequately
safeguard against inappropriate pressures by investment banking and
principal trading with respect to debt research budget determinations.
The Regulatory Notice 12-42 Proposal maintained these restrictions on
debt research budget input, and in response, SIFMA again asserted that
the provision denies research management the ability to assess the
value of the permissible input by comparing it to the revenues
generated from principal trading activities, thereby resulting in a
misallocation of resources. SIFMA contended that the allocation of the
research department's resources to a particular asset class ``will be
and should be influenced by the size and profitability of the
respective market.''
    FINRA appreciates the desire of firms to allocate research costs
based on the revenues to which the research department contributes, but
also sees a countervailing investor protection interest in firms
managing conflicts between their revenue-producing operations and
research. FINRA believes that the size and allocation of the research
budget should be insulated from pressure by those business

segments. In the case of investment banking, FINRA believes the
conflict is too pronounced to allow any consideration of investment
banking revenues in determining the research department budget.
However, given the vast array of debt securities and classes, FINRA
believes it appropriate to allow some consideration of revenue streams
in allocating research budget resources. Therefore, the proposed rule
change would permit consideration of those revenues, provided that: (1)
Senior management, other than persons engaged in principal trading or
investment banking activities, makes the final research department
budget determination; \125\ and (2) the member establishes information
barriers or other institutional safeguards to ensure that debt research
analysts are insulated from the review, pressure or oversight by
persons engaged in principal trading activities, among others.\126\
---------------------------------------------------------------------------

    \125\ See proposed FINRA Rule 2242(b)(2)(E).
    \126\ See proposed FINRA Rule 2242(b)(2)(H).
---------------------------------------------------------------------------

Debt Research Analyst Evaluation and Compensation
    With respect to evaluation and compensation of debt research
analysts, the proposed rule change maintains a provision in the Notice
Proposals that would allow sales and trading personnel, but not persons
engaged in principal trading activities, to provide input to research
management into the evaluation of a debt research analyst, so long as
research management makes final determinations on compensation, subject
to review by the compensation committee.
    In response to the Regulatory Notice 12-09 Proposal, SIFMA argued
that the proposal was too strict in prohibiting the input of principal
trading personnel and contributions to principal trading activities in
determining debt research analyst compensation. SIFMA asserted that as
long as final compensation decisions rest with research management and
the compensation committee, FINRA should allow input from principal
trading personnel because those individuals regularly interface with
customers and therefore are a necessary resource for customer feedback
on the quality and productivity of debt research analysts. SIFMA also
noted that the provision would preclude input from persons who wear
multiple hats and engage in both sales and principal trading
activities. Finally, SIFMA contended that compensation prohibitions
fail to acknowledge the important role that debt research analysts play
in assisting market making and customer facilitation desks.
    In response to Regulatory Notice 12-42, SIFMA reiterated that the
provision will deprive research management of important client feedback
to evaluate debt research analysts' performance because principal
traders are the primary conduit for such information. According to
SIFMA, there are limited means to obtain direct customer feedback on
the quality of research, and reliance on the sales force to provide
customer feedback is inadequate because debt traders can have as much
or more interaction with clients. In addition, SIFMA noted that the
CFTC business conduct rules permit employees of the business trading
unit or clearing unit of a swap dealer or major swap participant to
communicate customer feedback, ratings and other indicators of research
analyst performance to research department management.\127\
---------------------------------------------------------------------------

    \127\ The CFTC rules apply to research on derivatives, which is
predominantly an institutional business. As noted below, the
proposed rule change exempts from the compensation prohibitions
institutional debt research. By comparison, SIFMA asked to allow
principal traders to relay customer feedback in connection with
retail debt research.
---------------------------------------------------------------------------

    While FINRA recognizes that there is some value in input from those
engaged in principal trading activities, FINRA believes such input is
outweighed by conflicts that could provide incentive for principal
trading personnel to reward or punish a debt research analyst with
selected feedback based on whether his or her research or trading ideas
benefitted the firm's trading activities. Conversely, debt research
analysts may feel compelled to produce research and trade ideas to
benefit firm or particular customer positions if their compensation is
tied to contributions to principal trading activities. Moreover, FINRA
believes, in part based on discussions with research management
personnel, that input from sales and trading personnel provides an
effective proxy for customer feedback, to the extent such feedback
cannot be obtained directly from customers. Furthermore, FINRA believes
that research management should be in a position to assess the quality
of the research it oversees. Finally, to the extent firms qualify for
the limited principal trading exemption in the proposed rule change,
dual-hatted persons engaged in both research and principal trading
activities would be able to provide feedback to research department
management.
    Given the importance of principal trading operations to the
revenues of many firms, FINRA believes there is increased risk that
principal traders could improperly pressure or influence debt research
if they have input into analyst compensation or can solicit, relay or
characterize customer feedback on retail debt research. FINRA believes
this risk, which if manifested could directly impact retail investors,
outweighs the benefit of an additional data point for research
management to evaluate the quality of research produced by analysts
they oversee.
    BDA stated that FINRA should amend the proposal to clarify that
debt research analyst compensation may be based on the revenues and
results of the firm as a whole. FINRA agrees that a member may consider
the overall success of the firm when determining a debt analyst's
compensation, provided the member complies with the compensation review
and approval requirements. FINRA notes that the proposed rule change
specifies that the revenues and results of the firm as a whole may be
considered in determining the research department budget, including
expenses. Since debt analyst compensation is a research department
expense, FINRA does not believe it necessary to further amend the
compensation provisions.
Prohibitions on Interactions With Investment Banking Personnel
    The proposed rule change would require members to have written
policies and procedures to prohibit participation in pitches and other
solicitations of investment banking services transactions and
participation in road shows and other marketing on behalf of an issuer
related to investment banking services transactions.
    The Regulatory Notice 12-09 Proposal had a similar provision, but
did not limit the marketing prohibition to investment banking services
transactions. SIFMA asked whether the proposed requirement with respect
to road shows was intended to operate identically with NASD Rule 2711.
SIFMA also asked FINRA to clarify that, consistent with NASD Rule 2711,
the prohibition on road shows is only intended to cover road shows and
other marketing related to an investment banking transaction and not
non-deal road shows. FINRA is primarily concerned with marketing by
research analysts in connection with an investment banking services
transaction, and therefore FINRA has added that limitation to the
provision in proposed rule change. FINRA notes, however, that the
overarching requirement to have written policies and procedures to
manage conflicts related to the interaction between debt research
analysts and, among others, subject companies would apply to other

marketing activity on behalf of an issuer. FINRA does not believe that
merely facilitating a meeting between issuer management and investors,
absent other facts, would constitute marketing on behalf of the issuer.
    In response to the Regulatory Notice 12-09 Proposal, SIFMA
contended that the prohibition on joint due diligence conducted with
the subject company in the presence of investment banking personnel was
overly restrictive. FINRA has clarified in the proposed rule change
that the prohibition on joint due diligence applies only during the
period prior to the selection by the issuer of the underwriters for the
investment banking services transaction.\128\ In response to the
Regulatory Notice 12-42 Proposal, SIFMA commented that debt research
analysts should be able to passively attend road show presentations
because, unlike equity analysts that frequently have access to issuer
management, the road show is often the only opportunity for a debt
research analyst to view an issuer's management presentation and
evaluate the credibility of management's business plan and outlook.
SIFMA contended that it is impractical for issuers to meet separately
with debt research analysts and challenging for analysts to call in and
listen to an issuer presentation. SIFMA also noted that the concern is
more pronounced in certain sectors of the debt markets, such as high-
yield and emerging markets.
---------------------------------------------------------------------------

    \128\ See proposed FINRA Rule 2242.09 (Joint Due Diligence).
---------------------------------------------------------------------------

    FINRA does not believe that the prohibition with respect to road
show participation should differ between the debt and equity research
rules, since the conflicts are the same. FINRA believes the ability to
listen remotely to a road show presentation provides debt research
analysts a reasonable means to hear the issuer management's story,
while not appearing to be part of the deal team to prospective
customers attending the presentation in person. Therefore, FINRA did
not amend this provision of the proposal.
Prohibitions on Interactions with Sales and Trading
    The proposed rule change maintains a provision in the Notice
Proposals that would require members to have written policies and
procedures to prohibit certain interactions between debt research and
sales and trading and principal trading personnel. The proposed rule
change also delineates prohibited and permissible communications
between those persons. In response to the Regulatory Notice 12-09
Proposal, SIFMA asked FINRA to clarify that the prohibition on
attempting to influence analysts for the purpose of benefiting the
firm, a customer or class of customers would not capture ordinary-
course communications and is meant to prohibit non-research direction
over the decision to publish a report and non-research direction over
the views and opinions expressed in debt reports. The proposed rule
provides that communications between debt research analysts and trading
desk personnel that are not related to sales and trading, principal
trading or debt research activities may take place without restriction,
unless otherwise prohibited.\129\
---------------------------------------------------------------------------

    \129\ See proposed FINRA Rule 2242.03(c).
---------------------------------------------------------------------------

    SIFMA also recommended that FINRA include in the proposed rule text
the language provided in Regulatory Notice 12-09 that, in assessing
whether a debt research analyst's permissible communications are
``inconsistent'' with the analyst's published research, firms may
consider the context, including that the investment objectives or time
horizons being discussed differ from those underlying the analyst's
published views. FINRA incorporated the suggested language into
proposed FINRA Rule 2242.\130\
---------------------------------------------------------------------------

    \130\ See proposed FINRA Rule 2242.03(b)(3).
---------------------------------------------------------------------------

    ASIR noted that the Regulatory Notice 12-09 Proposal goes beyond
NASD Rule 2711 by restricting not only communications between analysts
and investment banking, but also between debt research analysts and
sales and trading personnel. ASIR asserted that the debt research
proposal should only restrict communications between research and
investment banking personnel, so as to harmonize with the equity rules.
    The proposed rule change specifically addresses communications
between debt research and sales and trading and principal trading
personnel because the interests of the trading department create a
particularly pronounced conflict with respect to debt research. This is
because, under current market conditions, principal trading is far more
prevalent in the debt markets than in the equity markets. However,
FINRA continues to monitor the relationship between equity research and
sales and trading and principal trading personnel to assess whether
similar specific restrictions should be applied in the equity research
context. FINRA notes that the current and proposed equity research
rules do require firms to manage conflicts between equity research and
other non-research personnel, including those engaged in sales and
trading and principal trading activities.
Conflicts Disclosure
    With respect to the Regulatory Notice 12-09 Proposal, SIFMA and BDA
found overly broad the provision that requires disclosure of ``all
conflicts that reasonably could be expected to influence the
objectivity of the research report and that are known or should have
been known by the member or debt research analyst on the date of
publication or distribution of the report.'' SIFMA contended that the
language would require firms to identify ``all possible conflicts
(material or immaterial)'' and encouraged FINRA to either specify the
conflicts it intends to capture or rely on the standard in NASD Rule
2711 requiring disclosure of ``actual, material'' conflicts. SIMFA
further questioned whether conflicts could ever be expected to
influence the objectivity of research reports and suggested that
existing FINRA research rules and Regulation AC assume the contrary.
    In response to SIFMA's doubt that conflicts could ever be expected
to influence the objectivity of research reports, FINRA notes that its
research rules are premised on the belief that conflicts can be
disinfected--and possibly discouraged--by disclosure and will give
investors the material information needed to assess the objectivity of
a research report. In addition, the rules prohibit certain conduct
where the conflicts are too pronounced to be cured by disclosure. Yet
the rules do not--and cannot--identify every such conflict. Thus, at a
minimum, FINRA's proposal would require firms to identify and disclose
them.
    In general, FINRA believes that an immaterial conflict could not
reasonably be expected to influence the objectivity of a research
report, and therefore a materiality standard is essentially congruent
with the proposed standard. FINRA agrees that the ``catch-all''
disclosure provision captures such material conflicts that the research
analyst and persons with the ability to influence the content of a
research report know or have reason to know. Therefore, FINRA has
amended the proposal to delete as superfluous the overarching
obligation to disclose ``all conflicts that reasonably could be
expected to influence the objectivity of the research report and that
are known or should have been known by the member or research analyst
on the date of publication or distribution of the report.''

    SIFMA also contended that the requirement in proposed FINRA Rule
2242(c)(5) to disclose information on the date of publication or
distribution is broader than current NASD Rule 2711, which only applies
at the time of publication, and problematic logistically because the
broader standard is not reflective of the conflicts that apply at the
time the debt research analyst writes the research report. In addition,
SIFMA argues that it is unclear how members could control and prevent
the distribution of reports that have already been published in order
to determine if additional disclosures are required. FINRA notes that
the term ``distribution'' is drawn from the provisions of the Sarbanes-
Oxley Law that apply to equity research reports and is intended to
capture research that may only be distributed electronically as opposed
to published in hard copy. FINRA has included the same ``publication or
distribution'' language in the proposed changes to the equity research
rules. However, FINRA interprets this language to require the
disclosures to be current only as of the date of first publication or
distribution, provided that the research report is prominently dated,
and the disclosures are not known to be misleading.
    The proposed rule text in the Regulatory Notice 12-09 Proposal
required firms to ensure any recommendation or rating has a reasonable
basis in fact and is accompanied by a clear explanation of the
valuation method utilized and a fair presentation of the risks that may
impede achievement of the recommendation or rating. SIFMA requested
clarification that the requirement with respect to valuation method
should apply only if the analyst used a ``formal'' valuation method.
FINRA is not clear what constitutes a ``formal'' valuation method, but
made a clarification in the proposed rule change to provide that any
recommendation or rating must be accompanied by a clear explanation of
``any'' (as opposed to ``the'') valuation method used.
    SIFMA also sought several other clarifications on the proposal.
First, it asked FINRA to clarify that the requirement to include in
research reports that contain a rating a distribution of ``all
securities rated by the member to which the member would assign a
`buy,' `hold,' or `sell' rating'' is limited to debt securities. FINRA
agrees that the proposed provision is limited to debt securities and
has changed the text accordingly. Second, SIFMA sought flexibility to
make a good faith determination as to which securities constitute a
debt security that must be accompanied by a ``ratings table,'' given
that bonds of the same issuer may have different ratings. FINRA agrees
that any ratings table should reflect ratings of distinct securities
rather than issuers. Finally, SIFMA requested guidance to distinguish
between a ``recommendation'' and a ``rating'' for the purposes of
disclosure under the revised proposal. In particular, SIFMA suggested
that a recommendation of a relative value or paired trade idea should
constitute a recommendation but not a rating. While any determination
will be fact specific, FINRA believes in general that a recommendation
is a suggestion to make a particular investment while a rating is a
label or conclusion attached to a research report.
    SIFMA asked that FINRA allow firms to modify the required ``health
warning'' disclosure for institutional debt research to refer to ``this
document'' rather than ``this research report'' when the material is
not prepared by research department personnel. While FINRA would permit
firms to use the word ``document'' rather than ``research report,''
such labeling must be used consistently and would have no bearing on
whether the communication constitutes a ``research report'' for
purposes of the proposed rule.
Third-Party Research Reports
    With respect to distribution of third-party debt research reports,
SIMFA objected to requirements in the Notice Proposals that do not
currently apply to equity research under NASD Rule 2711. In particular,
SIFMA cited the requirement to establish, maintain and enforce written
policies and procedures reasonably designed to ensure that any third-
party debt research report it distributes is ``reliable and
objective.'' SIFMA stated that it is unclear what FINRA means by
``objective.'' With respect to the requirement to disclose ``any
material conflict of interest that can reasonably expected to have
influenced the choice of a third-party debt research provider or the
subject company of a third-party debt research report,'' SIFMA stated
that it is ``not clear what types of conflicts this provision is
intended to capture.''
    FINRA notes that its equity research proposal contains identical
requirements with respect to the selection and distribution of third-
party research. FINRA believes it reasonable to require firms to
conduct upfront due diligence on the quality of its third-party
research providers, particularly given the lesser review obligations
imposed prior to distribution. FINRA notes that Global Settlement firms
had to have such procedures to select their independent research
providers,\131\ and FINRA does not believe it unreasonable to have some
type of screening procedures to ensure, for example that the third-
party provider is not being paid by the issuer or that the research has
some kind of track record or good reputation. In fact, in a 2006
comment letter, SIFMA stated that firms should ``demand high
standards'' from providers of third-party research.\132\ FINRA further
believes it appropriate for firms to disclose to investors any
relationship, e.g., an affiliate relationship, or other circumstances
that rise to a material conflict of interest that could reasonably be
seen as having influenced the choice of third-party research provider.
FINRA believes this disclosure is consistent with the requirement to
disclosure material conflicts of interest with respect to a firm's own
research, and therefore will similarly promote objectivity and
transparency of information provided to investors that may influence
their investment decisions. FINRA notes that a firm may avoid the
requirement to review third-party research for false or misleading
statements if it chooses to distribute only independent third-party
research.\133\
---------------------------------------------------------------------------

    \131\ See Letter from James A. Brigagliano, Assistant Director,
SEC Division of Trading and Markets, to Dana G. Fleischman, Clearly,
Gottlieb, Steen & Hamilton, dated Nov. 2, 2004.
    \132\ See Letter from Michael D. Udoff, SIFMA, to Nancy M.
Morris, Secretary, SEC, dated Nov. 14, 2006.
    \133\ See proposed FINRA Rules 2242(g)(2) and (g)(4).
---------------------------------------------------------------------------

    In response to the Notice Proposals, ASIR commented that the
proposal could be read to impose obligations on members who make
available third-party research pursuant to Section 28(e) of the
Exchange Act to have procedures to ensure that such research is
reliable and objective and labeled in a certain manner. FINRA is not
proposing to make any changes based on this comment. However, research
made available pursuant to Section 28(e) is not ``distributed'' and
therefore the proposed requirements would not apply.
Institutional Investor Definition
    The Regulatory Notice 12-09 proposal would have exempted from many
of the rule's provisions debt research reports disseminated only to
``institutional investors,'' provided that those institutional
investors had, prior to receipt of a debt research report,
affirmatively notified the member in writing that they wished to forego
treatment as a retail investor for the

purposes of the rule. ASIR, BDA and SIFMA found this provision
unnecessarily burdensome and difficult to implement and track. The
commenters noted that they already expend resources to document similar
consents under FINRA's suitability rule and that the nature of research
distribution makes it more challenging than the suitability rule to
track and process all eligible institutional investors that have
consented to receive institutional debt research. Commenters instead
advocated an approach whereby persons or entities that otherwise meet
the definition of ``institutional investor''--as defined in FINRA Rule
4512(c)--are presumed to have consented to the institutional debt
research regime unless they affirmatively choose to receive the
protections afforded recipients of retail debt research. Among other
things, these commenters asserted that this alternative approach would
be less costly and burdensome to administer and that the remaining
protections afforded institutional debt research under the proposal,
together with the content standards applicable to institutional
communications pursuant to FINRA's Communications with the Public
rules,\134\ provide less sophisticated institutional investors adequate
protections should they not to choose be treated as retail investors
for the purposes of debt research.
---------------------------------------------------------------------------

    \134\ At the time of the comment letters, those content
standards were found in NASD IM-2110-1. Since that time, the
Commission has approved a consolidated FINRA communications with the
public rule, and those standards are now found in FINRA Rule
2210(d).
---------------------------------------------------------------------------

    After considering these comments and discussing the issue further
with industry members, FINRA proposed a revised institutional investor
exemption in the Regulatory Notice 12-42 Proposal. Under the revised
proposal, institutional investors that meet the definition of QIB and
satisfy the FINRA Rule 2111 institutional suitability standards with
respect to debt trading and strategies would be eligible to receive
institutional debt research by way of negative consent. Other
institutional investors that meet the definition in FINRA Rule 4512(c)
but do not satisfy the higher tier requirements could still
affirmatively elect in writing to receive institutional debt research.
The revised proposal asked whether alternative standards for the higher
tier would be more appropriate, including one that combines the FINRA
Rule 4512(c) definition and the institutional suitability requirements.
    CFA Institute supported the revised higher tier of QIB plus
suitability standard in Regulatory Notice 12-42. SIFMA, BDA and BMO
opposed it. BDA asserted that all QIBs should be able to receive
research on debt securities without consent since they are in the
business of investing and that an institutional suitability standard
should be imposed to determine whether other institutional accounts may
receive institutional debt research. BMO expressed concern that the
proposal to require affirmative consent is cumbersome and burdensome
and would deprive some smaller and mid-size institutional investors of
research they receive today, in part because experience has shown that
some institutional clients cannot or will not provide the affirmation
required in FINRA Rule 2111.
    SIFMA contended that the proposal had both practical and logical
flaws. SIFMA maintained that the QIB component would introduce a
problematic new standard that would require complex and costly systems
to track QIB certifications and link them to FINRA Rule 2111
certifications and research distribution lists. SIFMA stated that one
firm estimated a cost of $5 million to develop such a system. SIFMA
further noted that suitability certifications are tracked at the order
placer level, whereas QIBs are tracked for particular transactions.
SIFMA also asserted that the proposal would lead to anomalous results,
such as the circumstance where a dual registered investment adviser has
multiple institutional accounts, only some of which have QIB
certificates. SIFMA asked how the registered investment adviser could
meet its duty to all of its clients but only utilize the institutional
debt research for the QIBs. SIFMA further questioned the logic of a
proposal that would allow institutional investors to transact in
restricted securities but not receive research on those securities
without taking additional steps.
    SIFMA offered two alternatives for the higher tier: (1) Non-natural
persons that satisfy institutional suitability requirements with
respect to debt trading and strategies; or (2) certain order placing
institutions: QIBs; registered broker-dealers, banks, savings and
loans, insurance companies, registered investment companies; registered
investment advisers; institutions with $50-$100 million in assets and
represented by an independent investment adviser; and universities,
regulatory and government entities that use research for academic
purposes.
    FINRA does not believe that retail investors or less sophisticated
institutional investors should be required to take any additional steps
to receive the full protections of the proposed rule. FINRA believes
that some QIBs may lack expertise and experience in debt market
analysis and trading, including some employee benefit plans, trust
funds with participants of employee benefit plans and charitable
organizations. For the same reasons, FINRA believes SIFMA's first
alternative is too broad in that it would require less sophisticated
institutional customers to affirmatively opt-in to the full protections
of the rule. Therefore, the proposed rule change would adopt a standard
under which firms may use negative consent only for the higher standard
QIBs that also satisfy the institutional suitability requirements under
FINRA Rule 2111 with respect to debt transactions, and affirmative
consent from any institutional account as defined in FINRA Rule
4512(c). To avoid a disruption in the receipt of institutional debt
research, the proposed rule change would allow firms to send
institutional debt research to any FINRA Rule 4512(c) account, except a
natural person, without affirmative or negative consent for a period of
up to one year after SEC approval while they obtain the necessary
consents. Natural persons that qualify as an institutional account
under Rule 4512(c) must provide affirmative consent to receive
institutional debt research during this transition period and
thereafter.
    FINRA believes that the proposed institutional investor definition
strikes an appropriate balance between protecting less sophisticated
institutional investors and maintaining the flow of research--and
minimizing the burdens and costs of distributing debt research--to
knowledgeable institutional investors. The exemption provides
additional protections beyond the FINRA Rule 4512(c) standard for firms
to receive institutional debt research by negative consent by ensuring
that those institutions satisfy the higher QIB standard and are both
capable of evaluating investment risks with respect to debt trading and
strategies and have affirmatively indicated that they are exercising
independent judgment in evaluating recommendations for such
transactions. FINRA believes an affirmative consent requirement is
appropriate for FINRA Rule 4512(c) accounts, which are more likely to
include investors lacking experience in debt market analysis and
trading. To the extent a FINRA Rule 4512(c) institutional investor
values institutional debt research, FINRA

believes the proposed rule change imposes a one-time small burden on
such investors to provide written consent. Some firms indicated to
FINRA that the consent could be obtained at the time of other required
written authorizations. FINRA believes the one-year grace period will
ease the transition to the new rules without disrupting the current
flow of debt research to institutional clients.
    As to SIFMA's second alternative above, FINRA believes it would
only exacerbate SIFMA's stated concerns about introducing a new
standard, as the suggested standard has no precedent and is even more
complex and presumably difficult to track than the QIB plus suitability
standard FINRA proposes to adopt to receive institutional debt research
by negative consent.
    SIFMA also commented that even if FINRA adopted its preferred
institutional suitability standard for the higher tier, many firms may
not avail themselves of the exemption because of cost, logistics and
obligations to provide their research to retail customers. Thus, SIFMA
asked to narrow the scope of restricted persons by adopting the
following definition of ``principal trading'' to mean:

    Engaging in proprietary trading activities for the trading book
of a member but does not include transactions undertaken as part of
underwriting related, market making related, or hedging activities,
or otherwise on behalf of clients.

    FINRA declined to adopt the suggested definition. FINRA believes
the definition is overly broad and ambiguous and could encourage
traders to pressure debt research analysts to support firm inventory
positions. For example, the proposed definition would seem to permit
traders of auction rate securities to participate in the determination
of compensation for debt research analysts, thereby sanctioning the
type of concerning conduct that served as a catalyst for rulemaking in
this area. For the same reason, FINRA declines a request by BMO for
FINRA to clarify that persons who position debt inventory to sell on a
principal basis to customers but not for a firm's proprietary trading
account would not be deemed to be engaged in principal trading
activities.
    SIFMA indicated to FINRA in discussions subsequent to their comment
letter that firms with large institutional client bases were divided on
whether the QIB-based negative consent standard or the FINRA Rule
4512(c) affirmative consent standard would be preferable from a cost
efficiency perspective. The proposed rule change provides both options,
which FINRA believes will help reduce the costs to satisfy the
exemption requirements. The proposed rule change further reduces the
costs of compliance by interpreting the QIB-based alternative to
capture both QIBs and any order placer (e.g. registered investment
adviser) that has at least one QIB sub-account. FINRA believes this
interpretation addresses SIFMA's concern that suitability
certifications are tracked at the order placer level, while QIBs are
tracked for particular transactions, as well as concerns as to how the
requirement would apply to a registered investment adviser with both
QIB and non-QIB accounts. FINRA understands that the single $5 million
estimate referenced by SIFMA in its letter was based in large part on
the cost of developing a system that could directly link institutional
suitability certifications to QIB sub-accounts and that the
interpretation would appreciably reduce the burden.
Limited Investment Banking or Principal Trading Activities Exemptions
    The proposed rule change includes an exemption for firms with
limited investment banking activity, which is defined as managing or
co-managing 10 or fewer investment banking services transactions on
average per year over the previous three years and generating $5
million or less in gross investment banking revenues from those
transactions. The proposed rule change also includes an exemption for
firms that engage in limited principal trading activity where, in
absolute value on an annual basis, the member's trading gains or losses
on principal trades in debt securities are $15 million or less over the
previous three years, on average per year, and the member employs fewer
than 10 debt traders.
    In response to Regulatory Notice 12-42, CFA opposed both the
proposed exemption for firms with limited investment banking and the
proposed exemption for firms with limited principal debt trading
activities because they would allow influences that could compromise
the independence and accuracy of debt research distributed to retail
investors. FINRA did not propose any changes based on CFA's comments.
With respect to the limited investment banking exemption, FINRA notes
that this provision parallels an exemption in the equity research rules
and FINRA has not found any evidence of abuse by firms subject to the
exemption. With respect to the exemption for limited principal trading
activity, FINRA notes that it would be limited to those firms whose
limited trading activity makes the conflicts less pronounced and where
it would be a significant marginal cost to add a trader dedicated to
producing research.
    In response to Regulatory Notice 12-09, Wulff and Romano expressed
concerns regarding the exemption for firms that engage in limited
investment banking activity, arguing that it did not go far enough to
curtail the burden of the proposed rule on small firms, many of which
have associated persons that engage in both producing debt research and
principal trading activities, and that the thresholds were not
appropriate for a proposal regarding debt research conflicts of
interest. FINRA subsequently amended the proposal to add a more
targeted exemption for firms with limited principal trading activity.
The exemption, discussed in detail in Item II.A.1., addresses the
concerns of small firms with dual-hatted persons by exempting those
firms that engage in modest principal trading activity from the
restrictions on supervision and compensation determination of debt
research analysts by those engaged in sales and trading and principal
trading activities. As noted above, FINRA determined the thresholds for
the exemption based on data analysis and a survey of firms that engage
in principal trading activity.
    In addition, FINRA maintained the exemption for firms with limited
investment banking activity, exempting eligible firms from similar
supervision and compensation determination restrictions with respect to
investment banking personnel. FINRA also engaged in data analysis,
discussed in Item II.A.1., to confirm the appropriateness of the
proposed thresholds for that exemption.
Effective Date
    In response to both Regulatory Notices, SIFMA requested that FINRA
establish an effective date that will provide adequate time for
implementation of the proposed rule change, e.g., 12 to 18 months after
SEC approval. FINRA notes that it will provide sufficient time for
implementation taking into account any required systems changes.

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

    Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or

(ii) as to which the self-regulatory organization consents, the
Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule
change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-FINRA-2014-048 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2014-048. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of FINRA. All comments
received will be posted without change; the Commission does not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File Number SR-FINRA-2014-048 and should be
submitted on or before December 15, 2014.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\135\
---------------------------------------------------------------------------

    \135\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-27701 Filed 11-21-14; 8:45 am]
BILLING CODE 8011-01-P