[Federal Register Volume 83, Number 111 (Friday, June 8, 2018)]
[Proposed Rules]
[Pages 26788-26831]
[FR Doc No: 2018-11497]

Vol. 83

Friday,

No. 111

June 8, 2018

Part III

Securities and Exchange Commission

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17 CFR Parts 230, 242, and 270

Covered Investment Fund Research Reports; Proposed Rule

Federal Register / Vol. 83 , No. 111 / Friday, June 8, 2018 /
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230, 242, and 270

[Release Nos. 33-10498; 34-83307; IC-33106; File No. S7-11-18]
RIN 3235-AM24

Covered Investment Fund Research Reports

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rules.

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SUMMARY: As directed by Congress pursuant to the Fair Access to
Investment Research Act of 2017, the Commission is proposing a new rule
under the Securities Act of 1933. If adopted, the proposal would
establish a safe harbor for an unaffiliated broker or dealer
participating in a securities offering of a ``covered investment fund''
to publish or distribute a ``covered investment fund research report.''
If the conditions for the safe harbor are satisfied, this publication
or distribution would be deemed not to be an offer for sale or offer to
sell the covered investment fund's securities for purposes of sections
2(a)(10) and 5(c) of the Securities Act of 1933. The Commission is also
proposing a new rule under the Investment Company Act of 1940. This
proposal would exclude a covered investment fund research report from
the coverage of 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 self-
regulatory organization rules related to research reports, including
those contained in the rules governing communications with the public
regarding investment companies or substantially similar standards. We
are also proposing a conforming amendment.

DATES: Comments should be received by July 9, 2018.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment forms (http://www.sec.gov/rules/proposed.shtml); or
     Send an email to [email protected]. Please include
File Number S7-11-18 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 S7-11-18. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
website (http://www.sec.gov/rules/proposed.shtml). Comments also are
available for website viewing and printing in the Commission's Public
Reference Room, 100 F Street NE, Room 1580, Washington, DC 20549, on
official business days between the hours of 10:00 a.m. and 3:00 p.m.
All comments received will be posted without change. Persons submitting
comments are cautioned that we do not redact or edit personal
identifying information from comment submissions. You should submit
only information that you wish to make available publicly.
    Studies, memoranda or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Asaf Barouk, Attorney-Adviser, John
Lee, Senior Counsel; Amanda Hollander Wagner, Branch Chief; or Brian
McLaughlin Johnson, Assistant Director, at<PHONE_NUMBER>, Investment
Company Regulation Office, Division of Investment Management; Steven G.
Hearne, Senior Special Counsel, at<PHONE_NUMBER>, Division of
Corporation Finance; Laura Gold or Samuel Litz, Attorney-Advisers; or
John Guidroz, Branch Chief, at<PHONE_NUMBER>, Office of Trading
Practices, Division of Trading and Markets, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Commission is proposing for comment new
rule 139b [17 CFR 230.139b] under the Securities Act of 1933 [15 U.S.C.
77a et seq.]; new rule 24b-4 [17 CFR 270.24b-4] under the Investment
Company Act of 1940 [15 U.S.C. 80a-1 et seq.]; and a conforming
amendment to rule 101 [17 CFR 242.101(a)] of Regulation M [17 CFR
242.100-242.105].

Table of Contents

I. Introduction and Background
    A. Introduction
    B. FAIR Act
II. Discussion
    A. Scope of Proposed Rule 139b
    1. Definition of ``Covered Investment Fund Research Report''
    2. Definition of ``Research Report''
    3. Definition of ``Covered Investment Fund''
    4. Non-Exclusivity of Safe Harbor
    B. Conditions for the Safe Harbor
    1. Issuer-Specific Research Reports
    2. Industry Research Reports
    C. Presentation of Performance Information in Research Reports
About Registered Investment Companies
    D. Role of Self-Regulatory Organizations
    1. SRO Content Standards and Filing Requirements for Covered
Investment Fund Research Reports
    2. SRO Limitations
    E. Conforming Amendment
III. Economic Analysis
    A. Introduction
    B. Baseline
    1. Market Structure and Market Participants
    2. Regulatory Structure
    C. Costs and Benefits
    1. FAIR Act Statutory Mandate
    2. Proposed Rule 139b
    3. Proposed Rule 24b-4
    4. Proposed Amendment to Rule 101 of Regulation M
    5. Effects on Efficiency, Competition, and Capital Formation
    6. Alternatives Considered
IV. Paperwork Reduction Act
V. Regulatory Flexibility Act Analysis
    A. Reasons for, and Objectives of, the Proposed Action
    B. Legal Basis
    C. Small Entities Subject to the Proposed Rules
    D. Reporting, Recordkeeping and Other Compliance Requirements
    E. Duplicative, Overlapping, or Conflicting Federal Rules
    F. Significant Alternatives
    G. General Request for Comment
VI. Small Business Regulatory Enforcement Fairness Act
VII. Statutory Authority

I. Introduction and Background

A. Introduction

    As directed by the Fair Access to Investment Research Act of
2017,\1\ we are proposing new rule 139b under the Securities Act of
1933 (the ``Securities Act'').\2\ Proposed rule 139b includes certain
conditions that, if satisfied, would provide that a broker's or
dealer's (a ``broker-dealer's'') publication or distribution of a
covered investment fund research report will 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.\3\ Proposed rule 139b would establish a new safe
harbor for unaffiliated broker-dealers' publication or distribution of
covered investment fund research reports similar to the existing safe
harbor under rule 139 applicable to research reports about other
issuers or their securities.\4\
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    \1\ Fair Access to Investment Research Act of 2017, Public Law
115-66, 131 Stat. 1196 (2017) (the ``FAIR Act'').
    \2\ 15 U.S.C. 77a et seq.
    \3\ See infra text accompanying notes 32-34 (discussing our
general approach in modeling proposed rule 139b after rule 139 [17
CFR 230.139], and noting that we propose this approach in
furtherance of the FAIR Act's directive to revise rule 139 to extend
the current safe harbor available under rule 139 to broker-dealers'
publication or distribution of covered investment fund research
reports); see also proposed addition to rule 139(a) (``For purposes
of the [FAIR Act], a safe harbor has been established for covered
investment fund research reports, and the specific terms of that
safe harbor are set forth in Rule 139b. . . .'').
    \4\ See infra notes 11-15 and accompanying text.
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    We are also proposing new rule 24b-4 under the Investment Company
Act of 1940 (the ``Investment Company Act''),\5\ which would exclude a
covered investment fund research report from the filing requirements of
section 24(b) of the Investment Company Act (or the rules and
regulations thereunder), except to the extent that such report is
otherwise not subject to the content standards in self-regulatory
organization (``SRO'') rules related to research reports, including
those contained in the rules governing communications with the public
regarding investment companies or substantially similar standards.\6\
This proposed rule would have the effect of reducing the filing
requirements currently applicable to certain communications that, by
operation of the FAIR Act and proposed rule 139b, would now be deemed
``covered investment fund research reports.'' \7\
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    \5\ 15 U.S.C. 80a-1 et seq.
    \6\ As discussed below, we are proposing this rule pursuant to
section 2(b)(4) of the FAIR Act (mandating that the Commission shall
provide that a covered investment fund research report shall not be
subject to section 24(b) of the Investment Company Act of 1940 (15
U.S.C. 80a-24(b)) or the rules and regulations thereunder, except
that such report may still 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). See infra
section II.D.1.
    \7\ See infra notes 184-187 and accompanying text.
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    Additionally, in light of the proposal of rule 139b, we are
proposing a conforming amendment to rule 101 of Regulation M. This
amendment would permit distribution participants, such as brokers or
dealers, to publish or disseminate any information, opinion, or
recommendation relating to a covered security if the conditions of
proposed rule 139b (or, alternatively, the conditions of rule 138 \8\
or rule 139 under the Securities Act) are satisfied.\9\ The proposed
conforming amendment is intended to align the treatment of research
under proposed rule 139b with the treatment of research under rules 138
and 139 for purposes of Regulation M.\10\
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    \8\ 17 CFR 230.138.
    \9\ See infra section II.E.
    \10\ See id.
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    Rule 139 currently provides a safe harbor for the publication or
distribution of research reports concerning one or more issuers by a
broker-dealer participating in a registered offering of one of the
covered issuers' securities.\11\ Specifically, rule 139 provides that a
broker-dealer's publication or distribution of research reports--
whether about a particular issuer or multiple issuers, including within
the same industry--that satisfy certain conditions under the rule are
``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.'' \12\ A
broker-dealer's publication or distribution of a research report in
reliance on rule 139 would therefore not be deemed to constitute an
offer that otherwise could be a non-conforming prospectus in violation
of section 5 of the Securities Act.\13\ Although the Commission has
previously requested comment as to whether to extend rule 139 to cover
investment company research reports,\14\ the rule's safe harbor
currently is not available for a broker-dealer's publication or
distribution of research reports pertaining to specific registered
investment companies or business development companies.\15\
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    \11\ The term ``research report'' in rule 139 under the
Securities Act is defined as ``a written communication, as defined
in Rule 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.'' 17 CFR
230.139(d); see infra section II.A.2 for a discussion of the term
``research report.''
     There are differences in how other rules and regulations define
the term ``research report,'' including Regulation Analyst
Certification (``Regulation AC'') under the Securities Act and the
Securities Exchange Act of 1934 (the ``Exchange Act''), 15 U.S.C.
78a et seq. Compare 17 CFR 242.500-505 (A ``research report'' as
defined under Regulation AC is limited to an analysis of a security
or an issuer, and information within the report must be ``reasonably
sufficient upon which to base an investment decision;'' whereas,
under rule 139, a ``research report'' includes not only an analysis
of a security or an issuer, as in Regulation AC, but also,
information, opinions, or recommendations regarding securities of an
issuer, irrespective of the information within the report being
``reasonably sufficient upon which to base an investment
decision.''); Financial Industry Regulatory Authority (``FINRA'')
rule 2241 (defining ``research report''); and FINRA rule 2242
(defining ``debt research report''). See also discussion of
Regulation AC infra at notes 57-58. We note that research reports
published or distributed by broker-dealers in reliance on the rule
139 safe harbor may also be subject to other rules and regulations
under the federal securities laws, including but not limited to
Regulation AC, as well as SRO rules governing their content and use,
including but not limited to FINRA rules 2210, 2241, and 2242.
    \12\ Rule 139(a) under the Securities Act [17 CFR 230.139(a)].
    \13\ Sections 5(a) and 5(c) of the Securities Act generally
prohibit any person (including broker-dealers) from using the mails
or interstate commerce as a means to sell or offer to sell, either
directly or indirectly, any security unless a registration statement
is in effect or has been filed with the Commission as to the offer
and sale of such security, or an exemption from the registration
provisions applies. See 15 U.S.C. 77e(a) and (c). Section 5(b)(1) of
the Securities Act requires that any ``prospectus'' relating to a
security to which a registration statement has been filed must
comply with the requirements of section 10 of the Securities Act.
See 15 U.S.C. 77e(b)(1). Section 5(b)(2) of the Securities Act
requires that any sale of securities (or delivery after sale) must
be accompanied or preceded by a prospectus meeting the requirements
of section 10(a) of the Securities Act. See 15 U.S.C. 77e(b)(2).
    \14\ See Securities Offering Reform, Securities Act Release No.
8501 (Nov. 3, 2004) [69 FR 67391 (Nov. 17, 2004)] (``Securities
Offering Reform Proposing Release'').
    \15\ For example, rule 139 is available for research reports
regarding issuers that meet the registrant requirements for
securities offerings on Form S-3 or Form F-3. See rule
139(a)(1)(i)(A)(1). To the extent that commodity- or currency-based
trusts or funds (as defined in section I.B below) register their
securities offering pursuant to the Securities Act and meet the
eligibility requirements of Form S-3 or F-3, as well as the other
conditions of rule 139, the rule 139 safe harbor would be currently
available for a broker-dealer's publication or distribution of
research reports pertaining to these issuers.
    However, covered investment funds that are registered investment
companies and business development companies are not able to
register their securities offerings on Form S-3 or Form F-3.
Registered investment companies register their securities offerings
on forms such as Forms N-1A, N-2, N-3, N-4, and N-6. Publicly-traded
business development companies register their securities offerings
on Form N-2. However, section 2(a)(3) of the Securities Act provides
a safe harbor for broker-dealers with respect to research reports
about ``emerging growth companies,'' as defined in section 2(a)(19)
of the Securities Act. Broker-dealers may therefore currently rely
on the section (2)(a)(3) safe harbor with respect to research
reports about business development companies that are emerging
growth companies.
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B. FAIR Act

    The FAIR Act directs us to propose and adopt rule amendments that
would extend the current safe harbor available under rule 139 to a
``covered investment fund research report.'' \16\ The FAIR Act also
directs that these amendments shall be ``upon such terms, conditions,
or requirements as the Commission may determine necessary or
appropriate in the public interest, for the protection of

investors, and for the promotion of capital formation.'' \17\
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    \16\ See section 2(a) of the FAIR Act.
    \17\ See id.
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    Under the FAIR Act, a ``covered investment fund research report''
is generally a research report published or distributed by a broker-
dealer about a covered investment fund or any of the covered investment
fund's securities.\18\ The term ``covered investment fund'' under the
FAIR Act includes registered investment companies and business
development companies.\19\ The term also includes other persons issuing
securities in an offering registered under the Securities Act (i) whose
securities are listed for trading on a national securities exchange,
(ii) whose assets consist primarily of commodities, currencies, or
derivative instruments that reference commodities or currencies or
interests in the foregoing, and (iii) whose registration statement
reflects that its securities are purchased or redeemed, subject to
certain conditions or limitations, for a ratable share of its assets
(such exchange-listed funds or trusts, ``commodity- or currency-based
trusts or funds'').\20\ However, a ``covered investment fund research
report'' excludes research reports published or distributed by the
covered investment fund itself, any affiliate of the covered investment
fund, or any broker-dealer that is an investment adviser (or an
affiliated person of the investment adviser) to the covered investment
fund.\21\
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    \18\ See id. at section 2(f)(3). But see infra note 21 and
accompanying text (noting that the definition of ``covered
investment fund research report'' excludes research reports
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 an affiliated person of an investment
adviser) for the covered investment fund).
    \19\ See id. at section 2(f)(2)(A).
    \20\ See id. at section 2(f)(2)(B).
    \21\ The FAIR Act definition of ``covered investment fund
research report'' uses the term ``affiliate'' in connection with a
covered investment fund and ``affiliated person'' in connection with
an investment adviser. See section 2(f)(3) of the FAIR Act.
    The FAIR Act includes a definition for the term ``affiliated
person,'' but not ``affiliate.'' Because the FAIR Act directs the
Commission to revise rule 139 under the Securities Act, we interpret
the reference to the term ``affiliate'' in the definition of
``covered investment fund research report'' to refer to the term
``affiliate'' as it would be interpreted under rule 139, which we
believe is by reference to rule 405 under the Securities Act. (We
believe this to be the case because, for example, rule 139 is
available for research reports regarding issuers that register their
securities on Form S-3 or F-3 (or that meet the registrant
requirements to register their securities offerings on Form S-3 or
Form F-3) and that meet the minimum float provisions of General
Instruction I.B.1 of such forms. See rule 139(a)(1)(i)(A)(1)(i).
General Instruction I.B.1, in turn, refers to the definition of
``affiliate'' in Securities Act rule 405.) Under rule 405, the term
``affiliate'' means an affiliate of, or person affiliated with, a
specified person, is a person that directly, or indirectly through
one or more intermediaries, controls or is controlled by, or is
under common control with, the person specified. See rule 405 under
the Securities Act [17 CFR 230.405]. The FAIR Act defines
``affiliated person'' as having the meaning given the term in
section 2(a) of the Investment Company Act. See section 2(f)(1) of
the FAIR Act. Section 2(a) of the Investment Company Act defines an
``affiliated person'' as: (A) Any person directly or indirectly
owning, controlling, or holding with power to vote, five per centum
or more of the outstanding voting securities of such other person;
(B) any person five per centum or more of whose outstanding voting
securities are directly or indirectly owned, controlled, or held
with power to vote, by such other person; (C) any person directly or
indirectly controlling, controlled by, or under common control with,
such other person; (D) any officer, director, partner, copartner, or
employee of such other person; (E) if such other person is an
investment company, any investment adviser thereof or any member of
an advisory board thereof; and (F) if such other person is an
unincorporated investment company not having a board of directors,
the depositor thereof.
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    The FAIR Act directs us to address the application of certain
aspects of current rule 139 to covered investment fund research
reports. For example, one of the conditions for using the rule 139 safe
harbor for research reports about a specific issuer is that the broker-
dealer's publication or distribution of the research report must ``not
represent the initiation of publication of research reports about such
issuer or its securities or reinitiation of such publication following
discontinuation of publication of such research reports.'' \22\ Because
many covered investment funds continuously offer their shares for sale
(as opposed to engaging in an offering over a discrete period of time),
it is difficult for a broker-dealer participating in such a continuous
offering to satisfy this condition. In light of this, the FAIR Act
prescribes that our extension of the rule 139 safe harbor, with respect
to research reports in an offering of covered investment funds that are
in ``substantially continuous distribution,'' cannot be conditioned on
whether the broker-dealer's publication or distribution of such
research reports constitutes initiation or reinitiation of research
about the covered investment fund or its securities.\23\
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    \22\ See rule 139(a)(1)(iii) [17 CFR 230.139(a)(1)(iii)].
    \23\ See section 2(b)(1) of the FAIR Act.
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    The FAIR Act also permits us to impose conditions on covered
investment fund research reports that are similar to the conditions
imposed under rule 139.\24\ We may set a minimum public float
requirement for covered investment funds but may not require a minimum
public float that is greater than what is required under rule 139
(currently, $75 million).\25\ Similarly, we may set a reporting history
requirement for covered investment funds, but may not require a
reporting history period for longer than what is required under rule
139 (currently, the 12 months preceding the time of the broker-dealer's
first reliance on the rule 139 safe harbor).\26\ Moreover, as noted
above, we may impose additional conditions that we determine to be
necessary or appropriate in the public interest, for the protection of
investors, and for the promotion of capital formation.\27\
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    \24\ See infra notes 25-27.
    \25\ See section 2(b)(2)(B) of the FAIR Act.
    \26\ Id. at section 2(b)(2)(A).
    \27\ See supra note 17 and accompanying text.
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    Finally, the FAIR Act includes provisions concerning the ability of
SROs to impose requirements on the use and filing of covered investment
fund research reports.\28\ First, the FAIR Act directs us to provide
that covered investment fund research reports will not be subject to
section 24(b) of the Investment Company Act and the rules and
regulations thereunder,\29\ except to the extent that such reports are
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.\30\ The FAIR Act also requires us
to provide that SROs: (i) Cannot prohibit the ability of a broker-
dealer to publish or distribute a covered investment fund

research report solely because the broker-dealer is participating in a
registered offering or other distribution of any securities of the
covered investment fund; and (ii) cannot prohibit the ability of a
broker-dealer to participate in a registered offering or other
distribution of securities of the covered investment fund solely
because the broker-dealer has published or distributed a research
report about that covered investment fund or its securities.\31\
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    \28\ See sections 2(b)(3)-(4), 2(c)(2) of the FAIR Act; see also
discussion at text accompanying notes 29-31 infra.
    \29\ Section 24(b) of the Investment Company Act makes it
unlawful for any registered open-end company (or any registered unit
investment trust, any registered face-amount certificate company, or
any underwriter of any of the preceding companies), in connection
with a public offering of any security of which such company is an
issuer, to transmit, among other things, sales literature addressed
to or intended for distribution to prospective investors unless the
sales literature is filed with the Commission. See 15 U.S.C. 80a-
24(b). Rule 24b-3 under the Investment Company Act deems these
materials to have been filed with the Commission if filed with
FINRA. See 17 CFR 270.24b-3.
    \30\ See section 2(b)(4) of the FAIR Act. However, the FAIR Act
also includes a provision clarifying that the Act will not be
construed as limiting an SRO's authority to require the filing of
communications with the public ``the purpose of which is not to
provide research and analysis of covered investment funds.'' See
section 2(c)(2) of the FAIR Act. In addition, the FAIR Act provides
that the Act does not limit SROs' authority to examine or supervise
a member's practices in connection with its publication or
distribution of covered investment fund research reports for
compliance with applicable provisions of the federal securities laws
and SRO rules related to research reports, including rules governing
communications with the public. See section 2(c)(2) of the FAIR Act.
    \31\ See section 2(b)(3) of the FAIR Act.
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II. Discussion

    In the sections that follow, we discuss in detail the scope and
conditions of proposed rule 139b, the operation and effect of proposed
rule 24b-4,\32\ and the proposed conforming amendment to rule 101 of
Regulation M.
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    \32\ This discussion appears in section II.D infra.
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    Proposed rule 139b's framework is modeled after and generally
tracks rule 139. However, proposed rule 139b differs from rule 139 in
certain respects. Some of these differences are specifically directed
or contemplated by the FAIR Act.\33\ Other differences, while not
specifically directed by the FAIR Act, clarify and tailor the
provisions of rule 139 more directly or specifically to the context of
broker-dealers' publication or distribution of covered investment fund
research reports.\34\ For the reasons described below, we believe that
the provisions of proposed rule 139b that differ from the provisions of
rule 139, and that are not specifically contemplated in the FAIR Act,
are necessary or appropriate in the public interest, for the protection
of investors, and for the promotion of capital formation.
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    \33\ See, e.g., infra section II.A.1 (discussing the ``affiliate
exclusion'' (defined below)).
    \34\ See, e.g., infra section II.B.1.a (discussing reporting
history and timeliness requirements for issuer-specific reports).
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A. Scope of Proposed Rule 139b

    Proposed rule 139b would establish a safe harbor for the
publication or distribution of ``covered investment fund research
reports'' by unaffiliated broker-dealers (as described below)
participating in a securities offering of a ``covered investment
fund.'' Under the safe harbor, such publication or distribution would
be deemed not to constitute an offer for sale or offer to sell the
covered investment fund's securities for purposes of sections 2(a)(10)
and 5(c) of the Securities Act. The safe harbor would be available even
if the broker-dealer is participating or may participate in a
registered offering of the covered investment fund's securities. We are
proposing to define the term ``covered investment fund research
report,'' as well as the ``covered investment fund'' and ``research
report'' components of this definition.
1. Definition of ``Covered Investment Fund Research Report''
    Under the FAIR Act, the term ``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 an affiliated person of an
investment adviser) for the covered investment fund (the ``affiliate
exclusion'').\35\ Proposed rule 139b incorporates the same definition
as is set forth in the FAIR Act.\36\
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    \35\ See section 2(f)(3) of the FAIR Act.
    \36\ See proposed rule 139b(c)(3); see also supra note 21
(discussing the terms ``affiliate'' and ``affiliated person'' in the
FAIR Act definition of ``covered investment fund research report'');
proposed rule 139b(c)(5) (defining the term ``investment adviser''
for purposes of the proposed rule).
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    The FAIR Act's affiliate exclusion prohibits two separate
categories of research reports from being deemed to be ``covered
investment fund research reports'' that a broker-dealer may publish or
distribute under the contemplated safe harbor. The first category
covers research reports published or distributed by the covered
investment fund or any affiliate of the covered investment fund. We
believe this exclusion would prevent such persons from indirectly using
the safe harbor to avoid the applicability of the Securities Act
prospectus requirements and other provisions applicable to written
offers by such persons.
    The second category covers research reports published or
distributed by any broker or dealer that is an investment adviser (or
an affiliated person of an investment adviser) for the covered
investment fund. This second exclusion addresses the concern that a
broker-dealer that is a fund's adviser or an affiliated person of a
fund's adviser may have financial incentives that could give rise to a
conflict of interest. For example, a broker-dealer that is an
affiliated person of a fund's adviser may have an incentive to promote
the covered investment fund's securities relative to other securities
because sales of the covered investment fund's securities would benefit
not only the fund, but also could benefit the broker-dealer.\37\ This
second exclusion therefore helps to establish a certain level of
independence in the activity of publishing and distributing covered
investment fund research reports and therefore could help mitigate
these potential conflicts of interest.
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    \37\ We note that broker-dealers may have incentives to
recommend certain covered investment funds to clients even when the
broker-dealer is not the fund's investment adviser (or an affiliated
person of the investment adviser). For example, when a covered
investment fund's investment adviser has entered into revenue
sharing arrangements with a broker-dealer, the broker-dealer may
have incentives to recommend to its clients the purchase of this
fund's securities relative to the securities of other covered
investment funds (whose investment advisers have not entered into
revenue sharing agreements with the broker-dealer). We also note
that certain covered investment fund research reports also may be
subject to additional rules and regulations under the federal
securities laws, as well as certain SRO rules, that are designed to
help address certain conflicts of interest and abuses identified
with analyst research. See, e.g., Sarbanes-Oxley Act of 2002, Public
Law 107-204, 116 Stat. 745 (2002) (``Sarbanes-Oxley Act''),
Regulation AC, and FINRA rules 2210, 2241, 2242. The Sarbanes-Oxley
Act, Regulation AC, and a global research analyst settlement
required structural changes and increased disclosures in connection
with certain abuses identified with analyst research. See section
501 of the Sarbanes-Oxley Act; Regulation Analyst Certification,
Securities Act Release No. 8193 (Feb. 20, 2003) [68 FR 9481 (Feb.
27, 2003)] (``Regulation AC Adopting Release''); Global Research
Analyst Settlement, Litigation Release No. 18438 (Oct. 31, 2003)
(``Lit. Rel. No. 18438''); 2010 Modifications to Global Research
Analyst Settlement, Litigation Release No. 21457 (Mar. 19, 2010)
(``Lit. Rel. No. 21457'').
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    We believe that it would be inappropriate for any person covered by
the affiliate exclusion, or for any person acting on its behalf, to
publish or distribute a research report indirectly that the person
could not publish or distribute directly under the proposed rule.\38\
For example, if a broker-dealer were to publish or distribute a
research report that included materials that were specifically
authorized or approved by a person covered by the affiliate exclusion,
expressly for the purpose of inclusion in a research report, this could
inappropriately circumvent the affiliate exclusion in proposed rule
139b. In this case, the person covered by the affiliate exclusion would
be publishing or distributing communications indirectly through the
third-party broker-dealer that otherwise would have to be included in a
statutory prospectus meeting the requirements of section 10 of the
Securities Act. One of the factors to consider in evaluating whether a
research report has been published or

distributed by a person covered by the affiliate exclusion is the
extent of such person's involvement in the preparation, distribution,
or publication of the research report.\39\
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    \38\ See, e.g., section 48(a) of the Investment Company Act [15
U.S.C. 80a-47(a)]; section 208(d) of the Investment Advisers Act of
1940 [15 U.S.C. 80b-8(d)].
    \39\ Such determinations would necessarily be based on the
extent to which a person covered by the affiliate exclusion, or any
person acting on its behalf, has been involved in the preparation of
the information or explicitly or implicitly endorsed or approved the
information. The Commission has referred to these as the
entanglement theory and the adoption theory, respectively, and these
are helpful guideposts in establishing whether a research report
about a covered investment fund may be deemed published or
distributed by the fund. See Securities Offering Reform, Securities
Act Release No. 8591 (July 19, 2005) [70 FR 44722 (Aug. 3, 2005)]
(``Securities Offering Reform Adopting Release'') (noting that
``[l]iability under the entanglement theory depends upon the level
of pre-publication involvement in the preparation of the
information''). See Use of Electronic Media, Securities Act Release
No. 7856 (Apr. 28, 2000) [65 FR 25843 (May 4, 2000)] (interpretive
release on the use of electronic media); Asset-Backed Securities,
Securities Act Release No. 8518 (Dec. 22, 2004) [70 FR 1506 (Jan. 5,
2005)] (adopting asset-backed securities regulations).
---------------------------------------------------------------------------

    We request comment on the proposed definition of ``covered
investment fund research report.''
     Should we define ``covered investment fund research
report'' as specified in the FAIR Act, as proposed? Why or why not?
What modifications, if any, to this definition do commenters recommend?
Solely for purposes of the proposed affiliate exclusion, should we use
a definition of ``affiliate'' that differs from the definition of this
term in rule 405 under the Securities Act? If so, should we interpret
the term ``affiliate'' in this context to mean an ``affiliated person''
as defined in the Investment Company Act? If not, what other definition
should we use?
     Should we include a provision in rule 139b specifying that
the affiliate exclusion would make the safe harbor unavailable if a
broker-dealer were to publish or distribute a research report that
includes materials that were specifically authorized or approved by a
person covered by the affiliate exclusion (or a person acting on its
behalf) for purposes of inclusion in a research report? Why or why not?
If not, is the guidance discussed above on this point \40\ appropriate
and helpful to the public in understanding the proposed affiliate
exclusion? Is there any other guidance that we should provide that
would be helpful to promote clarity with respect to the proposed
affiliate exclusion?
---------------------------------------------------------------------------

    \40\ See supra paragraph accompanying notes 38-39.
---------------------------------------------------------------------------

     Broker-dealers may have incentives--in particular, arising
from the compensation arrangements between registered investment
companies and their distributing broker-dealers--to recommend certain
covered investment funds to clients even when the broker-dealer is not
the fund's investment adviser (or an affiliated person of the
investment adviser).\41\ While certain covered investment fund research
reports may be subject to additional rules and regulations under the
federal securities laws, as well as certain SRO rules, that are
designed to help address certain conflicts of interest,\42\ these
additional rules and regulations would not necessarily be applicable
with respect to all covered investment fund research reports under
proposed rule 139b.\43\ Moreover, while these rules and regulations
address conflicts of interest, certain of the conflicts they address
may not be prevalent in the investment company context (e.g., FINRA
rules 2241 and 2242 address, among other things, investment-banking-
related conflicts). Are we correct that there are conflicts of interest
that could arise with respect to broker-dealers' publication or
distribution of covered investment fund research reports (in
particular, research reports about registered investment company
issuers) that would not be mitigated by proposed rule 139b's exclusion
of research reports published or distributed by a broker-dealer that is
an investment adviser for the covered investment fund (or an affiliated
person of the adviser)? If not, why not? If so, how should we address
these conflicts? Should we add restrictions or conditions to the safe
harbor to further mitigate potential conflicts? If so, what types of
additional restrictions or conditions would be appropriate? For
example, should we require a broker-dealer to describe in a research
report the revenue-sharing or other distribution arrangements it has
with a covered investment fund as a condition to relying on the
proposed safe harbor? Should the existence of a revenue-sharing
agreement or other particular type of distribution arrangement
disqualify a broker-dealer from being able to publish or distribute a
research report about a covered investment fund in reliance on the
proposed safe harbor? If so, what types and why?
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    \41\ See supra note 37 and accompanying text; see also infra
paragraphs accompanying notes 262-269.
    \42\ See id.
    \43\ For example, as discussed above, there are differences in
how the FAIR Act and proposed rule 139b, and other rules and
regulations, define the term ``research report,'' and therefore the
scope of other rules and regulations that govern broker-dealers'
publication and distribution of research reports does not correspond
in every respect to the scope of proposed rule 139b. See infra
section II.A.2 (discussing the definition of ``research report'' in
proposed rule 139b); see supra note 11 (discussing the differences
in the definition of ``research report'' in Regulation AC and FINRA
rules 2241 and 2242).
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     Alternatively, should we require broker-dealers that rely
on proposed rule 139b to maintain policies and procedures designed to
mitigate conflicts that are raised by the distribution of covered
investment funds (in particular, covered investment funds that are
registered investment companies) and not addressed by the Commission's
rules or SRO rules (such as FINRA rules 2241 and 2242)? To the extent
that Commission and SRO rules do not require disclosure of conflicts of
interest in covered investment fund research reports, should we require
broker-dealers that rely on the proposed rule 139b safe harbor to
disclose conflicts of interest in a salient way in covered investment
fund research reports? If so, what should the content and format
requirements be with respect to such disclosure?
2. Definition of ``Research Report''
    We are proposing to define the term ``research report'' in rule
139b as a written communication, as defined in rule 405 under the
Securities Act, 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.\44\ This definition is
identical to the corresponding definition of ``research report'' in
rule 139.\45\ We are not proposing to include a definition of
``research report'' in rule 139b that is identical to that in the FAIR
Act for two reasons, discussed in more detail below. First, we believe
that the definition we propose is consistent with the FAIR Act, because
we would interpret it to have

the same meaning as the definition of ``research report'' in the FAIR
Act.\46\ Second, we believe that proposing a definition of ``research
report'' in rule 139b that is identical to the existing definition of
``research report'' in rule 139 would reduce potential interpretive
confusion for market participants who are familiar with the rule 139
definition.
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    \44\ See proposed rule 139b(c)(6).
     Rule 405 defines ``written communication'' to mean that
``[e]xcept as otherwise specifically provided or the context
otherwise requires, a written communication is any communication
that is written, printed, a radio or television broadcast, or a
graphic communication as defined in [rule 405].'' 17 CFR 230.405.
    \45\ See rule 139(d) [17 CFR 230.139(d)]. Rule 139 defines
``research report'' to mean ``a written communication, as defined in
Rule 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.'' See rule
139(d) [17 CFR 230.139(d)]. A ``written communication,'' as defined
in rule 405, includes a ``graphic communication.'' As further
defined in rule 405, a ``graphic communication'' includes all forms
of electronic media, including electronic communications except
those, which at the time of the communication, originate in real-
time to a live audience and does not originate in recorded form or
otherwise as a graphic communication, although it is transmitted
through graphic means. See rule 405 [17 CFR 230.405].
    \46\ See infra notes 49-50 and accompanying text.
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    The FAIR Act defines the term ``research report'' as having the
meaning given to that term under section 2(a)(3) of the Securities Act
but specifies that the term ``shall not include an oral
communication.'' \47\ Section 2(a)(3) of the Securities Act, in turn,
defines ``research report'' to mean ``a written, electronic, or oral
communication 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.'' \48\
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    \47\ See section 2(f)(6) of the FAIR Act.
    \48\ 15 U.S.C. 77b(a)(3).
---------------------------------------------------------------------------

    The proposed rule 139b definition of ``research report'' tracks the
FAIR Act definition of ``research report,'' except that while it does
include ``electronic communications,'' it does not expressly reference
that term. For the following reasons, we believe that this difference
would have no effect on the types of communications that would qualify
as research reports under the proposed safe harbor. Current Commission
rules make clear that all electronic communications (other than
telephone and other live communications) are graphic and, therefore,
written communications for purposes of the Securities Act.\49\
Therefore, the proposed rule 139b definition's reference to a ``written
communication,'' as defined in rule 405, would include a ``graphic
communication,'' which in turn would include electronic communications
(other than telephone and other live communications).\50\
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    \49\ See Securities Offering Reform Adopting Release, supra note
39, at nn.96-97 and accompanying text; infra note 50. Among other
things, the Securities Offering Reform Adopting Release amended the
definition of ``research report'' in rule 139 to make clear that it
continues to apply to information, opinions, or recommendations
contained in written communications. See id., at text following
n.363.
    As the Commission noted in the Securities Offering Reform
Adopting Release, the intention of addressing electronic
communications under the Securities Act is ``to encompass new
technologies . . . [and] promote consistent understanding of what
constitutes such a communication in view of the technological
developments.'' See Securities Offering Reform Adopting Release,
supra note 39, at 44732.
    \50\ See supra note 45 (discussing the current definition of
``research report'' in rule 139, which references a ``written
communication'' as defined in rule 405, which definition in turn
incorporates the term ``graphic communication'').
---------------------------------------------------------------------------

    By using the same definition of ``research report'' in rule 139 and
proposed rule 139b we avoid creating ambiguity that may result if
market participants are unable to understand, based on the text of the
rules, that the term ``research report,'' though defined in two
different ways, would be interpreted identically.
    We request comment on the proposed definition of ``research
report.''
     Should we use the definition of ``research report'' in
rule 139 as we have proposed rather than as specified in the FAIR Act?
Is our proposed approach appropriate? Is defining ``research report''
as proposed consistent with section 2(f)(6) of the FAIR Act? Would the
proposed definition of ``research report'' have the intended result of
assuring that the definitions of ``research report'' under the FAIR Act
and rule 139b would be interpreted identically? Why or why not?
     Instead of using the rule 139 definition of ``research
report,'' as proposed, would it be preferable for the Commission to
incorporate the FAIR Act definition of ``research report'' into
proposed rule 139b? If so, why?
     What, if any, additional modifications to the proposed
definition of ``research report'' would promote clarity? Should we
incorporate any additional modifications to the proposed definition for
any other purpose?
3. Definition of ``Covered Investment Fund''
    The FAIR Act defines the term ``covered investment fund'' to
include registered investment companies, business development
companies, and certain commodity- or currency-based trusts or
funds.\51\ We are proposing to define the term ``covered investment
fund'' in rule 139b in substantially the same manner as the FAIR Act,
with the addition that we propose to specify in this definition that
the term ``investment company'' includes ``a series or class thereof.''
\52\
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    \51\ See supra notes 19-20 and accompanying text. Based on the
definition in section 2(f)(2) of the FAIR Act, the term ``covered
investment fund'' would not include an investment company that is
registered solely under the Investment Company Act, such as certain
master funds in a master-feeder structure. See id.
    \52\ See proposed rule 139b(c)(2). This approach reflects the
approach taken in other Commission rules that define the term
``fund'' to include a separate series of an investment company. See,
e.g., rule 22e-4(a)(4) under the Investment Company Act [17 CFR
270.22e-4(a)(4)]; rule 22c-1(a)(3)(v)(A) under the Investment
Company Act [17 CFR 270.22c-1(a)(3)(v)(A)] (effective Nov. 19,
2018).
---------------------------------------------------------------------------

    We request comment on the proposed definition of ``covered
investment fund.''
     Should we define ``covered investment fund'' substantially
the same as this term is defined in the FAIR Act as proposed? Why or
why not? Should we specify in the definition, as proposed, that the
term ``investment company'' includes a ``series or class thereof''?
What modifications, if any, to this definition do commenters recommend?
     Are there any types of funds, trusts, or other pooled
investment vehicles that would not be included within the proposed
definition of ``covered investment fund'' that we should consider
including in the definition? If so, why?
4. Non-Exclusivity of Safe Harbor
    Broker-dealers publishing or distributing research reports for some
covered investment funds, such as commodity- or currency-based trusts
or funds that have a class of securities registered under the Exchange
Act, may be able to rely on existing rule 139.\53\ We do not intend for
proposed rule 139b to preclude a broker-dealer from relying on existing
rule 139 where appropriate. In order to clarify that a broker-dealer
may rely on existing research safe harbors, proposed rule 139b provides
that the rule 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.\54\ A broker-dealer therefore
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,\55\ 138, and 139, as applicable.
---------------------------------------------------------------------------

    \53\ Section 803(b)(2)(F) of the Small Business Credit
Availability Act, which was enacted on March 23, 2018 as sections
801-803 of the 2018 Consolidated Appropriations Act, directs the
Commission to amend rules 138 and 139 to specifically include a
business development company as an issuer to which those rules
apply. Section 803(b) of the Small Business Credit Availability Act
directs the Commission to make these revisions to rules 138 and 139,
as well as the other rule revisions that section 803(b)(2) of the
Act describes, within one year of enactment, and these revisions
would be addressed in a Commission action that is separate from the
proposal that this release describes.
    \54\ See proposed rule 139b(a) (providing, in part, that the
rule 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); see also proposed addition to rule 139(a) (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 Rule 139b (Sec.
230.139b)).
    \55\ 17 CFR 230.137.
---------------------------------------------------------------------------

    We request comment on the non-exclusivity provision in proposed
rule 139b.
     Should other exemptions, exclusions, or safe harbors from
sections 2(a)(10) or 5(c) of the Securities Act for research reports,
such as rules 137, 138, or 139, continue to be available to broker-
dealers as proposed? Why or why not? Should we make any additional
clarifications? If so, what clarifications should we make?

B. Conditions for the Safe Harbor

    The Commission has previously acknowledged the value of research
reports in providing the market and investors with information about
reporting issuers.\56\ To mitigate the risk of research reports being
used to circumvent the prospectus requirements of the Securities
Act,\57\ the Commission has placed conditions on a broker-dealer's
publication or distribution of research reports.\58\ Under rule 139,
these conditions include restrictions on who may rely on the rule and
on the issuers to which the research may relate, as well as a
requirement that such reports be published in the regular course of a
broker-dealer's business. These conditions vary depending on whether a
research report covers a specific issuer (``issuer-specific research
reports'') or a substantial number of issuers in an industry or sub-
industry (``industry research reports'').
---------------------------------------------------------------------------

    \56\ See Securities Offering Reform Adopting Release, supra note
39.
     For example, the Commission has recognized that, for companies
that are well-followed, the research-report-related rules ``enhance
the efficiency of the markets by allowing a greater number of
research reports to provide a continuous flow of essential corporate
information into the marketplace.'' See Research Reports, Securities
Act Release No. 6550 (Sept. 19, 1984) [49 FR 37569 (Sept. 25, 1984)]
(``1984 Adopting Release'').
    \57\ See supra note 13 and accompanying text (noting that the
rule 139 safe harbor permits a broker-dealer to publish or
distribute a research report without this publication or
distribution being deemed to constitute an offer that otherwise
could be a non-conforming prospectus in violation of section 5 of
the Securities Act).
    See, also, e.g., Securities Offering Reform Adopting Release,
supra note 39 (discussing how the Sarbanes-Oxley Act, Regulation AC,
and a global research analyst settlement required structural changes
and increased disclosures in the early 2000s in connection with
certain abuses identified with analyst research); discussion at
supra note 37 (discussing certain rules and regulations under the
federal securities laws, as well as certain SRO rules, that are
designed to help address certain conflicts of interest and abuses
identified with analyst research).
    \58\ Many research reports that broker-dealers publish or
distribute in reliance on the rule 139 safe harbor may also be
subject to other federal securities rules and regulations under the
Exchange Act and SRO rules governing their content and use. See
supra note 57.
---------------------------------------------------------------------------

    Consistent with the FAIR Act's directive to revise rule 139 to
extend the rule's safe harbor to covered investment fund research
reports, proposed rule 139b seeks to address concerns that could
accompany broker-dealers' publication or distribution of these research
reports. Rule 139b proposes conditions for both issuer-specific reports
and industry research reports that must be satisfied in order for a
broker-dealer to rely on the safe harbor.\59\ The conditions are
intended to track the conditions already in place under rule 139 to the
extent practicable. We believe that any deviations from the
requirements of rule 139 are consistent with the FAIR Act's
directives.\60\ Tracking the requirements in rule 139 to the extent
practicable also provides efficiencies for broker-dealers familiar with
the requirements of rule 139.
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    \59\ Proposed rule 139b(a)(1)-(2).
    \60\ See supra paragraph accompanying notes 32-34.
---------------------------------------------------------------------------

1. Issuer-Specific Research Reports
a. Reporting History and Timeliness Requirements
    In order for a broker-dealer to include a covered investment fund
in a research report published or distributed in reliance on the
proposed safe harbor, we propose that the fund must meet certain
reporting history requirements. Specifically, we are proposing that any
such covered investment fund must have been subject to relevant
requirements under the Investment Company Act and/or the Exchange Act
to file certain periodic reports for at least 12 calendar months prior
to a broker-dealer's reliance on proposed rule 139b.\61\ We also are
proposing that any such covered investment fund must have filed certain
periodic reports in a timely manner during the immediately preceding 12
calendar months. Specifically, covered investment funds that are
registered investment companies would need to have been subject to the
reporting requirements of the Investment Company Act for a period of at
least 12 calendar months prior to reliance on the proposed rule and to
have filed in a timely manner all required reports, as applicable, on
Forms N-CSR,\62\ N-SAR,\63\ N-Q,\64\ N-PORT,\65\ N-MFP,\66\ and N-CEN
\67\ during the immediately preceding 12 months.\68\ If the covered
investment fund is not a registered investment company, it would need
to have been subject to the reporting requirements under section 13 or
15(d) of the Exchange Act for a period of at least 12 calendar months
and to have filed all required reports in a timely manner on Forms 10-K
\69\ and 10-Q \70\ and 20-F \71\ during the immediately preceding 12
months.\72\ The proposed reporting history requirements are consistent
with current rule 139.\73\ The timeliness

component of the proposed requirement also tracks rule 139.\74\
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    \61\ Proposed rule 139b(a)(1)(i)(A). We believe that this
proposed condition also gives effect to FAIR Act section 2(e), which
makes the safe harbor contemplated by the FAIR Act unavailable with
respect to broker-dealers' publication or distribution of research
reports about closed-end registered investment companies or business
development companies during these covered investment fund issuers'
first year of operation. See section 2(e) of the FAIR Act (The safe
harbor under subsection (a) of the FAIR Act shall not apply to the
publication or distribution by a broker or a dealer of a covered
investment fund research report, the subject of which is a business
development company or a registered closed-end investment company,
during the time period described in 17 CFR 230.139(a)(1)(i)(A)(1),
except where expressly permitted by the rules and regulations of the
Securities and Exchange Commission under the Federal securities
laws.); see also infra note 74 and accompanying text (discussing
rule 139(a)(1)(i)(A)(1)).
    \62\ 17 CFR 249.331 and 17 CFR 274.128.
    \63\ 17 CFR 249.330 and 17 CFR 274.101.
    \64\ 17 CFR 249.332 and 17 CFR 274.130.
    \65\ 17 CFR 274.150. Form N-PORT will be filed with the
Commission on a monthly basis, but only information reported for the
third month of each fund's fiscal quarter on Form N-PORT will be
publicly available (and not until 60 days after the end of the
fiscal quarter). See Investment Company Reporting Modernization,
Investment Company Act Release No. 32314 (Oct. 13, 2016) [81 FR
81870 (Nov. 18, 2016)] (``Reporting Modernization Release'').
Therefore, we would consider Form N-PORT to have been timely filed
for purposes of the proposed timeliness requirement if the public
filing of Form N-PORT every third month is timely filed.
    \66\ 17 CFR 274.201.
    \67\ 17 CFR 249.330 and 17 CFR 274.101.
    \68\ Proposed rule 139b(a)(1)(i)(A)(1). Form N-SAR will be
rescinded on June 1, 2018, which is the compliance date for Form N-
CEN. Form N-Q will be rescinded May 1, 2020. Larger fund groups will
begin submitting reports on Form N-PORT by April 30, 2019, and
smaller fund groups by April 30, 2020. See Reporting Modernization
Release, supra note 65; Investment Company Reporting Modernization,
Investment Company Act Release No. 32936 (Dec. 8, 2017) [82 FR 58731
(Dec. 14, 2017)]. At the time of these compliance dates, covered
investment funds would no longer be required to file reports N-SAR
and N-Q, and filing these reports would not be required as a
condition to rely on the rule 139b safe harbor. Accordingly, we
propose that rule 139b, if adopted, would be amended effective May
1, 2020 by removing the reference to Form N-Q. See infra section VII
(instruction 4 under Text of Proposed Rules and Amendments).
    \69\ 17 CFR 249.310.
    \70\ 17 CFR 249.308a.
    \71\ 17 CFR 249.220f.
    \72\ Proposed rule 139b(a)(1)(i)(A)(2).
    \73\ Rule 139(a)(1)(i)(A)(2) [17 CFR 230.139(a)(1)(i)(A)(2)] (As
of the date of reliance on the section, has filed all periodic
reports required during the preceding 12 months on Forms 10-K (Sec.
249.310), 10-Q (Sec.  249.308a), and 20-F (Sec.  249.220f) pursuant
to section 13 or section 15(d) of the Securities Exchange Act of
1934 (15 U.S.C. 78m or 78o(d)).). In addition, the reporting history
requirement is also a consequence of rule 139(a)(1)(i)(A)(1), which
requires that an issuer included in an issuer-specific research
report (other than a foreign private issuer) either must have filed
a registration statement on Form S-3 or Form F-3, or met the
registrant requirements of Form S-3 or Form F-3, as eligibility to
register on these forms incorporates a reporting history
requirement. Rule 139(a)(1)(i)(A)(1) and (a)(1)(i)(B)(1) [17 CFR
230.139(a)(1)(i)(A)(1) and (a)(1)(i)(B)(1)]. In order to be eligible
for registration on Form S-3 or Form F-3, the registrant must have
been subject to the requirements of section 12 or 15(d) of the
Exchange Act and have filed all materials required to be filed
pursuant to section 13, 14 or 15(d) for a period of at least 12
calendar months immediately preceding the filing of the Form S-3 or
Form F-3. See General Instruction I.A.3(a) to Form S-3 and General
Instruction I.A.2 to Form F-3.
    \74\ The timely reporting component in rule 139 is a consequence
of the rule 139 requirement that issuers be eligible to register on
Form S-3 or Form F-3. See supra note 73 (discussing rule
139(a)(1)(i)(A)(1)); see also General Instruction I.A.3(b) to Form
S-3 and General Instruction I.A.2 to Form F-3 (each providing that
the registrant must have filed the reports specified in the
instruction ``in a timely manner'').
---------------------------------------------------------------------------

    As the Commission has previously recognized in the context of Form
S-3 and F-3 issuers, satisfaction of the applicable reporting history
and public float requirements suggests the presence of a sufficiently
broad market following for the issuer's securities and, consequently,
an adequate mix of information to inform investors as to material
risks.\75\ Consistent with this view, we believe the proposed reporting
history and timely reporting requirements would facilitate investors'
analysis of issuer-specific covered investment fund research reports
and aid them in making informed investment decisions.\76\ The
Commission believes that it is appropriate to require a 12-month
reporting history for covered investment fund issuers that may be
included in issuer-specific research reports, rather than a shorter
duration.\77\ As under rule 139, this approach would provide investors
with publicly-available information about the issuers included in a
research report for a full year. The proposed approach also has the
benefit of maintaining consistency between rule 139b and the long-
established reporting history conditions of rule 139.\78\
---------------------------------------------------------------------------

    \75\ See, e.g., Revisions To The Eligibility Requirements For
Primary Securities Offerings On Forms S-3 and F-3, Securities Act
Release No. 8878 (Dec. 19, 2007) [72 FR 73533 (Dec. 27, 2007)] (``S-
3 Revisions Adopting Release''); Securities Offering Reform
Proposing Release, supra note 14.
    \76\ See, e.g., Securities Offering Reform Proposing Release,
supra note 14.
    \77\ As noted above, the FAIR Act specifically contemplates that
we set a reporting history requirement for covered investment fund
issuers that may be included in covered investment fund research
reports, but we may not require a reporting history period for
longer than what is required under rule 139(a)(1)(i)(A)(1). See
supra note 26.
    The reporting history period required under rule
139(a)(1)(i)(A)(1) is currently the preceding 12 months from the
time of the broker-dealer's reliance on the rule 139 safe harbor.
Rule 139(a)(1)(i)(A)(1) requires that an issuer included in an
issuer-specific research report (other than a foreign private
issuer) either must have filed a registration statement on Form S-3
or Form F-3, or met the registrant requirements of Form S-3 or Form
F-3, as eligibility to register on these forms incorporates a
reporting history requirement. Under these eligibility requirements,
the registrant must have been subject to the requirements of section
12 or 15(d) of the Exchange Act and have filed all materials
required to be filed pursuant to section 13, 14 or 15(d) for a
period of at least 12 calendar months immediately preceding the
filing of the Form S-3 or Form F-3. See discussion at supra note 73.
    In addition, rule 139(a)(1)(i)(A)(2) separately requires that,
as of the date of reliance on the rule 139 safe harbor, the
registrant must have filed all periodic reports required during the
preceding 12 months on Forms 10-K, 10-Q, and 20-F. See id.
    \78\ See supra paragraph accompanying notes 32-34.
---------------------------------------------------------------------------

    We recognize, however, that in the context of covered investment
funds that are open-end registered investment companies, use of a
reporting history of only 12 months could result in certain performance
and other information that may be relevant to investors not yet being
available in the fund's prospectus at the time the broker-dealer
publishes or distributes a research report on that fund. This is
because the disclosure requirements for a registered investment
company, or a series thereof, are based in part on how long the fund
has been operational. For example, for a newly-registered covered
investment fund that is an open-end registered investment company, a
bar chart pursuant to Item 4 of Form N-1A is not required to be
included in the fund's prospectus until the fund has been operational
for one full calendar year.\79\ We note, however, that other
information for such a fund, such as principal investment strategies
and estimated expenses, would be available at the time the fund
launches. We request comment below on whether--and if so, how--the
proposed reporting history and timeliness requirements could be more
tailored to covered investment funds.
---------------------------------------------------------------------------

    \79\ For example, under the requirements of Form N-1A, a fund
that launched on January 4 and has an August 31 fiscal year-end
would not be required to include a bar chart, which reflects
calendar year-end information, until almost three years after launch
(less a few days). However, other performance information about such
a fund would be required to appear in reports filed on Form N-PORT
(which will be made public quarterly, see supra notes 65, 68) and
the fund's annual reports, and also could appear in rule 482
advertisements.
---------------------------------------------------------------------------

    We request comment on the proposed reporting history and timeliness
requirements.
     Are the proposed reporting requirements an appropriate
condition for issuer-specific covered investment fund research reports
whose publication or distribution would be covered under the rule 139b
safe harbor?
     Should the proposed reporting requirements for issuer-
specific covered investment fund research reports track the existing
reporting requirements for issuer-specific reports under rule 139
(e.g., the length of reporting history, required reports, and
timeliness component)? If not, how should they differ? Is the proposed
requirement for a 12-month periodic reporting history the right amount
of time in the context of covered investment funds? For example, should
the reporting history requirement instead provide that an issuer that
is a registered open-end investment company must have filed a
prospectus reflecting at least a full calendar year of performance
information prior to the time that a broker-dealer relies on the
proposed safe harbor, and would this approach be consistent with
section 2(b)(2)(A) of the FAIR Act? Under proposed rule 139b, issuers
that are registered investment companies must have timely filed reports
on Forms N-CSR, N-SAR, N-Q, N-PORT, N-MFP, and N-CEN, as
applicable,\80\ for the immediately preceding 12 calendar months, and
issuers that are not registered investment companies must have timely
filed reports on Forms 10-K and 10-Q or 20-F for the immediately
preceding 12 calendar months, in order to be included in a research
report for whose publication or distribution the proposed safe harbor
would be available. Should we require a different set of periodic
reports to be timely filed, other than what we propose? For example,
should the requirement be based on a limited subset of the reports? Why
or why not?
---------------------------------------------------------------------------

    \80\ See supra note 68 (noting that we are proposing to remove
references to Form N-Q on the date that Form N-Q is rescinded).
---------------------------------------------------------------------------

b. Minimum Public Market Value Requirement
    In order for broker-dealers to use the proposed rule 139b safe
harbor to publish or distribute issuer-specific research reports, we
also are proposing that the covered investment fund that is the subject
of a report must satisfy a minimum public market value threshold at the
date of reliance on the proposed rule (the ``minimum public market
value requirement''). Specifically, we are proposing that the aggregate
market value of a covered investment fund,\81\ or the net asset value
in the case of a registered open-end investment company (other than an
exchange-

traded fund (``ETF'')),\82\ must equal or exceed the aggregate market
value required by General Instruction I.B.1 to Form S-3.\83\ This
amount is currently $75 million.\84\ Proposed rule 139b also specifies
that both aggregate market value and net asset value would be
calculated net of the value of shares held by affiliates.\85\ The
proposed minimum public market value requirement generally tracks the
minimum public float and aggregate market value requirements under rule
139, modified as appropriate to apply to covered investment fund
issuers.\86\ As discussed above, the FAIR Act specifically permits us
to set a minimum public float requirement for covered investment funds,
as long as the minimum public float is not greater than what is
required by rule 139.\87\
---------------------------------------------------------------------------

    \81\ The aggregate market value is the aggregate market value of
voting and non-voting common equity held by non-affiliates of the
covered investment fund. See proposed rule 139b(a)(1)(i)(B).
    \82\ See proposed rule 139b(a)(1)(i)(B), proposed rule
139b(c)(4) (defining ``exchange-traded fund'' for purposes of the
proposed rule to have the meaning given the term in General
Instruction A to Form N-1A).
    \83\ Because the proposed rule refers to General Instruction
I.B.1 to Form S-3, we would generally consider that, pursuant to
these instructions, aggregate market value would be ``computed by
use of the price at which the common equity was last sold, or the
average of the bid and asked prices of such common equity, in the
principal market for such common equity as of a date within 60 days
prior to the date of filing.'' General Instruction I.B.1 to Form S-
3. The definition of ``market price'' in the General Instructions of
Form N-1A contemplates valuing an ETF's shares similarly. See
General Instruction A to Form N-1A.
    For a registered open-end investment company other than an ETF,
net asset value would be computed using the investment company's
current net asset value, as used in determining its share price. See
rule 22c-1 under the Investment Company Act [17 CFR 270.22c-1]
(requiring registered open-end investment companies, their principal
underwriters, and dealers in the investment company's shares (and
certain others) to sell and redeem the investment company's shares
at a price determined at least daily based on the current net asset
value next computed after receipt of an order to buy or redeem).
    For covered investment funds that are not actively traded (such
as non-traded closed-end funds and non-traded business development
companies), we anticipate that, for purposes of proposed rule 139b,
net asset value and aggregate market value would be calculated based
on the fund's last publicly-disclosed share price (for non-traded
business development companies, this would be the common equity
share price).
    \84\ General Instruction I.B.1 to Form S-3.
    \85\ See proposed rule 139b(a)(1)(i)(B) (specifying for purposes
of this provision that ``aggregate market value'' is the aggregate
market value of voting and non-voting common equity held by non-
affiliates of the covered investment fund, and that ``net asset
value'' is calculated subtracting the value of shares held by
affiliates).
    This requirement tracks the minimum public float requirement
under rule 139, as discussed below. See infra note 86 and
accompanying text. As guidance, for purposes of this calculation, we
believe that shares held by affiliates generally should be
determined with reference to the security ownership information
listed in the covered investment fund's registration statement. See,
e.g., Item 11(m) of Form S-1; Item 18 of Form N-1A.
    \86\ See proposed rule 139b(a)(1)(i)(B); rule
139(a)(1)(i)(A)(1)(i) and (a)(1)(i)(B)(2)(i) [17 CFR
230.139(a)(1)(i)(A)(1)(i) and (a)(1)(i)(B)(2)(i)]. For registered
open-end investment companies other than ETFs, the proposed
threshold is expressed in terms of net asset value rather than
aggregate market value, to reflect market structure differences
between registered open-end investment companies (other than ETFs)
and all other covered investment funds.
    \87\ See supra note 25 and accompanying text.
---------------------------------------------------------------------------

    Historically, the Commission has used public float as an
approximate measure of a security's market following, through which the
market absorbs information that is reflected in the price of the
security.\88\ We continue to view as significant the relationship
between public float, information dissemination to the market, and
following by investment institutions.\89\ In the context of covered
investment funds, we would expect market information to be most limited
for new funds (which the reporting history and timeliness requirements
could help to address) and for funds that are marketed to a niche
segment of investors (which the minimum public market value requirement
could help to address).\90\ The proposed public market value
requirement is designed to protect investors by excluding research
reports on covered investment funds with a relatively small amount of
total assets, and hence a limited market following. We believe that it
is appropriate to include a $75 million public market value requirement
for issuers that may be included in issuer-specific research reports,
rather than some lower threshold. The proposed minimum public market
value threshold is the same as the parallel threshold in rule 139,
which we believe would increase compliance efficiencies among broker-
dealers relying on the rule 139 and proposed rule 139b safe
harbors.\91\ Moreover, a significantly lower minimum public market
value threshold may not adequately protect investors, as we expect the
information environment to be more limited for smaller funds than for
larger funds.\92\
---------------------------------------------------------------------------

    \88\ See, e.g., S-3 Revisions Adopting Release, supra note 75;
see also Securities Offering Reform Proposing Release, supra note 14
(discussing public float of a certain level as a factor indicating
that an issuer has a demonstrated market following).
    \89\ See, e.g., S-3 Revisions Adopting Release, supra note 75.
    \90\ See infra section III.C.2.c.
    \91\ See infra discussion following note 299.
    \92\ See infra section III.C.6.a.
---------------------------------------------------------------------------

    We request comment on the proposed minimum public market value
requirement.
     Is the proposed minimum public market value requirement an
appropriate restriction for issuer-specific covered investment fund
research reports whose publication or distribution would be covered
under the proposed rule 139b safe harbor?
     Should the proposed minimum public market value
requirement track the minimum float requirements under rule 139? Why or
why not? If so, is tying the proposed minimum public market value
requirement to the Form S-3 General Instruction I.B.1 appropriate, as
in rule 139? Why or why not? Should the aggregate market value
threshold be lower? Are there other requirements we should consider?
Why or why not?
     Is it appropriate for the proposed requirement to refer to
``aggregate market value'' for covered investment funds, and ``net
asset value'' in the case of a registered open-end investment company
(other than an ETF)? Should the proposed requirement instead refer to
``net asset value'' for ETFs? Is there another measure of market value
that is more appropriately tailored for covered investment fund
research reports?
     Should we include different or more specific instructions
about how covered investment funds would compute aggregate market value
and net asset value? For example, should we specify that an ETF's
aggregate market value be calculated with reference to the definition
of ``market price'' in Form N-1A rather than General Instruction I.B.1
of Form S-3? \93\ Should we include more specific instructions about
how a covered investment fund that is not actively traded should
compute aggregate market value and net asset value? \94\
---------------------------------------------------------------------------

    \93\ See supra note 83.
    \94\ See id.
---------------------------------------------------------------------------

     Would the proposed minimum public market value requirement
promote the dissemination into the market of an appropriate amount of
research about covered investment funds? Conversely, would it unduly
impede analyst coverage of covered investment fund issuers, and could
this in turn affect the market following for these issuers? Is the
approach we are proposing consistent with section 2(b)(2)(B) of the
FAIR Act?
c. Regular-Course-of-Business Requirement
    The proposed rule also would condition eligibility for the safe
harbor on a broker-dealer's publication or distribution of research
reports ``in the regular course of its business'' \95\ (the ``regular-
course-of-business'' requirement).
---------------------------------------------------------------------------

    \95\ Proposed rule 139b(a)(1)(ii).
---------------------------------------------------------------------------

    Although the proposed regular-course-of-business requirement is
generally similar to the existing provisions of rule 139, it differs in
one

respect as required by the FAIR Act. Rule 139 provides, in addition to
the requirement that a broker-dealer ``publish[] or distribute[]
research reports in the regular course of its business,'' that such
publication or distribution may not represent either the initiation of
publication of research reports about the issuer or its securities or
the reinitiation of such publication following a discontinuation
thereof (the ``initiation or reinitiation'' requirement).\96\ The FAIR
Act, however, provides that the safe harbor shall not apply the
``initiation or reinitiation'' requirement to a report concerning a
covered investment fund with a class of securities ``in substantially
continuous distribution.'' \97\ Proposed rule 139b reflects this
requirement by incorporating the ``initiation or reinitiation''
requirement from current rule 139 but specifying that it applies only
to research reports regarding a covered investment fund that does not
have a class of securities in substantially continuous
distribution.\98\ Determining whether a class of securities is in
substantially continuous distribution would be based on an analysis of
the relevant facts and circumstances. We request comment below on
whether there are any types of covered investment funds or classes of
securities that raise particular questions as to the presence or
absence of a ``substantially continuous distribution.'' We also request
comment as to whether market participants would benefit from further
Commission guidance on this point.
---------------------------------------------------------------------------

    \96\ Rule 139(a)(1)(iii) [17 CFR 230.139(a)(1)(iii)].
    \97\ Section 2(b)(1) of the FAIR Act.
    \98\ See proposed rule 139b(a)(1)(ii).
---------------------------------------------------------------------------

    Since rule 139 was first adopted, the regular-course-of-business
requirement has been a condition for a broker-dealer's publication or
distribution of research reports in reliance on the rule.\99\ We
believe requiring that research reports be published or distributed in
the regular course of a broker-dealer's business, consistent with the
requirements of rule 139, could reduce the potential that covered
investment fund research reports will be used to circumvent the
prospectus requirements of the Securities Act. Moreover, we are
concerned about certain potential consequences of broker-dealers'
ability, under proposed rule 139b, to publish or distribute
communications as research reports that have traditionally been viewed
by the investing public as advertisements or sales material related to
registered investment companies or business development companies. The
safe harbor provided under rule 139 is currently not available for a
broker-dealer's publication or distribution of research reports
pertaining to specific registered investment companies or business
development companies.\100\ Therefore, a research report about a
covered investment fund that is a registered investment company
currently must comply with the requirements of Securities Act rule
482.\101\ Given the definition of ``research report'' under the FAIR
Act,\102\ however, certain communications that are currently treated as
covered investment fund advertisements under Securities Act rule 482
also could fall under the proposed rule 139b definition of ``research
report.''
---------------------------------------------------------------------------

    \99\ See Adoption of Rules Relating to Publication of
Information and Delivery of Prospectus by Broker-Dealers Prior to or
After the Filing of a Registration Statement Under the Securities
Act of 1933, Securities Act Release No. 5105 (Nov. 19, 1970) [35 FR
18456 (Dec. 4, 1970)] (``1970 Adopting Release'').
    \100\ See supra notes 11-15 and accompanying text.
    \101\ 17 CFR 230.482. An investment company advertisement that
complies with rule 482 is deemed to be a section 10(b) prospectus
(also known as an ``advertising prospectus'' or ``omitting
prospectus'') for purposes of section 5(b)(1) of the Securities Act.
As a section 10(b) prospectus, an investment company advertisement
is subject to liability under section 12(a)(2) of the Securities
Act, as well as the antifraud provisions of the federal securities
laws.
    \102\ Section 2(f)(6) of the FAIR Act.
---------------------------------------------------------------------------

    Investors, particularly retail investors, may be unaware of the
differences in regulatory status and purpose among the various types of
communications regarding registered investment companies and business
development companies. This may result in investors not being able to
readily discern what constitutes a research report and what constitutes
an advertisement about these issuers. Context helps investors evaluate
and weigh the information presented to them. For example, investors
likely know that advertising directly promotes sales of a particular
product. A broker-dealer publishing or distributing a research report,
on the other hand, may do so with multiple purposes for multiple
audiences. While a research report may have the effect of promoting
sales of the securities of the issuer that the research report
features, it may serve a number of market functions as well, such as
promoting market trading, educating a particular audience, or providing
a service to clients.\103\
---------------------------------------------------------------------------

    \103\ See infra section III.C.1.b.
---------------------------------------------------------------------------

    We believe that broker-dealers that publish or distribute research
reports in the regular course of business are more likely to publish
analysis that investors recognize as research. For example, these
broker-dealers are more likely to have compliance structures in place,
with relevant policies and procedures, governing their publication of
research and (as applicable) their distribution of registered
investment company advertisements. Similarly, if a broker-dealer were
to publish or distribute research reports in the regular course of its
business, the broker-dealer may be more likely to have a research
department with research analysts who regularly cover particular
issuers or industries. This commitment in resources and infrastructure
makes it more likely that the market recognizes the broker-dealer as a
provider of research-related communications. A research report
published or distributed by a research analyst in the research
department at a broker-dealer that regularly covers that issuer or
industry would therefore be a factor indicating that the regular-
course-of-business requirement has been satisfied for purposes of
proposed rule 139b.\104\ Additional factors may include whether the
broker-dealer maintains policies and procedures governing its research
protocols and whether the broker-dealer regularly publishes or
distributes research on any other type of company or business other
than covered investment funds.
---------------------------------------------------------------------------

    \104\ We believe it is appropriate to include the regular-
course-of-business requirement because it is important that the
broker-dealer have a history of publishing or distributing a
particular type of research. If a broker or dealer begins publishing
research about a different type of security around the time of a
public offering of an issuer's security and does not have a history
of publishing research on those types of securities, such
publication or distribution could be viewed as a way to provide
information about the publicly-offered securities in circumvention
of the provisions of section 5 of the Securities Act. See Securities
Offering Reform Adopting Release, supra note 39.
---------------------------------------------------------------------------

    We request comment on the proposed regular-course-of-business
requirement.
     Is the proposed regular-course-of-business requirement
appropriate in the context of covered investment fund research reports?
     Would the proposed regular-course-of-business requirement
allow an appropriate flow of analyst-generated information to the
market?
     Should we define ``regular course of business'' in
proposed rule 139b more specifically in the context of research reports
on registered investment companies or business development companies?
Today, due to the unavailability of rule 139, we understand that
broker-dealers are generally not in the business of publishing and
distributing what we consider issuer-specific research reports on
registered investment companies or business development companies
(although some broker-dealers have

published and distributed communications styled as ``research reports''
in compliance with rule 482, and some broker-dealers have published and
distributed research reports on other issuers in reliance on the rule
139 safe harbor). Does this raise questions as to how to apply a
regular-course-of-business requirement to research reports regarding
these issuers that we should address in the proposed rule or through
additional Commission guidance? If so, what further definitions or
guidance should we consider? Would the proposed regular-course-of-
business requirement promote the publication or distribution of
research reports on covered investment funds that investors recognize
as research?
     What facts and circumstances suggest that a covered
investment fund has a class of securities in ``substantially continuous
distribution''? Are there any types of covered investment funds that
raise specific questions about whether or not they have a class of
securities in substantially continuous distribution, either generally
or in particular circumstances? For example, do all open-end management
investment companies, and those closed-end interval funds that make
periodic repurchase offers pursuant to rule 23c-3, have a class of
securities in substantially continuous distribution, while other
closed-end investment companies do not? Why or why not? Are there other
types of funds with a class of securities in substantially continuous
distribution, or are there specific circumstances that should
definitively constitute substantially continuous distribution? Would
market participants benefit from Commission guidance as to how one
would make a determination that a covered investment fund has a class
of securities in substantially continuous distribution?
     Alternatively, should we define the term ``substantially
continuous distribution'' in rule 139b, and if so, how? Should this
definition include certain types of funds (e.g., open-end management
investment companies, closed-end interval funds that make periodic
repurchase offers pursuant to rule 23c-3, and other types of funds that
are engaged in continuous offerings pursuant to Securities Act rule
415(a)(1)(ix) or others that conduct continuous offerings as shelf
takedowns pursuant to rule 415(a)(1)(x))? If so, what funds and under
what circumstances? Are there any specific factors that we should
incorporate in proposed rule 139b in order to determine whether a
covered investment fund is in substantially continuous distribution?
     Because a safe harbor is generally not currently available
for broker-dealers' publication or distribution of covered investment
fund research reports,\105\ should the proposed regular-course-of-
business requirement be modified to address how broker-dealers that
have not previously published or distributed research reports could
satisfy this requirement? If we were to modify the proposed regular-
course-of-business requirement to incorporate factors indicating that a
broker-dealer has created a history of publishing or distributing
research reports in the regular course of business, what should these
factors be, and why? Alternatively, should rule 139b provide a ``start-
up'' period to allow broker-dealers to establish a regular course of
business of publishing research reports? For example, should the rule
provide that a broker-dealer that could not satisfy the regular-course-
of-business requirement could nonetheless rely on rule 139b for a
specified period of time (e.g., one year) to establish a regular course
of business of publishing research reports? Without such a provision,
would the regular-course-of-business requirement pose challenges for
broker-dealers that had not previously published research reports
because of the absence of an applicable safe harbor? If we do not
modify the proposed requirement in this way, should we provide further
guidance regarding broker-dealers that have not previously published or
distributed research reports?
---------------------------------------------------------------------------

    \105\ See supra notes 11-15 and accompanying text.
---------------------------------------------------------------------------

     Should the proposed regular-course-of-business requirement
incorporate any more specific requirements regarding the person(s)
preparing a covered investment fund research report (e.g., a
requirement that the person who prepares the research report must be
employed by the broker-dealer to prepare research in the normal course
of his or her duties)?
2. Industry Research Reports
    Our proposed conditions for industry research reports parallel
those set forth in rule 139 and are intended to provide appropriate
parameters to address the risk of circumvention of the prospectus
requirements of the Securities Act.\106\
---------------------------------------------------------------------------

    \106\ See supra notes 57-58 and accompanying text; see also
paragraph accompanying notes 32-34.
---------------------------------------------------------------------------

a. Reporting Requirement
    Under the proposed safe harbor, each covered investment fund
included in an industry research report must be subject to the
reporting requirements of section 30 of the Investment Company Act (or,
for covered investment funds that are not registered investment
companies under the Investment Company Act, the reporting requirements
of section 13 or section 15(d) of the Exchange Act). This proposed
reporting requirement generally tracks an existing requirement for
industry research reports under rule 139 \107\ but has been modified so
that it would be applicable to industry research reports that include
covered investment fund issuers. Like the parallel provision of rule
139, the proposed reporting requirement helps assure that there is
publicly available information about the relevant issuers and that
investors are able to use such information in making their investment
decisions.
---------------------------------------------------------------------------

    \107\ See rule 139(a)(2)(i) [17 CFR 230.139(a)(2)(i)] (``The
issuer is required to file reports pursuant to section 13 or section
15(d) of the Securities Exchange Act of 1934 or satisfies the
conditions in paragraph (a)(1)(i)(B) of this section.'').
---------------------------------------------------------------------------

    We request comment on the reporting requirement in proposed rule
139b.
     Is the proposed reporting requirement appropriate? Why or
why not?
     As discussed above, proposed rule 139b's framework,
including its scope and conditions, generally tracks rule 139.\108\
Therefore, as in rule 139, the conditions applicable to industry and
issuer-specific research reports differ. For example, as proposed, rule
139b (like rule 139) would not require the issuers included in an
industry research report to satisfy the minimum market value thresholds
discussed in section II.B.1.b above. Is there any reason we should
extend all of the conditions for issuer-specific research reports (or a
subset of these conditions, to the extent they are not already
reflected in proposed rule 139b) to industry reports, even if this
approach would diverge from the approach taken in rule 139? Are the
concerns underlying the proposed conditions for broker-dealers'
publication or distribution of covered investment fund research reports
the same for issuer-specific research reports and industry research
reports? Are there any other concerns specific to industry research
reports that we should consider?
---------------------------------------------------------------------------

    \108\ See supra paragraph accompanying notes 32-34.
---------------------------------------------------------------------------

b. Regular-Course-of-Business Requirement
    We are also proposing that a broker-dealer be required to publish
or distribute research reports in the regular course of its business in
order to rely on the proposed safe harbor.\109\ The

proposed regular-course-of-business requirement for industry research
reports similarly applies to issuer-specific research reports,\110\ and
it also tracks an existing requirement for industry research reports
under rule 139.\111\
---------------------------------------------------------------------------

    \109\ Proposed rule 139b(a)(2)(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).
    \110\ See supra section II.B.1.c.
    \111\ See rule 139(a)(2)(v) [17 CFR 230.139(a)(2)(v)].
---------------------------------------------------------------------------

    Like the parallel provision in rule 139, the proposed regular-
course-of-business requirement for industry research reports includes a
``similar information'' requirement. To satisfy this requirement, at
the time a broker-dealer publishes or distributes an industry research
report, the broker-dealer would have to include similar information, in
similar reports, about the issuer covered in the industry report (or
its securities).\112\ However, unlike rule 139, we are proposing that
the ``similar information'' requirement apply only to circumstances in
which a broker-dealer is publishing or distributing a research report
regarding a covered investment fund that does not have a class of
securities in substantially continuous distribution. As discussed
above, the FAIR Act provides that the safe harbor shall not apply the
``initiation or reinitiation'' requirement to a research report
concerning a covered investment fund with a class of securities ``in
substantially continuous distribution.'' \113\ We believe that the
proposed ``similar information'' requirement is akin to the proposed
``initiation or reinitiation'' requirement, in that both would have the
effect of limiting a broker-dealer's ability to rely on the proposed
safe harbor to publish or distribute a research report about a
particular covered investment fund if the broker-dealer had not
previously published research on that issuer. Therefore, as in the
proposed ``initiation or reinitiation'' requirement, we are proposing
to exclude covered investment funds from the ``similar information''
requirement if they have a class of securities in substantially
continuous distribution.\114\
---------------------------------------------------------------------------

    \112\ Proposed rule 139b(a)(2)(iv).
    \113\ See supra notes 97-98 and accompanying text.
    \114\ See id.
---------------------------------------------------------------------------

    As discussed above, we believe that the proposed regular-course-of-
business requirement could reduce the possibility that broker-dealers'
publication or distribution of covered investment fund research reports
may be used to circumvent the prospectus requirements of the Securities
Act. We also believe that broker-dealers that publish or distribute
research reports in the regular course of business are more likely to
publish reports incorporating analysis that investors recognize as
research and to have appropriate compliance structures in place
governing their publication of research.\115\ We continue to believe,
in the context of proposed rule 139b as well as in rule 139, that a
regular-course-of-business requirement is equally appropriate for
issuer-specific research reports and industry research reports.
---------------------------------------------------------------------------

    \115\ See supra section II.B.1.c.
---------------------------------------------------------------------------

    We request comment on the proposed regular-course-of-business
requirement.
     Is the proposed regular-course-of-business requirement
appropriate? Why or why not?
     In the context of covered investment fund research
reports, would the proposed ``similar information'' requirement unduly
restrict broker-dealers' ability to rely on the proposed safe harbor?
Why or why not?
     Would any of the questions, concerns, or issues discussed
above with respect to the proposed regular-course-of-business
requirement in the context of issuer-specific research reports be
equally applicable in the context of industry research reports? Why or
why not?
c. Content Requirements for Industry Research Reports
    The proposed rule would also condition eligibility for the safe
harbor for industry research reports on certain content requirements.
Specifically, under the proposed rule, industry research reports either
must include similar information about a substantial number of covered
investment fund issuers of the same type or investment focus (the
``industry representation requirement''),\116\ or alternatively contain
a comprehensive list of covered investment fund securities currently
recommended by the broker or dealer (the ``comprehensive list
requirement'').\117\
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    \116\ Proposed rule 139b(a)(2)(ii)(A).
    \117\ Proposed rule 139b(a)(2)(ii)(B).
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Industry Representation Requirement
    The proposed industry representation requirement imposes a
requirement similar to one contained in rule 139 to covered investment
fund research reports.\118\ The Commission has stated that ``where a
publication covers a broad range of companies in an industry and is
issued not on a sporadic but on a regular schedule, the possibility
that such a publication could condition the market is lessened.'' \119\
Furthermore, the possibility of market conditioning is lessened ``where
research reports discussing the registrant contain similar information,
opinions or recommendations with respect to a substantial number of
other companies in the registrant's industry.'' \120\ We believe that
these observations are applicable today in the context of covered
investment fund industry research reports, and therefore we propose
that rule 139b include an industry representation requirement.
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    \118\ Rule 139 requires an industry research report to include
``similar information with respect to a substantial number of
issuers in the issuer's industry or sub-industry.'' Rule
139(a)(2)(iii) [17 CFR 230.139(a)(2)(iii)]. See infra note 121 and
accompanying text.
    \119\ Research Reports, Securities Act Release No. 6492 (Oct. 6,
1983) [48 FR 46801 (Oct. 14, 1983)] (``1983 Proposing Release'');
see also supra notes 57-58 and accompanying text (discussing the
role of rule 139 in helping to mitigate the risk that research
reports might be used to circumvent the prospectus requirements of
the Securities Act). See also The Regulation of Securities
Offerings, Securities Act Release No. 7607A (Nov. 13, 1998) [63 FR
67174 (Dec. 4, 1998)] (proposal to modernize and clarify the
regulatory structure for offerings under the Securities Act of
1933).
     We note that, in some cases, concerns about market conditioning
in the context of research reports about covered investment funds
may be substantially similar to these concerns in the context of
operating company issuers. For example, for covered investment funds
that are not in continuous distribution, ``gun-jumping'' concerns,
i.e., the failure to comply with restrictions on communications when
a securities offering is being contemplated or is in process
(similar to those that are applicable to operating companies) could
be applicable. For covered investment funds that are in continuous
distribution, on the other hand, we understand the role of the
conditions of rule 139b more generally as to help mitigate the risk
that research reports could be used to circumvent the Securities
Act's prospectus requirements.
    \120\ See 1983 Proposing Release, supra note 119. As a
corollary, the Commission has noted that ``The opportunity for the
abuses Section 5 was enacted to correct may still be present,
however, where a research report covers only a few companies
constituting a sub-industry group or where an entire industry is
composed of a small number of companies.'' See id.
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    Accordingly, we are proposing to replicate the language from rule
139's industry representation requirement in rule 139b, with
modifications designed to apply the language to the covered investment
fund context. Under rule 139's corresponding requirement, an industry
research report must include ``similar information with respect to a
substantial number of issuers in the issuer's industry or sub-
industry.'' \121\ When this section of rule 139 first was proposed, the
Commission explained that the term ``industry'' in this context refers
to a broad category of similar businesses, such as the airline or steel

industries.\122\ In adopting the rule, the Commission added ``sub-
industry'' to the rule text in order to clarify that the safe harbor
would apply to research reports covering a smaller number of companies
in a particular industry.\123\ While operating companies are typically
grouped based on their business category, entities that are included in
the definition of ``covered investment fund'' are typically grouped
based either on their type or investment focus.\124\ Therefore, the
proposed industry representation requirement would require an industry
research report to include similar information about a substantial
number of issuers either of the same type (e.g., ETFs or mutual funds
that are large cap funds, bond funds, balanced funds, money market
funds, etc.) or investment focus (e.g., primarily invested in the same
industry or sub-industry, or the same country or geographic
region).\125\ We believe that this proposed requirement tracks rule 139
to the extent practicable and appropriate.
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    \121\ Rule 139(a)(2)(iii) [17 CFR 230.139(a)(2)(iii)].
    \122\ 1983 Proposing Release, supra note 119.
    \123\ 1984 Adopting Release, supra note 56.
    \124\ See Investment Company Names, Investment Company Act
Release No. 24828 (Jan. 17, 2001) [66 FR 8509 (Feb. 1, 2001)]
(registered investment companies are typically categorized based on
industry (e.g., sector funds or country or geographic region)).
    \125\ Proposed rule 139b(a)(2)(ii)(A).
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Comprehensive List Requirement
    Under the proposed rule, a broker-dealer's publication or
distribution of an industry research report that conforms to the
comprehensive list requirement, rather than the industry representation
requirement, also would be eligible for the rule's safe harbor.\126\
Rule 139 contains a similar provision,\127\ and we are proposing to
replicate the language from rule 139's comprehensive list requirement
in rule 139b, with some modifications owing to the difference in
context and the FAIR Act's affiliate exclusion.\128\
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    \126\ Proposed rule 139b(a)(2)(ii)(B).
    \127\ Rule 139(a)(2)(iii) [17 CFR 230.139(a)(2)(iii)].
    \128\ Proposed rule 139b(a)(2)(ii)(B).
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    Like the proposed industry representation requirement, the proposed
comprehensive list requirement is designed to result in industry
research reports that cover a broad range of investment companies or
securities.\129\ We are proposing that a comprehensive list of
recommended issuers appearing in an industry research report could not
include any covered investment fund issuer 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.\130\ As discussed in
the context of the proposed industry representation requirement, we
believe that including a broad range of issuers in a research report
lessens concerns over market conditioning.\131\ At the same time, the
proposed comprehensive list requirement would permit a different
presentation of research about multiple covered investment funds than
the industry representation requirement would permit.\132\ We
understand that the two types of presentations could serve different
research needs.
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    \129\ 1983 Proposing Release, supra note 119. We note that when
the Commission originally adopted rule 139 in 1970, this rule only
provided a safe harbor for research reports that included ``a
comprehensive list of securities, opinions or recommendations
concerning the issuer'' and did not provide a parallel safe harbor
for issuer-specific research reports. See 1970 Adopting Release,
supra note 99.
    \130\ See proposed rule 139b(a)(2)(ii)(B) (excluding from the
comprehensive list 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)); see also
supra section II.A.1.
    \131\ See supra notes 119-120 and accompanying text.
    \132\ Under proposed rule 139b, a ``comprehensive list''
research report would have to include a list of all of the broker's
currently-recommended covered investment fund securities, whereas an
``industry representation'' report would not be required to list
each currently-recommended security (but instead could cover a more
limited number of issuers as long as a ``substantial number'' of
covered investment fund issuers of the same type or investment focus
were included). See also requests for comment infra at the end of
this section II.B.2.c (requesting comment on how these types of
research reports might be used and the content that would be
included in each type of research report).
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    We request comment on the proposed content requirements for
industry research reports.
     Are the proposed industry representation requirement and
the proposed comprehensive list requirement appropriate? Why or why
not?
     How would the publication or distribution of industry
research reports help investors, and do commenters anticipate that
industry research reports would be published or distributed more or
less frequently than issuer-specific research reports? Do commenters
anticipate that broker-dealers would be more likely to publish or
distribute industry research reports that comply with the industry
representation requirement, or alternatively the comprehensive list
requirement, or both, in relying on the proposed rule 139b safe harbor?
     Are there other conditions that we should consider in
addition to the proposed industry representation requirement and the
proposed comprehensive list requirement? For example, should we require
that there must be a minimum number of funds included in an industry
research report for it to qualify under the industry representation
requirement, particularly in light of the fact that there may be only a
few funds that track a particular sub-industry or geographic region or
country? If so, what should that minimum number be? Is there another
approach to industry research report content requirements that would be
more appropriately tailored to covered investment fund research
reports?
     The proposed industry representation requirement would be
based on the ``type'' or ``investment focus'' of the issuers covered in
the research report. Are these the appropriate terms to achieve
comparisons of similar entities in industry research reports? Why or
why not? Are there other more appropriate terms that could be used to
specify subsets of covered investment funds that would be included in
industry research reports (e.g., category, asset class, strategy,
topic, or investment policy)? Should we include more specific
definitions for the terms ``type'' and ``investment focus'' in rule
139b, and if so, what should these definitions be? Should we instead
identify categories that can qualify for the industry report
provisions, such as ``legal structure'' (e.g., ETF, mutual fund,
business development company, interval fund), ``asset class'' (e.g.,
international equity, domestic equity, international fixed income,
domestic fixed income), ``investment focus'' (e.g., sector, industry,
sub-industry, geographic region), or ``strategy'' (e.g., passive,
active, market-cap-weighted, smart beta, capital preservation, capital
appreciation)?
     The proposed comprehensive list requirement would require
the research report to contain a list of covered investment funds that
are ``currently recommended'' by the broker-dealer. Is it clear what is
meant by the terms ``comprehensive list'' and ``currently recommended''
under proposed rule 139b? Would broker-dealers seeking to rely on the
proposed safe harbor understand that we interpret these terms in the
context of rule 139b to have the same meaning as they do in the context
of rule 139? For example, would the term ``currently recommended'' be
interpreted as meaning ``available for sale by the broker-dealer,''
``given a `buy' recommendation by the broker-dealer,'' or something
else? Should we further define either of the terms ``comprehensive
list'' or ``currently

recommended'' as they appear in rule 139b (or, within rule 139b, as
these terms apply to certain types of covered investment funds such as
registered investment companies), and if so, how?
     Do commenters anticipate that, if a broker-dealer were to
rely on the proposed rule 139b safe harbor to publish or distribute
research reports that meet the proposed comprehensive list requirement,
there would be a sufficient number of ``currently recommended'' covered
investment funds to produce an appropriately broad array of funds
included in the report given the affiliate exclusion?
     We are proposing that a comprehensive list could not
include any covered investment fund issuer 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. Should rule 139b
instead provide that a comprehensive list of recommended issuers could
include issuers that are affiliates of the broker-dealer that is
publishing or distributing the research report under certain
circumstances? If so, what information, if any, should a broker-dealer
be permitted to include about affiliated issuers such that the list can
be described as ``comprehensive'' while continuing to address the goals
of the affiliate exclusion? For example, should the rule provide that
these issuers could be included in a comprehensive list if the research
report were to identify which issuers in the list, if any, were
affiliated with the broker-dealer? In addition, or in the alternative,
should we permit these issuers to be included in a comprehensive list
if disclosure about the affiliated issuers were limited, for example,
to basic identifying information such as the name of the covered
investment fund, its type and investment focus, and its ticker symbol
(if applicable)? As another example, should the rule require that if a
comprehensive list includes affiliated issuers and includes performance
information, the performance information must be presented in
accordance with rule 482 in order to address the concern that the
broker-dealer may be incentivized to present more favorably the
performance of its affiliated covered investment funds? \133\
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    \133\ See infra section 0.
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d. Presentation Requirement for Industry Research Reports
    Proposed rule 139b also would condition the safe harbor for
industry research reports on a presentation requirement. Under the
proposed rule, analysis of any covered investment fund issuer or its
securities included in an industry research report could not be given
materially greater space or prominence in the publication than that
given to any other covered investment fund issuer or its
securities.\134\
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    \134\ Proposed rule 139b(a)(2)(iii).
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    The proposed presentation requirement tracks a parallel ``no
greater space or prominence'' requirement in rule 139.\135\ The
Commission has stated that the ``no greater space or prominence''
language is necessary to mitigate the risk of conditioning the market
\136\ but also that the materiality standard within this presentation
requirement provides flexibility.\137\ We believe that the concerns
underlying the rule 139 presentation requirements apply equally in the
context of covered investment fund research reports. We believe that,
if the proposed rule were to permit a broker-dealer to rely on the safe
harbor even if it were to publish or distribute an industry research
report that gives materially greater space or prominence to one issuer
than to others, this would create an avenue for circumventing the
conditions associated with issuer-specific research reports. The
industry should already be familiar with this long-established and
well-understood condition, and therefore we believe implementing a
similar presentation condition for industry research reports on covered
investment funds would be straightforward.
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    \135\ Rule 139(a)(2)(iv) [17 CFR 230.139(a)(2)(iv)].
    \136\ 1983 Proposing Release, supra note 119.
    \137\ Id.
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    We request comment on the proposed presentation requirement for
industry research reports.
     Is the proposed presentation requirement appropriate for
covered investment fund industry research reports? Why or why not?
     Is the proposed presentation requirement sufficiently
clear? Should we provide guidance as to what compliance with this
requirement would entail?
     Would this requirement unduly restrict design flexibility
for research reports, or impede broker-dealers' ability to provide
material information in research reports?
     Should we consider additional presentation requirements
for covered investment fund research reports? Is there another approach
that would be more appropriately tailored?

C. Presentation of Performance Information in Research Reports About
Registered Investment Companies

    Specific statutory provisions and rules apply to advertising the
performance of registered investment companies.\138\ An advertisement
about a covered investment fund that is a registered investment company
is deemed a section 10(b) prospectus (also known as an ``advertising
prospectus'' or ``omitting prospectus'') for purposes of section
5(b)(1) of the Securities Act so long as it complies with rule
482.\139\ Therefore, under the current regulatory framework, a broker-
dealer's publication or distribution of a research report that complies
with the requirements of rule 482 would not be deemed a non-conforming
prospectus in violation of section 5 of the Securities Act.\140\
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    \138\ See, e.g., section 24(g) of the Investment Company Act [15
U.S.C. 80a-24(g)] (directing the Commission to adopt rules or
regulations that permit registered investment companies to use
prospectuses that (i) include information the substance of which is
not included in the statutory prospectus, and (ii) are deemed to be
permitted by section 10(b) of the Securities Act); rule 34b-1 under
the Investment Company Act [17 CFR 270.34b-1] (requiring that, in
order not to be misleading, investment company sales literature must
include certain information, including with respect to performance
information by incorporating certain related provisions of rule 482
of the Securities Act); rule 156 of the Securities Act [17 CFR
230.156] (providing guidance on what statements or omissions of
material fact may be misleading in investment company sales
literature); rule 482 of the Securities Act [17 CFR 230.482]
(setting forth that for an investment company advertisement to be
deemed a prospectus under section 10(b) of the Securities Act, it
must meet certain requirements thereunder, including with respect to
standardized performance information presentation).
    \139\ See supra note 101 and accompanying text.
    \140\ See supra notes 13, 101 and accompanying text. FINRA
content standards also would generally require a member's
publication or distribution of such a communication (to the extent
it presents performance data as permitted by rule 482) to include
certain of the standardized performance information specified under
rule 482. See FINRA rule 2210(d)(5)(A).
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    Given the breadth of 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 considered covered
investment fund research reports subject to the proposed rule 139b safe
harbor.\141\ Among other things, rule 482 requires standardized
presentation of performance data included in registered open-end
investment company

advertisements.\142\ Alternatively, if other performance measures are
presented, they must be accompanied by certain standardized performance
data.\143\ Because a broker-dealer's publication or distribution of a