On May 24, 2016, FINRA proposed amendments to its new debt research rule (Rule 2422). The amendments are intended to clarify Rule 2422 in four respects: (1) the consent requirement for institutional debt research reports distributed to non-U.S. investors by non-U.S. affiliates of members; (2) the consent requirement for institutional debt research reports distributed to specified persons for informational purposes unrelated to investing in debt securities; (3) the scope of the institutional exemption when distributing third-party debt research reports to eligible institutional investors; and (4) the disclosure requirements for debt research analysts in public appearances.
Distribution to Non-U.S. Investors by Non-U.S. Affiliates of Members
Rule 2242(j) exempts debt research reports distributed solely to eligible institutional investors from most of the provisions regarding supervision, coverage determinations, budget and compensation determinations, and all of the disclosure requirements applicable to debt research reports distributed to retail investors. Rules 2242(j)(1)(A) and (B) require either negative or affirmative written consent for eligible institutional investors to receive institutional debt research pursuant to the institutional exemption. The proposed amendments clarify the application of Rule 2242(j) to non-U.S. investors that are customers of a member's U.S. affiliate but not customers of the member. Specifically, the requirements of Rules 2242(j)(1)(A) and (B) will not apply to the distribution of an institutional debt research report by a non-U.S. affiliate of a member to a non-U.S. investor, provided that: (1) the non-U.S. investor is not a customer of the member; (2) the non-U.S. investor is a customer of the non-U.S. affiliate of the member; and (3) the non-U.S. affiliate of the member has a reasonable basis to believe that the customer meets the definition of "institutional account" in Rule 4512(c).
Distribution to Persons for Informational Purposes
The proposed amendments permit a member to distribute institutional debt research reports to specified persons for informational purposes unrelated to investing in debt securities, provided that the member does not distribute the reports prior to their publication and the member has disclosed that: (1) the member may provide to institutional investors debt research reports that are not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors; and (2) the debt research reports would be provided only for informational purposes and not for the purpose of making an investment decision related to debt securities. The proposed amendments also provide that if the person receiving institutional debt research does not contact the member to request that such institutional debt research reports not be provided, then the member may reasonably conclude that the person has consented to receiving debt institutional research reports. Institutional debt research may be distributed for informational purposes unrelated to investing in debt securities: (1) regulators for regulatory purposes; (2) academics for academic purposes; (3) issuers for the purpose of enhancing knowledge of their industry and competitors and market and economic factors; and (4) media organizations for news gathering purposes.
Distribution of Third-Party Debt Research Reports to Institutional Investors
The proposed amendments clarify that a member that distributes third-party debt research reports to institutional investors pursuant to the institutional exemption must establish, maintain and enforce written policies and procedures reasonably designed to comply with Rules 2242(g)(1), (g)(2), (g)(4) and (g)(6). The review requirements in Rules 2242(g)(2) and (g)(4) for third-party debt research reports and independent third-party debt research reports, respectively, would apply to reports distributed to retail investors or to institutional investors. Accordingly, third-party debt research reports distributed pursuant to the institutional exemption would be subject to the same review requirements as third-party debt research reports distributed to retail investors. With respect to disclosures, the proposed amendments clarify that third-party debt research reports distributed pursuant to the institutional exemption are not required to carry the specific disclosures applicable to retail debt research.
Public Appearances by Debt Research Analysts
Rule 2242(d) requires disclosures from debt research analysts in public appearances, including debt research analysts that only prepare debt research reports pursuant to the institutional exemption. The proposed amendments clarify that the public appearance disclosure requirements do not apply in such circumstances. The proposed amendments require that the member maintain records sufficient to demonstrate that attendance at the public appearance was limited to institutional investors eligible to receive institutional debt research. The proposed amendments also require that the records be maintained for at least three years from the date of the public appearance. The disclosure requirements of Rule 2242(d) would apply, however, where attendance at the public appearance was not limited to institutional investors eligible to receive institutional debt research reports.
The text of the proposed amendments to Rule 2422 is available at: http://www.finra.org/sites/default/files/rule_filing_file/SR-FINRA-2016-017.pdf
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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