FINRA proposed amendments to FINRA Rule 2242 ("Debt Research Analysts and Debt Research Reports"), which addresses conflicts of interest relating to the publication and distribution of debt research reports. The proposed amendments would clarify the application of the rule in the following respects:

1. Distribution of Debt Research Reports to Non-U.S. Investors by Non-U.S. Affiliates of FINRA Members. Currently, Rule 2242(j) exempts debt research reports that are distributed solely to eligible institutional investors (the "Institutional Exemption") from many of the provisions regarding supervision and disclosure that are applicable to debt research reports distributed to retail investors. In order to benefit from the exemption, an institutional investor must provide either affirmative or negative consent to receiving institutional debt research that does not meet all of the standards applicable to reports prepared for retail investors ("Institutional Consent"). The proposed rule change would clarify that a debt research report will fall within the Institutional Exemption even if the non-U.S. customers of a FINRA member's non-U.S. affiliate receive such reports without giving Institutional Consent, so long as the non-U.S. affiliate has a reasonable basis for believing that the customer meets the definition of an "institutional account."

2. Distribution of Debt Research Reports to Non-Investors. The proposed rule change would clarify that, subject to a negative consent requirement, a FINRA member may distribute institutional debt research reports to specified persons (e.g., regulators, academics, issuers and media) for informational purposes unrelated to investing without complying with all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

3. Distribution of Debt Research Reports to Non-Investors. The proposed rule change would clarify that a member who 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 certain independence, review and disclosure requirements with respect to such third-party reports.

4. Public Appearance of Debt Research Analysts. The proposed rule change would clarify that public appearances by debt research analysts are exempt from the rule's public appearance disclosure requirements where attendance is limited to institutional investors who are eligible to receive institutional debt research reports.

FINRA has filed the proposed rule change for immediate effectiveness and the implementation date of the proposed rule change will be July 16, 2016. All comments should be submitted within twenty-one days after the rule change's publication in the Federal Register.

Commentary

Although FINRA's proposed changes to the rule are well intended, the amended rule would remain quite broad – arguably overbroad – in its application to non-U.S. investors. Even as proposed, the rule would (i) require non-U.S. institutions to monitor their non-U.S. customers in order to determine whether they fit within the definition of "institutional accounts," which is a U.S. regulatory construction and (ii) limit the access of non-U.S. retail investors to research reports (even if they are not doing business with a FINRA member), regardless of whether such access would be permitted by the applicable home regulator. It is not necessarily true that restricting the access of retail investors to research is good public policy in the first place. Certainly, it is plausible that a non-U.S. regulator might decide that if retail investors had more as opposed to less access to information, the outcome would be better.

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