SEC Requests Comments on FINRA Proposal to Amend Debt Research Rule (Fed. Reg.)

The SEC solicited comments on a FINRA proposal to amend FINRA Rule 2242 that addresses conflicts of interest relating to the publication and distribution of debt research reports. The request for comments was published in the Federal Register.

The FINRA amendments, which are effective immediately, are intended to 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 from many of the provisions regarding supervision and disclosure that are applicable to debt research reports distributed to retail investors (the "Institutional Exemption"). In order to benefit from the exemption, an institutional investor must provide either affirmative or negative consent when receiving institutional debt research that does not meet all applicable standards for reports that are prepared for retail investors ("Institutional Consent"). The proposed rule change clarifies that debt research reports 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 clarifies 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 being required to comply with all of the independence and disclosure standards that are applicable to debt research reports prepared for retail investors.

3. Distribution of Third-Party Debt Research Reports to Institutional Investors. The proposed rule change clarifies 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 reports.

4. Public Appearance of Debt Research Analysts. The proposed rule change also clarifies 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 filed the proposed rule change with an implementation date of July 16, 2016. Comments on the amendments must be submitted by June 28, 2016.