The Securities and Exchange Commission has approved two Financial Industry Regulatory Authority rules that apply to equity and debt research. FINRA Rule 2241 adopts, with modifications, NASD Rule 2711 as a FINRA rule and amends NASD Rule 1050 and Incorporated NYSE Rule 344 (collectively, Equity Rule). FINRA Rule 2242 (Debt Rule, and together with the Equity Rule, the Rules) is a new rule that incorporates many of the provisions of the Equity Rule.
The Rules impose a new overarching requirement to adopt and maintain written policies and procedures that identify and effectively manage conflicts of interest stemming from research reports, public appearances by research analysts, and the interaction between research analysts and persons outside the research department. The Rules require policies and procedures, and also specify certain prohibitions and restrictions, with respect to the following topics:
- prepublication review or approval of research reports;
- parties permitted to influence research coverage decisions;
- supervision of research analysts;
- determination of the research department’s budget;
- personal trading activities of research analysts;
- promises of favorable research;
- solicitation and marketing by research analysts;
- information barriers;
- retaliation against research analysts; and
- interaction between research analysts and other personnel.
The Rules retain, with some modifications, pre-existing provisions around the content and disclosures of research reports and disclosures associated with public appearances. In addition, the Equity Rule reduces quiet periods associated with initial public offerings and secondary offerings and eliminates the quiet period associated with a lock-up agreement.
The Equity Rule provides relief from certain requirements for members with limited investment banking activity and for personnel who only produce research reports on an occasional basis. The Debt Rule provides certain relief for members with limited investment banking or principal trading activity, and for debt research distributed solely to eligible institutional investors.
Most of the provisions in the Equity Rule become effective December 24. Certain provisions, including those related to quiet periods and the relief for personnel who produce research reports on an occasional basis became effective September 25. The text of the Equity Rule can be found here.
The Debt Rule becomes effective February 22, 2016. The text of the Debt Rule can be found here.