On January 15, the Securities and Exchange Commission approved Financial Industry Regulatory Authority (FINRA) adoption of a rule prohibiting trading in a security or a derivative thereof ahead of research reports. FINRA Rule 5280 generally adopts NASD Interpretive Material (IM) 2110-4, which prohibits member firms from establishing or adjusting an inventory position in an exchange-listed security traded over-the-counter or a derivative of such security in anticipation of issuing a research report on that security.
FINRA Rule 5280 differs from NASD IM-2110-4 in three respects. FINRA Rule 5280:
- covers inventory positions for any security (including debt) or a derivative thereof, irrespective of whether the security is exchange-listed;
- applies only to member firms that establish or adjust their inventory based on non-public, advance knowledge of a research report in that security; and
- eliminates the option to establish internal controls to manage the information flow between the research and trading departments, and instead requires member firms to establish policies and procedures that restrict or limit the information flow between their research department personnel, or other persons with non-public, advance knowledge of a research report, and trading department personnel.
The effective date of the rule change is April 20.