United States: FINRA Proposes Revisions To Fixed-Income Research Rule

Clarifications Regarding Distribution of Third-Party Research to Institutional Investors, Non-U.S. Affiliate Distribution to Institutional Investors, Distribution of Institutional Research to Media and Other Non-Investors, and Institutional Public Appearances

Earlier this week, FINRA filed with the SEC proposed revisions (the "Proposed Revisions")1 to Rule 2242,2 FINRA's new fixed-income research rule (the "Rule"). The Rule is scheduled to take effect on July 16, 2016. The Proposed Revisions will not impact the implementation of the rule as adopted, meaning that the Rule will become effective as adopted pending the adoption of these Proposed Revisions. The Proposed Revisions address:

  • Which of the Rule's requirements for distribution of third-party research apply to such research3 that is distributed only to institutional investors ("third-party institutional research");
  • Whether customer consent requirements apply to a non-U.S. affiliate's distribution of institutional fixed-income research prepared by a FINRA member to non-U.S. institutional investors;
  • Distribution of institutional fixed-income research to the media and other persons for informational rather than investment purposes; and,
  • Disclosure requirements for public appearances of fixed-income research analysts when the audience is comprised solely of institutional investors.

Third-Party Institutional Research

The Proposed Revisions clarify the interaction of Rule 2242(j), which provides that institutional research is exempt from all of the Rule's requirements except those expressly noted therein, and Rule 2242(g), which imposes specific requirements for distribution of third-party research. The Proposed Revisions provide that firms distributing third-party institutional research must comply with the Rule's third-party research review requirements. On the other hand, firms do not need to include the specific conflict of interest disclosures that are required for third-party retail research; instead, firms are required to include a more limited version of the "health warning" that the Rule mandates for institutional research. The following chart describes the application of every provision of Rule 2242(g) (Distribution of Third-Party Debt Research Reports) to institutional third-party research if the Proposed Revisions are adopted:

Distribution of Research by Non-U.S. Affiliates to Non-U.S. Institutional Customers

The Proposed Revisions permit non-U.S. affiliates to distribute fixed-income research of their FINRA-member affiliate, including globally branded research, to the affiliate's non-U.S. institutional customers without receiving the customer consent normally required under the Rule for institutional research, subject to conditions. FINRA noted that some non-U.S. customers had struggled to understand why they were being asked to provide those consents, when they were not customers of a U.S. broker-dealer. Specifically, the Proposed Revisions would add Supplemental Material .12 to the Rule, which permits distribution of a FINRA-member research report to a non-U.S. institutional customer of a non-U.S. affiliate, provided that:

  • The non-U.S. institutional investor is not a customer of the FINRA member firm;
  • The non-U.S. institutional investor is a customer of the non-U.S. affiliate distributing the report; and,
  • The non-U.S. affiliate distributing the report has a reasonable basis to believe that the customer meets the definition of institutional account under Rule 4512.

Distribution of Institutional Fixed-Income Research for Informational Purposes

The Proposed Revisions add Supplemental Material .13 to the Rule permitting the distribution of published institutional research to persons and entities that do not qualify as institutional investors under the Rule "for informational purposes unrelated to investing in debt securities," subject to disclosure conditions described below. The Proposed Revisions specifically permit distribution of institutional research to the following:

  • Regulators for regulatory purposes;
  • Academics for academic purposes;
  • Issuers for the purpose of enhancing knowledge of their industry and competitors and market and economic factors; and,
  • Media organizations for news gathering purposes.

The news will be welcome in particular to media outlets that had been informed by many firms that they would no longer be distributing research to them.

In respect of any such distributions, firms are required to disclose that:

  • The firm may provide the recipient debt research reports that were prepared for institutional investors and are not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors; and,
  • The institutional debt research reports would be provided only for informational purposes and not for the purpose of making an investment decision related to debt securities.

Public Appearances by Research Analysts

The Proposed Revisions would add Supplemental Material .14, which provides that the disclosures the Rule mandates for public appearances of debt research analysts (about fixed-income securities) are not required if attendance is limited to institutional investors eligible to receive institutional-only fixed-income research under the Rule.

The Proposed Revisions expressly require that firms utilizing the exemption maintain sufficient records to demonstrate that attendance at the public appearance was limited to such investors.

Concluding Thoughts

The Proposed Revisions provide clarifying guidance in areas where interaction among Rule provisions were not without doubt, and provide helpful relief in other respects. As firms producing fixed-income research gear up for the July 16 effective date of Rule, they should review policies and procedures to include any aspects of the Proposed Revisions applicable to their firm's business.


1 FINRA's SEC filing in respect of the Proposed Revisions can be found here.

2 For a broader and more detailed description of the Rule generally, please see our October 2015 client publication regarding the Rule's approval by the SEC: FINRA's New Fixed-Income Research Rule and Modifications to Equity Research Rule. For a description of FINRA's earlier proposals in respect of the Rule, you may refer to our client publications regarding Regulatory Notice 11-11 (April 2011), Regulatory Notice 12-09 (March 2012), and Regulatory Notice 12-42 (March 2013).

3 All references in this publication to "research" should be understood to refer only to fixed-income research. Rule 2241 regulates equity research and is not affected by the Proposed Revisions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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