FINRA issued three regulatory notices related to the capital formation process and requested comments on (i) rules governing capital raising, (ii) proposed amendments for underwriting arrangements, and (iii) a limited safe harbor from research rules for desk commentary. Comments are due by May 30, 2017.

FINRA requested comments on the following:

  • Existing FINRA rules, operations and administrative processes related to capital-raising activities of member firms. This includes the recently added capital acquisition broker rules and funding portal rules (see Regulatory Notice 17-14).
  • FINRA-proposed amendments to "modernize, simplify and clarify" FINRA's rule governing the underwriting terms and arrangements regarding the public offering of securities ( FINRA Rule 5110) (see Regulatory Notice 17-15).
  • A FINRA proposal to create a limited safe harbor for specified brief, written reports (i.e., desk commentary), which are distributed to eligible institutional investors by sales and trading personnel, from "research reports" and "debt research reports" pursuant to FINRA Rules 2241 and 2242 that are subject to more onerous supervisory and compliance requirements.

FINRA President and CEO Robert W. Cook said in a statement: "As the environment for capital raising evolves, it is essential that we continue to assess how regulation can best facilitate capital formation on a strong foundation of investor protection and market integrity."

Commentary

Even though the scope is limited, FINRA's revisiting of the research rules is a positive development. It is important for regulators to be mindful of the fact that investment research may be distorted by conflicts of interest. An equally important consideration should be to encourage firms to produce research and commentary that is useful to investors. Rules that discourage the production of commentary, or that make it impossible for firms to profit economically from the production of research, are not good for investors. Such rules have the most negative impact on smaller companies because the limited interest in the trading issuers of smaller companies means that broker-dealers are not going to be willing to jump through expensive regulatory hoops to produce research on these companies.

Firms should review the research proposal carefully and consider whether it is worth commenting on a broader reconsideration of the FINRA and SEC rules governing research.

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