The long-anticipated overhaul of FINRA's research rules has now been approved by the SEC. Most provisions of the new equity research rule will become effective on December 24, 2015, with limited provisions, including changes to equity research quiet periods, having already gone into effect on September 25, 2015.1 The fixed-income research rule will become effective on February 22, 2016.2 Firms will be reviewing and revising their policies and procedures in response to the new rules. The requirements of the fixed-income research rule will also require a cultural shift at some firms.
Key Aspects of the New Research Rules
FINRA Rule 2241 (the "New Equity Research Rule") and FINRA Rule 2242 (the "Fixed-Income Research Rule") are summarized here, with each of the rules discussed in greater depth in the pages that follow. Further detail is in Appendix A, which compares, section-by-section, the New Equity Research Rule and the Fixed-Income Research Rule with existing NASD Rule 2711; and Appendix B, analyzing which of the Fixed-Income Research Rule's policy and procedure requirements apply to firms qualifying for each of the rule's exemptions.
Fixed-Income Research Rule – Key Aspects
Firms that produce analysis falling within the rule's definition of "debt research report" may face significant new regulatory obligations depending on applicable exemptions. Key aspects include:
- No specific exemption for trader commentary pieces from the definition of "debt research report," although the general firm-level exemptions discussed below will provide relief from some of the rule's requirements;
- Requirements for policies and procedures imposing information barrier/institutional safeguards between persons producing fixed-income research reports and personnel in investment banking, sales and trading and principal trading functions. These requirements are structured similarly to those of the New Equity Research Rule, although the Fixed-Income Research Rule provides additional exemptions for some firms; and
- Disclosure requirements for fixed-income research reports distributed to retail investors that are similar to those of the New Equity Research Rule. Institutional-only research, however, will only require a "health warning" rather than the panoply of specific disclosures applicable to retail fixed-income research.
New Equity Research Rule – Key Aspects
The New Equity Research Rule retains the core provisions of the existing NASD and NYSE equity research rules, with some important modifications, including:
- Addition of a "principles-based procedures" approach to potential conflicts of interest;
- Shortening or elimination of equity research quiet periods required by the rule;
- Imposition of some of the Global Settlement prohibitions on all firms;
- Others, including provisions regarding selective dissemination, modifications to required disclosures and changes regarding the distribution of third-party research.
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Footnotes
1 The FINRA regulatory notice announcing the approved rule is available here.
2 For a description of FINRA's earlier proposals in respect of the proposed 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). FINRA's FAQs regarding FINRA's equity research rule is discussed in our client publication issued today, FINRA Publishes FAQs Regarding Research Conflicts of Interest in the Offering Process.
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.
