Final FINRA Research Rules - Morrison & Foerster77 Research Quick Guide to Offerings (1) The Jumpstart Our usiness Startups (JO S) Act (April 2012) defines “emerging growth company”

Final FINRA Research Rules

Tuesday, February 9, 2016

12:00 PM – 1:00 PM EST

Teleconference

Presenters:

Ze’-ev D. Eiger, Partner, Morrison & Foerster LLP Anna T. Pinedo, Partner, Morrison & Foerster LLP

1. Presentation

2. Morrison & Foerster Client Alert: “FINRA’s Final Equity Research Rules Go Effective; Final Debt Research Rules’ Effective Date Quickly Approaching”

3. NSCP Currents Article: “Will Principles-Based Guidance be Easier to Follow?”

4. Morrison & Foerster Quick Guide: “Research Quick Guide to Offerings”

5. Morrison & Foerster Tracking Chart:

“Final FINRA Rule 2241 (Equity) vs. Final FINRA Rule 2242 (Debt)

http://www.mofo.com/people/e/eiger-zeev-d

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Final FINRA Research Rules

February 9, 2016

Presented by:

Ze’-ev D. Eiger

Anna T. Pinedo

NY2 764004

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Applicable Rules • Analyst Settlement

• Final FINRA Rule 2241; Equity Research Rule

• Effective as of December 24, 2015

• Final FINRA Rule 2242; Debt Research Rule

• Will become effective on February 26, 2016

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ANALYST SETTLEMENT

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Analyst Settlement - Timeline • April 2000: Dotcom bust; scrutiny of research reports and analysts begins.

• July 2002: NASD (now FINRA), and NYSE (together, “SROs”) issue joint memorandum explaining the application of FINRA’s Rule 2711 and NYSE Rule 472 (together, the “SRO Rules”).

• April 2003: SEC establishes Regulation AC, which requires that broker-dealers:

• Include in research reports certifications by the research analyst that the views expressed in the report accurately reflect his or her personal views, and

• Disclose whether or not the analyst received compensation or other payments in connection with his or her specific recommendations or views.

• October 2003: U.S. District Court establishes guidelines that require certain financial institutions to separate their investment banking and research functions.

• December 2005: SROs issue a joint report “On the Operation and Effectiveness of the Research Analyst Conflict of Interest Rules,” including many recommended amendments to the SRO Rules that have now been adopted.

• March 2010: District Court modifies the settlement to permit chaperoned research analyst and investment banking participation in joint due diligence sessions under certain circumstances.

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Analyst Settlement Global settlement technically applies only to the settling firms and

their successors. As a practical matter, it has much broader

application since many institutional investors have required non-

settling securities firms to agree to follow its provisions.

Most settlement provisions apply only in respect of a research report

that is both (i) prepared by the firm, and (ii) that relates to either (A) a

U.S. company, or (B) a non-U.S. company for which a U.S. market is

the principal equity trading market.

SRO Rules establish a similar (and somewhat broader) set of

guidelines.

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Final Research Rules for

Equity and Debt Research

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Research Quick Guide to Offerings

(1) The Jumpstart Our Business Startups (JOBS) Act (April 2012) defines “emerging growth company” (“EGC”) as an issuer with total gross revenues of less than $1 billion (subject to inflationary adjustment) during its most recently completed fiscal year. A company remains an EGC until the earliest of: the last day of the fiscal year during which the issuer has total annual gross revenues in excess of a $1 billion (subject to inflationary indexing); the last day of the issuer’s fiscal year following the fifth anniversary of the date of the first registered sale of common equity securities of the issuer under the Securities Act; the date on which such issuer has, during the prior three-year period, issued more than $1 billion in non-convertible debt; or the date on which the issuer is deemed a “large accelerated filer.” An issuer will not be able to qualify as an EGC if it first sold its common stock in an IPO prior to December 8, 2011.

(2) Meets all of the registrant requirements of Form F–3 (other than the reporting history); and either: (i) satisfies the public float threshold of Form F–3; or (ii) is issuing non-convertible securities (if the issuer has issued at least $1 billion of non-convertible securities in transactions registered under the Securities Act, other than equity securities, for cash during the past three years or the issuer has outstanding at least $750 million of non-convertible securities, other than common equity, issued in primary offerings for cash registered under the Securities Act); and (iii) either (A) has its equity securities trading on a designated offshore securities market and has had them so traded for at least 12 months; or (B) has a worldwide public float of $700 million or more. (3) The JOBS Act prohibits any SRO and the SEC from adopting any rule/regulation that would restrict a broker-dealer from participating in certain meetings relating to EGCs. Post-offering, no SRO or the SEC may adopt any rule/regulation prohibiting a broker-dealer from publishing or distributing a research report or making a public appearance with respect to the securities of an EGC.

Is the Issuer conducting an IPO?

Does research cover the Issuer?

Has the Issuer filed all required SEC

reports over preceding 12

months?

Is the Issuer a WKSI?

Does the Issuer’s float exceed $75

million?

Is the Issuer a U.S. corporation?

Research cannot initiate coverage until 10 days (if

underwriter or dealer) after IPO

Is the Issuer a foreign private

issuer that meets requirements of Rule 138/139?(2)

Research cannot initiate coverage or publish reports on

the Issuer until 3 days (if manager) after follow-on

offering

Research can publish both issuer and industry-specific reports

(subject to conditions for reports)

Research may publish report on security that is not the subject of IB mandate (i.e., (1) equity if security offered is non-convertible debt and (2) debt if security offered is equity

or convertible debt)

Yes

No

Yes

Yes

Yes

Yes

Yes

Yes

No

No

No

No

No

No

Start here

Is the Issuer an “emerging growth company”? (1)

Yes

No

Research may publish or distribute a research report about an EGC at

any time and the report will not be deemed an “offer” under the

Securities Act even if the broker-dealer will participate or is

participating in the offering(3)

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Final FINRA Equity Research Rule • Amends and adopts NASD Rule 2711 as consolidated FINRA Rule

2241

• Retains most of the principal provisions of Rule 2711; however, the

final rule also:

• Introduces a more principles-based, less prescriptive approach

• Places greater reliance on a member firm’s compliance policies and

procedures

• Introduces more flexibility with respect to quiet periods

• Expands the exemption for member firms with limited investment banking

activity

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Definitions • Investment banking services: expanded to include all acts in

furtherance of a public or private offering on behalf of an issuer

• Research report: no longer includes a report relating to a mutual

fund not listed or traded on an exchange

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Conflicts of interest • Member firms are required to establish, maintain and enforce written

policies and procedures reasonably designed to identify and

effectively manage conflicts of interest related to research

Pre-publication review: at a minimum, policies must:

• prohibit prepublication review, clearance or approval of research reports

by investment banking personnel

• prohibit review, clearance or approval by other persons not directly

responsible for the preparation, content and distribution of research

reports, other than legal and compliance

• Eliminates ability under FINRA Rule 2711(b)(3) for investment

banking personnel to review reports for factual accuracy

• Requires that review by personnel (other than legal and compliance)

be documented

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Conflicts of interest (cont’d) • Coverage universe: policies and procedures at a minimum must:

• Limit or restrict investment banking personnel’s input or influence on

coverage determinations

• Research personnel/management must make final decisions regarding

coverage

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Conflicts of interest (cont’d) • Oversight and control of research analysts:

• Policies and procedures must at a minimum prohibit investment banking

personnel from supervising or controlling research analysts, including

exerting influence or control over research analyst compensation

evaluations and determinations

• Research budget:

• Restrict research department determinations to senior management,

excluding senior management engaged in investment banking activities

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Conflicts of interest (cont’d) • Compensation: policies and procedures must:

• Prohibit compensation of research analysts based upon specific

investment banking or contributions to investment banking

• Require that compensation of research analysts primarily responsible for

the preparation of the substance of a research report be reviewed and

approved at least annually by a compensation committee (that reports to

the firm’s board of directors)

• The compensation committee cannot include any representatives

from the firm’s investment banking department

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Conflicts of interest (cont’d) • Information barriers: Policies and procedures must establish

information barriers or other institutional safeguards to ensure the

research analysts are insulated from the review, pressure or

oversight by investment banking personnel, sales and trading

personnel or others that may be biased in their judgment

• FINRA Rule 2241 does not explicitly require physical separation

• However, FINRA Rule 2241 notes that FINRA expects physical separation except

in extraordinary circumstances where the costs are unreasonable due to the firm’s

size and resources

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Conflicts of interest (cont’d) • Anti-retaliation:

• Policies and procedures must prohibit investment bankers and other

employees from directly or indirectly retaliating (or threatening to

retaliate) against research analysts as the result of any adverse research

report or public appearance

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Conflicts of interest (cont’d) • Quiet Periods:

• Requires that policies and procedures define quiet periods to consist of:

a minimum of 10 days (reduced from 40 days) in the case of an IPO in

which the firm has acted as underwriter or dealer, and a minimum of 3

days (reduced from 10 days) in the case of a follow-on offering in which

the firm has acted as manager or co-manager

• During the quiet period, the firm must not publish research or make

public appearances if the member has participated as an underwriter or

dealer in the IPO or as a manager or co-manager of a follow-on offering

• Retains current exception for EGC research reports

• Eliminates quiet period around expiration, termination or waiver of a lock-

up agreement

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Conflicts of interest (cont’d) • Solicitation and marketing:

• Imposes new policies that restrict research analyst activities that can

reasonably be expected to compromise objectivity

• Preserves the prohibition on analyst participation in pitches and other

solicitation of investment banking business (e.g., road shows)

• Analysts may, however, view road shows or presentations from a

remote location or separate room

• Distinction between permissible activities in the case of EGC and non-

EGC offerings

• Pitch materials cannot include any information about the firm’s research

in a manner that suggests the member firm would provide coverage (for

example, pitch materials cannot include a research analyst’s industry

ranking in a way that suggests the outcome of future research)

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Conflicts of interest (cont’d) • Joint due diligence:

• Policies and procedures must prohibit an equity research analyst’s

participation in due diligence in the presence of investment banking

personnel prior to the selection of the underwriters for the investment

banking transaction

• Following the award of a mandate, joint diligence sessions are permitted

with the appropriate safeguards

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Conflict of interest (cont’d) • Favorable Research and Prepublication Review:

• Prohibits promise of favorable research, a particular research

recommendation or a rating or specific content as an inducement for the

receipt of business or compensation

• Prohibits review of a research report by a subject company for purposes

other than factual verification

• Non-investment banking personnel and subject company representatives

can review sections of the report for factual accuracy; however, the draft

reviewed by them cannot contain the summary recommendation, rating,

price target

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Conflict of interest (cont’d) • Personal trading:

• Requires that policies and procedures restrict equity research analyst

account trading in securities covered by the equity research analyst, as

well as trading in any derivatives of such securities

• Firms may, however, specify financial hardship circumstances which

would enable research analysts to trade against recent

recommendations

• Policies also must ensure that equity research analyst accounts,

supervisors of equity research analysts and associated persons able to

affect or influence the content of research reports do not benefit from

knowledge of the content or the timing of the report before recipients of

the report have a reasonable opportunity to act on the information in the

report

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Content

• Essentially maintains current disclosure requirements

• Beyond current requirements, FINRA Rule 2241 requires that a

member firm establish policies and procedures that are reasonably

designed to ensure that:

• Purported facts in reports are based on reliable information

• Reports disclose when a member firm or its affiliates have a “significant

financial interest in the equity of the subject company” including at a

minimum beneficial ownership of 1% or more of any class of common

equity securities of the subject company

• Reports disclose any material conflicts known not only by equity research

analysts but also by any associated person with the ability to influence

the content of the report

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Public appearances

• FINRA Rule 2241 maintains current disclosure requirements

• However, the rule further requires that in connection with a public

appearance, an equity research analyst disclose if the member or

affiliate maintains a significant financial interest in the debt or equity

of the subject company

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Distribution of reports

• Consistent with FINRA Rule 2010, Rule 2241 requires that member firms

establish, maintain and enforce written policies that reasonably ensure that

research is not distributed selectively to internal trading personnel or to

selected customers of the firm

• Different research products may be distributed to different customers, but

differentiation cannot be based on timing of sharing market sensitive

information

• Research dissemination practices must be disclosed to all customers

• When distributing third-party reports, the firm must ensure the report is

clearly labeled, does not contain any untrue statement of material fact and is

not otherwise false or misleading

• Firm distributing third-party report must disclose any significant interest in

securities of the subject company as well as any other material conflict that

may have influenced the choice of research provider

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Limited investment banking activity • Firms with limited investment banking activity permitted to have

investment banking personnel participate in compensation review for

equity research analysts

• Exempts firms from current provisions restricting or limiting research

coverage decisions and budget determinations

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FINRA Enforcement • December 2014 – FINRA fined 10 firms a total of $43.5 million for allowing

their equity research analysts to solicit investment banking business and for

offering favorable research coverage in connection with the 2010 planned

initial public offering of Toys"R"Us.

• Finding that each of the ten firms:

• Used its equity research analyst as part of its solicitation for a role in the

IPO; equity research analysts made separate presentations to

Toys"R"Us' management and sponsors for the purpose of ensuring that

the analysts' views on key issues, including valuation factors, were

aligned with the views expressed by the firms' investment bankers.

• Understood that the performance of their analysts at the presentations

would be a key factor in determining whether the firm received an

underwriting role in the IPO.

• As detailed in the settlement documents, implicitly or explicitly at the

initial pitch meetings or in follow-up communications offered favorable

research coverage in return for a role in the IPO.

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FINRA Enforcement (cont’d) • FINRA also found that six of the 10 firms had inadequate supervisory

procedures related to research analyst participation in investment

banking pitches

• “This settlement affirms our commitment to policing the boundaries

between research and investment banking to ensure that research is

not improperly influenced.”

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Final FINRA Debt Research Rule

• FINRA Rule 2242 imposes requirements on the publication and

distribution of debt research reports generally comparable to those

for equity research reports

• Debt research report: any written (including electronic)

communication that includes an analysis of a debt security or an

issuer of a debt security and, in either case, that provides information

reasonably sufficient upon which to base an investment decision

• Excludes:

• A recommendation regarding a particular industry, or a particular type of debt

security, which would not be “sufficient upon which to base an investment

decision”

• Discussions of broad-based indices

• Market or technical commentary

• Analyses of particular types of debt securities

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Debt-conflicts of interest • As with equity research, member firms are required to establish,

maintain and enforce written policies and procedures reasonably designed to identify and effectively manage conflicts of interest related to the preparation, content, and distribution of debt research reports

• Prohibits: • performance of joint due diligence prior to the award of a mandate

• sales and trading and principal trading personnel from influencing debt research

• debt research analyst from identifying or recommending specific trading transactions to sales and trading personnel inconsistent with the debt research analyst’s current reports as well as from disclosing the timing of or contents of a pending report

• Distribution of third-party debt research that member firm knows or has reason to know is unreliable or not objective

• Communications between a debt research analyst and customer should be fair and balanced

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Debt-approval of reports

• Policies and procedures must at a minimum: • Prohibit prepublication review, clearance or approval of reports by

investment banking, sales and trading, or principal trading personnel and

any non-research report, other than legal and compliance

• Limit subject company’s review to only the verification of facts

• Same qualifications and requirements as those applicable

in the case of pre-publication review of equity research

reports under Rule 2241

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Debt-coverage and budgetary decisions

• A member firm’s policies and procedures must at a minimum:

• Restrict or limit input by investment banking, sales and trading and

principal trading personnel to ensure research management make final

decisions regarding coverage

• Limit determination of debt research budget to senior management,

excluding senior management engaged in investment banking or

principal trading activities and without regard to specific revenues or

results derived from investment banking

• Certain firms (eligible for limited banking exemption or principal

trading exemption) are relieved from this requirement

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Debt-supervision, review and compensation

• Policies and procedures at a minimum must:

• Limit supervision of debt research analysts to personnel not engaged in

investment banking, sales and trading or principal trading activities

• Include information barriers or other institutional safeguards to ensure debt

research is insulated from oversight, review and pressure by investment banking,

sales and trading personnel, etc.

• Ensure compensation determinations are not based on specific investment

banking or trading transactions or contributions to a firm’s principal trading

activities

• Investment banking and trading personnel are precluded from having

input into compensation of debt research analysts

• Compensation must be reviewed at least annually by a committee

that reports to the board of directors and does not include any

representation from investment banking or principal trading personnel

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Debt-anti-retaliation

• Policies and procedures must prohibit: • member firm employees from directly or indirectly retaliating against a

debt research analyst for publishing research or making a public

appearance that may adversely affect the firm’s business interests

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Debt-personal trading • Restrict trading by a debt research analyst account in securities

covered by the debt research analyst, derivatives of such securities,

and any fund the performance of which is materially dependent upon

the performance of securities covered by debt research analyst

• The procedures must also ensure that debt research analyst

accounts and supervisors of debt research analysts and any

associated persons who have the ability to influence the content of

debt research reports do not benefit in their trading from knowledge

or content or timing of debt research reports before the reports are

disseminated

• The institutional debt research report exemption, however, provides

an exception from these requirements

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Debt-prohibition against solicitation • Debt research analyst cannot:

• Participate in pitches or solicitations of investment banking business

• Participate in road shows and other marketing on behalf of issuers

related to such transactions

• Engage in sales or marketing related to an investment banking

transaction

• Engage in any communication with a current or prospective customer

about an investment banking transaction

• Written and oral communication by a debt research analyst

with a current or prospective customer related to an investment

banking service transaction must be fair, balanced and not

misleading

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Debt-content • Content requirements: similar to those required for equity research,

except in the case of institutional debt research reports subject to the

exemption

• Public appearances: requirements are similar to those required in

the case of equity research

• Distribution of reports: similar to the requirements for equity

research, debt research cannot be selectively disseminated

• Distribution of third-party reports: similar to requirements for

equity research

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Debt-exemption for limited principal

trading activity

• Exemption is available to member firms that engage in limited

principal trading activity where: in absolute value on an annual basis,

the member’s trading gains or losses on principal trades in debt

securities are $15 million or less over the previous three years, on

average per year; and the member employs fewer than 10 debt

traders

• A firm meeting the limited principal trading activity definition may

claim an exemption from certain provisions regarding the separation

of debt research from sales and trading; provided that the firm

implement measures to ensure that debt research analysts are

insulated from pressure from banking and sales and trading

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Debt-eligible institutional investors • Debt research distributed solely to eligible institutional investors is

exempt from requirements relating to: (i) supervision, (ii) coverage

determinations, (iii) budget and compensation decisions, and (iv)

disclosure requirements

• Eligible institutional investors must opt in to receive institutional debt

research

• Opt-in process differs depending upon type of investor

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Debt-eligible institutional investors (cont’d)

• For a QIB: a member firm can distribute debt research to a particular

QIB customer via negative consent if: (1) the member firm has a

reasonable basis to believe that the QIB customer is capable of

evaluating investment risks independently, both in general and with

regard to the particular transactions and investment strategies

involving a debt security; and (2) the QIB affirmatively indicates that it

is exercising independent judgment pursuant to FINRA’s suitability

requirement

• For an institutional account (that is not a QIB): the member firm must

obtain affirmative written consent

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1 Attorney Advertisement

Client Alert January 25, 2016

FINRA’s Final Equity Research

Rules Go Effective; Final Debt

Research Rules’ Effective Date

Quickly Approaching

In November 2014, FINRA proposed to adopt NASD Rule 2711 as new FINRA Rule 2241, with several modifications, to address conflicts of interest relating to equity research analysts and research reports (“Rule 2241”). FINRA additionally proposed to adopt new FINRA Rule 2242, designed to address conflicts of interest relating to the publication and distribution of debt research reports (“Rule 2242”). Together, the proposals sought to effectively serve the public interest by successfully managing research conflicts of interest, while contemporaneously preserving the ability of FINRA members (“member firms”) to continue to provide research, and thus information, to the investing public.1 Finalized versions of Rule 2241 and Rule 2242 were approved by the Securities and Exchange Commission (“SEC”) in July 2015. While Rule 2241’s requirements became effective on December 24, 2015, Rule 2242 will not become effective until February 22, 2016.

Rule 2241 and Rule 2242 create a much more stringent regulatory environment for member firms and their equity and debt analysts. FINRA has additionally indicated in its priorities letter for 2016 that it will continue to focus on whether a member firm’s research analysts are inappropriately involved in the firm’s investment banking activities and whether investment banking personnel are exercising undue influence over analysts.2

This Alert is separated into two parts. Part I provides a brief overview of the requirements of both Rule 2241 and Rule 2242. Part II provides a comparison chart, which illustrates the specific overlapping provisions contained in both Rule 2241 and Rule 2242, as well as provisions that are unique to each rule. As described in further detail below, although the majority of the provisions contained in both Rule 2241 and Rule 2242 are largely similar, there are several notable differences.

I. Summary of the Key Provisions Contained in Rule 2241 and Rule 2242

This section provides a summary of the provisions contained in both Rule 2241 and Rule 2242, including a description of the notable differences, where applicable, between the rules.

A. DEFINITIONS

Definitions. Rule 2241 applies to equity “research analysts,” which is defined in Rule 2241 as any associated person who is primarily responsible for, and any associated person who reports directly or indirectly to a research

1 See Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change, as Modified by Amendment No. 1 Thereto, to Adopt FINRA Rule 2242 (Debt Research Analysts and Debt Research Reports), SEC Release No. 34-75472, at 73 (July 16, 2015), available at https://www.sec.gov/rules/sro/finra/2015/34-75472.pdf. 2 See FINRA Regulatory and Examination Priorities Letter for 2016 (Jan. 5, 2016), available at http://www.finra.org/sites/default/files/2016-regulatory-and-examination-priorities-letter.pdf.


analyst in connection with, the preparation of the substance of a “research report.” It is not relevant whether a person has the specific job title of “research analyst.” 3 “Equity security” has the same meaning as provided in Section 3(a)(11) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).4

FINRA Rule 2242 applies to “debt research analysts,” which like Rule 2241 is defined as “an associated person who is primarily responsible for, and any associated person who reports directly or indirectly to a debt research analyst in connection with, the preparation of the substance of a debt research report, whether or not any such person has the job title of ‘research analyst.’”5 “Debt security” includes any security as defined in Section 3(a)(10) of the Exchange Act, excluding any “equity security,” “municipal security” and “security-based swap” as defined under the Exchange Act, and any “U.S. Treasury” as defined under FINRA Rule 6710(p).6

“Research reports” are similarly defined under Rule 2241 and Rule 2242 as any written (including electronic) communication that provides (1) an analysis of equity (or debt) securities of individual companies or industries (or a debt security or an issuer of a debt security), and (2) information reasonably sufficient upon which to base an investment decision. However, Rule 2241 no longer includes a report relating to a mutual fund not listed or traded on an exchange.7

Rule 2241 and Rule 2242 expressly exclude from the definition of “research report”:

Communications that are limited to: (i) discussions of broad-based indices; (ii) commentaries on economic, political, or market conditions; (iii) technical analyses concerning the demand and supply for a sector, index, or industry based on trading volume and price; (iv) recommendations regarding increasing or decreasing holdings in particular industries or sectors; (v) notices of certain ratings or price target changes;8 and (iv) statistical summaries of multiple companies’ financial data, including lists of current ratings;9

Periodic reports or other communications prepared for investment company shareholders or discretionary investment account clients, which discuss individual securities in the context of a fund’s account or past performance;10

Communications that constitute statutory prospectuses that are filed as part of a registration statement;11 and

Communications that constitute private placement memoranda and comparable offering-related documents prepared in connection with investment bank transactions (other than those that purport to be research).12

Rule 2241 further excludes from the definition of “research report” any communications distributed to fewer than 15 persons,13 while Rule 2242 provides exclusions from the definition of “research report” for: (i) an analysis prepared for a specific person or a limited group of fewer than 15 persons; and (ii) commentaries on or analyses of

3 FINRA Rule 2241(a)(8). 4 FINRA Rule 2241(a)(2). 5 FINRA Rule 2242(a)(1). 6 FINRA Rule 2242(a)(4). 7 FINRA Rule 2241(a)(11); FINRA Rule 2242(a)(3). 8 FINRA Rule 2241(a)(11)(A)(i)-(iii), (v)-(vi); FINRA Rule 2242(a)(3)(A)(i)-(iii), (v)-(vi). 9 FINRA Rule 2241(a)(11)(A)(iv); FINRA Rule 2242(a)(3)(B)(i). Note, however, that FINRA Rule 2242 qualifies this exclusion by noting that listings of current ratings will be excluded to the extent that they do not include an analysis of individual companies’ data. 10 FINRA Rule 2241(a)(11)(B)(ii); FINRA Rule 2242(a)(3)(B)(iii). 11 FINRA Rule 2241(a)(11)(C); FINRA Rule 2242(a)(3)(C). 12 FINRA Rule 2241(a)(11)(D); FINA Rule 2242(a)(3)(D). 13 FINRA Rule 2241(a)(11)(B)(i).


particular types of debt securities or characteristics.14

B. CONFLICTS OF INTEREST

Identifying and Managing Conflicts of Interest. Under Rule 2241 and Rule 2242, member firms must establish, maintain and enforce written policies and procedures reasonably designed to identify and effectively manage any conflicts of interests related to research reports.15 Specifically, a member firm’s policies must address the preparation, content and distribution of research reports, public appearances by research analysts and the interaction between research analysts and those outside of the firm’s research department.16 Written policies and procedures must also be reasonably designed to promote objective and reliable research that provides only the truly held opinions of the firm’s research analysts, and must affirmatively seek to diminish the manipulation of research analysts (or their research reports) in an attempt to favor the interests of the firm or a current or prospective customer or class of customers.17

Firms must also develop policies and procedures that specifically address pre-publication review. At a minimum, such policies and procedures must prohibit pre-publication review, clearance or approval of research reports by: (i) investment banking personnel (or, in the case of debt research, any investment banking, principal trading and sales and trading personnel); and (ii) all other persons not directly responsible for the preparation, content and distribution of research reports, other than the member firm’s legal and compliance personnel.18

Member firms are also required to maintain policies and procedures that prohibit prepublication review of a research report by a subject company for purposes other than verification of facts.19 Member firms may provide sections of a draft research report to non-investment banking personnel (or, in the case of debt research, non-principal trading, non-sales and trading personnel) or the subject company for factual review, if: (i) the draft sections do not consist of any research summary, research rating or price target; (ii) a complete draft of the report is provided to the member firm’s legal or compliance personnel prior to the sections being provided to non-investment banking personnel (or, in the case of debt research, non-principal trading, non-sales and trading personnel) or the subject company; and (iii) any subsequent proposed changes to the rating (or, in the case of equity research, the price target) are accompanied by a written justification to the member firm’s legal or compliance personnel and the changes are authorized by such legal or compliance personnel.20

FINRA Rule 2241 largely diminishes the input and influence that investment banking personnel may have on equity research reports and equity research analysts. Furthermore, FINRA Rule 2241 requires that firms limit or restrict investment banking personnel’s input or influence on coverage determinations and instead, provide such final discretion regarding coverage to equity research personnel and management.21

In addition to investment banking personnel, FINRA Rule 2242 similarly limits the input and influence of sales and trading and principal trading personnel on debt research analysts. FINRA Rule 2242 further limits the supervision of debt research analysts to persons not engaged in (i) investment banking services transactions, (ii) principal trading activities or (iii) sales and trading.22

Compensation of Research Analysts. A member firm must, under both Rule 2241 and Rule 2242,

14 FINRA Rule 2242(a)(3)(A)(iii); FINRA Rule 2242(a)(3)(B)(ii). 15 See FINRA Rule 2241(b)(1); FINRA Rule 2242(b)(1). 16 FINRA Rule 2241(b)(1)(A)-(C); FINRA Rule 2242(b)(1)(A)-(C). 17 FINRA Rule 2241(b)(2); FINRA Rule 2242(b)(2). 18 FINRA Rule 2241(b)(2)(A); FINRA Rule 2242(b)(2)(A)-(B). 19 FINRA Rule 2241(b)(2)(N); FINRA Rule 2242(b)(2)(N). Member firms are also prohibited under Rule 2241 and Rule 2242 from making promises of (i) favorable research and (ii) a particular research recommendation, rating or specific content, as inducement for receipt of business or compensation. See FINRA Rule 2241(b)(2)(K); FINRA Rule 2242(b)(2)(K). 20 See FINRA Rule 2241.05; FINRA Rule 2242.05. Moreover, the member firm must retain copies of all draft and final versions of research reports for three years. Id. 21 FINRA Rule 2241(b)(2)(B). 22 FINRA Rule 2242(b)(2)(C)-(D).


implement written policies and procedures that at a minimum prohibit investment banking personnel (or, in the case of debt research, personnel engaged in investment banking services transactions, principal trading activities or sales and trading) from supervising or controlling research analysts, including exerting influence or control over research analyst compensation evaluations and determinations.23

Moreover, a member firm’s policies and procedures must prohibit compensation of research analysts based upon specific contributions to investment banking activities (or, for debt research, principal trading activities), as well as require that compensation of research analysts primarily responsible for the preparation of the substance of a research report be reviewed and approved on an annual basis by a compensation committee.24 The compensation committee must report to the member firm’s board of directors, as applicable, and may not consist of any of the member firm’s investment banking personnel (as well as persons engaged in principal trading activities in the case of debt research).25

Under Rule 2241, the compensation committee is required to consider several factors when evaluating the appropriate compensation for equity research analysts, including: (i) individual performance (e.g., productivity and quality of research); (ii) the correlation between the analyst’s recommendations and actual performance of the recommended securities; and (iii) the overall ratings received from clients, sales force and peers independent of the firm’s investment banking department. 26 Rule 2242 requires the compensation committee to consider: (i) individual performance (e.g., productivity and quality of debt research); and (ii) the overall ratings received from customers and peers. While persons engaged in principal trading activities may not provide input on a debt research analyst’s compensation, sales and trading personnel may provide their input to debt research management on the evaluation of the debt research analyst in order to convey customer feedback—however, all final compensation determinations must be made by research management and the compensation committee.27

Research Department Budget. Under Rule 2241 and Rule 2242, a member firm must limit determinations of the appropriate research department budget to senior management of the member firm. However, senior management engaged in investment banking services (or, in the case of debt research, investment banking activities or principal trading activities) are expressly prohibited from providing any input on such determinations.28

Information Barriers and Safeguards. Rule 2241 and Rule 2242 both require that a member firm’s policies and procedures establish information barriers or other institutional safeguards that ensure that research analysts are insulated from the review, pressure or oversight by persons engaged in investment banking services, sales and trading (or, in the case of debt research, principal trading or sales and trading activities) and other persons who may be biased in their judgment or supervision.29 Although Rule 2241 and Rule 2242 do not explicitly require physical separation between research analysts and certain personnel, FINRA notes that it expects physical separation except in “extraordinary circumstances where the costs are unreasonable due to a firm’s size and resources.”30

Anti-Retaliation. Pursuant Rule 2241, a member firm’s policies and procedures must prohibit the member firm’s investment banking personnel, and other firm employees engaged in investment banking services activities,

23 FINRA Rule 2241(b)(2)(C); FINRA Rule 2242(b)(2)(D). 24 FINRA Rule 2241(b)(2)(E)-(F); FINRA Rule 2242(b)(2)(F)-(G). 25 FINRA Rule 2241(b)(2)(F). 26 FINRA Rule 2241(b)(2)(F)(i)-(iii). 27 FINRA Rule 2242(b)(2)(G)(i)-(ii). 28 FINRA Rule 2241(b)(2)(D); FINRA Rule 2242(b)(2)(E). FINRA Rule 2242 further specifies, however, that revenues and results of the member firm as a whole may be considered in determining the debt research department budget and allocation of debt research department budget. See FINRA Rule 2242(b)(2)(E). 29 FINRA Rule 2241(b)(2)(G); FINRA Rule 2241(b)(2)(H). 30 See Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change, as Modified by Amendment No. 1 Thereto, to Adopt FINRA Rule 2241 (Research Analysts and Research Reports) in the Consolidated FINRA Rulebook, SEC Release No. 34-75471, at 56 n.193 (July 16, 2015), available at https://www.sec.gov/rules/sro/finra/2015/34-75471.pdf; SEC Release No. 34-75472, supra note 1 at 58.


from directly or indirectly retaliating (or threatening retaliation) against equity research analysts as a result of any adverse research report or public appearance.31 While Rule 2242 maintains an analogous anti-retaliation provision, it creates a broader prohibition by applying it to any employee of the member firm and not just those engaged specifically in investment banking services activities.32

Quiet Periods. Under Rule 2241, but not Rule 2242, a members firm’s policies and procedures must prohibit research analysts from publishing research or making public appearances (i.e., establishment of a “quiet period”) in connection with an issuer’s IPO (if the member firm has participated as an underwriter or dealer) or an issuer’s secondary offering (if the member firm has participated as a manager or co-manager). The policies and procedures must stipulate the following “quiet periods”: (i) a minimum of ten days in the case of an IPO; and (ii) a minimum of three days in the case of a secondary offering.33 Rule 2241 amends the quiet periods established under NASD Rule 2711, which contained quiet periods for IPOs and secondary offerings of 40 days and 10 days, respectively.

Rule 2241 expressly excludes from the “quiet period”: (i) the publication or distribution of a research report or public appearance following an IPO or secondary offering by an emerging growth company (“EGC”), as defined under Section 3(a)(80) of the Securities Act of 1933, as amended (the “Securities Act”); (ii) the publishing or distribution of a research report, or making of a public appearance, concerning the effects of a significant news or event on an issuer provided that the firm’s legal or compliance personnel provided prior authorization before such publication was distributed or public appearance made; and (iii) the distribution of research reports or making of public appearances pursuant to Rule 139 under the Securities Act.34

Solicitation and Marketing. Under Rule 2241 and Rule 2242, a member firm must restrict a research analyst’s activities that can reasonably be expected to comprise the analyst’s objectivity.35 Equity and debt research analysts are prohibited from participating in pitches and other solicitation of investment banking services transactions. Moreover, equity and debt research analysts are prohibited from participating in road shows and other marketing on behalf of an issuer related to investment banking services.36 The supplementary materials to Rule 2241 and Rule 2242 further stipulate that pitch materials cannot include any information about the member firm’s research capacity in a manner that suggests the firm would provide, either directly or indirectly, favorable research.37

Joint Due Diligence. A member firm’s policies and procedures must prohibit an equity and debt research analyst’s participation in due diligence in the presence of investment banking personnel prior to the selection of underwriters for an investment banking services transaction.38 However, following the award of a mandate, joint diligence sessions are permitted with appropriate institutional safeguards.

FINRA has clarified that it interprets the joint due diligence requirement under Rule 2241“. . . to apply only to the extent it is not contrary to the JOBS Act.” Accordingly, the due diligence proscription would not “. . . apply where the joint due diligence activities involve a communication with the management of an EGC that is attended by both the [equity] research analyst and an investment banker.”39

Restrictions on Personal Trading by a Research Analyst. A member firm must maintain policies and procedures that restrict research analyst account trading in: (i) securities, (ii) any derivatives of such securities, and (iii) any funds whose performance is materially dependent upon the performance of any securities covered by

31 FINRA Rule 2241(b)(2)(H). 32 FINRA Rule 2242(b)(2)(I). 33 FINRA Rule 2241(b)(2)(I). 34 FINRA Rule 2241(b)(2)(I)(ii)-(iii). 35 FINRA Rule 2241(b)(2)(L); FINRA Rule 2242(b)(2)(L). 36 FINRA Rule 2241(b)(2)(L)(i)-(ii); FINRA Rule 2242(b)(2)(L)(i)-(ii). However, member firms should take note that these activities represent a “non-exhaustive list” of the types that can violate this provision under Rule 2241. See SEC Release No. 34-75471, supra note 30 at 9 n.35. 37 FINRA Rule 2241.01; FINRA Rule 2242.02. 38 FINRA Rule 2241.02; FINRA Rule 2242.09. 39 See SEC Release No. 34-75471, supra note 30 at 10 n.39.


the research analyst.40 Furthermore, policies and procedures must ensure that research analyst accounts, supervisors of such analysts and associated persons able to influence the content of research reports do not benefit from knowledge of the content or the timing of the report before recipients of the report have a reasonable opportunity to act on the report’s information.41 However, unlike Rule 2242, Rule 2241 further prohibits equity analysts from receiving pre-IPO shares in the sector that he or she covers and trading against his or her recent recommendations.42

Both Rule 2241 and Rule 2242 provide several exclusions from the aforementioned restrictions on personal trading. First, an equity or debt research analyst may be permitted to trade against his or her most recent recommendation as long as the trade falls within the member firm’s definition of “financial hardship circumstances.”43 Second, an equity or debt research analyst may trade in securities in a manner that is inconsistent with his or her recommendation (even where a member firm has instituted a policy that prohibits any analyst from holding securities, or options on or derivatives of such securities), provided that: (i) the member firm establishes a reasonable plan to liquidate such holdings; and (ii) the plan is approved by the firm’s legal or compliance personnel.44

C. CONTENT AND DISCLOSURE

Content and Disclosure in Research Reports. Under both Rule 2241 and Rule 2242, a member firm must establish policies and procedures that are reasonably designed to ensure that: (i) purported facts in research reports are based on reliable information; (ii) reports disclose any material conflicts known not only by research analysts but also by any associated person with the ability to influence the content of the report; and (iii) any recommendation or rating (or, in the case of an equity research report, any price target) has a reasonable basis and is accompanied by a clear explanation of any valuation method used and a fair presentation of the risks that may impede achievement of the recommendation or rating (or price target).45

A member firm is also required to disclose in any equity or debt research report at the time of publication of a distributed report: (i) if the research analyst or a member of the research analyst’s household has a financial interest in the debt or equity securities of the subject company; (ii) if the research analyst has received compensation based upon the member firm’s investment banking revenues, among other factors; and (iii) if the member firm or any of its affiliates: (a) managed or co-managed a public offering of securities for the subject company, (b) received compensation for investment banking services from the subject company performed in the past 12 months or (c) expects to receive or intends to seek compensation for investment banking services from the subject company in the next three months.46 A member firm additionally must, as part of the “catch-all” disclosure requirements for Rule 2241 and Rule 2242, disclose in a research report any other material conflict of interest of the research analyst or member firm that the research analyst knows or has reason to know of at the time of the publication or distribution of a research report.47 Finally, in addition to the disclosure requirements expressly provided for in Rule 2241 and Rule 2242, member firms and their equity and debt research analysts must comply with all applicable disclosure provisions of FINRA Rule 2210 and the U.S. federal securities laws.48

There are several content disclosure requirements that are unique to each of Rule 2241 and Rule 2242. First, under Rule 2241, equity research reports must disclose when a member firm or its affiliates have a “significant financial interest in the equity of a company,” and at a minimum, beneficial ownership of 1% or more of any class of common equity securities of the subject company. Furthermore, Rule 2241 requires that an equity research

40 FINRA Rule 2241(b)(2)(J); FINRA Rule 2242(b)(2)(J). 41 FINRA Rule 2241(b)(2)(J)(i); FINRA Rule 2242(b)(2)(J)(i). 42 FINRA Rule 2241(b)(2)(J)(iii). 43 FINRA Rule 2241(b)(2)(J)(ii); FINRA Rule 2242(b)(2)(J)(ii). 44 FINRA Rule 2241.10; FINRA Rule 2242.10. For a plan to be “reasonable” under Rule 2241 and Rule 2242, the plan must be consistent with the principles annunciated in FINRA Rule 2241(b)(2)(J)(i) and Rule 2242(b)(2)(J)(i), respectively. 45 See FINRA Rule 2241(c)(1)-(2); FINRA Rule 2242(c)(1)-(2). 46 See FINRA Rule 2241(c)(4); FINRA Rule 2242(c)(4). 47 FINRA Rule 2241(c)(4)(I); FINRA Rule 2242(c)(4)(H). 48 FINRA Rule 2241(e); FINRA Rule 2242(e).


report disclose whether the firm was making a market in the securities of the subject company at the time of publication or distribution of an equity research report.49 On the other hand, Rule 2242 requires firms to disclose in the debt research report whether it trades or may trade as principal in the debt securities (or related derivatives) that are the subject of the debt research report.50

Distribution of Firm and Third-Party Research Reports. Member firms must establish, maintain and enforce written policies and procedures that are reasonably designed to ensure that a research report is not distributed selectively to trading personnel or to selected customers of the firm.51 Different research products may be distributed to different customers, but differentiation cannot be based on the timing of receipt of potentially market sensitive information.52

When distributing third-party reports, the member firm must ensure that the report (i) is clearly labeled to ensure that there is no confusion on the part of the recipient as to the person or entity that prepared the report, (ii) does not contain any untrue statement of material fact, (iii) is not otherwise false or misleading and (iv) reliable and objective.53 Firms distributing a third-party report must also disclose any significant interest in securities of the report’s subject company and any other material conflict that may have influenced the choice of a third-party research provider.54

Disclosure for Public Appearances. When an equity or debt research analyst makes a public appearance, he or she must largely satisfy the same disclosure requirements that are required when distributing research reports under Rule 2241 and Rule 2242. However, unlike the disclosure requirements for research reports, the “catch all” disclosure requirement for public appearances would only apply to a conflict of interest of the equity or debt research analyst or member firm that the research analyst knows or has reason to know at the time of the public appearance.55 A member firm must also maintain records of public appearances sufficient to demonstrate compliance by its research analysts with applicable disclosure requirements.56

Termination of Coverage. Rule 2241, but not Rule 2242, expressly requires that a member firm promptly notify its customers if it intends to terminate coverage of a subject company. Such notice must be made to the member firm’s customers using the firm’s ordinary means to disseminate research reports on the subject company. The notice must also be accompanied by a final research report (comparable in scope and detail to prior research reports) and a final recommendation or rating. Where it is impracticable to provide such a final research report, recommendation or rating, a member firm may alternatively disclose to its customers its reason for terminating coverage.57

D. EXEMPTIONS

Exemption for Limited Investment Banking Activity. Both Rule 2241 and Rule 2242 provide an exemption from their respective requirements for member firms that have (i) participated in ten or fewer investment banking services transactions over the past three years as manager or co-manager; and (ii) generated $5 million or less in gross investment banking revenues from those transactions. However, this exemption is only available for those member firms that establish information barriers or other institutional safeguards to ensure that their analysts are insulated from pressure by persons engaged in investment banking services activities or other persons, including sales and trading department personnel, who might be biased in their judgment or

49 FINRA Rule 2241(c)(4)(F)-(G). 50 FINRA Rule 2242(c)(4)(F). 51 FINRA Rule 2241(g); FINRA Rule 2242(f). 52 FINRA Rule 2241.07; FINA Rule 2242.07. 53 See FINRA Rule 2241(h); FINRA Rule 2242(g). 54 FINRA Rule 2241(h)(4); FINRA Rule 2242(g)(3). 55 FINRA Rule 2241(d); FINRA Rule 2242(d). 56 FINRA Rule 2241(d)(3); FINRA Rule 2242(d)(3). 57 FINRA Rule 2241(f).


supervision.58

Exemption for Good Cause. Both Rule 2241 and Rule 2242 provide an exemption for “good cause.” Specifically, FINRA may in exceptional and unusual circumstances grant a conditional or unconditional exemption from any requirement under Rule 2241 or Rule 2242 for good cause shown after taking into account relevant factors, including: (i) the extent to which such an exemption is consistent with the purposes of Rule 2241 or Rule 2242, as applicable; (ii) the protection of investors; and (iii) the public interest.59

Exemption for Limited Principal Trading Activity. Rule 2242 contains a unique exemption for member firms that engage in limited principal trading activity. To rely on such an exemption, the member firm must (i) have trading gains or losses on principal trades in debt securities (in absolute value on an annual basis) that do not exceed $15 million or over the previous three years, on average per year; and (ii) employ fewer than ten debt traders. Member firms that claim this exemption must maintain records sufficient to establish eligibility for the exemption and also maintain (for at least three years) any communication that, but for this exemption, would be subject to the provisions of Rule 2242.60

Exemption for Debt Research Reports Provided to Institutional Investors. Rule 2242 contains an exemption for the distribution of debt research to qualified institutional buyers (“QIBs”). A member firm may rely on this exemption if: (i) the firm has a reasonable basis to believe that the QIB customer is capable of evaluating investment risks independently, both in general and with regard to the particular transactions and investment strategies involving a debt security; and (ii) the QIB affirmatively indicates that it is exercising independent judgment pursuant to FINRA’s suitability requirement. Even where the QIB has not contacted the firm to request that such institutional debt research not be provided, the firm may reasonably conclude that the QIB has consented to receive debt institutional research reports (i.e., via negative consent). A member firm may similarly provide debt research reports to a person that qualifies as an “institutional account” pursuant to FINRA Rule 4512(c), provided that such person, prior to receiving the debt research report, affirmatively notifies the member firm in writing that it wishes to receive institutional debt research and forego treatment as a retail investor for the purposes of Rule 2242 (i.e., via affirmative written consent).61 The member firm may, however, distribute institutional debt research to any person, other than a “natural person,” that qualifies as an “institutional account” for a period of up to one year after the SEC’s approval date of Rule 2242 (the “Transition Period”) without first obtaining affirmative written consent. After the Transition Period expires, a member firm must obtain the necessary consents to distribute institutional debt research to any person (natural or otherwise).62

II. Comparison Chart

See our comparison chart on the following page.

Authors

Ze’-ev Eiger New York (212) 468-8222

[email protected]

Jared Kaplan New York (212) 336-4334 [email protected]

58 FINRA Rule 2241(i); FINRA Rule 2242(h). 59 FINRA Rule 2241(j); FINRA Rule 2242(k). 60 FINRA Rule 2242(i). 61 FINRA Rule 2242(j). 62 FINRA Rule 2242.11.


About Morrison & Foerster

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institutions, investment banks, Fortune 100, technology and life sciences companies. We’ve been included on The American

Lawyer’s A-List for 12 straight years, and Fortune named us one of the “100 Best Companies to Work For.” Our lawyers are

committed to achieving innovative and business-minded results for our clients, while preserving the differences that make us

stronger. This is MoFo. Visit us at www.mofo.com. © 2016 Morrison & Foerster LLP. All rights reserved.

For more updates, follow Thinkingcapmarkets, our Twitter feed: www.twitter.com/Thinkingcapmkts.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations


Comparison Between FINRA Rule 2241 and Rule 2242

Provision Included in FINRA Rule

2241 Included in FINRA Rule

2242

Definitions

Identifying and Managing Conflicts of Interest

Content and Disclosure in Research Reports

Disclosure in Public Appearances

Disclosure Required by Other Provisions

Termination of Coverage

Distribution of Member Research Reports

Distribution of Third-Party Research Reports

Exemption for Members with Limited Investment Banking Activity

Exemption for Good Cause

Exemption for Limited Principal Trading Activity

Exemption for Research Reports Provided to Institutional Investors

Supplementary Materials

Efforts to Solicit Investment Banking Business

Joint Due Diligence

Restrictions on Communications with Customers and Internal Personnel

Information Barriers Between Research Analysts and Trading Desk Personnel

Disclosure of Non-Investment Banking Services Compensation

Disclosure of Compensation Received by Affiliates

Submission of Sections of a Draft Research Reports for Factual Review

Beneficial Ownership of Equity Securities

Distribution of Member Research Products

Ability to Influence the Content of a Research Report

Obligations of Persons Associated with a Member

Divesting Research Analyst Holdings

Distribution of Institutional Debt Research During Transition Period

Provision not contained in FINRA Rule

Provision contained in FINRA Rule

NSCP CURRENTS

APRIL 2015 3

Will Principles-Based Guidance be Easier to Follow?A Brief Summary of Proposed Changes to FINRA’s Research RulesBy Anna Pinedo

Practitioners and market participants often complain that rules and regulations ought to be principles-based rather than prescriptive. In advocating for principles-based regulation,

the argument is often made that the objectives underlying the rules and regulations should be clear to those subject to compliance requirements. In November 2014, the Financial Industry Regulatory Authority, Inc., or FINRA, filed a proposed rule change with the Securities and Exchange Commission, or the SEC, which was subsequently amended in early 2015, to adopt NASD Rule 2711 (the equity research rule) as new FINRA Rule 2241 with significant modifications. Although the proposed changes generally retain many of the principal provisions of Rule 2711, proposed Rule 2241 represents a shift in approach. The proposed rule relies on a principles-based approach that puts more emphasis on the effective design and monitoring of a member firm’s compliance policies and procedures to mitigate and avoid conflicts of interest. As such, in preparing for the new rule, member firms may be required to take a more holistic approach to reviewing and revising their policies and procedures and undertake a more rigorous look at the types of activities that may pose conflicts of interest or be perceived as improperly influencing research. In addition to implementing this new approach, proposed Rule 2241 attempts to establish a level playing field as between investment banks subject to the Global Settlement and those that are not, as well as establish a level playing field in the treatment of research relating to issuers that are emerging growth companies, or EGCs, and those that are not. At the same time that it filed the proposed rule change relating to equity research, FINRA also filed a rule proposal relating to debt research, which is substantially similar although it takes into account the fact that debt research generally is more oriented at institutional investors.

Identifying and Managing Conflicts of Interest – Rule 2241(b)

Rule 2241(b), titled “Identifying and Managing Conflicts of Interest,” sets forth the principles underlying the revised rule. It requires member firms to establish, maintain and enforce written policies and procedures reasonably designed to identify and effectively manage conflicts of interest related to (a) the preparation, content and distribution of research reports, (b) public appearances by research analysts, and (c) the interaction between research analysts and persons outside of the research department, including investment banking and sales and trading personnel, the subject companies and customers. The Supplemental Material that forms part of the rule itself includes some prescriptive requirements addressing areas in which FINRA believes there is heightened risk of undue influence being applied to research. For example, in Supplemental Material .02, “Joint Due Diligence,” FINRA states that it interprets clause (c) above to prohibit joint due diligence sessions involving a research analyst in the presence of investment banking department personnel prior to the selection by the issuer of the underwriters for the investment banking transaction. Once

a mandate has been awarded, FINRA believes joint due diligence sessions may take place in accordance with appropriate policies and procedures.

Principal Areas to be Addressed by Member Firms

Rule 2241(b)(2) outlines the principal matters to be addressed by member firms in their policies and procedures. These include the following:

• Prepublication Review: Policies and procedures should prohibit prepublication review, clearance or approval of research reports by persons engaged in investment banking services activities and restrict or prohibit such review, clearance or approval by other persons not directly responsible for the preparation, content and distribution of research reports, other than legal and compliance personnel. The new rule eliminates the current provision of Rule 2711 that permits pre-publication review of research reports by investment banking to verify the factual accuracy of information in a research report. FINRA stated that it believes that review of facts in a report by investment banking is unnecessary in light of the numerous other sources available to verify factual information, including the subject company, and only raises concerns about the objectivity of the report and invites pressure on a research analyst. The proposed rule requires policies and procedures reasonably designed to at least restrict prepublication review by other non-research personnel, other than legal and compliance personnel. A firm must specify in its policies and procedures the circumstances, if any, under which such review would be permitted as necessary and appropriate; for example, where non-research personnel are best situated to verify selected facts or where administrative personnel review a report for formatting.

• Coverage Decisions: Policies and procedures must restrict or limit input by the investment banking department into research coverage decisions to ensure that research management independently makes all final decisions regarding the research coverage plan. This provision makes express FINRA’s interpretation that the separation requirements in current Rule 2711(b)(1) prohibit investment banking personnel from making final coverage decisions. The proposed rule does not preclude investment banking personnel from conveying customer interests or providing input into coverage considerations, so long as final decisions regarding the coverage plan are made by research management.

• Supervision, Oversight, Control and Compensation: Policies and procedures must prohibit persons engaged in investment banking activities from supervising or controlling research analysts, including exerting influence or control over research analyst compensation evaluation and determination. Member firms should limit determination of research department budget to senior management, excluding senior management engaged in investment banking services activities. Similarly, member firm policies and procedures should prohibit research personnel compensation based upon specific investment banking transactions or contributions to a member firm’s investment banking activities. At least annually, a committee that reports to the member firm’s board of directors, must

ABOUT THE AUTHOR

Anna Pinedo is a Partner with Morrison Foerster LLP, www.mofo.com. She can be reached at [email protected].

NSCP CURRENTS

APRIL 20154

review and approve the compensation of a research analyst who is primarily responsible for preparation of the substance of a research report. This committee may not include representation from the member’s investment banking department. The committee must consider the following factors when reviewing a research analyst’s compensation, if applicable, and document its determinations: the research analyst’s individual performance, including the analyst’s productivity and the quality of the analyst’s research; the correlation between the research analyst’s recommendations and the performance of the recommended securities; and the overall ratings received from clients, sales force and peers independent of the member’s investment banking department, and other independent ratings services.

• Separation and Information Walls: A member firm must establish information barriers or other institutional safeguards to ensure that research analysts are insulated from review, pressure or oversight by persons engaged in investment banking activities or other persons, including sales and trading department personnel. FINRA expanded the concept of separation to include “other persons, including sales and trading department personnel, who might be biased in their judgment or supervision.”

• Anti-Retaliation: Member firms must prohibit direct or indirect retaliation or the threat of retaliation against research analysts employed by the member firm or its affiliates by persons engaged in investment banking services activities or other employees as the result of an adverse, negative, or otherwise unfavorable research report or public appearance

written or made by the research analyst that may adversely affect the member firm’s present or prospective business interests;

• Quiet Periods: Policies and procedures should define periods during which the member firm must not publish or otherwise distribute research reports, and during which period research analysts must not make public appearances, relating to the issuer, of: a minimum of 10 days following the date of an initial public offering if the member firm has participated as an underwriter or dealer in the initial public offering; or a minimum of three days following the date of a secondary offering if the member firm has acted as a manager or co-manager of that offering. Of course, as a result of the JOBS Act, the IPO quiet period referenced immediately above would not apply to the publication or distribution of a research report or a public appearance following an initial public offering or secondary offering of the securities of an EGC. The proposed rule substantially shortens the quiet period, eliminates the differing treatment of managing underwriters and the other underwriters in the offering, and also eliminates the current quiet periods 15 days before and after the expiration, waiver or termination of a lock-up agreement.

• Restrictions on Trading; Analyst Objectivity: The proposed rule requires that a member firm restrict or limit research analyst account trading in securities, as well as derivatives of such securities and funds whose performance materially depends upon the performance of securities covered by the research analyst. The proposed rule sets out a broader, more encompassing approach designed to prohibit an analyst from benefitting economically from the knowledge of the contents or timing of a report and from trading in a manner that is inconsistent with the analyst’s recommendations. Member firms also must prohibit explicit or implicit promises of favorable research, a particular research rating or recommendation or specific research content as inducement for the receipt of business or compensation. Policies and procedures should restrict or limit activities by research analysts that can reasonably be expected to compromise their objectivity, including prohibiting participation in pitches and other solicitations of investment banking services transactions; and participation in road shows and other marketing on behalf of an issuer related to an investment banking services transaction. Similarly, investment banking department personnel are to be prohibited from, directly or indirectly, directing a research analyst to engage in sales or marketing efforts related to an investment banking services transaction; or directing a research analyst to engage in any communication with a current or prospective customer about an investment banking services transaction.

• Content and Disclosure Requirements: Proposed Rule 2241(c) sets forth the general principle that a member firm should adopt written policies and procedures relating to the content of, location of disclosures within, and procedures for, research reports. There are few changes from existing requirements although some are recast as policies and procedures rather than requirements. For example, Proposed Rule 2241(c)(1)(A) requires the adoption of policies and procedures reasonably designed to ensure that purported facts in the report are based on reliable information. In addition to proposed specific disclosure requirements regarding conflicts of interest that are substantively the same as existing requirements, the proposed rule expands the “catch all” disclosure provision by requiring disclosure of material conflicts known not only by the research analyst but also by any “associated person of the member with the ability to influence the content of a

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NSCP CURRENTS

APRIL 2015 5

research report.” FINRA’s intention is to capture material conflicts that may be known only to a supervisor or the head of research. In FINRA’s view, the “reason to know” standard would not impose a duty of inquiry on the research analysts or others but rather “it would cover disclosure of those conflicts that should reasonably be discovered by those persons in the ordinary course of discharging their functions. Proposed Rule 2241(c)(4)(F) expands the disclosure requirements relating to beneficial ownership of 1% or more of the securities of a subject company in order to include, in addition to common equity interests, to include debt and other forms of equity. FINRA stated that “an equity research report that analyzes the creditworthiness of the subject company could impact the price of the company’s debt securities, and therefore a material conflict exists where the member or its affiliates maintains significant debt holdings in the subject company.”

• Public Appearances: Proposed Rule 2241(d) is generally unchanged substantively from Rule 2711 with the addition of the requirement to disclose ownership of debt securities similar to Rule 2241(c)(4)(F). However the “catch all” disclosure requirement remains applicable only to the research analyst and would not be applicable to any other person, unlike current Rule 2241(c).

Conclusion

The proposed rule will become effective following receipt of SEC approval. As noted above, the debt research rules proposed by FINRA address debt research conflicts of interest. Largely, the construct of the equity and the debt research rules is similar; however the debt research rule includes exemptions for research distributed to certain institutional investors and also exemptions for firms with limited principal debt trading activity. We have produced a chart contrasting the provisions of the two proposed rules, which is available here: http://media.mofo.com/files/uploads/Images/FINRA-Rule-2241-Tracking-Chart.pdf. Once the rules are approved and become effective, we will see whether market participants find it compliance with principles-based regulation more appealing.

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NSCP LEGAL ALERT - Holding Customer Checks: SEC “No Action” Letter Gives Significant Relief to Introducing Broker-Dealers. Available to members - simply login and click the

“Publications” tab and navigate to the “Legal Alerts” folder.

Research Quick Guide to Offerings

Is the Issuer conducting an IPO?

Does research cover the Issuer?

Has the Issuer filed all required SEC reports over preceding 12 months?

Is the Issuer a WKSI?

Does the Issuer’s float exceed $75

million?

Is the Issuer a U.S. corporation?

Research cannot initiate coverage until 10 days (if

underwriter or dealer) after IPO

Is the Issuer a foreign private

issuer that meets requirements of Rule 138/139?(2)

Research cannot initiate coverage or publish reports on

the Issuer until 3 days (if manager) after follow‐on

offering

Research can publish both issuer and industry‐specific reports

(subject to conditions for reports)

Research may publish report on security that is not the subject of IB mandate (i.e., (1) equity if security offered is non‐convertible debt and (2) debt if security offered is equity

or convertible debt)

Yes

No

Yes

Yes

Yes

Yes

Yes

Yes

No

No

No

No

No

No

(1) The Jumpstart Our Business Startups (JOBS) Act (April 2012) defines “emerging growth company” (“EGC”) as an issuer with total gross revenues of less than $1 billion (subject to inflationary adjustment) during its most recently completed fiscal year. A company remains an EGC until the earliest of: the last day of the fiscal year during which the issuer has total annual gross revenues in excess of a $1 billion (subject to inflationary indexing); the last day of the issuer’s fiscal year following the fifth anniversary of the date of the first registered sale of common equity securities of the issuer under the Securities Act; the date on which such issuer has, during the prior three‐year period, issued more than $1 billion in non‐convertible debt; or the date on which the issuer is deemed a “large accelerated filer.” An issuer will not be able to qualify as an EGC if it first sold its common stock in an IPO prior to December 8, 2011.(2) Meets all of the registrant requirements of Form F–3 (other than the reporting history); and either: (i) satisfies the public float threshold of Form F–3; or (ii) is issuing non‐convertible securities (if the issuer has issued at least $1 billion of non‐convertible securities in transactions registered under the Securities Act, other than equity securities, for cash during the past three years or the issuer has outstanding at least $750 million of non‐convertible securities, other than common equity, issued in primary offerings for cash registered under the Securities Act); and (iii) either (A) has its equity securities trading on a designated offshore securities market and has had them so traded for at least 12 months; or (B) has a worldwide public float of $700 million or more. (3) The JOBS Act prohibits any SRO and the SEC from adopting any rule/regulation that would restrict a broker‐dealer from participating in certain meetings relating to EGCs. Post‐offering, no SRO or the SEC may adopt any rule/regulation prohibiting a broker‐dealer from publishing or distributing a research report or making a public appearance with respect to the securities of an EGC.

StarthereIs the Issuer an “emerging

growth company”? (1)

Yes

No

Research may publish or distribute a research report about an EGC at any time and the report will not be

deemed an “offer” under the Securities Act even if the broker‐

dealer will participate or is participating in the offering(3)

FINAL FINRA RULE 2241 (EQUITY) VS. FINAL FINRA RULE 2242 (DEBT)

1

Section from

Final FINRA

Rule 2241

Final FINRA Rule 2241

(Research Analysts and Research Reports)

Equivalent

Section from

Final FINRA

Rule 2242


(Debt Research Analysts and Debt Research Reports)

Effective Date Rule 2241 was originally proposed with the filing of SR-FINRA-2014-047,

which has been approved by the Securities and Exchange Commission. This

version (Final Rule 2241) became effective on December 24, 2015.

Effective Date Rule 2242 was originally proposed with the filing of SR-FINRA-2014-048,

which has been approved by the Securities and Exchange Commission. This

version (Final Rule 2242) becomes effective on February 22, 2016.

(a) Definitions (a) Definitions

(a)

(a) Definitions

For purposes of this Rule, the following terms shall be defined as

provided. (a)

(a) Definitions

For purposes of this Rule, the following terms shall be defined as

provided.

(a)(1) (1) “Emerging Growth Company” has the same meaning as in Section

3(a)(80) of the Exchange Act. N/A N/A

(a)(2)

(2) “Equity security” has the same meaning as defined in Section

3(a)(11) of the Exchange Act.

(a)(4)

(4) “Debt security” means any “security” as defined in Section

3(a)(8010) of the Exchange Act. (2) "Equity, except for any “equity security”

has the same meaning as defined in Section 3(a)(11) of the Exchange Act. ,

any “municipal security” as defined in Section 3(a)(29) of the Exchange Act,

any “security-based swap” as defined in Section 3(a)(68) of the Exchange

Act, and any “U.S. Treasury Security” as defined in paragraph (p) of Rule

6710.

(a)(3) (3) “Independent third-party research report” means a third-party

research report, in respect of which the person producing the report: (a)(6)

(36) “Independent third-party debt research report” means a third-party debt research report, in respect of which the person producing the report:

(a)(3)(A)

(A) has no affiliation or business or contractual relationship with the

distributing member or that member's affiliates that is reasonably likely to

inform the content of its research reports; and (a)(6)(A)

(A) has no affiliation or business or contractual relationship with the

distributing member or that member's affiliates that is reasonably likely to inform the content of its research reports; and

(a)(3)(B) (B) makes content determinations without any input from the

distributing member or that member's affiliates. (a)(6)(B)

(B) makes content determinations without any input from the distributing member or that member's affiliates.

(a)(4)

(4) “Investment banking department” means any department or

division, whether or not identified as such, that performs any investment

banking service on behalf of a member. (a)(8)

(48) “Investment banking department” means any department or division,

whether or not identified as such, that performs any investment banking service on behalf of a member.

(a)(5)

(5) “Investment banking services” include, without limitation, acting as

an underwriter, participating in a selling group in an offering for the issuer or

otherwise acting in furtherance of a public offering of the issuer; acting as a

financial adviser in a merger or acquisition; providing venture capital or

equity lines of credit or serving as placement agent for the issuer or otherwise

acting in furtherance of a private offering of the issuer.

(a)(9)

(5(9) “Investment banking services” include, without limitation, acting as

an underwriter, participating in a selling group in an offering for the issuer or

otherwise acting in furtherance of a public offering of the issuer; acting as a

financial adviser in a merger or acquisition; providing venture capital or

equity lines of credit or serving as placement agent for the issuer or otherwise acting in furtherance of a private offering of the issuer.


2

Section from

Final FINRA

Rule 2241



Equivalent

Section from

Final FINRA

Rule 2242



(a)(6)

(6) “Member of a research analyst’s household” means any individual

whose principal residence is the same as the research analyst’s principal

residence. This term does not include an unrelated person who shares the

same residence as a research analyst, provided that the research analyst and

unrelated person are financially independent of one another.

(a)(10)

(610) “Member of a debt research analyst's household” means any

individual whose principal residence is the same as the debt research analyst's

principal residence. This term doesshall not include an unrelated person who

shares the same residence as a debt research analyst, provided that the debt

research analyst and unrelated person are financially independent of one

another.

(a)(7)

(7) “Public appearance” means any participation in a conference call,

seminar, forum (including an interactive electronic forum) or other public

speaking activity before 15 or more persons or before one or more

representatives of the media, a radio, television or print media interview, or

the writing of a print media article, in which a research analyst makes a

recommendation or offers an opinion concerning an equity security. This term

does not include a password protected Webcast, conference call or similar

event with 15 or more existing customers, provided that all of the event

participants previously received the most current research report or other

documentation that contains the required applicable disclosures, and that the

research analyst appearing at the event corrects and updates during the event

any disclosures in the research report that are inaccurate, misleading or no

longer applicable.

(a)(11)

(711) “Public appearance” means any participation in a conference call,

seminar, forum (including an interactive electronic forum) or other public

speaking activity before 15 or more persons or before one or more

representatives of the media, a radio, television or print media interview, or

the writing of a print media article, in which a debt research analyst makes a

recommendation or offers an opinion concerning an equitya debt security or

an issuer of a debt security. This term doesshall not include a password

protected Webcast, conference call or similar event with 15 or more existing

customers, provided that all of the event participants previously received the

most current debt research report or other documentation that contains the

required applicable disclosures, and that the debt research analyst appearing at

the event corrects and updates during the event any disclosures in the debt

research report that are inaccurate, misleading or no longer applicable.

(a)(8)

(8) “Research analyst” means an associated person who is primarily

responsible for, and any associated person who reports directly or indirectly to

a research analyst in connection with, the preparation of the substance of a

research report, whether or not any such person has the job title of “research

analyst.”

(a)(1)

(8)(1) “ResearchDebt research analyst” means an associated person who is

primarily responsible for, and any associated person who reports directly or

indirectly to a debt research analyst in connection with, the preparation of the

substance of a debt research report, whether or not any such person has the job title of “research analyst.”

(a)(9)

(9) “Research analyst account” means any account in which a research

analyst or member of the research analyst’s household has a financial interest,

or over which such analyst has discretion or control. This term shall not

include an investment company registered under the Investment Company Act

over which the research analyst or a member of the research analyst’s

household has discretion or control, provided that the research analyst or

member of the research analyst’s household has no financial interest in such

investment company, other than a performance or management fee. The term

also shall not include a “blind trust” account that is controlled by a person

other than the research analyst or member of the research analyst’s household

where neither the research analyst nor a member of the research analyst’s

household knows of the account’s investments or investment transactions.

(a)(2)

(9(2) “ResearchDebt research analyst account” means any account in

which a debt research analyst or member of the debt research analyst's

household has a financial interest, or over which such analyst has discretion

or control. This term shall not include an investment company registered

under the Investment Company Act over which the debt research analyst or a

member of the debt research analyst's household has discretion or control,

provided that the debt research analyst or member of thea debt research

analyst's household has no financial interest in such investment company,

other than a performance or management fee. The term also shall not include

a "blind trust" account that is controlled by a person other than the debt

research analyst or member of the debt research analyst's household where

neither the debt research analyst nor a member of the debt research analyst's household knows of the account's investments or investment transactions.


3

Section from

Final FINRA

Rule 2241



Equivalent

Section from

Final FINRA

Rule 2242



(a)(10)

(10) “Research department” means any department or division, whether

or not identified as such, that is principally responsible for preparing the

substance of a research report on behalf of a member. (a)(14)

(1014) “Research department” means any department or division, whether

or not identified as such, that is principally responsible for preparing the substance of a debt research report on behalf of a member.

(a)(11)

(11) “Research report” means any written (including electronic)

communication that includes an analysis of equity securities of individual

companies or industries (other than an open-end registered investment

company that is not listed or traded on an exchange) and that provides

information reasonably sufficient upon which to base an investment decision.

This term does not include:

(a)(3)

(113) “ResearchDebt research report” means any written (including

electronic) communication that includes an analysis of equity securities of

individual companies or industries (other than an open-end registered

investment company that is not listed or traded on an exchange)a debt

security or an issuer of a debt security and that provides information

reasonably sufficient upon which to base an investment decision. This term

does, excluding communications that solely constitute an equity research report as defined in Rule 2241(a)(11). In general, this term shall not include:

(a)(11)(A) (A) communications that are limited to the following:

(a)(3)(A)

(A) communications that are limited to the following, if they do not

include an analysis of, or recommend or rate, individual debt securities or issuers:

(a)(11)(A)(i) (i) discussions of broad-based indices; (a)(3)(A)(i) (i) discussions of broad-based indices;

(a)(11)(A)(ii) (ii) commentaries on economic, political or market conditions; (a)(3)(A)(ii) (ii) commentaries on economic, political or market conditions;

N/A N/A (a)(3)(A)(iii) (iii) commentaries on or analyses of particular types of debt securities or

characteristics of debt securities;

(a)(11)(A)(iii) (iii) technical analyses concerning the demand and supply for a sector,

index or industry based on trading volume and price; (a)(3)(A)(iv)

(iv) technical analyses concerning the demand and supply for a sector,

index or industry based on trading volume and price

(a)(11)(A)(iv) (iv) statistical summaries of multiple companies’ financial data,

including listings of current ratings; (a)(3)(B)(i)

(iv) (i) statistical summaries of multiple companies' financial data,

including listings of current ratings that do not include an analysis of individual companies' data;

(a)(11)(A)(v) (v) recommendations regarding increasing or decreasing holdings in

particular industries or sectors; (a)(3)(A)(v)

(v) recommendations regarding increasing or decreasing holdings in particular industries or sectors; or types of debt securities; or

(a)(11)(A)(vi)

(vi) notices of ratings or price target changes, provided that the member

simultaneously directs the readers of the notice to the most recent research

report on the subject company that includes all current applicable disclosures

required by this Rule and that such research report does not contain materially

misleading disclosures, including disclosures that are outdated or no longer

applicable; or

(a)(3)(A)(vi)

(vi) notices of ratings or price target changes, provided that the

member simultaneously directs the readers of the notice to the most recent

debt research report on the subject company that includes all current

applicable disclosures required by this Rule and that such debt research report

does not contain materially misleading disclosures disclosure, including disclosures that are outdated or no longer applicable; or


4

Section from

Final FINRA

Rule 2241



Equivalent

Section from

Final FINRA

Rule 2242



(a)(11)(B)

(B) the following communications, even if they include an analysis of

an individual equity security and information reasonably sufficient upon

which to base an investment decision: (a)(3)(B)

(B) the following communications, even if they include an analysis of

an individual equitydebt security or issuer and information reasonably sufficient upon which to base an investment decision:

(a)(11)(B)(i) (i) any communication distributed to fewer than 15 persons;

(a)(3)(B)(ii) (ii) any communication distributed to fewer than 15 persons; an

analysis prepared for a specific person or a limited group of fewer than 15 persons;

(a)(11)(B)(ii)

(ii) periodic reports or other communications prepared for investment

company shareholders or discretionary investment account clients that discuss

individual securities in the context of a fund’s or account’s past performance

or the basis for previously made discretionary investment decisions; or

(a)(3)(B)(iii)

(iiiii) periodic reports or other communications prepared for investment

company shareholders or discretionary investment account clients that discuss

individual debt securities in the context of a fund's or account's past

performance or the basis for previously made discretionary investment decisions; or

(a)(11)(B)(iii) (iii) internal communications that are not given to current or prospective

customers; and (a)(3)(B)(iv)

(iiiiv) internal communications that are not given to current or prospective customers;

(a)(11)(C) (C) communications that constitute statutory prospectuses that are filed

as part of a registration statement. (a)(3)(C)

(C) communications that constitute statutory prospectuses that are filed as part of athe registration statement; and

(a)(11)(D)

(D) communications that constitute private placement memoranda and

comparable offering-related documents prepared in connection with investment

banking services transactions, other than those that purport to be research. (a)(3)(D)

(D) communications that constitute private placement memoranda and

comparable offering-related documents prepared in connection with

investment banking services transactions, other than those that purport to be research.

(a)(12)

(12) “Sales and trading personnel” includes persons in any department or

division, whether or not identified as such, who perform any sales or trading

service on behalf of a member. (a)(15)

(1215) “Sales and trading personnel” includes persons in any department

or division, whether or not identified as such, who perform any sales or trading service on behalf of a member.

(a)(13) (13) “Subject company” means the company whose equity securities are

the subject of a research report or public appearance. (a)(16)

(1316) “Subject company” means the companyissuer whose equitydebt securities are the subject of a debt research report or a public appearance

(a)(14) (14) “Third-party research report” means a research report that is

produced by a person other than the member. (a)(17)

(1417) “Third-party debt research report” means a debt research report that is produced by a person or entity other than the member.

N/A N/A (a)(7)

(7) “Institutional investor” means any person that satisfies the requirements of paragraph (j)(1)(A) or (B) of this Rule.

N/A N/A (a)(5)

(5) “Debt trader” means a person, with respect to transactions in debt

securities, who is engaged in proprietary trading or the execution of transactions on an agency basis.


5

Section from

Final FINRA

Rule 2241



Equivalent

Section from

Final FINRA

Rule 2242



N/A N/A (a)(12)

(12) “Qualified institutional buyer” has the same meaning as under Rule

144A of the Securities Act

N/A N/A (a)(13) (13) “Retail investor” means any person other than an institutional investor.

(b) Identifying and Managing Conflicts of Interest (b) Identifying and Managing Conflicts of Interest

(b)(1)

(1) A member must establish, maintain and enforce written policies and

procedures reasonably designed to identify and effectively manage conflicts

of interest related to: (b)(1)


procedures reasonably designed to identify and effectively manage conflicts of interest related to:

(b)(1)(A) (A) the preparation, content and distribution of research reports; (b)(1)(A) (A) the preparation, content and distribution of debt research reports;

(b)(1)(B) (B) public appearances by research analysts; and (b)(1)(B) (B) public appearances by debt research analysts; and

(b)(1)(C)

(C) the interaction between research analysts and those outside of the

research department, including investment banking and sales and trading

personnel, subject companies and customers. (b)(1)(C)

(C) the interaction between debt research analysts and those outside of

the research department, including investment banking and department

personnel, sales and trading department personnel, principal trading personnel, subject companies and customers.;

(b)(2)

(2) A member’s written policies and procedures must be reasonably

designed to promote objective and reliable research that reflects the truly held

opinions of research analysts and to prevent the use of research reports or

research analysts to manipulate or condition the market or favor the interests

of the member or a current or prospective customer or class of customers.

Such policies and procedures must:

(b)(2)

(2) A member’s written policies and procedures must be reasonably

designed to promote objective and reliable debt research that reflects the truly

held opinions of debt research analysts and to prevent the use of debt research

reports or debt research analysts to manipulate or condition the market or

favor the interests of the member or a current or prospective customer or class of customers. Such policies and procedures must:

(b)(2)(A)

(A) prohibit prepublication review, clearance or approval of research

reports by persons engaged in investment banking services activities and

restrict or prohibit such review, clearance or approval by other persons not

directly responsible for the preparation, content and distribution of research

reports, other than legal and compliance personnel;

(b)(2)(A)-(B)

(A) prohibit prepublication review, clearance or approval of debt research reports by persons engaged in investment banking services:

(i) investment banking personnel;

(ii) principal trading personnel; and

(iii) sales and trading personnel;

(B) restrict or prohibit suchprepublication review, clearance or approval

of debt research reports by other persons not directly responsible for the

preparation, content and distribution of debt research reports, other than legal and compliance personnel;


6

Section from

Final FINRA

Rule 2241



Equivalent

Section from

Final FINRA

Rule 2242



(b)(2)(B)

(B) restrict or limit input by investment banking department into

research coverage decisions to ensure that research management

independently makes all final decisions regarding the research coverage plan; (b)(2)(C)

(C) restrict or limit input by investment banking department into, sales

and trading and principal trading personnel into debt research coverage

decisions to ensure that research management independently makes all final decisions regarding the research coverage plan;

(b)(2)(C)

(C) prohibit persons engaged in investment banking activities from

supervision or control of research analysts, including influence or control over

research analyst compensation evaluation and determination; (b)(2)(D)

(D) limit supervision of a debt research analyst to persons not engaged in:

N/A N/A (b)(2)(D)(i)

(i) investment banking services transactions (such persons shall also be

precluded from input into the compensation of debt research analysts);

N/A N/A (b)(2)(D)(ii)

(ii) principal trading activities (such persons shall also prohibit persons

engaged in investment banking activities be precluded from input into the

compensation of debt research from supervision or control of research analysts, including influence); or

N/A N/A (b)(2)(D)(iii) (iii) sales and trading;

(b)(2)(D)

(D) limit determination of research department budget to senior

management, excluding senior management engaged in investment banking

services activities;

(b)(2)(E)

(E) limit determination of the debt research department budget to senior

management, excluding senior management engaged in investment banking

services activitiesor principal trading activities, and without regard to specific

revenues or results derived from investment banking. Revenues and results of

the firm as a whole, however, may be considered in determining the debt

research department budget and allocation of debt research department

expenses. Nothing in this provision shall require a member to prohibit any

personnel from providing to senior management input regarding the demand

for and quality of debt research, including product trends and customer

interests;

(b)(2)(E)

(E) prohibit compensation based upon specific investment banking

services transactions or contributions to a member’s investment banking

services activities; (b)(2)(F)

(F) prohibit compensation based upon specific investment banking

services or specific trading transactions or contributions to a member’s investment banking services or principal trading activities;


7

Section from

Final FINRA

Rule 2241



Equivalent

Section from

Final FINRA

Rule 2242



(b)(2)(F)

(F) require that the compensation of a research analyst who is primarily

responsible for preparation of the substance of a research report be reviewed

and approved at least annually by a committee that reports to a member’s

board of directors, or if the member has no board of directors, a senior

executive officer of the member. This committee may not have representation

from the member’s investment banking department and must consider the

following factors when reviewing a research analyst’s compensation, if

applicable:

(b)(2)(G)

(G) require that the compensation of a debt research analyst who is

primarily responsible for preparation of the substance of a research report be

reviewed and approved at least annually by a committee that reports to a

member’s board of directors, or if the member has no board of directors, a

senior executive officer of the member. This committee may not have

representation from the member’s investment banking departmentpersonnel

or persons engaged in principal trading activities and must consider the

following factors when reviewing a debt research analyst’s compensation, if

applicable:

(b)(2)(F)(i) (i) the research analyst’s individual performance, including the

analyst’s productivity and the quality of the analyst’s research; (b)(2)(G)(i)

(i) the debt research analyst’s individual performance, including the

analyst’s productivity and the quality of the debt research analyst’s research; and

(b)(2)(F)(ii) (ii) the correlation between the research analyst’s recommendations and

the performance of the recommended securities; and N/A N/A

(b)(2)(F)(iii)

(iii) the overall ratings received from clients, sales force and peers

independent of the member’s investment banking department, and other

independent ratings services. The committee must document the basis upon

which each such research analyst’s compensation was established;

(b)(2)(G)(ii)

(ii)(iii) the overall ratings received from clients, sales forcecustomers and

peers (independent of the member’s investment banking department, and

persons engaged in principal trading activities) and other independent ratings

services. Sales and trading personnel, but not personnel engaged in principal

trading activities, may provide input to debt research management into the

evaluation of the debt research analyst in order to convey customer feedback;

provided, however, that final compensation determinations must be made by

research management, subject to review and approval by the committee

described in this subparagraph (G). The committee must document the basis

upon which each such research analyst’s compensation was established, including any input from sales and trading;

(b)(2)(G)

(G) establish information barriers or other institutional safeguards

reasonably designed to ensure that research analysts are insulated from the

review, pressure or oversight by persons engaged in investment banking

services activities or other persons, including sales and trading personnel, who

might be biased in their judgment or supervision; (b)(2)(H)(i)-(iii)

(H)(G) establish information barriers or other institutional safeguards to

ensure that debt research analysts are insulated from the review, pressure or oversight by persons engaged in:

(i) investment banking services;

(ii) principal trading or sales and trading activities; and or

(iii) other persons, including sales and trading personnel, who might be biased in their judgment or supervision;


8

Section from

Final FINRA

Rule 2241



Equivalent

Section from

Final FINRA

Rule 2242



(b)(2)(H)

(H) prohibit direct or indirect retaliation or threat of retaliation against

research analysts employed by the member or its affiliates by persons engaged

in investment banking services activities or other employees as the result of

an adverse, negative, or otherwise unfavorable research report or public

appearance written or made by the research analyst that may adversely affect

the member's present or prospective business interests;

(b)(2)(I)

(I) prohibit direct or indirect retaliation or threat of retaliation against

debt research analysts employed by any employee of the member or its

affiliates by persons engaged in investment banking services activities or

other employees as the result of an adverse, negative, or otherwise

unfavorable debt research report or public appearance written or made by the

debt research analyst that may adversely affect the member's present or prospective business interests;

(b)(2)(I)

(I) define periods during which the member must not publish or

otherwise distribute research reports, and research analysts must not make

public appearances, relating to the issuer: N/A N/A

(b)(2)(I)(i)

(i) of a minimum of 10 days following the date of an initial public

offering if the member has participated as an underwriter or dealer in the

initial public offering; or N/A N/A

(b)(2)(I)(ii)

(ii) of a minimum of three days following the date of a secondary

offering if the member has acted as a manager or co-manager of that offering.

This subparagraph (I) shall not apply to the publication or distribution of a

research report or a public appearance following an initial public offering or

secondary offering of the securities of an Emerging Growth Company;

N/A N/A

(b)(2)(I)(iii)

(iii) Subparagraphs (I)(i) and (ii) shall not prevent a member from

publishing or otherwise distributing a research report, or prevent a research

analyst from making a public appearance, concerning the effects of significant

news or a significant event on the subject company within such 10- and three-

day periods, and provided further that legal or compliance personnel authorize

publication of that research report before it is issued or authorize the public

appearance before it is made. Subparagraph (ii) will not prevent a member

from publishing or otherwise distributing a research report pursuant to

Securities Act Rule 139 regarding a subject company with “actively-traded

securities,” as defined in Rule 101(c)(1) of SEC Regulation M, and will not

prevent a research analyst from making a public appearance concerning such

a company.

N/A N/A

(b)(2)(J)

(J) restrict or limit research analyst account trading in securities, any

derivatives of such securities and funds whose performance is materially

dependent upon the performance of securities covered by the research analyst,

including:

(b)(2)(J)

(J) restrict or limit debt research analyst account trading in securities,

any derivatives of such securities and fundsany fund whose performance is

materially dependent upon the performance of securities covered by the debt research analyst, including:


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(b)(2)(J)(i)

(i) ensuring that research analyst accounts, supervisors of research

analysts and associated persons with the ability to influence the content of

research reports do not benefit in their trading from knowledge of the content

or timing of a research report before the intended recipients of such research

have had a reasonable opportunity to act on the information in the research

report;

(b)(2)(J)(i)

(i) ensuring that debt research analyst accounts, supervisors of debt

research analysts and associated persons with the ability to influence the

content of debt research reports do not benefit in their trading from

knowledge of the content or timing of a debt research report before the

intended recipients of such debt research have had a reasonable opportunity to

act on the information in the debt research report; and

(b)(2)(J)(ii)

(ii) providing that no research analyst account may purchase or sell any

security or any option on or derivative of such security in a manner

inconsistent with the research analyst's recommendation as reflected in the

most recent research report published by the member, and defining financial

hardship circumstances, if any (e.g., unanticipated significant change in the

personal financial circumstances of the beneficial owner of the research

analyst account), in which the member will permit a research analyst account

to trade in a manner inconsistent with such research analyst's most recently

published recommendation; and

(b)(2)(J)(ii)

(ii) providing that no debt research analyst account may purchase or

sell any security or any option on or derivative of such security in a manner

inconsistent with the research analyst's recommendation as reflected in the

most recent debt research report published by the member, and defining

financial hardship circumstances, if any (e.g., unanticipated significant change

in the personal financial circumstances of the beneficial owner of the research

analyst account), in which the member will permit a debt research analyst

account to trade in a manner inconsistent with such research analyst's most recently published recommendation; and

(b)(2)(J)(iii)

(iii) prohibiting a research analyst account from purchasing or receiving

any security before an issuer's initial public offering if the issuer is principally

engaged in the same types of business as companies that the research analyst

follows;

N/A N/A

(b)(2)(K)

(K) prohibit explicit or implicit promises of favorable research, a

particular research rating or recommendation or specific research content as

inducement for the receipt of business or compensation;

(b)(2)(K)

(K) prohibit explicit or implicit promises of favorable debt research, a

particular debt research rating or recommendation or specific debt research content as inducement for the receipt of business or compensation;

(b)(2)(L) (L) restrict or limit activities by research analysts that can reasonably be

expected to compromise their objectivity, including prohibiting: (b)(2)(L) (L) restrict or limit activities by debt research analysts that can

reasonably be expected to compromise their objectivity, including prohibiting:

(b)(2)(L)(i) (i) participation in pitches and other solicitations of investment

banking services transactions; and (b)(2)(L)(i) (i) participation in pitches and other solicitations

of investment banking services transactions; and

(b)(2)(L)(ii) (ii) participation in road shows and other marketing on behalf of an

issuer related to an investment banking services transaction; (b)(2)(L)(ii)

(i) participation in road shows and other marketing on behalf of an issuer related to an investment banking services transaction;

(b)(2)(M) (M) prohibit investment banking department personnel from directly or

indirectly: (b)(2)(M)

(M) prohibit investment banking department personnel from directly or indirectly:


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(b)(2)(M)(i) (i) directing a research analyst to engage in sales or marketing efforts

related to an investment banking services transaction; and (b)(2)(M)(i)

(i) directing a debt research analyst to engage in sales or marketing

efforts related to an investment banking services transaction; and

(b)(2)(M)(ii)

(ii) directing a research analyst to engage in any communication with a

current or prospective customer about an investment banking services

transaction; and

(b)(2)(M)(ii)

(ii) directing a debt research analyst to engage in any communication

with a current or prospective customer about an investment banking services transaction; and

(b)(2)(N) (N) prohibit prepublication review of a research report by a subject

company for purposes other than verification of facts. (b)(2)(N)

(N) prohibit prepublication review of a debt research report by a subject

company for purposes other than verification of facts.

(c) Content and Disclosure in Research Reports (c) Content and Disclosure in Debt Research Reports

(c)(1) (1) A member must establish, maintain and enforce written policies and

procedures reasonably designed to ensure that: (c)(1)

(1) A member must establish, maintain and enforce written policies and procedures reasonably designed to ensure that:

(c)(1)(A) (A) purported facts in its research reports are based on reliable

information; and (c)(1)(A)

(A) purported facts in its debt research reports are based on reliable information; and

(c)(1)(B)

(B) any recommendation, rating or price target has a reasonable basis

and is accompanied by a clear explanation of any valuation method used and a

fair presentation of the risks that may impede achievement of the

recommendation, rating or price target.

(c)(1)(B)

(B) any recommendation, or rating or price target has a reasonable basis

and is accompanied by a clear explanation of any valuation method used and

a fair presentation of the risks that may impede achievement of the

recommendation, or rating or price target.

(c)(2)

(2) A member that employs a rating system must clearly define in each

research report the meaning of each rating in the system, including the time

horizon and any benchmarks on which a rating is based. The definition of

each rating must be consistent with its plain meaning.

(c)(2)

(2) A member that employs a rating system must clearly define in each

debt research report the meaning of each rating in the system, including the

time horizon and any benchmarks on which a rating is based. The definition of each rating must be consistent with its plain meaning.

(c)(2)(A)

(A) Irrespective of the rating system a member employs, a member must

include in each research report that includes a rating the percentage of all

securities rated by the member to which the member would assign a “buy,”

“hold” or “sell” rating.

(c)(2)(A)

(A) Irrespective of the rating system a member employs, a member must

include in each debt research report limited to the analysis of an issuer of a

debt security that includes a rating of the subject company the percentage of all

securitiessubject companies rated by the member to which the member would assign a “buy,” “hold” or “sell” rating.

(c)(2)(B)

(B) A member must disclose in each research report the percentage of

subject companies within each of the “buy,” “hold” and “sell” categories for

which the member has provided investment banking services within the

previous 12 months.

(c)(2)(B)

(B) A member must disclose in each debt research report the percentage

of subject companies within each of the “buy,” “hold” and “sell” categories

for which the member has provided investment banking services within the

previous 12 months.


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(c)(2)(C)

(C) The information required in paragraphs (c)(2)(A) and (B) must be

current as of the end of the most recent calendar quarter or the second most

recent calendar quarter if the publication date of the research report is less

than 15 calendar days after the most recent calendar quarter.

(c)(2)(C)

(C) The information required in paragraphs (c)(2)(A) and (B) of this

Rule must be current as of the end of the most recent calendar quarter or the

second most recent calendar quarter if the publication date of the debt

research report is less than 15 calendar days after the most recent calendar quarter.

(c)(3)

(3) If a research report contains either a rating or price target for a

subject company’s security, and the member has assigned a rating or price

target to such security for at least one year, the research report must include a

line graph of the security’s daily closing prices for the period that the member

has assigned any rating or price target or for a three-year period, whichever is

shorter. The graph must:

(c)(3)

(3) If a debt research report limited to the analysis of an issuer of a debt

security contains either a rating or price target for athe subject company's

security, and the member has assigned a rating or price target to such

securitysubject company for at least one year, the debt research report must

include a line graph of the security's daily closing pricesshow each date on

which a member has assigned a rating and the rating assigned on such date.

The member must include this information for the period that the member has

assigned any rating or price target or for a three-year period, whichever is shorter. The graph must:

(c)(3)(A) (A) indicate the dates on which the member assigned or changed each

rating or price target; N/A N/A

(c)(3)(B) (B) depict each rating or price target assigned or changed on those

dates; and N/A N/A

(c)(3)(C)

(C) be current as of the end of the most recent calendar quarter (or the

second most recent calendar quarter if the publication date of the research

report is less than 15 calendar days after the most recent calendar quarter). N/A N/A

(c)(4) (4) A member must disclose in any research report at the time of

publication or distribution of the report: (c)(4)

(4) A member must disclose in any debt research report at the time of publication or distribution of the report:

(c)(4)(A)

(A) if the research analyst or a member of the research analyst’s

household has a financial interest in the debt or equity securities of the subject

company (including, without limitation, whether it consists of any option,

right, warrant, future, long or short position), and the nature of such interest;

(c)(4)(A)

(A) if the debt research analyst or a member of the debt research

analyst’s household has a financial interest in the debt or equity securities of

the subject company (including, without limitation, whether it consists of any

option, right, warrant, future, long or short position), and the nature of such

interest;

(c)(4)(B) (B) if the research analyst has received compensation based upon

(among other factors) the member’s investment banking revenues; (c)(4)(B) (B) if the debt research analyst has received compensation based upon

(among other factors) the member’s investment banking, sales and trading or principal trading revenues;

(c)(4)(C) (C) if the member or any of its affiliates: (c)(4)(C) (C) if the member or any of its affiliates:


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Rule 2242



(c)(4)(C)(i) (i) managed or co-managed a public offering of securities for the

subject company in the past 12 months; (c)(4)(C)(i)

(i) managed or co-managed a public offering of securities for the

subject company in the past 12 months;

(c)(4)(C)(ii) (ii) received compensation for investment banking services from the

subject company in the past 12 months; or (c)(4)(C)(ii)

(ii) received compensation for investment banking services from the

subject company in the past 12 months; or

(c)(4)(C)(iii) (iii) expects to receive or intends to seek compensation for investment

banking services from the subject company in the next three months; (c)(4)(C)(iii)

(iii) expects to receive or intends to seek compensation for investment

banking services from the subject company in the next three months;

(c)(4)(D)

(D) if, as of the end of the month immediately preceding the date of

publication or distribution of a research report (or the end of the second most

recent month if the publication or distribution date is less than 30 calendar

days after the end of the most recent month), the member or its affiliates have

received from the subject company any compensation for products or services

other than investment banking services in the previous 12 months;

(c)(4)(D)

(D) if, as of the end of the month immediately preceding the date of

publication or distribution of a debt research report (or the end of the second

most recent month if the publication or distribution date is less than 30

calendar days after the end of the most recent month), the member or its

affiliates have received from the subject company any compensation for

products or services other than investment banking services in the previous 12

months;

(c)(4)(E)

(E) if the subject company is, or over the 12-month period preceding

the date of publication or distribution of the research report has been, a client

of the member, and if so, the types of services provided to the issuer. Such

services, if applicable, shall be identified as either investment banking

services, non-investment banking securities-related services or non-securities

services;

(c)(4)(E)

(E) if the subject company is, or over the 12-month period preceding

the date of publication or distribution of the debt research report has been, a

client of the member, and if so, the types of services provided to the issuer.

Such services, if applicable, shall be identified as either investment banking

services, non-investment banking securities-related services or non-securities services;

(c)(4)(F)

(F) if the member or its affiliates beneficially own 1% or more of any

class of common equity securities of the subject company; (c)(4)(F)

(F) if the member or its affiliates beneficially own 1% or more of trades

or may trade as principal in the debt any class of common equity securities of

the subject company; securities (or in related derivatives) that are the subject of the debt research report;

(c)(4)(G) (G) if the member was making a market in the securities of the subject

company at the time of publication or distribution of the research report; N/A N/A

(c)(4)(H) (H) if the research analyst received any compensation from the subject

company in the previous 12 months; and (c)(4)(G)

(G)(H) if the debt research analyst received any compensation from the

subject company in the previous 12 months; and

(c)(4)(I)

(I) any other material conflict of interest of the research analyst or

member that the research analyst or an associated person of the member with

the ability to influence the content of a research report knows or has reason to

know at the time of the publication or distribution of a research report.

(c)(4)(H)

(H)(I) any other material conflict of interest of the debt research analyst or

member that the debt research analyst or an associated person of the member

with the ability to influence the content of a debt research report knows or has

reason to know at the time of the publication or distribution of a debt research

report.


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Rule 2242



(c)(5)

(5) A member or research analyst will not be required to make a

disclosure required by paragraph (c)(4) to the extent such disclosure would

reveal material non-public information regarding specific potential future

investment banking transactions of the subject company.

(c)(5)

(5) A member or debt research analyst will not be required to make a

disclosure required by paragraph (c)(4) of this Rule to the extent such

disclosure would reveal material non-public information regarding specific potential future investment banking transactions of the subject company.

(c)(6)

(6) The disclosures required by this paragraph (c) must be presented on

the front page of research reports or the front page must refer to the page on

which the disclosures are found. Electronic research reports may provide a

hyperlink directly to the required disclosures. All disclosures and references

to disclosures required by this Rule must be clear, comprehensive and

prominent.

(c)(6)

(6) Except as provided in subparagraph (7), the disclosures required by

this paragraph (c) must be presented on the front page of debt research reports

or the front page must refer to the page on which the disclosures are found.

Electronic debt research reports may provide a hyperlink directly to the

required disclosures. All disclosures and references to disclosures required by this Rule must be clear, comprehensive and prominent.

(c)(7)

(7) A member that distributes a research report covering six or more

subject companies (a “compendium report”) may direct the reader in a clear

manner as to where the reader may obtain applicable current disclosures

required by this paragraph (c). Electronic compendium reports may include a

hyperlink directly to the required disclosures. Paper-based compendium

reports may provide either a toll free number to call or a postal address to

request the required disclosures and may also include a web address where the

disclosures can be found.

(c)(7)

(7) A member that distributes a debt research report covering six or

more subject companies (a “compendium report”) may direct the reader in a

clear manner as to where the reader may obtain applicable current disclosures

required by this paragraph (c). Electronic compendium reports maymust

include a hyperlink directly to the required disclosures. Paper-based

compendium reports maymust provide either a toll -free number to call or a

postal address to request the required disclosures and may also may include a web address of the member where the disclosures can be found.

(d) Disclosure in Public Appearances (d) Disclosure in Public Appearances

(d)(1) (1) A research analyst must disclose in public appearances:

(d)(1) (1) A debt research analyst must disclose in public appearances:

(d)(1)(A)

(A) if the research analyst or a member of the research analyst’s

household has a financial interest in the debt or equity securities of the subject

company (including, without limitation, whether it consists of any option,

right, warrant, future, long or short position), and the nature of such interest;

(d)(1)(A)

(A) if the debt research analyst or a member of the debt research

analyst’s household has a financial interest in the debt or equity securities of

the subject company (including, without limitation, whether it consists of any

option, right, warrant, future, long or short position), and the nature of such interest;

(d)(1)(B)

(B) if the member or its affiliates maintain a significant financial

interest in the debt or equity securities of the subject company including, at a

minimum, if the member or its affiliates beneficially own 1% or more of any

class of common equity securities of the subject company;

N/A N/A

(d)(1)(C)

(C) if, to the extent the research analyst knows or has reason to know,

the member or any affiliate received any compensation from the subject

company in the previous 12 months;

(d)(1)(B)

(B) if, to the extent the debt research analyst knows or has reason to

know, the member or any affiliate received any compensation from the subject company in the previous 12 months;


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(d)(1)(D) (D) if the research analyst received any compensation from the subject

company in the previous 12 months; (d)(1)(C)

(C)(D) if the debt research analyst received any compensation from the

subject company in the previous 12 months;

(d)(1)(E)

(E) if, to the extent the research analyst knows or has reason to know,

the subject company currently is, or during the 12-month period preceding the

date of publication or distribution of the research report, was, a client of the

member. In such cases, the research analyst also must disclose the types of

services provided to the subject company, if known by the research analyst; or

(d)(1)(D)

(D)(E) if, to the extent the debt research analyst knows or has reason to know,

the subject company currently is, or during the 12-month period preceding the

date of publication or distribution of the debt research report, was, a client of

the member. In such cases, the debt research analyst also must disclose the

types of services provided to the subject company, if known by the debt

research analyst; or

(d)(1)(F)

(F) any other material conflict of interest of the research analyst or

member that the research analyst knows or has reason to know at the time of

the public appearance. (d)(1)(E)

(E)(F) any other material conflict of interest of the debt research analyst or

member that the debt research analyst knows or has reason to know at the time of the public appearance.

(d)(2)

(2) A member or research analyst will not be required to make a

disclosure required by this paragraph (d) to the extent such disclosure would



(d)(2)

(2) A member or debt research analyst will not be required to make a

disclosure required by this paragraph (d) to the extent such disclosure would



(d)(3)

(3) Members must maintain records of public appearances by research

analysts sufficient to demonstrate compliance by those research analysts with

the applicable disclosure requirements in this paragraph (d). Such records

must be maintained for at least three years from the date of the public

appearance.

(d)(3)

(3) Members must maintain records of public appearances by debt

research analysts sufficient to demonstrate compliance by those debt research

analysts with the applicable disclosure requirements in this paragraph (d).

Such records must be maintained for at least three years from the date of the public appearance.

(e) Disclosure Required by Other Provisions (e) Disclosure Required by Other Provisions

(e) (e) In addition to the disclosures required by paragraphs (c) and (d), members

and research analysts must comply with all applicable disclosure provisions of

FINRA Rule 2210 and the federal securities laws.

(e)

(e) In addition to the disclosures required by paragraphs (c) and (d) of this

Rule, members and debt research analysts must comply with all applicable

disclosure provisions of FINRA Rule 2210 and the federal securities laws.

(f) Termination of Coverage N/A

(f)

(f) Termination of Coverage:

A member must promptly notify its customers if it intends to terminate

coverage of a subject company. Such notice must be made using the

member’s ordinary means to disseminate research reports on the subject

company to its various customers. The notice must be accompanied by a final

research report, comparable in scope and detail to prior research reports, and

include a final recommendation or rating. If impracticable to provide a final

research report, recommendation or rating, a member must disclose to its

customers its reason for terminating coverage.

N/A N/A


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Rule 2242



(g) Distribution of Member Research Reports (f)(g) Distribution of Member Research Reports

(g)

(g) Distribution of Member Research Reports:

A member must establish, maintain and enforce written policies and

procedures reasonably designed to ensure that a research report is not

distributed selectively to internal trading personnel or a particular customer or

class of customers in advance of other customers that the member has

previously determined are entitled to receive the research report.

(f)

(f)(g) Distribution of Member Research Reports

A member must establish, maintain and enforce written policies and

procedures reasonably designed to ensure that a debt research report is not

distributed selectively to internal trading personnel or a particular customer

or class of customers in advance of other customers that the member has

previously determined are entitled to receive the debt research report.

(h) Distribution of Third-Party Research Reports (g)(h) Distribution of Third-Party Debt Research Reports

(h)(1)

(1) Subject to paragraph (h)(5), a registered principal or supervisory

analyst approved pursuant to Incorporated NYSE Rule 344 must review for

compliance with the applicable provisions of paragraph (h) and approve by

signature or initial all third-party research reports distributed by a member.

N/A N/A

(h)(2) (2) A member may not distribute third-party research if it knows or has

reason to know such research is not objective or reliable. (g)(1) (1)(2) A member may not distribute third-party debt research if it knows or has reason to know such research is not objective or reliable.

(h)(3)


procedures reasonably designed to ensure that any third-party research it

distributes contains no untrue statement of material fact and is otherwise not

false or misleading. For the purposes of this paragraph (h)(3) only, a

member’s obligation to review a third-party research report extends to any

untrue statement of material fact or any false or misleading information that:

(g)(2)

(2)(3) A member must establish, maintain and enforce written policies

and procedures reasonably designed to ensure that any third-party debt

research report it distributes contains no untrue statement of material fact

and is otherwise not false or misleading. For the purposes of this

paragraph (hg)(32) only, a member’s obligation to review a third-party

debt research report extends to any untrue statement of material fact or any false or misleading information that:

(h)(3)(A) (A) should be known from reading the report; or (g)(2)(A) (A) should be known from reading the debt research report; or

(h)(3)(B) (B) is known based on information otherwise possessed by the member.

(g)(2)(B) (B) is known based on information otherwise possessed by the member

(h)(4)

(4) A member must accompany any third-party research report it

distributes with, or provide a web address that directs a recipient to,

disclosure of any material conflict of interest that can reasonably be expected

to have influenced the choice of a third-party research provider or the subject

company of a third-party research report, including, at a minimum, the

disclosures required by paragraphs (c)(4)(C), (c)(4)(F), (c)(4)(G) and (c)(4)(I)

of this Rule.

(g)(3)

(3)(4) A member must accompany any third-party debt research report

it distributes with, or provide a web address that directs a recipient to,

disclosure of any material conflict of interest that can reasonably be

expected to have influenced the choice of a third-party debt research report

provider or the subject company of a third-party debt research report,

including, at a minimum, the disclosures required by paragraphs (c)(4)(C),

(c)(4)(F), (c)(4)(G) and (c)(4)(IH) of this Rule.


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(h)(5)

(5) A member shall not be required to review a third-party research

report to determine compliance with paragraph (h)(3) if such research report

is an independent third-party research report. (g)(4)

(4)(5) A member shall not be required to review a third-party debt

research report to determine compliance with paragraph (hg)(3)2) of this

Rule if such debt research report is an independent third-party debt research report.

(h)(6)

(6) A member shall not be considered to have distributed a third-party

research report for the purposes of paragraph (h)(4) where the research is an

independent third-party research report and is made available by a member

(a) upon request; (b) through a member-maintained website; or (c) to a

customer in connection with a solicited order in which the registered

representative has informed the customer, during the solicitation, of the

availability of independent research on the solicited equity security and the

customer requests such independent research.

(g)(5)

(5)(6) A member shall not be considered to have distributed a third-

party debt research report for the purposes of paragraph (hg)(43) where the

research is an independent third-party debt research report and is made

available by a member (a) upon request; (b) through a member-maintained

website; or (c) to a customer in connection with a solicited order in which

the registered representative has informed the customer, during the

solicitation, of the availability of independent debt research on the solicited

equitydebt security and the customer requests such independent debt research.

(h)(7)

(7) A member must ensure that a third-party research report is clearly

labeled as such and that there is no confusion on the part of the recipient as to

the person or entity that prepared the research report. (g)(6)

(6)(7) A member must ensure that a third-party debt research report is

clearly labeled as such and that there is no confusion on the part of the recipient as to the person or entity that prepared the debt research report.

(i) Exemption for Members with Limited Investment Banking Activity (i)(h) Exemption for Members with Limited Investment Banking Activity

(i)

(i) Exemption for Members with Limited Investment Banking Activity

The provisions of paragraphs (b)(2)(A), (B), (C), (D), (F) and (G) shall not

apply to members that over the previous three years, on average per year,

have participated in 10 or fewer investment banking services transactions as

manager or co-manager and generated $5 million or less in gross investment

banking revenues from those transactions; provided, however, that with

respect to paragraph (b)(2)(G), such members must establish information

barriers or other institutional safeguards to ensure that research analysts are

insulated from pressure by persons engaged in investment banking services

activities or other persons, including sales and trading department personnel,

who might be biased in their judgment or supervision. For the purposes of

this paragraph (i), the term “investment banking services transactions”

include the underwriting of both corporate debt and equity securities but not

municipal securities. Members that qualify for this exemption must maintain

records sufficient to establish eligibility for the exemption and also maintain

for at least three years any communication that, but for this exemption, would

be subject to paragraphs (b)(2)(A), (B), (C), (D), (F) and (G).

(h)

(i)(h) Exemption for Members with Limited Investment Banking Activity

The provisions of paragraphs (b)(2)(A)(i), (b)(2)(B), (C), (D), (F) and

(G)b)(2)(C) (with respect to investment banking), (b)(2)(D)(i), (b)(2)(E)

(with respect to investment banking), (b)(2)(G) and (b)(2)(H)(i) and (iii) of

this Rule shall not apply to members that over the previous three years, on

average per year, have participated in 10 or fewer investment banking

services transactions as manager or co-manager and generated $5 million

or less in gross investment banking revenues from those transactions;

provided, however, that with respect to paragraph (b)(2)(G)H)(i) and (iii)

of this Rule, such members must establish information barriers or other

institutional safeguards to ensure thatdebt research analysts are insulated

from pressure by persons engaged in investment banking services activities

or other persons, including persons engaged in principal trading or sales

and trading department personnel, activities, who might be biased in their

judgment or supervision. For the purposes of this paragraph (ih), the term

“investment banking services transactions” includeincludes the

underwriting of both corporate debt and equity securities but not municipal

securities. Members that qualify for this exemption must maintain records


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sufficient to establish eligibility for the exemption and also maintain for at

least three years any communication that, but for this exemption, would be

subject to paragraphs (b)(2)(A)(i), (b)(2)(B), (b)(2)(C), (D), (F) and (G)b)(2)(D)(i), (b)(2)(E), (b)(2)(G) and (b)(2)(H)(i) and (iii) of this Rule.

(j) Exemption for Good Cause (j)(k) Exemption for Good Cause

(j)

(j) Exemption for Good Cause:

Pursuant to the Rule 9600 Series, FINRA may in exceptional and unusual

circumstances, conditionally or unconditionally grant an exemption from any

requirement of this Rule for good cause shown after taking into account all

relevant factors, to the extent such exemption is consistent with the purposes

of the Rule, the protection of investors, and the public interest.

(k)

(j)(k) Exemption for Good Cause:

Pursuant to the Rule 9600 Series, FINRA may in exceptional and unusual

circumstances, conditionally or unconditionally grant an exemption from

any requirement of this Rule for good cause shown after taking into

account all relevant factors, to the extent such exemption is consistent with

the purposes of the Rule, the protection of investors, and the public interest.

N/A (i) Exemption for Limited Principal Trading Activity

N/A N/A (i)

(i) Exemption for Limited Principal Trading Activity

The provisions of paragraphs (b)(2)(A)(ii) and (iii), (b)(2)(B), (b)(2)(C)

(with respect to sales and trading and principal trading), (b)(2)(D)(ii) and

(iii), (b)(2)(E) (with respect to principal trading), (b)(2)(G) and

(b)(2)(H)(ii) and (iii) of this Rule shall not apply to members where (1) in

absolute value on an annual basis, the member’s trading gains or losses on

principal trades in debt securities are $15 million or less over the previous

three years, on average per year; and (2) the member employs fewer than

10 debt traders; provided, however, that with respect to paragraph

(b)(2)(H)(ii) and (iii) of this Rule, such members must establish

information barriers or other institutional safeguards to ensure debt

research analysts are insulated from pressure by persons engaged in

principal trading or sales and trading activities or other persons who might

be biased in their judgment or supervision.

Members that qualify for this exemption must maintain records sufficient

to establish eligibility for the exemption and also maintain for at least three

years any communication that, but for this exemption, would be subject to

paragraphs (b)(2)(A)(ii) and (iii), (b)(2)(B), (b)(2)(C), (b)(2)(D)(ii) and

(iii), (b)(2)(E), (b)(2)(G) and (b)(2)(H)(ii) and (iii) of this Rule.


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N/A (j) Exemption for Debt Research Reports Provided to Institutional Investors

N/A N/A (j)(1) (1) Except as provided in paragraph (j)(2) of this Rule, the provisions of this Rule shall not apply to the distribution of a debt research report to:

N/A N/A (j)(1)(A) (A) A qualified institutional buyer where, pursuant to Rule 2111(b):

N/A N/A (j)(1)(A)(i)

(i) the member or associated person has a reasonable basis to believe

that the qualified institutional buyer is capable of evaluating investment risks

independently, both in general and with regard to particular transactions and

investment strategies involving a debt security or debt securities; and

N/A N/A (j)(1)(A)(ii)

(ii) such qualified institutional buyer has affirmatively indicated that it

is exercising independent judgment in evaluating the member’s

recommendations pursuant to Rule 2111 and such affirmation covers

transactions in debt securities; so long as the member has provided written

disclosure to the qualified institutional buyer that the member may provide

debt research reports that are intended for institutional investors and that are

not subject to all of the independence and disclosure standards applicable to

debt research reports prepared for retail investors. If the qualified

institutional buyer does not contact the member to request that such

institutional debt research not be provided, the member may reasonably

conclude that the qualified institutional buyer has consented to receiving debt institutional research reports; or

N/A N/A (j)(1)(B)

(B) a person that meets the definition of “institutional account” in Rule

4512(c); provided that such person, prior to receipt of a debt research report,

has affirmatively notified the member in writing that it wishes to receive

institutional debt research and forego treatment as a retail investor for the purposes of this Rule.

N/A N/A (j)(2)

(2) Notwithstanding paragraph (j)(1) of this Rule, a member must

establish, maintain and enforce written policies and procedures reasonably

designed to identify and effectively manage conflicts of interest described in

paragraphs (b)(2)(A)(i), (b)(2)(H) (with respect to pressuring), (b)(2)(I),

(b)(2)(K), (b)(2)(L), (b)(2)(M), (b)(2)(N) and Supplementary Material .02(a)

of this Rule.

N/A N/A (j)(3)

(3) Debt research reports provided to institutional investors pursuant to

this exemption (“institutional debt research”) must disclose prominently on

the first page that:


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N/A N/A (j)(3)(A) (A) “This document is intended for institutional investors and is not

subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.”

N/A N/A (j)(3)(B)

(B) If applicable, “The views expressed in this report may differ from

the views offered in [Firm’s] debt research reports prepared for retail

investors.”

N/A N/A (j)(3)(C)

(C) If applicable, “This report may not be independent of [Firm’s]

proprietary interests. [Firm] trades the securities covered in this report for its

own account and on a discretionary basis on behalf of certain clients. Such

trading interests may be contrary to the recommendation(s) offered in this

report.”

N/A N/A (j)(4)

(4) A member must establish, maintain and enforce written policies

and procedures reasonably designed to ensure that institutional debt research

is made available only to eligible institutional investors. A member may not

rely on this exemption with respect to a debt research report that the member

has reason to believe will be redistributed to a retail investor.

N/A N/A (j)(5) (5) This paragraph (j) does not relieve a member of its obligations to

comply with the antifraud provisions of the federal securities laws and FINRA rules.

Supplementary Material

.01 Efforts to Solicit Investment Banking Business .01 Efforts to Solicit Investment Banking Business

.01(a)

(a) FINRA interprets paragraph (b)(2)(L)(i) to prohibit in pitch materials

any information about a member’s research capacity in a manner that

suggests, directly or indirectly, that the member might provide favorable

research coverage. For example, FINRA would consider the publication

in a pitch book or related materials of an analyst’s industry ranking to

imply the potential outcome of future research because of the manner in

which such rankings are compiled. On the other hand, a member would

be permitted to include in the pitch materials the fact of coverage and the

name of the research analyst because such information alone does not

imply favorable coverage. Members must consider whether the facts and

circumstances of any solicitation or engagement would warrant disclosure

under Section 17(b) of the Securities Act.

.01(a)

(a) FINRA interprets paragraph (b)(2)(L)(i) of this Rule to prohibit in pitch

materials any information about a member’s debt research capacity in a

manner that suggests, directly or indirectly, that the member might provide

favorable debt research coverage. For example, FINRA would consider the

publication in a pitch book or related materials of an analyst’s industry

ranking to imply the potential outcome of future research because of the

manner in which such rankings are compiled. On the other hand, a member

would be permitted to include in the pitch materials the fact of coverage and

the name of the debt research analyst because such information alone does

not imply favorable coverage. Members must consider whether the facts and

circumstances of any solicitation or engagement would warrant disclosure

under Section 17(b) of the Securities Act.


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.01(b)

(b) Paragraph (b)(2)(L)(i) shall not prevent a research analyst from

attending a pitch meeting in connection with an initial public offering of

an Emerging Growth Company that also is attended by investment

banking personnel; provided, however, that a research analyst may not

engage in otherwise prohibited conduct in such meetings, including efforts

to solicit investment banking business.

N/A N/A

.02 Joint Due Diligence .09.2 Joint Due Diligence

.02

.02 FINRA interprets paragraph (b)(1)(C) to prohibit the performance of

joint due diligence (i.e., confirming the adequacy of disclosure in offering

or other disclosure documents for a transaction) by the research analyst in

the presence of investment banking department personnel prior to the

selection by the issuer of the underwriters for the investment banking

services transaction.

.09

.09.2 FINRA interprets paragraph (b)(1)(C) to prohibit the performance of

joint due diligence (i.e., confirming the adequacy of disclosure in offering or

other disclosure documents for a transaction) by the debt research analyst in

the presence of investment banking department personnel prior to the selection

by the issuer of the underwriters for the investment banking services transaction.

.03 Restrictions on Communications with Customers and Internal Personnel .02.3 Restrictions on Communications with Customers and Internal Personnel

.03(a)

(a) Consistent with the requirements of paragraph (b)(2)(M) of this

Rule, no research analyst may engage in any communication with a

current or prospective customer in the presence of investment banking

department personnel or company management about an investment

banking services transaction.

.02(a)

(a) Consistent with the requirements of paragraph (b)(2)(M) of this

Rule, no debt research analyst may engage in any communication with a

current or prospective customer in the presence of investment banking

department personnel or company management about an investment banking services transaction.

.03(b)

(b) FINRA interprets paragraph (b)(1)(C) of this Rule to require

that any written or oral communication by a research analyst with a

current or prospective customer or internal personnel related to an

investment banking services transaction must be fair, balanced and not

misleading, taking into consideration the overall context in which the

communication is made.

.02(b)

(b) FINRA interprets paragraph (b)(1)(C) of this Rule to, among other

things, require that any written or oral communication by a debt research

analyst with a current or prospective customer or internal personnel related to

an investment banking services transaction must be fair, balanced and not

misleading, taking into consideration the overall context in which the communication is made.

N/A .03 Information Barriers between Research Analysts and Trading Desk Personnel

N/A N/A .03(a)

(a) FINRA interprets paragraph (b)(1)(C) of this Rule to, among other

things, require members to establish, maintain and enforce written policies and procedures reasonably designed to prohibit:

N/A N/A .03(a)(1)

(1) Sales and trading and principal trading personnel attempting to

influence a debt research analyst's opinion or views for the purpose of

benefiting the trading position of the firm, a customer or a class of customers;

and


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N/A N/A .03(a)(2)

(2) Debt research analysts identifying or recommending specific

potential trading transactions to sales and trading or principal trading

personnel that are inconsistent with such debt research analyst’s currently

published debt research reports, or disclosing the timing of, or material

investment conclusions in, a pending debt research report.

N/A N/A .03(b) (b) The following communications between debt research analysts and sales and trading or principal trading personnel are permitted:

N/A N/A .03(b)(1)

(1) Sales and trading and principal trading personnel may

communicate customers’ interests to a debt research analyst, so long as the

debt research analyst does not respond by publishing debt research for the

purpose of benefiting the trading position of the firm, a customer or a class of customers;

N/A N/A .03(b)(2)

(2) Debt research analysts may provide customized analysis,

recommendations or trade ideas to sales and trading and principal trading

personnel and customers, provided that any such communications are not

inconsistent with the analyst’s currently published or pending debt research,

and that any subsequently published debt research is not for the purpose of benefiting the trading position of the firm, a customer or a class of customers;

N/A N/A .03(b)(3)

(3) Sales and trading and principal trading personnel may seek the

views of debt research analysts regarding the creditworthiness of the issuer of

a debt security and other information regarding an issuer of a debt security

that is reasonably related to the price/performance of the debt security, so

long as, with respect to any covered issuer, such information is consistent

with the debt research analyst’s published debt research report and consistent

in nature with the types of communications that a debt research analyst might

have with customers. In determining what is consistent with the debt

research analyst’s published debt research, a member may consider the

context, including that the investment objectives or time horizons being

discussed differ from those underlying the debt research analyst’s published views; and

N/A N/A .03(b)(4)

(4) Debt research analysts may seek information from sales and

trading and principal trading personnel regarding a particular bond

instrument, current prices, spreads, liquidity and similar market information

relevant to the debt research analyst’s valuation of a particular debt security.


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N/A N/A .03(c)

(c) Communications between debt research analysts and sales and trading or

principal trading personnel that are not related to sales and trading, principal

trading or debt research activities may take place without restriction, unless otherwise prohibited.

.04 Disclosure of Non-Investment Banking Services Compensation .04 Disclosure of Non-Investment Banking Services Compensation Received by

Affiliates

.04

.04 A member may satisfy the disclosure requirement in paragraph

(c)(4)(D) with respect to receipt of non- investment banking services

compensation by an affiliate by implementing policies and procedures

reasonably designed to prevent the research analyst and associated persons

of the member with the ability to influence the content of research reports

from directly or indirectly receiving information from the affiliate as to

whether the affiliate received such compensation. However, a member

must disclose receipt of non-investment banking services compensation

by its affiliates from the subject company in the past 12 months when the

research analyst or an associated person with the ability to influence the

content of a research report has actual knowledge that an affiliate received

such compensation during that time period. .04

.04 A member may satisfy the satisfy the disclosure requirement in

paragraph (c)(4)(D) of this Rule with respect to receipt of non-

investment banking services compensation by an affiliate by

implementing written policies and procedures reasonably designed to

prevent the debt research analyst and associated persons of the member

with the ability to influence the content of debt research reports from

directly or indirectly receiving information from the affiliate as to

whether the affiliate received such compensation. In addition, a member

may satisfy the disclosure requirement in paragraph (c)(4)(C) of this

Rule with respect to the receipt of investment banking compensation

from a foreign sovereign by a non-U.S. affiliate of the member by

implementing written policies and procedures reasonably designed to

prevent the debt research analyst and associated persons of the member

with the ability to influence the content of debt research reports from

directly or indirectly receiving information from the non-U.S. affiliate

as to whether such non-U.S. affiliate received or expects to receive

such compensation from the foreign sovereign. However, a member

must disclose receipt of non-investment banking services compensation

received by its affiliates from the subject company (including any

foreign sovereign) in the past 12 months when the debt research analyst

or an associated person with the ability to influence the content of a

debt research report has actual knowledge that an affiliate received such compensation during that time period.

.05 Submission of Sections of a Draft Research Reports for Factual Review .05 Submission of Sections of a Draft Research ReportsReport for Factual Review

.05

.05 Consistent with the requirements of paragraphs (b)(2)(A) and

(b)(2)(N), sections of a draft research report may be provided to non-

investment banking personnel or to the subject company for factual

review so long as:

.05

Consistent with the requirements of paragraphs (b)(2)(AB) and (b)(2)(N) of

this Rule, sections of a draft debt research report may be provided to non-

investment banking personnel, non-principal trading personnel, non-sales and

trading personnel or to the subject company for factual review so long as, if:

.05(a) (a) the sections of the report submitted do not contain the research

summary, the research rating or the price target; .05(a) (a) the sections of the draft debt research report submitted do not

contain the research summary, the researchrecommendation or rating or the price target;


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.05(b)

(b) a complete draft of the report is provided to legal or compliance

personnel before sections of the report are submitted to non-investment

banking personnel or the subject company; and .05(b)

(b) a complete draft of the debt research report is provided to legal or

compliance personnel before sections of the report are submitted to non-

investment banking personnel, non-principal trading personnel, non-sales and trading personnel or the subject company; and

.05(c)

(c) if, after submitting sections of the report to non-investment

banking personnel or the subject company, the research department

intends to change the proposed rating or price target, it must first provide

written justification to, and receive written authorization from, legal or

compliance personnel for the change. The member must retain copies of

any draft and the final version of such report for three years after

publication.

.05(c)

(c) if, after submitting sections of the draft debt research report to non-

investment banking personnel, non-principal trading personnel, non-sales and

trading personnel or the subject company, the research department intends to

change the proposed rating or price targetrecommendation, it must first

provide written justification to, and receive written authorization from, legal

or compliance personnel for the change. The member must retain copies of

any draft and the final version of such debt research report for three years after publication.

.06 Beneficial Ownership of Equity Securities N/A

.06

.06 With respect to paragraphs (c)(4)(F) and (d)(1)(B), beneficial

ownership of any class of common equity securities shall be computed in

accordance with the same standards used to compute ownership for

purposes of the reporting requirements under Section 13(d) of the

Exchange Act.

N/A N/A

.07 Distribution of Member Research Products .6 .06.7 Distribution of Member Research Products

.07

.07 With respect to paragraph (g), a member may provide different

research products and services to different classes of customers. For

example, a member may offer one research product for those with a long-

term investment horizon (“investor research”) and a different research

product for those customers with a short-term investment horizon

(“trading research”). These products may lead to different

recommendations or ratings, provided that each is consistent with the

meaning of the member’s ratings system for each respective product.

However, a member may not differentiate a research product based on the

timing of receipt of a recommendation, rating or other potentially market

moving information, nor may a member label a research product with

substantially the same content as a different product as a means to allow

certain customers to trade in advance of other customers. In addition, a

member that provides different research products and services for

different customers must inform its other customers that its alternative

research products and services may reach different conclusions or

recommendations that could impact the price of the equity security. Thus,

.7 .06

.8 06.7 With respect to paragraph (g), af) of this Rule, a member may provide

different debt research products and services to different classes of

customers. For example, a member may offer one debt research product for

those with a long-term investment horizon (“investor research”) and a

different debt research product for those customers with a short-term

investment horizon (“trading research”). These products may lead to

different recommendations or ratings, provided that each is consistent with

the meaning of the member’s ratings system for each respective product.

However, a member may not differentiate a debt research product based on

the timing of receipt of a recommendation, rating or other potentially market

moving information, nor may a member label a debt research product with

sub he same content as a different debt research product as a means to allow

certain customers to trade in advance of other customers. In addition, a

member that provides different debt research products and services for

different customers must inform its other customers that receive. a research

product that its alternative debt research products and services


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for example, a member that offers trading research must inform its

investment research customers that its trading research product may

contain different recommendations or ratings that could result in short-

term price movements contrary to the recommendation in its investment

research.

.9

.10 may reach different conclusions or recommendations that could impact the

price of the equitydebt security. Thus, for example, a member that offers

trading research must inform its investment research customers that its

trading research product may contain different recommendations or ratings

that could result in short-term price movements contrary to the recommendation in its investment research.

.08 Ability to Influence the Content of a Research Report .07..8 Ability to Influence the Content of a Debt Research Report

.08

.08 For the purposes of this Rule, an associated person with the ability to

influence the content of a research report is an associated person who is

required to review the content of the research report or has exercised

authority to review or change the research report prior to publication or

distribution. This term does not include legal or compliance personnel

who may review a research report for compliance purposes but are not

authorized to dictate a particular recommendation, rating or price target.

.07

.07..8 For the purposes of this Rule, an associated person with the ability to

influence the content of a debt research report is an associated person who is

required to review the content of the debt research report or has exercised

authority to review or change the debt research report prior to publication or

distribution. This term does not include legal or compliance personnel who

may review a debt research report for compliance purposes but are not authorized to dictate a particular recommendation, or rating or price target.

.09 Obligations of Persons Associated with a Member .08..9 Obligations of Persons Associated with a Member

.09

.09 Consistent with Rule 0140, persons associated with a member must

comply with such member’s written policies and procedures as established

pursuant to this Rule 2241. In addition, consistent with Rule 0140, it shall

be a violation of this Rule for an associated person to engage in the

restricted or prohibited conduct to be addressed through the establishment,

maintenance and enforcement of policies and procedures required by this

Rule or related Supplementary Material.

.08

.08..9 Consistent with Rule 0140, persons associated with a member

must comply with such member’s written policies and procedures as

established pursuant to this Rule 2241.. In addition, consistent with Rule

0140, it shall be a violation of this Rule for an associated person to engage in

the restricted or prohibited conduct to be addressed through the establishment,

maintenance and enforcement of written policies and procedures required by

this Rule or related Supplementary Material.

.10 Divesting Research Analyst Holdings .10 Divesting Research Analyst Holdings

.10

.10 With respect to paragraph (b)(2)(J)(ii), FINRA shall not consider a

research analyst account to have traded in a manner inconsistent with a

research analyst’s recommendation where a member has instituted a

policy that prohibits any research analyst from holding securities, or

options on or derivatives of such securities, of the companies in the

research analyst’s coverage universe; provided that the member

establishes a reasonable plan to liquidate such holdings consistent with the

principles in paragraph (b)(2)(J)(i) and such plan is approved by the

member’s legal or compliance department.

.10

.10 With respect to paragraph (b)(2)(J)(ii), FINRA shall not consider a

research analyst account to have traded in a manner inconsistent with a

research analyst’s recommendation where a member has instituted a policy

that prohibits any research analyst from holding securities, or options on or

derivatives of such securities, of the companies in the research analyst’s

coverage universe; provided that the member establishes a reasonable plan to

liquidate such holdings consistent with the principles in paragraph (b)(2)(J)(i) and such plan is approved by the member’s legal or compliance department.

N/A .11 Distribution of Institutional Debt Research During Transition Period


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N/A N/A .11

.11 A member may distribute institutional debt research to any person that

meets the definition of “institutional account” in Rule 4512(c), other than a

natural person, for a period of up to one-year after [insert date of approval of

the proposed rule change by the Securities and Exchange Commission] (“the

transition period”). After the transition period, a member must have obtained

the necessary consent in either paragraph (j)(1)(A) or (j)(1)(B) to distribute

institutional debt research to a person. Natural persons that qualify as an

institutional account under Rule 4512(c) must provide affirmative written

consent to receive institutional debt research during the year transition period

and thereafter. This Supplementary Material .11 shall automatically sunset at the end of the transition period.

Documents

Final FINRA Research Rules - Morrison & Foerster77 Research Quick Guide to Offerings (1) The Jumpstart Our usiness Startups (JO S) Act (April 2012) defines “emerging growth company”