FINRA has recently made several changes to FINRA Rule 2210 to expressly address its application to debt research reports in light of the SEC’s approval of a dedicated debt research conflict of interest rule. FINRA Rule 2242, which addresses conflicts of interest relating to the publication and distribution of debt research reports, became effective on July 16, 2016.
First, Rule 2210(b)(1)(A) requires an appropriately qualified registered principal to approve each “retail communication” before the earlier of its use or filing with FINRA’s Advertising Regulation Department. Both a debt and equity research report constitutes a “retail communication,” unless it is distributed or made available only to “institutional investors” as defined in Rule 2210(a)(4), in which case it would be considered an “institutional communication” not subject to the pre-use approval requirement.
Previously, Rule 2210(b)(1)(B) stated that the pre-use approval requirement may be satisfied by a Supervisory Analyst approved pursuant to NYSE Rule 344 with respect to: (i) Research reports on debt and equity securities; (ii) retail communications as described in Rule 2241(a)(11)(A); and (iii) other research that does not meet the definition of “research report” under Rule 2241(a)(11), provided that the Supervisory Analyst has technical expertise in the particular product areas. For dual FINRA and New York Stock Exchange members, this provision therefore broadly allowed a Series 16 qualified Supervisory Analyst to satisfy the pre-use approval requirement with respect to any research-related communication, including those expressly excepted by the definition of “research report” under Rule 2241(a)(11)(A) or not otherwise captured by that definition of “research report” under the equity research rule.
FINRA’s rule change clarifies and streamlines the scope of approval permitted by Supervisory Analysts to specifically reference the definitions of “research report” and “debt research report” in Rules 2241(a)(11) and 2242(a)(3), respectively. It also added a specific reference to the exceptions under Rule 2242(a)(3)(A), thereby making express the references to debt research-related retail communications consistent with the references to equity research-related retail communications. The rule change also maintains the ability for a Supervisory Analyst to approve other research communications—e.g., research on options—provided that the Supervisory Analyst has technical expertise in the product area and any other required registrations for such product.
Secondly, Rule 2210(b)(1)(D)(i) excepts from the pre-use approval requirement any retail communication that is excepted from the definition of “research report” under Rule 2241(a)(11)(A), unless the communication makes any financial or investment recommendation. Those communications still must be supervised and reviewed in the same manner as correspondence pursuant to FINRA’s supervision rules. FINRA adopted this exception due to concerns that the pre-use approval requirements for these types of research communications in some circumstances may have inhibited the flow of information to traders and other investors who base their investment decisions on timely market analysis. FINRA’s rule change made this exception from the pre-use approval requirements consistent for debt and equity research communications.
Third, Rule 2210(d)(7) requires specific applicable disclosures in retail communications that include a recommendation of securities; however, the requirements do not apply to communications that meet the definition of an equity research report under Rule 2241(a), as long as the research report includes all the required disclosures under that rule. Similarly, Rule 2210(f)(2) requires specific applicable disclosures where an associated person recommends a security in a public appearance, but Rule 2210(f)(5) excepts from those disclosure requirements public appearances by an equity “research analyst” as defined in Rule 2241(a)(8), provided the research analyst makes all of the disclosures required under that rule. The basis for these exceptions is that the equity research rule has more extensive required disclosures in both research reports and public appearances than Rule 2210(d)(7) and (f)(2), respectively. New Rule 2242 requires similarly extensive corresponding disclosures in debt research reports and public appearances by debt research analysts. As such, FINRA believes it appropriate to similarly except debt research reports from the disclosure requirements of Rule 2210(d)(7) and except public appearances by debt research analysts from the disclosure requirements of Rule 2210(f)(2) for consistency purposes.
The changes to FINRA Rule 2210 were effective on July 16, 2016 to coincide with the effective date of FINRA Rule 2242.