The Securities and Exchange Commission (SEC) recently adopted rules and amendments designed to promote research on investment funds. These funds include mutual funds, exchange‑traded funds, registered closed-end funds, business development companies, and similar covered investment funds. These changes are intended to reduce obstacles to providing research on investment funds. This should be realized by harmonizing the treatment of such research with research on other public companies. The SEC took this action in furtherance of the mandate in the Fair Access to Investment Research Act of 2017 (FAIR Act).
The rules and amendments generally establish a safe harbor for a broker or dealer to publish or distribute research reports on investment funds under certain conditions. This new safe harbor is similar to a regulatory safe harbor that currently exists for research reports about public companies.
“These rules will promote greater access to research for investors in funds,” said SEC Chairman Jay Clayton. “Our response to this legislation is crafted to facilitate more informed decision making, which in turn should improve the quality of a market that has become important to our Main Street investors.”
New Rule 139b is modeled on Securities Act Rule 139, which provides a safe harbor for the publication or distribution of research reports concerning one or more issuers by a broker or dealer participating in a registered offering of one of the covered issuers’ securities. The affiliate exclusion prohibits two separate categories of research reports from being deemed to be “covered investment fund research reports” under Rule 139b’s safe harbor. The first category covers research reports published or distributed by the covered investment fund or any affiliate of the covered investment fund. This exclusion prevents such persons from indirectly using the safe harbor to avoid the applicability of the Securities Act prospectus requirements and other provisions applicable to written offers by such persons. The second category covers research reports published or distributed by any broker-dealer that is an investment adviser (or an affiliated person of an investment adviser) for the covered investment fund. Rule 139b does not preclude a broker-dealer from relying on existing Rule 139 if applicable.
Ultimately, the rules, as adopted, will be effective 30 days after publication in the Federal Register. Once adopted, it is anticipated that FINRA will incorporate the rules into the FINRA rulebook so as to address research reports for investment funds directly.