SEC Approves Rule Addressing Conflicts of Interest in Research Reports

The Securities and Exchange Commission (SEC) approved the adoption of FINRA Rule 2241 ( Research Analysts and Research Reports), a consolidated rule to address conflicts of interest relating to the publication and distribution of equity research reports, which may come into effect either September 25, 2015 or December 24, 2015.  In general, the rule retains  the core provisions of the current rules, broadens the obligations on members to identify  and manage research-related conflicts of interest, restructures the rules to provide some  flexibility in compliance without diminishing investor protection, extends protections  where gaps have been identified, expands an exemption for firms with limited investment  banking activity, and provides clarity to the applicability of existing rules.

The SEC also  approved an accompanying amendment to NASD Rule 1050 and Incorporated NYSE  Rule 344 that creates a limited exception from the research analyst registration and  qualification requirements for “research reports” produced by individuals whose primary  job function is something other than producing investment research.

The rule mostly maintains the definitions in current NASD Rule 2711, with the following modifications – Click here for the detailed list.  However, the rule includes a new section entitled “Identifying and Managing Conflicts of Interest.” Rule 2241(b)(1) contains an overarching requirement 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 research reports and public appearances by research analysts and 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. Rule 2241(b)(2) requires the written policies and procedures to 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 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. These provisions, therefore, set out the fundamental obligation for a member to establish and maintain a system to identify and mitigate conflicts to foster integrity and fairness in its research products and services.

The Implementation Schedule is as follows:

The rule changes will be implemented in two stages:

Effective on September 25, 2015

1. Amendments to NASD Rule 1050 and Incorporated NYSE Rule 344.10(registration of research analysts)

2. Rule 2241(b)(2)(I) and deletion of NASD Rules 2711(f)(1) through (5) and Incorporated NYSE Rules 472(f)(1) through (6) (quiet periods)

3. Rule 2241(j) (exemption for good cause)

4. Rule 2241.10 (divesting research analyst holdings)

5. Deletion of NASD Rule 2711(i) and Incorporated NYSE Rule 351 (annual attestation requirement)

Effective on December 24, 2015:

All other provisions.

Click here for the full text of Regulatory Notice 15-30.