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Research Reports by Broker/Dealers – FINRA Catches Up

As described in my February 28, 2019, article, “Broker/Dealer Research Reports – Mutual Funds, ETFs, and Business Development Companies,” the U.S. Securities and Exchange Commission (“SEC”) adopted new Rule 139b on November 30, 2018, to allow broker/dealers to issue “covered investment fund research reports” with respect to mutual funds, exchange-traded funds (“ETFs”), business development funds, and certain other pooled investment vehicles (such as unit investment trusts, commodity funds, and currency funds). The SEC acted as required by the 2017 Fair Access to Investment Research Act. The congressional act responded to material changes in American capital markets since 1970 when the SEC adopted Rule 139 to allow broker/dealers unaffiliated with the underwriters of a public offering to publish proprietary research reports on the stocks or bonds being sold in an offering. Rule 139 provided no relief for research reports about investment funds; hence, those reports were seen as sales efforts, exposing an issuing broker/dealer to SEC enforcement penalties for “gun-jumping” and market conditioning.

As far as the SEC was concerned, Rule 139b fixed that problem by allowing the issuance of complying research reports by broker/dealers. But in the never-ending complexity of securities regulation, it did not free broker/dealers wishing to issue covered investment fund research reports from legal prohibitions, EXCEPT research reports on mutual funds.

Broker/dealers are all registered not only with the SEC and with up to 50 state securities administrators (depending upon where the broker/dealer conducts business) but also with the Financial Industry Regulatory Authority (“FINRA”). FINRA has its own rules with respect to i) Communications with the Public – Rule 2210; and ii) Research Analysts and Research Reports – Rule 2241.  These FINRA Rules do not apply to research reports concerning mutual funds. Hence, broker/dealers who come within the SEC Rule 139b safe harbor could publish research reports on mutual funds beginning December 1, 2018. As for other “covered investment funds,” a broker/dealer risked disciplinary action by FINRA if it published a report within 10 days of an initial public offering or within 3 days of a secondary offering (Rule 2241). In addition, FINRA’s existing Rule 2210 essentially implements SEC Rule 24b-3, which requires all “sales material” related to covered investment funds to be filed with the SEC or a “registered national securities association” with appropriate advertising practices and review procedures. FINRA is the only such association. FINRA maintains a Central Registration Depository system to collect all such filings.

On June 20, 2019 (i.e., almost seven months after the SEC adopted Rule 139b), FINRA proposed amendments to its Rules 2210 and 2241 to exempt broker/dealers who meet the requirements of SEC Rule 139b from both the so-called “quiet period” requirements of Rule 2241 and the research report filing requirement of Rule 2210. That proposal is subject to SEC approval. Attached to the FINRA proposal as Exhibit I is a draft of the related SEC Notice of a Proposed Rule Change to FINRA’s Rules. That Notice states that the SEC is “publishing this notice to solicit comments on the proposed rule change from interested persons.”

The wheels of regulatory change move with “all deliberate speed.” If you have any questions about this post or any other related matters, please feel free to contact me at