FINRA Proposal on Debt Research Reports (Important Proposal) (with Lofchie Comment)

FINRA published this comment request on a revised proposal addressing debt research conflicts of interest, which includes some fairly substantial amendments to FINRA's previously proposed rule as to research on debt securities as originally set forth in FINRA Reg. Notice 11-11. Among the changes made by new rule proposal to original rule proposals are:

• an exemption from the rule would be provided for research distributed to a very limited tier of institutional investors;
• an exemption would be provided as to firms that engaged in limited principal debt trading activity;
• the definition of "debt research report" has been amended;
• the requirement of disclosure as to conflicts of interest has been limited to those which are known by, or should have been known by, the firm or analyst.

Comments Due: December 10, 2012.

Lofchie Comment: This is a very important rule proposal that firms should research, review and comment upon. In considering how they might comply with the rule, firms should not view it in isolation; they must also consider the existing equity research rules and the CFTC's rules as to research on swaps. The "interaction" between the CFTC rules and the FINRA rules is likely to prove problematic, or to require limiting the topics discussed in research reports; e.g., firms may wish to adopt policies that limit any discussion of swaps in research reports on debt securities. For a full discussion of the securities law rules applicable to debt securities, see theResearch Chapter of the Broker-Dealer Guide.

View regulatory notice here(links externally to FINRA website).See also: Text of the proposed rule.