FINRA Proposes to Amend Debt Research Rules
Commentary by Steven Lofchie
FINRA filed with the SEC a proposal to adopt new FINRA Rule 2242 to address conflicts of interest relating to the publication and distribution of debt research reports. As anticipated, the proposed debt research rule is based on FINRA's existing equity research rule (NASD Rule 2711), but contains important modifications that FINRA considers necessary to reflect the differences between the equity and debt markets. First, the proposed debt research rule would adopt a "tiered approach" that distinguishes between debt research distributed to retail investors on the one hand, and institutional investors on the other. While debt research distributed to retail investors would be subject to extensive disclosure and structural requirements similar to those applicable to equity research reports, debt research reports distributed exclusively to institutional investors would be subject to more limited requirements. Second, while the focus of the structural requirements in the equity research rules is the interaction between equity research and investment banking personnel, the debt research rules include similar restrictions on interaction between debt research personnel and debt sales and trading personnel.
See: Text of Proposed Rule Change.
Commentary
FINRA's debt research rule filing follows a concept proposal (FINRA Reg. Notice 11-11) and two previous debt research rule proposals (FINRA Reg. Notices 12-09 and 12-42). Firms should begin considering how they would go about incorporating the requirements of the proposed rule into their research policies and procedures. As a threshold question, firms should consider the categories of research they produce (e.g., equity, debt, derivatives or macro). While some types of research reports fall neatly into one category, others may be more difficult to categorize (e.g., a report that analyzes interest rates relevant to a debt security, derivative or macro-economic conditions). This will be particularly important for registered swap dealers or futures commission merchants that produce derivatives research subject to the CFTC Rules.
Also, firms should consider the extent to which they may use their existing equity research procedures as a basis for developing debt research procedures, and those provisions that will need to be amended to reflect different requirements of the proposed debt rules. This will require consideration of various factors, including the types of customers to whom the firm distributes debt research (e.g., institutional or retail), the types of debt trading activities the firm conducts (e.g., proprietary or customer-related), and existing practices concerning interaction between debt research personnel and debt sales and trading personnel.
Finally, FINRA notes that the proposed rules "require firms to be more proactive in identifying and managing conflicts as new research products, affiliations and distribution methods emerge." Firms will thus have to be cognizant of developments that may require changes to the firm's debt policies and procedures.