January 27, 2016

FINRA Podcast Focuses on New Rules for Debt Research

Commentary by Steven Lofchie

FINRA released the final podcast in its four-part series on conflicts of interest involving the publication and distribution of research reports. The final podcast focused on new FINRA Rule 2242, which governs debt research.

The podcast provided an overview of the principal provisions of the debt research rule. It focused on the following differences between the debt research rule and the equity research rule:

The debt research rule includes specific restrictions on communications between debt research analysts, on the one hand, and principal trading and sales-and-trading personnel, on the other.
The debt research rule exempts debt research that is distributed solely to qualifying institutional investors from many of the structural and disclosure requirements applicable to retail debt research, as long as firms obtain customer consent (positive or negative, depending on the category of customer), and research reports include specified institutional "health warnings."
The debt research rule exempts firms with limited principal trading activity from certain of its provisions.

Commentary

Steven Lofchie

FINRA Rule 2242, which comes into effect on February 22, 2016, imposes a comprehensive regulatory regime on debt research for the very first time. Firms that produce debt research will be required to adopt compliance policies and procedures to address both the prescriptive elements of the rule and more principles-based elements, which are intended to foster objectivity in debt research. In assessing the scope of their compliance requirements, firms should consider the following high-priority issues:

As a threshold question, firms should consider whether they fall within the scope of the institutional debt research exemption and, if so, what steps they must take to address the consent and disclosure requirements of the exemption, as well as those provisions of the rule to which they will remain subject, including restrictions on interaction with investment banking personnel and participation in investment banking activities.

Firms that produce desk commentaries should be mindful that the rule contains no specific exemption for such communications. That is why it's important to consider whether the kinds of desk commentary that are produced by a firm may be considered "debt research," subject to the requirements of the rule.

Firms that produce retail debt research should consider the extent to which they can leverage their existing compliance policies and procedures for equity research. They also should note the differences between the requirements of the two rules, including restrictions on interactions between debt research analysts and principal trading personnel.

Firms that produce derivatives research that is subject to the CFTC research rules should consider the extent to which there could be any overlap in their derivatives and debt research activities, and how best to coordinate compliance with the applicable requirements.

Primary Sources

Transcript of Podcast

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