FINRA Answers Additional Questions about Equity and Debt Research Rules

FINRA updated its FAQ to address certain issues concerning new Equity and Debt Research Rules. The FAQ page includes the following additional guidance:

• Registration of Debt Research Analysts. A debt research analyst is not required to register as a "research analyst" or to take a qualification examination. However, FINRA is considering whether to impose registration and qualification requirements on debt analysts.

• Disclosure.

Conflicts involving Research Influencers: Firms are not required to disclose in research reports any material conflicts of interest of "persons with the ability to influence the content of a (debt) research report" (i.e., so-called "research influencers," such as supervisory analysts or research principals) unless the conflicts rise to the level of conflicts of interest of the firms themselves. However, a research influencer is required to disclose material conflicts of interest, of which the research influencer knows or has reason to know, involving a research analyst or the firm.

Issuer-Paid Research: A firm must disclose in a research report that a subject company paid the firm to produce the report. It is insufficient for this purpose to rely on a general disclosure regarding whether the company was a client of the firm, or provided compensation to the firm, within the last 12 months.

• Institutional Debt Research.

Separation from Non-Research Departments: A firm operating under the institutional debt research exemption is required to establish information barriers or other institutional safeguards in order to insulate institutional debt research analysts from "pressure" by investment banking, principal trading, or sales and trading personnel. Accordingly, a firm that does not separate research personnel physically from those non-research departments must implement and document other policies and procedures to insulate debt research personnel against pressure from non-research departments.

Reliance on Institutional Investor Certifications: Although FINRA neither requires nor endorses the use of particular institutional investor certifications, firms may use these certifications to qualify investors for the institutional investor exemption. However, if a firm relies on a certification to meet the requirement that a qualified institutional buyer affirmatively indicate its exercising of independent judgment in evaluating the firm's recommendations under Rule 2111, the certification must be broad enough to include transactions in debt securities.

Public Appearance involving Institutional Debt Research Analysts: Firms operating under the institutional debt research exemption may not permit institutional debt research analysts to make public appearances before audiences that include retail investors.

• Applicability of Rule 5280 ("Trading ahead of Research Reports"): The provisions of Rule 5280 do not apply to research produced outside the research department, such as sales or trading desk research. However, trading ahead of customers based on nonpublic advance knowledge of desk research may violate FINRA Rule 2010 ("High Standards of Commercial Honor and Principles of Trade"), and to fail to prevent the misuse of material nonpublic information is to breach Section 15(g) of the Exchange Act.