[Federal Register: September 26, 2007 (Volume 72, Number 186)]
[Notices]
[Page 54698-54700]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26se07-120]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-56480; File No. SR-FINRA-2007-011]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change To Amend NASD
Rule 2711 and NYSE Rule 472 Regarding a Member's Disclosure and
Supervisory Review Obligations When Distributing Third-Party Research
September 20, 2007.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 12, 2007, Financial Industry Regulatory Authority, Inc.
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc.
(``NASD'')) filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by FINRA. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend NASD Rule 2711 and NYSE Rule 472 with
respect to a member's disclosure and supervisory review obligations
when it distributes or makes available third-party research reports.
The text of the proposed rule change is available at FINRA, on
FINRA's Web site at http://www.finra.org, and in the Commission's
Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.\3\
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\3\ The Commission has modified parts of these statements.
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A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
NASD Rule 2711(h)(13) and NYSE Rule 472(k)(4) set forth a member's
disclosure and supervisory review obligations when the member
distributes--i.e., ``pushes out''--or makes available a research report
produced by a third party. A member that distributes a third-party
research report must accompany the report with certain current
applicable disclosures (``third-party disclosures''), as they pertain
to the member: (1) If the member owns 1% or more of any class of equity
securities of the subject company; (2) if the member or any affiliate
has managed or co-managed a public offering of securities of the
subject company or received compensation for investment banking
services from the subject company in the past 12 months, or expects to
receive or intends to seek compensation for such services in the next
three months; (3) if the member makes a market in the subject company's
securities; and (4) any other actual, material conflict of interest of
the research analyst or member of which the research analyst knows or
has reason to know at the time the research report is distributed or
made available. The third-party disclosure requirements do not apply if
a member makes available to its customers non-affiliate research either
upon request or through a member-maintained Web site.
NASD Rule 2711(h)(13) further requires that a registered principal
(or supervisory analyst approved pursuant to Rule 344 of the New York
Stock Exchange) must review and approve by signature or initial any
third-party research distributed by a member. Consistent with NASD Rule
2210(d)(1)(B), the member must review such research to ensure that the
applicable disclosures discussed above are complete and accurate
(``disclosure review'') and the content of the research reports
contains no untrue statement of material fact or is otherwise not false
or misleading (``content review''). Similarly, NYSE Rule 472(k)(4)
requires a supervisory analyst approved pursuant to New York Stock
Exchange Rule 344 to approve by signature or initial any third-party
research distributed by a member organization. Additionally, NYSE Rule
472(k)(4) requires a supervisory analyst or qualified person,
designated pursuant to NYSE Rule 342(b)(1), to conduct the same
disclosure and content review as NASD Rule 2711(h)(13).
[[Page 54699]]
FINRA has interpreted that content review requirement to mean that
a member's supervisory obligation for review of third-party research
extends to any untrue statement of material fact or any false or
misleading information that (1) should be known from a reading of the
report or (2) is known based on information otherwise possessed by the
member.\4\ No supervisory review is required under either rule when a
member makes available non-affiliate research either upon request or
through a member-maintained Web site.
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\4\ See Notice to Members 07-04. NYSE Information Memo 07-11,
which has been incorporated by FINRA, sets out the same standard for
NYSE Rule 472(k)(4).
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The proposed rule change would define a ``third-party research
report'' for the purposes of the rules as a research report that is
produced by a person or entity other than a member. The proposal
further would create the subcategory of ``independent third-party
research'' and eliminate the content review requirement when a member
distributes or makes available such research. The proposal would define
``independent third-party research'' for the purposes of the rules to
mean a third-party research report, in respect of which the person or
entity producing the report: (1) Has no affiliation or business or
contractual relationship with the distributing member or that member's
affiliates that is reasonably likely to inform the content of its
research reports; and (2) makes coverage and content determinations
without any input from the distributing member or that member's
affiliates.
The proposed rule change would create an exception from the
disclosure review requirement for independent third-party research
reports made available by a member either (1) upon request, (2) through
a member-maintained Web site, or (3) where such report is made
available by a member to a customer in connection with a solicited
order in which the registered representative has informed the customer,
during the course of the solicitation, of the availability of
independent research on the solicited equity security and the customer
requests such independent research.
The proposed rule change would require that current applicable
third-party disclosures accompany any third-party research report that
does not meet the definition of ``independent third-party research
report,'' irrespective of whether it is distributed or made available
upon request, on a member-maintained Web site or in connection with a
solicitation, as described above. However, the proposed rule change
would amend NASD Rule 2711(h)(13) and NYSE 472(k)(4) to allow a member
to direct a customer to a Web address where such applicable third-party
disclosures could be found.
FINRA believes the proposed rule change will promote the
availability of independent third-party research--a valuable source of
independent analysis for investors that can be compared with or
supplement a member's own research. At the same time, the proposal
would maintain member supervisory review in those circumstances where
the member's relationship with the research provider is such that the
research is not wholly free from the control or influence of the
member. Moreover, the proposed rule change preserves the requirement
that a member disclose potential conflicts with the subject company
whenever it ``pushes out'' research to customers.
The filing includes a statement about when FINRA will announce the
effective date of the proposed rule change.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of section 15A(b)(6) of the Act,\5\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. FINRA believes that the proposed rule change is
consistent with the provisions of the Act noted above in that it will
promote the availability of independent third-party research reports,
thereby resulting in more fully informed investment decisions by
investors.
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\5\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
changes are consistent with the Act. Comments may be submitted by any
of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-FINRA-2007-011 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2007-011. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying in the Commission's Public Reference Room, 100 F Street,
NE., Washington, DC 20549, on official business days
[[Page 54700]]
between the hours of 10 a.m. and 3 p.m. Copies of such filing also will
be available for inspection and copying at the principal office of
FINRA. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
FINRA-2007-011 and should be submitted on or before October 17, 2007.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\6\
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\6\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-18958 Filed 9-25-07; 8:45 am]
BILLING CODE 8010-01-P