Should FINRA Safe Harbor BD Desk Commentary?
Many broker-dealer firms produce “desk commentary” for institutional investors. This is brief, written sales material based on the observations of their non research personnel (sales and trading and principal trading personnel) in response to a trading event or news flash.
To create a limited safe harbor from its “Research Rules,” FINRA proposed amendments to FINRA Rule 2241 (Research Analysts and Research Reports) and FINRA Rule 2242 (Debt Research Analysts and Debt Research Reports).
Safe Harbor for Desk Commentary:
To lessen research-related conflicts, the proposed safe harbor for desk commentary would:
- Be subject to compliance with a number of Rule 2241 or Rule 2242 provisions
- Require firms a “health warning” on desk commentary and
- Require a negative consent from eligible institutional investors to receive such commentary
Safe Harbor Conditions:
Desk commentary would need to meet certain author, content, and recipient conditions. If satisfied, the communication and its author would be exempt from all of the provisions of either Rule 2241 or 2242, except for provisions where compliance is a condition for the safe harbor.
Of course, desk commentary that rises to the level of fundamental research or research distributed to retail investors would be subject to the Research Rules as applicable.
Author, Content and Recipient
The proposed safe harbor would be available only for three communications criteria:
- “Author: must be produced by sales and trading and principal trading personnel who: (a) are not primarily engaged in the preparation of research reports that do not meet the safe harbor content limitation; (b) do not require registration as a research analyst and (c) do not report directly or indirectly to research department personnel
- Content: limited to brief observations (not including a rating, price target or earnings estimate) regarding recent, current, or near term expected trading activity, trading ideas or opportunities, market conditions, economic statistics or company results, or regarding a recent recommendation or research report”
- Recipient: may only be distributed solely to consenting investors that meet the definition of “institutional account” under FINRA Rule 4512(c) (Customer Account Information) and have satisfied the FINRA Rule 2111 (Suitability) institutional suitability standard with respect to equity or debt transactions or trading strategies, as applicable.”
The proposed safe harbor under the Research Rules would require a firm to establish, maintain and enforce a number of very specific written policies and procedures reasonably designed to:
- Prevent the use of research reports or research analysts to manipulate the market
- Prevent a favorably rating or recommendation of a stock for compensation
- Cover all manner of interaction with their firms investment banking department personnel and the department’s services transactions/clients
- Limit desk commentary to eligible institutional investors
- Prohibit a subject company’s review before publication
- Continue to maintain written policies and procedures to prevent dissemination of material non-public research information
The proposed safe harbor would require desk commentary to carry a “health warning” akin to that for debt research distributed pursuant to the institutional debt research exemption.
The health warning would state:
- “This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to research reports prepared for retail investors”; and
- If applicable, “Clients should assume that this document is not independent of [Firm’s] proprietary interests. [Firm] trades, and will continue to trade, the securities covered in this document for its own account and on a discretionary basis on behalf of certain clients. Such trading interests may be contrary to or entered into in advance of this document.”
Safe Harbor Relief:
Compliance with the proposed safe harbor conditions would relieve a firm that provides desk commentary from:
- Certain conflicts management provisions:
- separation of research and sales and trading and principal trading personnel
- specific disclosure requirements
- registration and qualification requirements for equity research analysts and research principal under NASD Rule 1050
How the Institutional Debt Research Exemption Differs:
While similar, this safe harbor and the research exemption in Rule 2242(j), are different. (The institutional debt exemption would be retained and a separate debt desk research safe harbor would be added.) It applies more broadly to all debt research reports, not just debt research coming from sales and trading and principal personnel. It requires more stringent consents: negative consent for larger institutions and affirmative for smaller.
See the full notice for question prompts.
- Email: firstname.lastname@example.org
- Mail: Jennifer Piorko Mitchell Office of the Corporate Secretary
FINRA 1735 K Street, NW Washington, DC 20006-1506
- Comment deadline extended to July 15, 2017
About the SDDco Group
Formed in 1952, the SDDco Group (www.sddco.com) delivers outsourced professional support to the financial services and technology sectors. Our menu of professional services includes accounting, regulatory and tax compliance, AML testing, brokerage hosting and supervision, as well as assuming designated FinOp, CCO, and CFO roles. To connect with SDDCO:
- Call Us: 212-751-4422
- Email Us: email@example.com
- Ask Us: contact form