The SEC approved FINRA's proposal to clarify the application of FINRA Rule 2210 (Communications with the Public) to debt research reports as the result of approval of a new FINRA debt research conflict of interest rule, which becomes effective on July 16, 2016. The rule change also becomes effective on that date.

FINRA proposed making several conforming changes to FINRA Rule 2210 to expressly address its application to debt research reports under FINRA Rule 2242 to address conflicts of interest relating to the publication and distribution of debt research reports. Until that rule becomes effective, FINRA's research conflict of interest rules apply only to equity research under FINRA Rule 2241 (Research Analysts and Research Reports).

Rule 2210(b)(1)(A) requires an appropriately qualified registered principal of a broker-dealer to approve each retail communication before the earlier of its use or filing with FINRA's Advertising Regulation Department. Both a debt and equity research report constitutes a "retail communication," unless it is distributed or made available only to "institutional investors" as defined in Rule 2210(a)(4), in which case it is considered an "institutional communication" not subject to the pre-use approval requirement.

Rule 2210(b)(1)(B) states that the pre-use approval requirement may be satisfied by a supervisory analyst approved under NYSE Rule 344 regarding:

For dual FINRA and NYSE members, this provision allows a Series 16 qualified supervisory analyst to satisfy the pre-use approval requirement regarding any research-related communication, including those expressly excepted from the definition of research report under Rule 2241(a)(11)(A) or not otherwise captured by that definition of research report under the equity research rule.

The rule change clarifies and streamlines the scope of approval permitted by supervisory analysts to specifically reference the definitions of research report and debt research report in Rules 2241(a)(11) and 2242(a)(3), respectively. It also adds a specific reference to the exceptions under Rule 2242(a)(3)(A), making explicit the references to debt research-related retail communications consistent with the references to equity research-related retail communications. The rule change, therefore, maintains the ability for a supervisory analyst to approve other research communications if the supervisory analyst has technical expertise in the product area and any other required registrations for the product covered in the communication.

Rule 2210(b)(1)(D)(i) excepts from the pre-use approval requirement any retail communication that is excepted from the definition of research report under Rule 2241(a)(11)(A), unless the communication makes any financial or investment recommendation. Those communications still must be supervised and reviewed in the same manner as correspondence under FINRA’'s supervision rules. The rule change makes this exception from the pre-use approval requirements consistent for debt and equity research communications.

Rule 2210(d)(7) requires specific applicable disclosures in retail communications that include a recommendation of securities. However, the requirements do not apply to communications that meet the definition of an equity research report under Rule 2241(a), if the research report includes all the required disclosures under that rule. Similarly, Rule 2210(f)(2) requires specific applicable disclosures where an associated person recommends a security in a public appearance.

Rule 2210(f)(5) excepts from those disclosure requirements public appearances by an equity research analyst as defined in Rule 2241(a)(8), provided the research analyst makes all of the disclosures required under that rule or an associated person recommends a security in a public appearance.

Rule 2242 requires similarly extensive corresponding disclosures in debt research reports and public appearances by debt research analysts. Therefore, FINRA believes it appropriate to similarly except debt research reports from the disclosure requirements of Rule 2210(d)(7) and except public appearances by debt research analysts from the disclosure requirements of Rule 2210(f)(2) for consistency purposes.

The SEC has agreed to waive the requirement that the proposed rule change not become operative for 30 days after the date of the filing. Therefore, the implementation date for the rule change is July 16, 2016, to coincide with the effective date of FINRA Rule 2242.

For further information on the FINRA communications rules, see Practice Note, FINRA Communications with the Public Rules.