On November 18, 2014, the Financial Industry Regulatory Authority, Inc. (“FINRA”) filed a proposed rule change with the Securities and Exchange Commission (the “SEC”) to adopt NASD Rule 2711 as new FINRA Rule 2241 with significant modifications. The proposed changes reflect a more flexible principles-based approach and incorporate many of the FINRA interpretations that have developed since the 2005 changes to NASD Rule 2711. The proposal also seeks to establish a level playing field as between investment banks subject to the “Global Settlement” and those that are not, as well as for issuers that are emerging growth companies, or EGCs. Comments on the proposal are due December 16, 2014, 21 days after publication in the Federal Register, assuming no extension. If approved, Rule 2241 will be effective no later than 180 days following publication of the notice announcing the SEC’s approval of the rule.
Rule 2711 generally requires disclosure of conflicts of interest in equity research reports and public appearances by equity research analysts. The Rule prohibits certain conduct, such as investment banking personnel involvement in the content of equity research reports and in the determination of analyst compensation, where disclosure may not be sufficient to protect from the effects of conflicts of interest. The Rule requires separation between equity research and investment banking, proscribes conduct that could affect an equity research analyst’s objectivity and requires specific disclosures in equity research reports and public appearances. At the same time FINRA proposed new Rule 2241, FINRA issued a revised proposal for debt research reports and debt research analysts, which we discuss in a separate alert.
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