Header graphic for print

The BD/IA Regulator

Providing securities regulatory, enforcement and litigation trends for broker-dealers, investment advisers and investment funds

FINRA Proposes Amendments to its New Debt Research Rule

Posted in Research

On May 24, 2016, FINRA proposed amendments to its new debt research rule (Rule 2422).  The amendments are intended to clarify Rule 2422 in four respects: (1) the consent requirement for institutional debt research reports distributed to non-U.S. investors by non-U.S. affiliates of members; (2) the consent requirement for institutional debt research reports distributed to specified persons for informational purposes unrelated to investing in debt securities; (3) the scope of the institutional exemption when distributing third-party debt research reports to eligible institutional investors; and (4) the disclosure requirements for debt research analysts in public appearances.

Distribution to Non-U.S. Investors by Non-U.S. Affiliates of Members

Rule 2242(j) exempts debt research reports distributed solely to eligible institutional investors from most of the provisions regarding supervision, coverage determinations, budget and compensation determinations, and all of the disclosure requirements applicable to debt research reports distributed to retail investors.  Rules 2242(j)(1)(A) and (B) require either negative or affirmative written consent for eligible institutional investors to receive institutional debt research pursuant to the institutional exemption.  The proposed amendments clarify the application of Rule 2242(j) to non-U.S. investors that are customers of a member’s U.S. affiliate but not customers of the member.  Specifically, the requirements of Rules 2242(j)(1)(A) and (B) will not apply to the distribution of an institutional debt research report by a non-U.S. affiliate of a member to a non-U.S. investor, provided that: (1) the non-U.S. investor is not a customer of the member; (2) the non-U.S. investor is a customer of the non-U.S. affiliate of the member; and (3) the non-U.S. affiliate of the member has a reasonable basis to believe that the customer meets the definition of “institutional account” in Rule 4512(c).

Distribution to Persons for Informational Purposes

The proposed amendments permit a member to distribute institutional debt research reports to specified persons for informational purposes unrelated to investing in debt securities, provided that the member does not distribute the reports prior to their publication and the member has disclosed that: (1) the member may provide to institutional investors debt research reports that are not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors; and (2) the debt research reports would be provided only for informational purposes and not for the purpose of making an investment decision related to debt securities.  The proposed amendments also provide that if the person receiving institutional debt research does not contact the member to request that such institutional debt research reports not be provided, then the member may reasonably conclude that the person has consented to receiving debt institutional research reports.  Institutional debt research may be distributed for informational purposes unrelated to investing in debt securities: (1) regulators for regulatory purposes; (2) academics for academic purposes; (3) issuers for the purpose of enhancing knowledge of their industry and competitors and market and economic factors; and (4) media organizations for news gathering purposes.

Distribution of Third-Party Debt Research Reports to Institutional Investors

The proposed amendments clarify that a member that distributes third-party debt research reports to institutional investors pursuant to the institutional exemption must establish, maintain and enforce written policies and procedures reasonably designed to comply with Rules 2242(g)(1), (g)(2), (g)(4) and (g)(6).  The review requirements in Rules 2242(g)(2) and (g)(4) for third-party debt research reports and independent third-party debt research reports, respectively, would apply to reports distributed to retail investors or to institutional investors.  Accordingly, third-party debt research reports distributed pursuant to the institutional exemption would be subject to the same review requirements as third-party debt research reports distributed to retail investors.  With respect to disclosures, the proposed amendments clarify that third-party debt research reports distributed pursuant to the institutional exemption are not required to carry the specific disclosures applicable to retail debt research.

Public Appearances by Debt Research Analysts

Rule 2242(d) requires disclosures from debt research analysts in public appearances, including debt research analysts that only prepare debt research reports pursuant to the institutional exemption.  The proposed amendments clarify that the public appearance disclosure requirements do not apply in such circumstances. The proposed amendments require that the member maintain records sufficient to demonstrate that attendance at the public appearance was limited to institutional investors eligible to receive institutional debt research.  The proposed amendments also require that the records be maintained for at least three years from the date of the public appearance.  The disclosure requirements of Rule 2242(d) would apply, however, where attendance at the public appearance was not limited to institutional investors eligible to receive institutional debt research reports.

The text of the proposed amendments to Rule 2422 is available at:  http://www.finra.org/sites/default/files/rule_filing_file/SR-FINRA-2016-017.pdf

SEC Approves FINRA’s Educational Communication Rule

Posted in Investment Adviser Regulation

The SEC recently approved FINRA’s new Rule 2273 (Educational Communication Related to Recruitment Practices and Account Transfers), which requires delivery of an educational communication prepared by FINRA to customers of a transferring representative.  The rule will become effective on November 11, 2016.

On May 16, 2016, FINRA released Regulatory Notice 16-18, which provides an overview of the new Educational Communication Rule and includes the rule text and the form of educational communication required by FINRA.

The rule requires a firm that hires or associates with registered representatives to deliver an educational communication to former customers of the representative when:

  • the firm or its registered representative individually contacts a former customer of that representative regarding transferring assets to the new firm; or
  • a former customer of the registered representative, absent individualized contact, seeks to transfer assets to an account assigned, or to be assigned, to the representative at the new firm.

The educational communication must be delivered at the time the registered representative or the firm first has individualized contact with a former customer about transferring assets.  If the contact is made via e-mail, the requirement may be satisfied through a hyperlink.  For situations without individual contact occurring before the former customer seeks to transfer assets, the delivery must occur with the account transfer approval documentation.

The educational communication must be in the form created by FINRA without alteration.

The purpose of the educational communication is to encourage former customers to focus on certain key considerations that could impact the decision to transfer assets.  For example, former customers could be unaware of key implications of transferring assets to a new firm, such as potential costs, the inability to transfer existing assets to a new firm or incentives for the representative making the recommendation.  The form of educational communication seeks to advise former customers regarding important factors to consider before transferring assets to recruiting new firm, as well as any direct and indirect impact such transfer may have on those assets.

Global Fund Valuation Forum

Posted in Broker-Dealer Regulation, Events, Fund Regulation, Investment Adviser Regulation

Wednesday, June 1, 2016
8:00 a.m. – 10:30 a.m.

Thomson Reuters
3 Times Square
New York, NY 10036

The Global Fund Valuation Forum provides the opportunity to hear from industry experts as they assess the regulatory landscape for mutual and private investment funds in the US. The agenda will dive deep into new regulatory demands from a valuations perspective and will address how fund managers can respond to increasingly rigorous reporting requirements.

Morrison & Foerster Partner Jay Baris will speak on a panel entitled “Evaluated Pricing and Due Diligence Requirements.” Topics will include:

  • An overview of the current US regulatory regime for valuations of mutual and private funds, how the rules are evolving and what they demand of fund managers from a compliance perspective
  • What are the main challenges faced by fund boards, advisers and their service providers when it comes to meeting their valuation obligations?
  • What should fund boards and managers be aware of when it comes to fund valuations, reporting on performance and adhering to key documentation and disclosure policies? What constitutes ‘best practice’?
  • Is it really necessary to use an external evaluator? If so, how should fund managers go about making their selection? What constitutes good due diligence?
  • What does the future hold in store? Which regulatory obligations will be keeping fund boards and advisers awake at night over the next 12 months?

For more information, or to register, please click here.

Shining a Light on the SFT Regulation and an Update on Shadow Banking Reform

Posted in Events

Tuesday, May 24, 2016
12:00 p.m. – 1:00 p.m. EDT

The Financial Stability Board has been spearheading a review of “shadow banking” entities and activities since the onset of the financial crisis. A key element of its work has been assessing the financial stability risks and strengthening regulation of securities lending and repo transactions. In the EU this work has resulted in the Regulation on Transparency of Securities Financing Transactions (the “SFT Regulation”) which came into force in January 2016.

This presentation will give an overview of the provisions of the SFT Regulation and the effect it is having on financial markets. An overview on the current status of other aspects of global shadow banking reform will also be provided.

Speakers:

For more information, or to register, please click here.

CLE credit is pending for California and New York.

Financial Regulatory Briefing

Posted in Broker-Dealer Regulation, Events, Fund Regulation

Thursday, June 2, 2016
Registration/Breakfast: 8:00 a.m. EDT

Morrison & Foerster LLP
250 West 55th Street
New York, NY 10019

Please join Morrison & Foerster attorneys at our Financial Regulatory Briefing in New York City.

Agenda:

  • The SEC’s Focus on the Use of Derivatives by Funds
    8:30 a.m. to 9:30 a.m.
  • Asset Management and Financial Stability
    9:30 a.m. to 10:00 a.m.
  • Fed’s Long Term Debt, TLAC and Clean Holding Company Requirement and its Effects on Financial Institutions Issuers and the Debt Capital Markets
    10:00 a.m. to 11:00 a.m.
  • The Single Counterparty Exposure Reproposal, the Net Stable Funding Rule Proposal, and Incentive Compensation at Covered Financial Institutions
    11:00 a.m. to 12:00 p.m.
  • Lunch
    12:00 p.m. to 12:15 p.m.
  • A FinTech Discussion:  An Overview of Legal and Regulatory Issues That Arise when Banks Work with FinTech Companies
    12:15 p.m. to 1:15 p.m.

For more information, or to register, please click here.

CLE credit is pending for New York and California.

SIFMA Complex Products Forum

Posted in Events

The Complex Products Forum is a collaborative event that brings together regulators, distributors, and manufacturers to discuss the issues, challenges, and opportunities related to the sale of complex products to retail investors.

Partner Anna T. Pinedo will moderate a panel entitled “Complex Products: Changing Regulatory Focus.” This session will emphasize the importance customer suitability, financial advisor and investor education and due diligence play in the sale of complex products to individual investors while addressing how the industry prepares for continued regulation of complex products.

Partner Jay G. Baris will speak on a panel entitled “Regulatory Enforcement Overview: Complex Products 4.5 Years Later.” This session will address regulation, compliance and responsibility of firms creating and distributing complex investment products to suit the financial needs of retail investors.

Thursday, June 16, 2016
8:30 a.m. – 4:00 p.m.

SIFMA Conference Center
120 Broadway, 2nd Floor
New York, NY 10271

For more information, or to register, please click here.

Implications of the DOL Fiduciary Rule for Structured Products

Posted in Broker-Dealer Regulation, Events

The new Department of Labor rules will substantially impact the sale of a variety of investment products.  In the following May 2016 article, we discuss how the rule will affect the market for structured products: http://www.mofo.com/~/media/Files/Newsletter/2016/05/160504StructuredThoughts.pdf.

On May 4, 2016, Partner Paul Borden and Senior of Counsel Hillel Cohn hosted a teleconference session entitled “Final Department of Labor Fiduciary Rule.” Presentation materials are available here: http://www.mofo.com/~/media/Files/Presentations/2016/05/160504FinalDepartmentOfLaborFiduciaryRule.pdf.