Securities Regulation Daily SEC proposes rules to promote investment fund research
Thursday, May 24, 2018

SEC proposes rules to promote investment fund research

By Amy Leisinger, J.D.

The SEC has proposed new rules and amendments to reduce the burdens involved with providing research on investment funds and to harmonize the treatment of investment company research reports with reports on other public entities. As mandated by the Fair Access to Investment Research Act of 2017 (FAIR Act), the changes would establish a safe harbor for brokers or dealers to publish or distribute research reports on investment funds similar to that provided for other entities, subject to certain conditions (Covered Investment Fund Research ReportsRelease No. 33-10498, May 23, 2018).

"The proposed changes are intended to provide investors with greater access to research to aid them in making investment decisions," said SEC Chairman Jay Clayton.

FAIR Act. To address the disparate treatment afforded to research on certain funds versus other asset classes, the FAIR Act, S. 327, requires the SEC to revise Securities Act Rule 139 to provide that a covered investment fund research report published or distributed by a broker-dealer (who is not an investment adviser to the fund or an affiliate of the adviser) is not an offer to sell a security. The legislation also directs the SEC to provide that a covered investment fund research report is not subject to Investment Company Act Section 24(b) and related rules except to the extent that the reports are not subject to a self-regulatory organization’s content standards for research reports. The safe harbor applies even if the broker-dealer will participate in the registered offering of the covered investment fund’s securities.

Safe harbor. Proposed Securities Act Rule 139b would establish a safe harbor for an unaffiliated broker or dealer participating in a securities offering of a "covered investment fund" to publish or distribute a "covered investment fund research report." If the conditions for the safe harbor are satisfied, this publication or distribution would be deemed not to constitute an offer for sale or offer to sell a security. The proposed safe harbor is designed to apply to a broker-dealer’s publication or distribution of covered investment fund research reports in a manner similar to the existing safe harbor under Rule 139 for research reports about other issuers, even if the broker-dealer may participate in an offering of the covered investment fund’s securities.

As does the FAIR Act, proposed Rule 139b defines a "covered investment fund research report" as a research report published or distributed by a broker-dealer about a covered investment fund or any of its securities but excludes research reports published or distributed by the covered investment fund itself, any affiliate of the fund, or any broker-dealer that is an investment adviser to the fund. A "covered investment fund" includes registered investment companies (or series or classes thereof), business development companies, and others issuing securities in an registered offering if: (1) the securities are listed on a national securities exchange; (2) the issuer’s assets consist primarily of commodities, currencies, or certain derivative instruments; and (3) the issuer’s registration statement reflects that its securities are purchased or redeemed for a ratable share of its assets. A "research report" is a written communication containing information, opinions, or recommendations with respect to securities of an issuer, or an analysis of a security or an issuer, regardless of whether the communication provides information reasonably sufficient on which to base an investment decision.

Proposed Rule 139b also contains conditions for both issuer-specific reports and industry research reports that must be satisfied in order for a broker-dealer to rely on the safe harbor. Among other things, the conditions include reporting history and timely reporting standards, certain content requirements, and a minimum public market value threshold.

Proposed Investment Company Act Rule 24b-4 would exclude a covered investment fund research report from the filing requirements of Section 24(b) of the Act, except to the extent the research report is otherwise not subject to the content standards in SRO rules related to research reports. This includes standards contained in rules governing communications with the public regarding investment companies or other similar standards.

A proposed conforming amendment to Rule 101 of Regulation M would permit distribution participants, including brokers or dealers, to publish or disseminate any information or opinion relating to a covered security so long as the conditions of proposed Rule 139b are satisfied.

Comments on the proposal must be received within 30 days following publication of the proposing release in the Federal Register.

The release is No. 33-10498.

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