Covered Investment Fund Research Reports

Federal RegisterJun 8, 2018

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230, 242, and 270

[Release Nos. 33-10498; 34-83307; IC-33106; File No. S7-11-18]

RIN 3235-AM24

Covered Investment Fund Research Reports

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rules.

SUMMARY:

As directed by Congress pursuant to the Fair Access to Investment Research Act of 2017, the Commission is proposing a new rule under the Securities Act of 1933. If adopted, the proposal 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 be an offer for sale or offer to sell the covered investment fund's securities for purposes of sections 2(a)(10) and 5(c) of the Securities Act of 1933. The Commission is also proposing a new rule under the Investment Company Act of 1940. This proposal would exclude a covered investment fund research report from the coverage of section 24(b) of the Investment Company Act (or the rules and regulations thereunder), except to the extent the research report is otherwise not subject to the content standards in self-regulatory organization rules related to research reports, including those contained in the rules governing communications with the public regarding investment companies or substantially similar standards. We are also proposing a conforming amendment.

DATES:

Comments should be received by July 9, 2018.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's internet comment forms (

http://www.sec.gov/rules/proposed.shtml

); or

• Send an email to

rule-comments@sec.gov.

Please include File Number S7-11-18 on the subject line.

Paper Comments

• Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-11-18. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's website (

http://www.sec.gov/rules/proposed.shtml

). Comments also are available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Room 1580, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly.

Studies, memoranda or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the Commission's website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at

www.sec.gov

to receive notifications by email.

FOR FURTHER INFORMATION CONTACT:

Asaf Barouk, Attorney-Adviser, John Lee, Senior Counsel; Amanda Hollander Wagner, Branch Chief; or Brian McLaughlin Johnson, Assistant Director, at (202) 551-6792, Investment Company Regulation Office, Division of Investment Management; Steven G. Hearne, Senior Special Counsel, at (202) 551-3430, Division of Corporation Finance; Laura Gold or Samuel Litz, Attorney-Advisers; or John Guidroz, Branch Chief, at (202) 551-5777, Office of Trading Practices, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION:

The Commission is proposing for comment new rule 139b [17 CFR 230.139b] under the Securities Act of 1933 [15 U.S.C. 77a

et seq.

]; new rule 24b-4 [17 CFR 270.24b-4] under the Investment Company Act of 1940 [15 U.S.C. 80a-1

et seq.

]; and a conforming amendment to rule 101 [17 CFR 242.101(a)] of Regulation M [17 CFR 242.100-242.105].

Table of Contents

I. Introduction and Background

A. Introduction

B. FAIR Act

II. Discussion

A. Scope of Proposed Rule 139b

1. Definition of “Covered Investment Fund Research Report”

2. Definition of “Research Report”

3. Definition of “Covered Investment Fund”

4. Non-Exclusivity of Safe Harbor

B. Conditions for the Safe Harbor

1. Issuer-Specific Research Reports

2. Industry Research Reports

C. Presentation of Performance Information in Research Reports About Registered Investment Companies

D. Role of Self-Regulatory Organizations

1. SRO Content Standards and Filing Requirements for Covered Investment Fund Research Reports

2. SRO Limitations

E. Conforming Amendment

III. Economic Analysis

A. Introduction

B. Baseline

1. Market Structure and Market Participants

2. Regulatory Structure

C. Costs and Benefits

1. FAIR Act Statutory Mandate

2. Proposed Rule 139b

3. Proposed Rule 24b-4

4. Proposed Amendment to Rule 101 of Regulation M

5. Effects on Efficiency, Competition, and Capital Formation

6. Alternatives Considered

IV. Paperwork Reduction Act

V. Regulatory Flexibility Act Analysis

A. Reasons for, and Objectives of, the Proposed Action

B. Legal Basis

C. Small Entities Subject to the Proposed Rules

D. Reporting, Recordkeeping and Other Compliance Requirements

E. Duplicative, Overlapping, or Conflicting Federal Rules

F. Significant Alternatives

G. General Request for Comment

VI. Small Business Regulatory Enforcement Fairness Act

VII. Statutory Authority

I. Introduction and Background

A. Introduction

As directed by the Fair Access to Investment Research Act of 2017,

we are proposing new rule 139b under the Securities Act of 1933 (the “Securities Act”).

Proposed rule 139b includes certain conditions that, if satisfied, would provide that a broker's or dealer's (a “broker-dealer's”) publication or distribution of a covered investment fund research report will be deemed for purposes of sections 2(a)(10) and 5(c) of the Securities Act not to constitute an offer for sale or offer to sell a security that is the subject of an offering of the

covered investment fund, even if the broker-dealer is participating or may participate in a registered offering of the covered investment fund's securities.

Proposed rule 139b would establish a new safe harbor for unaffiliated broker-dealers' publication or distribution of covered investment fund research reports similar to the existing safe harbor under rule 139 applicable to research reports about other issuers or their securities.

Fair Access to Investment Research Act of 2017, Public Law 115-66, 131 Stat. 1196 (2017) (the “FAIR Act”).

15 U.S.C. 77a

et seq.

See infra

text accompanying notes 32-34 (discussing our general approach in modeling proposed rule 139b after rule 139 [17 CFR 230.139], and noting that we propose this approach in furtherance of the FAIR Act's directive to revise rule 139 to extend the current safe harbor available under rule 139 to broker-dealers' publication or distribution of covered investment fund research reports);

see also

proposed addition to rule 139(a) (“For purposes of the [FAIR Act], a safe harbor has been established for covered investment fund research reports, and the specific terms of that safe harbor are set forth in Rule 139b. . . .”).

See infra

notes 11-15 and accompanying text.

We are also proposing new rule 24b-4 under the Investment Company Act of 1940 (the “Investment Company Act”),

which would exclude a covered investment fund research report from the filing requirements of section 24(b) of the Investment Company Act (or the rules and regulations thereunder), except to the extent that such report is otherwise not subject to the content standards in self-regulatory organization (“SRO”) rules related to research reports, including those contained in the rules governing communications with the public regarding investment companies or substantially similar standards.

This proposed rule would have the effect of reducing the filing requirements currently applicable to certain communications that, by operation of the FAIR Act and proposed rule 139b, would now be deemed “covered investment fund research reports.”

15 U.S.C. 80a-1

et seq.

As discussed below, we are proposing this rule pursuant to section 2(b)(4) of the FAIR Act (mandating that the Commission shall provide that a covered investment fund research report shall not be subject to section 24(b) of the Investment Company Act of 1940 (15 U.S.C. 80a-24(b)) or the rules and regulations thereunder, except that such report may still be subject to such section and the rules and regulations thereunder to the extent that it is otherwise not subject to the content standards in the rules of any self-regulatory organization related to research reports, including those contained in the rules governing communications with the public regarding investment companies or substantially similar standards).

See infra

section II.D.1.

See infra

notes 184-187 and accompanying text.

Additionally, in light of the proposal of rule 139b, we are proposing a conforming amendment to rule 101 of Regulation M. This amendment would permit distribution participants, such as brokers or dealers, to publish or disseminate any information, opinion, or recommendation relating to a covered security if the conditions of proposed rule 139b (or, alternatively, the conditions of rule 138

or rule 139 under the Securities Act) are satisfied.

The proposed conforming amendment is intended to align the treatment of research under proposed rule 139b with the treatment of research under rules 138 and 139 for purposes of Regulation M.

17 CFR 230.138.

See infra

section II.E.

See id.

Rule 139 currently provides a safe harbor for the publication or distribution of research reports concerning one or more issuers by a broker-dealer participating in a registered offering of one of the covered issuers' securities.

Specifically, rule 139 provides that a broker-dealer's publication or distribution of research reports—whether about a particular issuer or multiple issuers, including within the same industry—that satisfy certain conditions under the rule are “deemed for purposes of sections 2(a)(10) and 5(c) of the [Securities] Act not to constitute an offer for sale or offer to sell.”

A broker-dealer's publication or distribution of a research report in reliance on rule 139 would therefore not be deemed to constitute an offer that otherwise could be a non-conforming prospectus in violation of section 5 of the Securities Act.

Although the Commission has previously requested comment as to whether to extend rule 139 to cover investment company research reports,

the rule's safe harbor currently is not available for a broker-dealer's publication or distribution of research reports pertaining to specific registered investment companies or business development companies.

The term “research report” in rule 139 under the Securities Act is defined as “a written communication, as defined in Rule 405, that includes information, opinions, or recommendations with respect to securities of an issuer or an analysis of a security or an issuer, whether or not it provides information reasonably sufficient upon which to base an investment decision.” 17 CFR 230.139(d);

see infra

section II.A.2 for a discussion of the term “research report.”

There are differences in how other rules and regulations define the term “research report,” including Regulation Analyst Certification (“Regulation AC”) under the Securities Act and the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. 78a

et seq. Compare

17 CFR 242.500-505 (A “research report” as defined under Regulation AC is limited to an analysis of a security or an issuer, and information within the report must be “reasonably sufficient upon which to base an investment decision;” whereas, under rule 139, a “research report” includes not only an analysis of a security or an issuer, as in Regulation AC, but also, information, opinions, or recommendations regarding securities of an issuer, irrespective of the information within the report being “reasonably sufficient upon which to base an investment decision.”); Financial Industry Regulatory Authority (“FINRA”) rule 2241 (defining “research report”); and FINRA rule 2242 (defining “debt research report”).

see also

discussion at text accompanying notes 29-31

infra.

Section 24(b) of the Investment Company Act makes it unlawful for any registered open-end company (or any registered unit investment trust, any registered face-amount certificate company, or any underwriter of any of the preceding companies), in connection with a public offering of any security of which such company is an issuer, to transmit, among other things, sales literature addressed to or intended for distribution to prospective investors unless the sales literature is filed with the Commission.

See

15 U.S.C. 80a-24(b). Rule 24b-3 under the Investment Company Act deems these materials to have been filed with the Commission if filed with FINRA.

See

17 CFR 270.24b-3.

See

section 2(b)(4) of the FAIR Act. However, the FAIR Act also includes a provision clarifying that the Act will not be construed as limiting an SRO's authority to require the filing of communications with the public “the purpose of which is not to provide research and analysis of covered investment funds.”

See

section 2(c)(2) of the FAIR Act. In addition, the FAIR Act provides that the Act does not limit SROs' authority to examine or supervise a member's practices in connection with its publication or distribution of covered investment fund research reports for compliance with applicable provisions of the federal securities laws and SRO rules related to research reports, including rules governing communications with the public.

See

section 2(c)(2) of the FAIR Act.

See

section 2(b)(3) of the FAIR Act.

II. Discussion

In the sections that follow, we discuss in detail the scope and conditions of proposed rule 139b, the operation and effect of proposed rule 24b-4,

and the proposed conforming amendment to rule 101 of Regulation M.

This discussion appears in section II.D

infra.

Proposed rule 139b's framework is modeled after and generally tracks rule 139. However, proposed rule 139b differs from rule 139 in certain respects. Some of these differences are specifically directed or contemplated by the FAIR Act.

Other differences, while not specifically directed by the FAIR Act, clarify and tailor the provisions of rule 139 more directly or specifically to the context of broker-dealers' publication or distribution of covered investment fund research reports.

For the reasons described below, we believe that the provisions of proposed rule 139b that differ from the provisions of rule 139, and that are not specifically contemplated in the FAIR Act, are necessary or appropriate in the public interest, for the protection of investors, and for the promotion of capital formation.

See, e.g., infra

section II.A.1 (discussing the “affiliate exclusion” (defined below)).

See, e.g., infra

section II.B.1.a (discussing reporting history and timeliness requirements for issuer-specific reports).

A. Scope of Proposed Rule 139b

Proposed rule 139b would establish a safe harbor for the publication or distribution of “covered investment fund research reports” by unaffiliated broker-dealers (as described below) participating in a securities offering of a “covered investment fund.” Under the safe harbor, such publication or distribution would be deemed not to constitute an offer for sale or offer to sell the covered investment fund's securities for purposes of sections 2(a)(10) and 5(c) of the Securities Act. The safe harbor would be available even if the broker-dealer is participating or may participate in a registered offering of the covered investment fund's securities. We are proposing to define the term “covered investment fund research report,” as well as the “covered investment fund” and “research report” components of this definition.

1. Definition of “Covered Investment Fund Research Report”

Under the FAIR Act, the term “covered investment fund research report” means a research report published or distributed by a broker or dealer about a covered investment fund or any securities issued by the covered investment fund, but does not include a research report to the extent that the research report is published or distributed by the covered investment fund or any affiliate of the covered investment fund, or any research report published or distributed by any broker or dealer that is an investment adviser (or an affiliated person of an investment adviser) for the covered investment fund (the “affiliate exclusion”).

Proposed rule 139b incorporates the same definition as is set forth in the FAIR Act.

See

section 2(f)(3) of the FAIR Act.

See

proposed rule 139b(c)(3);

see also supra

note 21 (discussing the terms “affiliate” and “affiliated person” in the FAIR Act definition of “covered investment fund research report”); proposed rule 139b(c)(5) (defining the term “investment adviser” for purposes of the proposed rule).

The FAIR Act's affiliate exclusion prohibits two separate categories of research reports from being deemed to be “covered investment fund research reports” that a broker-dealer may publish or distribute under the contemplated safe harbor. The first category covers research reports published or distributed by the covered investment fund or any affiliate of the covered investment fund. We believe this exclusion would prevent such persons from indirectly using the safe harbor to avoid the applicability of the Securities Act prospectus requirements and other provisions applicable to written offers by such persons.

The second category covers research reports published or distributed by any broker or dealer that is an investment adviser (or an affiliated person of an investment adviser) for the covered investment fund. This second exclusion addresses the concern that a broker-dealer that is a fund's adviser or an affiliated person of a fund's adviser may have financial incentives that could give rise to a conflict of interest. For example, a broker-dealer that is an affiliated person of a fund's adviser may have an incentive to promote the covered investment fund's securities relative to other securities because sales of the covered investment fund's securities would benefit not only the fund, but also could benefit the broker-dealer.

This second exclusion therefore helps to establish a certain level of independence in the activity of publishing and distributing covered investment fund research reports and therefore could help mitigate these potential conflicts of interest.

We note that broker-dealers may have incentives to recommend certain covered investment funds to clients even when the broker-dealer is not the fund's investment adviser (or an affiliated person of the investment adviser). For example, when a covered investment fund's investment adviser has entered into revenue sharing arrangements with a broker-dealer, the broker-dealer may have incentives to recommend to its clients the purchase of this fund's securities relative to the securities of other covered investment funds (whose investment advisers have not entered into revenue sharing agreements with the broker-dealer). We also note that certain covered investment fund research reports also may be subject to additional rules and regulations under the federal securities laws, as well as certain SRO rules, that are designed to help address certain conflicts of interest and abuses identified with analyst research.

See, e.g.,

Sarbanes-Oxley Act of 2002, Public Law 107-204, 116 Stat. 745 (2002) (“Sarbanes-Oxley Act”), Regulation AC, and FINRA rules 2210, 2241, 2242. The Sarbanes-Oxley Act, Regulation AC, and a global research analyst settlement required structural changes and increased disclosures in connection with certain abuses identified with analyst research.

See

section 501 of the Sarbanes-Oxley Act; Regulation Analyst Certification, Securities Act Release No. 8193 (Feb. 20, 2003) [68 FR 9481 (Feb. 27, 2003)] (“Regulation AC Adopting Release”); Global Research Analyst Settlement, Litigation Release No. 18438 (Oct. 31, 2003) (“Lit. Rel. No. 18438”); 2010 Modifications to Global Research Analyst Settlement, Litigation Release No. 21457 (Mar. 19, 2010) (“Lit. Rel. No. 21457”).

We believe that it would be inappropriate for any person covered by the affiliate exclusion, or for any person acting on its behalf, to publish or distribute a research report indirectly that the person could not publish or distribute directly under the proposed rule.

For example, if a broker-dealer were to publish or distribute a research report that included materials that were specifically authorized or approved by a person covered by the affiliate exclusion, expressly for the purpose of inclusion in a research report, this could inappropriately circumvent the affiliate exclusion in proposed rule 139b. In this case, the person covered by the affiliate exclusion would be publishing or distributing communications indirectly through the third-party broker-dealer that otherwise would have to be included in a statutory prospectus meeting the requirements of section 10 of the Securities Act. One of the factors to consider in evaluating whether a research report has been published or

distributed by a person covered by the affiliate exclusion is the extent of such person's involvement in the preparation, distribution, or publication of the research report.

See, e.g.,

section 48(a) of the Investment Company Act [15 U.S.C. 80a-47(a)]; section 208(d) of the Investment Advisers Act of 1940 [15 U.S.C. 80b-8(d)].

Such determinations would necessarily be based on the extent to which a person covered by the affiliate exclusion, or any person acting on its behalf, has been involved in the preparation of the information or explicitly or implicitly endorsed or approved the information. The Commission has referred to these as the entanglement theory and the adoption theory, respectively, and these are helpful guideposts in establishing whether a research report about a covered investment fund may be deemed published or distributed by the fund.

See

Securities Offering Reform, Securities Act Release No. 8591 (July 19, 2005) [70 FR 44722 (Aug. 3, 2005)] (“Securities Offering Reform Adopting Release”) (noting that “[l]iability under the entanglement theory depends upon the level of pre-publication involvement in the preparation of the information”).

See

Use of Electronic Media, Securities Act Release No. 7856 (Apr. 28, 2000) [65 FR 25843 (May 4, 2000)] (interpretive release on the use of electronic media); Asset-Backed Securities, Securities Act Release No. 8518 (Dec. 22, 2004) [70 FR 1506 (Jan. 5, 2005)] (adopting asset-backed securities regulations).

We request comment on the proposed definition of “covered investment fund research report.”

• Should we define “covered investment fund research report” as specified in the FAIR Act, as proposed? Why or why not? What modifications, if any, to this definition do commenters recommend? Solely for purposes of the proposed affiliate exclusion, should we use a definition of “affiliate” that differs from the definition of this term in rule 405 under the Securities Act? If so, should we interpret the term “affiliate” in this context to mean an “affiliated person” as defined in the Investment Company Act? If not, what other definition should we use?

• Should we include a provision in rule 139b specifying that the affiliate exclusion would make the safe harbor unavailable if a broker-dealer were to publish or distribute a research report that includes materials that were specifically authorized or approved by a person covered by the affiliate exclusion (or a person acting on its behalf) for purposes of inclusion in a research report? Why or why not? If not, is the guidance discussed above on this point

appropriate and helpful to the public in understanding the proposed affiliate exclusion? Is there any other guidance that we should provide that would be helpful to promote clarity with respect to the proposed affiliate exclusion?

See supra

paragraph accompanying notes 38-39.

• Broker-dealers may have incentives—in particular, arising from the compensation arrangements between registered investment companies and their distributing broker-dealers—to recommend certain covered investment funds to clients even when the broker-dealer is not the fund's investment adviser (or an affiliated person of the investment adviser).

While certain covered investment fund research reports may be subject to additional rules and regulations under the federal securities laws, as well as certain SRO rules, that are designed to help address certain conflicts of interest,

these additional rules and regulations would not necessarily be applicable with respect to all covered investment fund research reports under proposed rule 139b.

Moreover, while these rules and regulations address conflicts of interest, certain of the conflicts they address may not be prevalent in the investment company context (

e.g.,

FINRA rules 2241 and 2242 address, among other things, investment-banking-related conflicts). Are we correct that there are conflicts of interest that could arise with respect to broker-dealers' publication or distribution of covered investment fund research reports (in particular, research reports about registered investment company issuers) that would

not

be mitigated by proposed rule 139b's exclusion of research reports published or distributed by a broker-dealer that is an investment adviser for the covered investment fund (or an affiliated person of the adviser)? If not, why not? If so, how should we address these conflicts? Should we add restrictions or conditions to the safe harbor to further mitigate potential conflicts? If so, what types of additional restrictions or conditions would be appropriate? For example, should we require a broker-dealer to describe in a research report the revenue-sharing or other distribution arrangements it has with a covered investment fund as a condition to relying on the proposed safe harbor? Should the existence of a revenue-sharing agreement or other particular type of distribution arrangement disqualify a broker-dealer from being able to publish or distribute a research report about a covered investment fund in reliance on the proposed safe harbor? If so, what types and why?

See supra

note 37 and accompanying text;

see also

proposed addition to rule 139(a) (for purposes of the Fair Access to Investment Research Act of 2017 [Pub. L. 115-66, 131 Stat. 1196 (2017)], a safe harbor has been established for covered investment fund research reports, and the specific terms of that safe harbor are set forth in Rule 139b (§ 230.139b)).

17 CFR 230.137.

We request comment on the non-exclusivity provision in proposed rule 139b.

• Should other exemptions, exclusions, or safe harbors from sections 2(a)(10) or 5(c) of the Securities Act for research reports, such as rules 137, 138, or 139, continue to be available to broker-dealers as proposed? Why or why not? Should we make any additional clarifications? If so, what clarifications should we make?

B. Conditions for the Safe Harbor

The Commission has previously acknowledged the value of research reports in providing the market and investors with information about reporting issuers.

To mitigate the risk of research reports being used to circumvent the prospectus requirements of the Securities Act,

the Commission has placed conditions on a broker-dealer's publication or distribution of research reports.

Under rule 139, these conditions include restrictions on who may rely on the rule and on the issuers to which the research may relate, as well as a requirement that such reports be published in the regular course of a broker-dealer's business. These conditions vary depending on whether a research report covers a specific issuer (“issuer-specific research reports”) or a substantial number of issuers in an industry or sub-industry (“industry research reports”).

See

Securities Offering Reform Adopting Release,

supra

note 39.

For example, the Commission has recognized that, for companies that are well-followed, the research-report-related rules “enhance the efficiency of the markets by allowing a greater number of research reports to provide a continuous flow of essential corporate information into the marketplace.”

See

Research Reports, Securities Act Release No. 6550 (Sept. 19, 1984) [49 FR 37569 (Sept. 25, 1984)] (“1984 Adopting Release”).

See supra

note 13 and accompanying text (noting that the rule 139 safe harbor permits a broker-dealer to publish or distribute a research report without this publication or distribution being deemed to constitute an offer that otherwise could be a non-conforming prospectus in violation of section 5 of the Securities Act).

See, also, e.g.,

Securities Offering Reform Adopting Release,

supra

note 39 (discussing how the Sarbanes-Oxley Act, Regulation AC, and a global research analyst settlement required structural changes and increased disclosures in the early 2000s in connection with certain abuses identified with analyst research); discussion at

supra

note 37 (discussing certain rules and regulations under the federal securities laws, as well as certain SRO rules, that are designed to help address certain conflicts of interest and abuses identified with analyst research).

Many research reports that broker-dealers publish or distribute in reliance on the rule 139 safe harbor may also be subject to other federal securities rules and regulations under the Exchange Act and SRO rules governing their content and use.

See supra

note 57.

Consistent with the FAIR Act's directive to revise rule 139 to extend the rule's safe harbor to covered investment fund research reports, proposed rule 139b seeks to address concerns that could accompany broker-dealers' publication or distribution of these research reports. Rule 139b proposes 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.

The conditions are intended to track the conditions already in place under rule 139 to the extent practicable. We believe that any deviations from the requirements of rule 139 are consistent with the FAIR Act's directives.

Tracking the requirements in rule 139 to the extent practicable also provides efficiencies for broker-dealers familiar with the requirements of rule 139.

Proposed rule 139b(a)(1)-(2).

See supra

paragraph accompanying notes 32-34.

1. Issuer-Specific Research Reports

a. Reporting History and Timeliness Requirements

In order for a broker-dealer to include a covered investment fund in a research report published or distributed in reliance on the proposed safe harbor, we propose that the fund must meet certain reporting history requirements. Specifically, we are proposing that any such covered investment fund must have been subject to relevant requirements under the Investment Company Act and/or the Exchange Act to file certain periodic reports for at least 12 calendar months prior to a broker-dealer's reliance on proposed rule 139b.

We also are proposing that any such covered investment fund must have filed certain periodic reports in a timely manner during the immediately preceding 12 calendar months. Specifically, covered investment funds that are registered investment companies would need to have been subject to the reporting requirements of the Investment Company Act for a period of at least 12 calendar months prior to reliance on the proposed rule and to have filed in a timely manner all required reports, as applicable, on Forms N-CSR,

N-SAR,

N-Q,

N-PORT,

N-MFP,

and N-CEN

during the immediately preceding 12 months.

If the covered investment fund is

not

a registered investment company, it would need to have been subject to the reporting requirements under section 13 or 15(d) of the Exchange Act for a period of at least 12 calendar months and to have filed all required reports in a timely manner on Forms 10-K

and 10-Q

and 20-F

during the immediately preceding 12 months.

The proposed reporting history requirements are consistent with current rule 139.

The timeliness

component of the proposed requirement also tracks rule 139.

Proposed rule 139b(a)(1)(i)(A). We believe that this proposed condition also gives effect to FAIR Act section 2(e), which makes the safe harbor contemplated by the FAIR Act unavailable with respect to broker-dealers' publication or distribution of research reports about closed-end registered investment companies or business development companies during these covered investment fund issuers' first year of operation.

See

section 2(e) of the FAIR Act (The safe harbor under subsection (a) of the FAIR Act shall not apply to the publication or distribution by a broker or a dealer of a covered investment fund research report, the subject of which is a business development company or a registered closed-end investment company, during the time period described in 17 CFR 230.139(a)(1)(i)(A)(

), except where expressly permitted by the rules and regulations of the Securities and Exchange Commission under the Federal securities laws.);

see also

General Instruction I.A.3(b) to Form S-3 and General Instruction I.A.2 to Form F-3 (each providing that the registrant must have filed the reports specified in the instruction “in a timely manner”).

As the Commission has previously recognized in the context of Form S-3 and F-3 issuers, satisfaction of the applicable reporting history and public float requirements suggests the presence of a sufficiently broad market following for the issuer's securities and, consequently, an adequate mix of information to inform investors as to material risks.

Consistent with this view, we believe the proposed reporting history and timely reporting requirements would facilitate investors' analysis of issuer-specific covered investment fund research reports and aid them in making informed investment decisions.

The Commission believes that it is appropriate to require a 12-month reporting history for covered investment fund issuers that may be included in issuer-specific research reports, rather than a shorter duration.

As under rule 139, this approach would provide investors with publicly-available information about the issuers included in a research report for a full year. The proposed approach also has the benefit of maintaining consistency between rule 139b and the long-established reporting history conditions of rule 139.

See, e.g.,

Revisions To The Eligibility Requirements For Primary Securities Offerings On Forms S-3 and F-3, Securities Act Release No. 8878 (Dec. 19, 2007) [72 FR 73533 (Dec. 27, 2007)] (“S-3 Revisions Adopting Release”); Securities Offering Reform Proposing Release,

supra

note 14.

See, e.g.,

Securities Offering Reform Proposing Release,

supra

note 14.

As noted above, the FAIR Act specifically contemplates that we set a reporting history requirement for covered investment fund issuers that may be included in covered investment fund research reports, but we may not require a reporting history period for longer than what is required under rule 139(a)(1)(i)(A)(

See supra

note 26.

The reporting history period required under rule 139(a)(1)(i)(A)(

) is currently the preceding 12 months from the time of the broker-dealer's reliance on the rule 139 safe harbor. Rule 139(a)(1)(i)(A)(

) requires that an issuer included in an issuer-specific research report (other than a foreign private issuer) either must have filed a registration statement on Form S-3 or Form F-3, or met the registrant requirements of Form S-3 or Form F-3, as eligibility to register on these forms incorporates a reporting history requirement. Under these eligibility requirements, the registrant must have been subject to the requirements of section 12 or 15(d) of the Exchange Act and have filed all materials required to be filed pursuant to section 13, 14 or 15(d) for a period of at least 12 calendar months immediately preceding the filing of the Form S-3 or Form F-3.

See

discussion at

supra

note 73.

In addition, rule 139(a)(1)(i)(A)(

) separately requires that, as of the date of reliance on the rule 139 safe harbor, the registrant must have filed all periodic reports required during the preceding 12 months on Forms 10-K, 10-Q, and 20-F.

See id.

See supra

paragraph accompanying notes 32-34.

We recognize, however, that in the context of covered investment funds that are open-end registered investment companies, use of a reporting history of only 12 months could result in certain performance and other information that may be relevant to investors not yet being available in the fund's prospectus at the time the broker-dealer publishes or distributes a research report on that fund. This is because the disclosure requirements for a registered investment company, or a series thereof, are based in part on how long the fund has been operational. For example, for a newly-registered covered investment fund that is an open-end registered investment company, a bar chart pursuant to Item 4 of Form N-1A is not required to be included in the fund's prospectus until the fund has been operational for one full calendar year.

We note, however, that other information for such a fund, such as principal investment strategies and estimated expenses, would be available at the time the fund launches. We request comment below on whether—and if so, how—the proposed reporting history and timeliness requirements could be more tailored to covered investment funds.

For example, under the requirements of Form N-1A, a fund that launched on January 4 and has an August 31 fiscal year-end would not be required to include a bar chart, which reflects calendar year-end information, until almost three years after launch (less a few days). However, other performance information about such a fund would be required to appear in reports filed on Form N-PORT (which will be made public quarterly,

see supra

notes 65, 68) and the fund's annual reports, and also could appear in rule 482 advertisements.

We request comment on the proposed reporting history and timeliness requirements.

• Are the proposed reporting requirements an appropriate condition for issuer-specific covered investment fund research reports whose publication or distribution would be covered under the rule 139b safe harbor?

• Should the proposed reporting requirements for issuer-specific covered investment fund research reports track the existing reporting requirements for issuer-specific reports under rule 139 (

e.g.,

the length of reporting history, required reports, and timeliness component)? If not, how should they differ? Is the proposed requirement for a 12-month periodic reporting history the right amount of time in the context of covered investment funds? For example, should the reporting history requirement instead provide that an issuer that is a registered open-end investment company must have filed a prospectus reflecting at least a full calendar year of performance information prior to the time that a broker-dealer relies on the proposed safe harbor, and would this approach be consistent with section 2(b)(2)(A) of the FAIR Act? Under proposed rule 139b, issuers that are registered investment companies must have timely filed reports on Forms N-CSR, N-SAR, N-Q, N-PORT, N-MFP, and N-CEN, as applicable,

for the immediately preceding 12 calendar months, and issuers that are not registered investment companies must have timely filed reports on Forms 10-K and 10-Q or 20-F for the immediately preceding 12 calendar months, in order to be included in a research report for whose publication or distribution the proposed safe harbor would be available. Should we require a different set of periodic reports to be timely filed, other than what we propose? For example, should the requirement be based on a limited subset of the reports? Why or why not?

See supra

note 68 (noting that we are proposing to remove references to Form N-Q on the date that Form N-Q is rescinded).

b. Minimum Public Market Value Requirement

In order for broker-dealers to use the proposed rule 139b safe harbor to publish or distribute issuer-specific research reports, we also are proposing that the covered investment fund that is the subject of a report must satisfy a minimum public market value threshold at the date of reliance on the proposed rule (the “minimum public market value requirement”). Specifically, we are proposing that the aggregate market value of a covered investment fund,

or the net asset value in the case of a registered open-end investment company (other than an exchange-

traded fund (“ETF”)),

must equal or exceed the aggregate market value required by General Instruction I.B.1 to Form S-3.

This amount is currently $75 million.

Proposed rule 139b also specifies that both aggregate market value and net asset value would be calculated net of the value of shares held by affiliates.

The proposed minimum public market value requirement generally tracks the minimum public float and aggregate market value requirements under rule 139, modified as appropriate to apply to covered investment fund issuers.

As discussed above, the FAIR Act specifically permits us to set a minimum public float requirement for covered investment funds, as long as the minimum public float is not greater than what is required by rule 139.

The aggregate market value is the aggregate market value of voting and non-voting common equity held by non-affiliates of the covered investment fund.

See

proposed rule 139b(a)(1)(i)(B).

See

proposed rule 139b(a)(1)(i)(B), proposed rule 139b(c)(4) (defining “exchange-traded fund” for purposes of the proposed rule to have the meaning given the term in General Instruction A to Form N-1A).

Because the proposed rule refers to General Instruction I.B.1 to Form S-3, we would generally consider that, pursuant to these instructions, aggregate market value would be “computed by use of the price at which the common equity was last sold, or the average of the bid and asked prices of such common equity, in the principal market for such common equity as of a date within 60 days prior to the date of filing.” General Instruction I.B.1 to Form S-3. The definition of “market price” in the General Instructions of Form N-1A contemplates valuing an ETF's shares similarly.

See

General Instruction A to Form N-1A.

For a registered open-end investment company other than an ETF, net asset value would be computed using the investment company's current net asset value, as used in determining its share price.

See

rule 22c-1 under the Investment Company Act [17 CFR 270.22c-1] (requiring registered open-end investment companies, their principal underwriters, and dealers in the investment company's shares (and certain others) to sell and redeem the investment company's shares at a price determined at least daily based on the current net asset value next computed after receipt of an order to buy or redeem).

For covered investment funds that are not actively traded (such as non-traded closed-end funds and non-traded business development companies), we anticipate that, for purposes of proposed rule 139b, net asset value and aggregate market value would be calculated based on the fund's last publicly-disclosed share price (for non-traded business development companies, this would be the common equity share price).

General Instruction I.B.1 to Form S-3.

See

proposed rule 139b(a)(1)(i)(B) (specifying for purposes of this provision that “aggregate market value” is the aggregate market value of voting and non-voting common equity held by non-affiliates of the covered investment fund, and that “net asset value” is calculated subtracting the value of shares held by affiliates).

This requirement tracks the minimum public float requirement under rule 139, as discussed below.

See infra

note 86 and accompanying text. As guidance, for purposes of this calculation, we believe that shares held by affiliates generally should be determined with reference to the security ownership information listed in the covered investment fund's registration statement.

See, e.g.,

Item 11(m) of Form S-1; Item 18 of Form N-1A.

See

proposed rule 139b(a)(1)(i)(B); rule 139(a)(1)(i)(A)(

)(

) and (a)(1)(i)(B)(

)(

) [17 CFR 230.139(a)(1)(i)(A)(

)(

) and (a)(1)(i)(B)(

)(

)]. For registered open-end investment companies other than ETFs, the proposed threshold is expressed in terms of net asset value rather than aggregate market value, to reflect market structure differences between registered open-end investment companies (other than ETFs) and all other covered investment funds.

See supra

note 25 and accompanying text.

Historically, the Commission has used public float as an approximate measure of a security's market following, through which the market absorbs information that is reflected in the price of the security.

We continue to view as significant the relationship between public float, information dissemination to the market, and following by investment institutions.

In the context of covered investment funds, we would expect market information to be most limited for new funds (which the reporting history and timeliness requirements could help to address) and for funds that are marketed to a niche segment of investors (which the minimum public market value requirement could help to address).

The proposed public market value requirement is designed to protect investors by excluding research reports on covered investment funds with a relatively small amount of total assets, and hence a limited market following. We believe that it is appropriate to include a $75 million public market value requirement for issuers that may be included in issuer-specific research reports, rather than some lower threshold. The proposed minimum public market value threshold is the same as the parallel threshold in rule 139, which we believe would increase compliance efficiencies among broker-dealers relying on the rule 139 and proposed rule 139b safe harbors.

Moreover, a significantly lower minimum public market value threshold may not adequately protect investors, as we expect the information environment to be more limited for smaller funds than for larger funds.

See, e.g.,

S-3 Revisions Adopting Release,

supra

note 75;

see also

Securities Offering Reform Proposing Release,

supra

note 14 (discussing public float of a certain level as a factor indicating that an issuer has a demonstrated market following).

See, e.g.,

S-3 Revisions Adopting Release,

supra

note 75.

See infra

section III.C.2.c.

See infra

discussion following note 299.

See infra

section III.C.6.a.

We request comment on the proposed minimum public market value requirement.

• Is the proposed minimum public market value requirement an appropriate restriction for issuer-specific covered investment fund research reports whose publication or distribution would be covered under the proposed rule 139b safe harbor?

• Should the proposed minimum public market value requirement track the minimum float requirements under rule 139? Why or why not? If so, is tying the proposed minimum public market value requirement to the Form S-3 General Instruction I.B.1 appropriate, as in rule 139? Why or why not? Should the aggregate market value threshold be lower? Are there other requirements we should consider? Why or why not?

• Is it appropriate for the proposed requirement to refer to “aggregate market value” for covered investment funds, and “net asset value” in the case of a registered open-end investment company (other than an ETF)? Should the proposed requirement instead refer to “net asset value” for ETFs? Is there another measure of market value that is more appropriately tailored for covered investment fund research reports?

• Should we include different or more specific instructions about how covered investment funds would compute aggregate market value and net asset value? For example, should we specify that an ETF's aggregate market value be calculated with reference to the definition of “market price” in Form N-1A rather than General Instruction I.B.1 of Form S-3?

Should we include more specific instructions about how a covered investment fund that is not actively traded should compute aggregate market value and net asset value?

See supra

note 83.

See id.

• Would the proposed minimum public market value requirement promote the dissemination into the market of an appropriate amount of research about covered investment funds? Conversely, would it unduly impede analyst coverage of covered investment fund issuers, and could this in turn affect the market following for these issuers? Is the approach we are proposing consistent with section 2(b)(2)(B) of the FAIR Act?

c. Regular-Course-of-Business Requirement

The proposed rule also would condition eligibility for the safe harbor on a broker-dealer's publication or distribution of research reports “in the regular course of its business”

(the “regular-course-of-business” requirement).

Proposed rule 139b(a)(1)(ii).

Although the proposed regular-course-of-business requirement is generally similar to the existing provisions of rule 139, it differs in one

respect as required by the FAIR Act. Rule 139 provides, in addition to the requirement that a broker-dealer “publish[] or distribute[] research reports in the regular course of its business,” that such publication or distribution may not represent either the initiation of publication of research reports about the issuer or its securities or the reinitiation of such publication following a discontinuation thereof (the “initiation or reinitiation” requirement).

The FAIR Act, however, provides that the safe harbor shall not apply the “initiation or reinitiation” requirement to a report concerning a covered investment fund with a class of securities “in substantially continuous distribution.”

Proposed rule 139b reflects this requirement by incorporating the “initiation or reinitiation” requirement from current rule 139 but specifying that it applies only to research reports regarding a covered investment fund that does not have a class of securities in substantially continuous distribution.

Determining whether a class of securities is in substantially continuous distribution would be based on an analysis of the relevant facts and circumstances. We request comment below on whether there are any types of covered investment funds or classes of securities that raise particular questions as to the presence or absence of a “substantially continuous distribution.” We also request comment as to whether market participants would benefit from further Commission guidance on this point.

Rule 139(a)(1)(iii) [17 CFR 230.139(a)(1)(iii)].

Section 2(b)(1) of the FAIR Act.

See

proposed rule 139b(a)(1)(ii).

Since rule 139 was first adopted, the regular-course-of-business requirement has been a condition for a broker-dealer's publication or distribution of research reports in reliance on the rule.

We believe requiring that research reports be published or distributed in the regular course of a broker-dealer's business, consistent with the requirements of rule 139, could reduce the potential that covered investment fund research reports will be used to circumvent the prospectus requirements of the Securities Act. Moreover, we are concerned about certain potential consequences of broker-dealers' ability, under proposed rule 139b, to publish or distribute communications as research reports that have traditionally been viewed by the investing public as advertisements or sales material related to registered investment companies or business development companies. The safe harbor provided under rule 139 is currently not available for a broker-dealer's publication or distribution of research reports pertaining to specific registered investment companies or business development companies.

100

Therefore, a research report about a covered investment fund that is a registered investment company currently must comply with the requirements of Securities Act rule 482.

101

Given the definition of “research report” under the FAIR Act,

102

however, certain communications that are currently treated as covered investment fund advertisements under Securities Act rule 482 also could fall under the proposed rule 139b definition of “research report.”

See

Adoption of Rules Relating to Publication of Information and Delivery of Prospectus by Broker-Dealers Prior to or After the Filing of a Registration Statement Under the Securities Act of 1933, Securities Act Release No. 5105 (Nov. 19, 1970) [35 FR 18456 (Dec. 4, 1970)] (“1970 Adopting Release”).

100

See supra

notes 11-15 and accompanying text.

101

17 CFR 230.482. An investment company advertisement that complies with rule 482 is deemed to be a section 10(b) prospectus (also known as an “advertising prospectus” or “omitting prospectus”) for purposes of section 5(b)(1) of the Securities Act. As a section 10(b) prospectus, an investment company advertisement is subject to liability under section 12(a)(2) of the Securities Act, as well as the antifraud provisions of the federal securities laws.

102

Section 2(f)(6) of the FAIR Act.

Investors, particularly retail investors, may be unaware of the differences in regulatory status and purpose among the various types of communications regarding registered investment companies and business development companies. This may result in investors not being able to readily discern what constitutes a research report and what constitutes an advertisement about these issuers. Context helps investors evaluate and weigh the information presented to them. For example, investors likely know that advertising directly promotes sales of a particular product. A broker-dealer publishing or distributing a research report, on the other hand, may do so with multiple purposes for multiple audiences. While a research report may have the effect of promoting sales of the securities of the issuer that the research report features, it may serve a number of market functions as well, such as promoting market trading, educating a particular audience, or providing a service to clients.

103

See infra

section III.C.1.b.

We believe that broker-dealers that publish or distribute research reports in the regular course of business are more likely to publish analysis that investors recognize as research. For example, these broker-dealers are more likely to have compliance structures in place, with relevant policies and procedures, governing their publication of research and (as applicable) their distribution of registered investment company advertisements. Similarly, if a broker-dealer were to publish or distribute research reports in the regular course of its business, the broker-dealer may be more likely to have a research department with research analysts who regularly cover particular issuers or industries. This commitment in resources and infrastructure makes it more likely that the market recognizes the broker-dealer as a provider of research-related communications. A research report published or distributed by a research analyst in the research department at a broker-dealer that regularly covers that issuer or industry would therefore be a factor indicating that the regular-course-of-business requirement has been satisfied for purposes of proposed rule 139b.

104

Additional factors may include whether the broker-dealer maintains policies and procedures governing its research protocols and whether the broker-dealer regularly publishes or distributes research on any other type of company or business other than covered investment funds.

104

We believe it is appropriate to include the regular-course-of-business requirement because it is important that the broker-dealer have a history of publishing or distributing a particular type of research. If a broker or dealer begins publishing research about a different type of security around the time of a public offering of an issuer's security and does not have a history of publishing research on those types of securities, such publication or distribution could be viewed as a way to provide information about the publicly-offered securities in circumvention of the provisions of section 5 of the Securities Act.

See

Securities Offering Reform Adopting Release,

supra

note 39.

We request comment on the proposed regular-course-of-business requirement.

• Is the proposed regular-course-of-business requirement appropriate in the context of covered investment fund research reports?

• Would the proposed regular-course-of-business requirement allow an appropriate flow of analyst-generated information to the market?

• Should we define “regular course of business” in proposed rule 139b more specifically in the context of research reports on registered investment companies or business development companies? Today, due to the unavailability of rule 139, we understand that broker-dealers are generally not in the business of publishing and distributing what we consider issuer-specific research reports on registered investment companies or business development companies (although some broker-dealers have

published and distributed communications styled as “research reports” in compliance with rule 482, and some broker-dealers have published and distributed research reports on other issuers in reliance on the rule 139 safe harbor). Does this raise questions as to how to apply a regular-course-of-business requirement to research reports regarding these issuers that we should address in the proposed rule or through additional Commission guidance? If so, what further definitions or guidance should we consider? Would the proposed regular-course-of-business requirement promote the publication or distribution of research reports on covered investment funds that investors recognize as research?

• What facts and circumstances suggest that a covered investment fund has a class of securities in “substantially continuous distribution”? Are there any types of covered investment funds that raise specific questions about whether or not they have a class of securities in substantially continuous distribution, either generally or in particular circumstances? For example, do all open-end management investment companies, and those closed-end interval funds that make periodic repurchase offers pursuant to rule 23c-3, have a class of securities in substantially continuous distribution, while other closed-end investment companies do not? Why or why not? Are there other types of funds with a class of securities in substantially continuous distribution, or are there specific circumstances that should definitively constitute substantially continuous distribution? Would market participants benefit from Commission guidance as to how one would make a determination that a covered investment fund has a class of securities in substantially continuous distribution?

• Alternatively, should we define the term “substantially continuous distribution” in rule 139b, and if so, how? Should this definition include certain types of funds (

e.g.,

open-end management investment companies, closed-end interval funds that make periodic repurchase offers pursuant to rule 23c-3, and other types of funds that are engaged in continuous offerings pursuant to Securities Act rule 415(a)(1)(ix) or others that conduct continuous offerings as shelf takedowns pursuant to rule 415(a)(1)(x))? If so, what funds and under what circumstances? Are there any specific factors that we should incorporate in proposed rule 139b in order to determine whether a covered investment fund is in substantially continuous distribution?

• Because a safe harbor is generally not currently available for broker-dealers' publication or distribution of covered investment fund research reports,

105

should the proposed regular-course-of-business requirement be modified to address how broker-dealers that have not previously published or distributed research reports could satisfy this requirement? If we were to modify the proposed regular-course-of-business requirement to incorporate factors indicating that a broker-dealer has created a history of publishing or distributing research reports in the regular course of business, what should these factors be, and why? Alternatively, should rule 139b provide a “start-up” period to allow broker-dealers to establish a regular course of business of publishing research reports? For example, should the rule provide that a broker-dealer that could not satisfy the regular-course-of-business requirement could nonetheless rely on rule 139b for a specified period of time (

e.g.,

one year) to establish a regular course of business of publishing research reports? Without such a provision, would the regular-course-of-business requirement pose challenges for broker-dealers that had not previously published research reports because of the absence of an applicable safe harbor? If we do not modify the proposed requirement in this way, should we provide further guidance regarding broker-dealers that have not previously published or distributed research reports?

105

See supra

notes 11-15 and accompanying text.

• Should the proposed regular-course-of-business requirement incorporate any more specific requirements regarding the person(s) preparing a covered investment fund research report (

e.g.,

a requirement that the person who prepares the research report must be employed by the broker-dealer to prepare research in the normal course of his or her duties)?

2. Industry Research Reports

Our proposed conditions for industry research reports parallel those set forth in rule 139 and are intended to provide appropriate parameters to address the risk of circumvention of the prospectus requirements of the Securities Act.

106

See supra

notes 57-58 and accompanying text;

see also

paragraph accompanying notes 32-34.

a. Reporting Requirement

Under the proposed safe harbor, each covered investment fund included in an industry research report must be subject to the reporting requirements of section 30 of the Investment Company Act (or, for covered investment funds that are not registered investment companies under the Investment Company Act, the reporting requirements of section 13 or section 15(d) of the Exchange Act). This proposed reporting requirement generally tracks an existing requirement for industry research reports under rule 139

107

but has been modified so that it would be applicable to industry research reports that include covered investment fund issuers. Like the parallel provision of rule 139, the proposed reporting requirement helps assure that there is publicly available information about the relevant issuers and that investors are able to use such information in making their investment decisions.

107

See

rule 139(a)(2)(i) [17 CFR 230.139(a)(2)(i)] (“The issuer is required to file reports pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 or satisfies the conditions in paragraph (a)(1)(i)(B) of this section.”).

We request comment on the reporting requirement in proposed rule 139b.

• Is the proposed reporting requirement appropriate? Why or why not?

• As discussed above, proposed rule 139b's framework, including its scope and conditions, generally tracks rule 139.

108

Therefore, as in rule 139, the conditions applicable to industry and issuer-specific research reports differ. For example, as proposed, rule 139b (like rule 139) would not require the issuers included in an industry research report to satisfy the minimum market value thresholds discussed in section II.B.1.b above. Is there any reason we should extend all of the conditions for issuer-specific research reports (or a subset of these conditions, to the extent they are not already reflected in proposed rule 139b) to industry reports, even if this approach would diverge from the approach taken in rule 139? Are the concerns underlying the proposed conditions for broker-dealers' publication or distribution of covered investment fund research reports the same for issuer-specific research reports and industry research reports? Are there any other concerns specific to industry research reports that we should consider?

108

See supra

paragraph accompanying notes 32-34.

b. Regular-Course-of-Business Requirement

We are also proposing that a broker-dealer be required to publish or distribute research reports in the regular course of its business in order to rely on the proposed safe harbor.

109

The

proposed regular-course-of-business requirement for industry research reports similarly applies to issuer-specific research reports,

110

and it also tracks an existing requirement for industry research reports under rule 139.

111

109

Proposed rule 139b(a)(2)(iv) (the broker or dealer publishes or distributes research reports in the regular course of its business and, at the time

of the publication or distribution of the research report (in the case of a research report regarding a covered investment fund that does not have a class of securities in substantially continuous distribution) is including similar information about the issuer or its securities in similar reports).

110

See supra

section II.B.1.c.

111

See

rule 139(a)(2)(v) [17 CFR 230.139(a)(2)(v)].

Like the parallel provision in rule 139, the proposed regular-course-of-business requirement for industry research reports includes a “similar information” requirement. To satisfy this requirement, at the time a broker-dealer publishes or distributes an industry research report, the broker-dealer would have to include similar information, in similar reports, about the issuer covered in the industry report (or its securities).

112

However, unlike rule 139, we are proposing that the “similar information” requirement apply only to circumstances in which a broker-dealer is publishing or distributing a research report regarding a covered investment fund that does not have a class of securities in substantially continuous distribution. As discussed above, the FAIR Act provides that the safe harbor shall not apply the “initiation or reinitiation” requirement to a research report concerning a covered investment fund with a class of securities “in substantially continuous distribution.”

113

We believe that the proposed “similar information” requirement is akin to the proposed “initiation or reinitiation” requirement, in that both would have the effect of limiting a broker-dealer's ability to rely on the proposed safe harbor to publish or distribute a research report about a particular covered investment fund if the broker-dealer had not previously published research on that issuer. Therefore, as in the proposed “initiation or reinitiation” requirement, we are proposing to exclude covered investment funds from the “similar information” requirement if they have a class of securities in substantially continuous distribution.

114

112

Proposed rule 139b(a)(2)(iv).

113

See supra

notes 97-98 and accompanying text.

114

See id.

As discussed above, we believe that the proposed regular-course-of-business requirement could reduce the possibility that broker-dealers' publication or distribution of covered investment fund research reports may be used to circumvent the prospectus requirements of the Securities Act. We also believe that broker-dealers that publish or distribute research reports in the regular course of business are more likely to publish reports incorporating analysis that investors recognize as research and to have appropriate compliance structures in place governing their publication of research.

115

We continue to believe, in the context of proposed rule 139b as well as in rule 139, that a regular-course-of-business requirement is equally appropriate for issuer-specific research reports and industry research reports.

115

See supra

section II.B.1.c.

We request comment on the proposed regular-course-of-business requirement.

• Is the proposed regular-course-of-business requirement appropriate? Why or why not?

• In the context of covered investment fund research reports, would the proposed “similar information” requirement unduly restrict broker-dealers' ability to rely on the proposed safe harbor? Why or why not?

• Would any of the questions, concerns, or issues discussed above with respect to the proposed regular-course-of-business requirement in the context of issuer-specific research reports be equally applicable in the context of industry research reports? Why or why not?

c. Content Requirements for Industry Research Reports

The proposed rule would also condition eligibility for the safe harbor for industry research reports on certain content requirements. Specifically, under the proposed rule, industry research reports either must include similar information about a substantial number of covered investment fund issuers of the same type or investment focus (the “industry representation requirement”),

116

or alternatively contain a comprehensive list of covered investment fund securities currently recommended by the broker or dealer (the “comprehensive list requirement”).

117

116

Proposed rule 139b(a)(2)(ii)(A).

117

Proposed rule 139b(a)(2)(ii)(B).

Industry Representation Requirement

The proposed industry representation requirement imposes a requirement similar to one contained in rule 139 to covered investment fund research reports.

118

The Commission has stated that “where a publication covers a broad range of companies in an industry and is issued not on a sporadic but on a regular schedule, the possibility that such a publication could condition the market is lessened.”

119

Furthermore, the possibility of market conditioning is lessened “where research reports discussing the registrant contain similar information, opinions or recommendations with respect to a substantial number of other companies in the registrant's industry.”

120

We believe that these observations are applicable today in the context of covered investment fund industry research reports, and therefore we propose that rule 139b include an industry representation requirement.

118

Rule 139 requires an industry research report to include “similar information with respect to a substantial number of issuers in the issuer's industry or sub-industry.” Rule 139(a)(2)(iii) [17 CFR 230.139(a)(2)(iii)].

See infra

note 121 and accompanying text.

119

Research Reports, Securities Act Release No. 6492 (Oct. 6, 1983) [48 FR 46801 (Oct. 14, 1983)] (“1983 Proposing Release”);

see also supra

notes 57-58 and accompanying text (discussing the role of rule 139 in helping to mitigate the risk that research reports might be used to circumvent the prospectus requirements of the Securities Act).

see also supra

section II.A.1.

131

See supra

notes 119-120 and accompanying text.

132

Under proposed rule 139b, a “comprehensive list” research report would have to include a list of all of the broker's currently-recommended covered investment fund securities, whereas an “industry representation” report would not be required to list each currently-recommended security (but instead could cover a more limited number of issuers as long as a “substantial number” of covered investment fund issuers of the same type or investment focus were included).

see also

rule 156 under the Securities Act [17 CFR 230.156].

153

See

Amendments to Investment Company Advertising Rules Adopting Release,

supra

note 152.

154

Rule 156(b) under the Securities Act provides guidance factors concerning misleading statements in investment company sales literature including: (i) Statements and omissions generally (including in light of general economic or financial conditions or circumstances), (ii) representations about past or future investment performance, and (iii) statements involving a material fact about an investment company's characteristics or attributes.

For example, rule 156(b)(2) provides guidance on whether investment performance representations may be misleading by highlighting the following situations: (1) Portrayals of past income, gain, or growth of assets convey an impression of the net investment results achieved by an actual or hypothetical investment which would not be justified under the circumstances, including portrayals that omit explanations, qualifications, limitations, or other statements necessary or appropriate to make the portrayals not misleading; and (2) representations, whether express or implied, about future investment performance, including: (i) Representations, as to security of capital, possible future gains or income, or expenses associated with an investment; (ii) representations implying that future gain or income may be inferred from or predicted based on past investment performance; or (iii) portrayals of past performance, made in a manner which would imply that gains or income realized in the past would be repeated in the future.

155

See

Rule 482 Amendments Proposing Release,

supra

note 148.

Rule 139 includes an instruction on the use of projections of an issuer's sales and earnings.

156

This instruction provides that a projection “constitutes an analysis or information falling within the definition of research report” and includes certain conditions associated with the use of projections.

157

We are not incorporating this or a similar instruction in proposed rule 139b for a number of reasons. FINRA content standards governing communications with the public generally prohibit a broker-dealer from using performance projections.

158

In addition, rule 156 notes as guidance that statements and illustrations about a registered fund's future performance in sales literature could be misleading depending on the context in which they are made, and lists considerations to weigh in making this evaluation. The projection instruction in rule 139—which refers to “sales” and “earnings”—also appears inapplicable to covered investment funds. A covered investment fund's returns will be based on the returns of the fund's investments and fund expenses, among other factors, as opposed to “earnings” and “sales.”

156

See

“Instruction” to rule 139 [17 CFR 230.139].

157

See id.

The instruction provides that, when a broker or dealer publishes or distributes projections of an issuer's sales or earnings in reliance on rule 139(a)(2), it must: (1) Have previously published or distributed projections on a regular basis in order to satisfy the “regular course of its business” condition; (2) at the time of publishing or disseminating a research report, be publishing or distributing projections with respect to that issuer; and (3) for purposes of rule 139(a)(2)(ii), include projections covering the same or similar periods with respect to either a substantial number of issuers in the issuer's industry or sub-industry or substantially all issuers represented in the comprehensive list of securities contained in the research report.

158

See

FINRA rule 2210(d)(1)(F).

We request comment on whether we should adopt any additional conditions in rule 139b or issue guidance to help mitigate the potential for investor confusion regarding research reports about registered investment companies.

• Do commenters anticipate that certain issuer-specific covered investment fund research reports could be confused with registered investment company advertisements and sales materials? If so, what additional conditions could prevent investor confusion, including, for example, legends?

• If commenters anticipate that certain covered investment fund research reports could be confused with registered investment company advertisements and sales materials, what additional conditions or guidance factors would help mitigate investor confusion? For example, should we incorporate any of the rule 156 guidance factors, which are weighed in considering whether statements in investment company sales literature could be misleading? Why or why not? Alternatively, should we provide any additional guidance regarding considerations to be weighed in considering whether research reports about registered investment companies (including any performance information presented in these research reports) could be misleading? Should any additional guidance be limited either to issuer-specific research reports or to industry research reports?

• Do commenters anticipate that broker-dealers would include performance information in covered investment fund research reports about registered open-investment investment companies in a manner inconsistent with the requirements for the presentation of total return or yield in rule 482 (“non-482 performance information”)?

159

We request that commenters provide specific examples of non-482 performance information that they would consider using in a research report about an open-end investment company, and why they would use this information.

159

As discussed above, rule 482 also permits the inclusion of performance measures in an open-end registered investment company advertisement that are not subject to any prescribed method of computation, provided (among other things) that these other performance measures are accompanied by certain standardized performance data.

See supra

note 143 and accompanying text.

• What, if any, risks could result from including non-482 performance information in covered investment fund research reports about registered open-end investment companies? For example, would the variability of non-482 performance information result in investor confusion? Would the inclusion of non-482 performance information result in any of the concerns that the provisions of rule 482 are meant to address, such as disclosing performance without providing adequate disclosure of unusual circumstances that have contributed to performance; without providing adequate disclosure of the performance period (including information about current performance); or without disclosing important context that would permit an investor to evaluate performance (such as the fact that the performance is based on selective dates or time periods)?

160

Would the ability of a covered investment fund to include non-482 performance information incentivize broker-dealers to recast registered investment company advertisements or selling materials as research reports that they could publish or distribute under proposed rule 139b, instead of meeting the requirements of rule 482? To what extent would any such risks be mitigated by regulations that are currently in effect, for example, the rule 156 guidance factors discussed above, or other factors (such as the applicable content standards in SRO rules, such as FINRA rule 2210

161

160

See

Rule 482 Amendments Proposing Release,

supra

note 148.

161

See infra

section II.D.1.

• If we were to permit non-482 performance information to appear in covered investment fund research reports about registered open-end investment companies, as proposed, what benefits could result? Would any benefits of the ability to include the non-482 performance information be diminished if the broker-dealer were also required to include the standardized information required by rule 482?

162

See supra

note 159.

• If commenters anticipate that the potential risks of including non-482 performance information in covered investment fund research reports would outweigh the benefits, what action should we take to mitigate these risks? Would these risks be mitigated if we were to incorporate any of the requirements of rule 482 directly into rule 139b?

163

Why or why not? If so,

which requirements? For example, should we incorporate a provision in rule 139b stating that, where a registered open-end investment company's total return or yield is presented in a covered investment fund research report, the presentation must be consistent with the requirements for the presentation of total return or yield in rule 482? Should we include in rule 139b only certain of the requirements in rule 482, such as those listed in paragraphs (d)(5) and (e) of rule 482 for the presentation of other, non-482 conforming performance information measures?

163

Rule 34b-1, which governs the use of registered investment company supplemental sales literature as discussed above, also incorporates

many of the rule 482 requirements relating to performance disclosure, and a related alternative approach could be to reference the performance presentation requirements of rule 34b-1 in rule 139b.

See supra

note 144.

• Should we incorporate a requirement in rule 139b relating to the timeliness of performance data about registered investment companies, similar to timeliness of performance requirements for advertising prospectuses under rule 482

164

or supplemental sales literature under rule 34b-1?

165

If so, why? Would unaffiliated broker-dealers have any difficulty obtaining this information in order to comply with such a requirement? Would the inclusion of performance data in covered investment fund research reports entail the same concerns about timeliness that rules 482 and rule 34b-1 are designed to address? Why or why not?

164

Rule 482(g) [17 CFR 230.482(g)].

165

Rule 34b-1(b)(2) [17 CFR 270.34b-1(b)(2)].

• Alternatively, should we incorporate a provision in rule 139b requiring that a research report must include certain disclosures or disclaimers when performance information about registered open-end investment companies is presented as non-482 performance information? For example, should we require that a research report about a registered investment company must incorporate disclosure stating that the document is a research report and is not subject to the Commission's regulations applicable to sales and advertising? If a covered investment fund research report about a registered open-end investment company includes non-482 performance information, should we require that the research report must disclose the website address for that registered open-end investment company (including a hyperlink for research reports in electronic format), to facilitate investor access to total return or yield disclosure that is presented in a manner consistent with the requirements in rule 482? Should we require that the methodology used to calculate the registered open-end investment company's total return or yield be disclosed, if the research report includes non-482 performance information?

• Should we include an instruction in rule 139b on the use of projections that is similar to the instruction on the use of projections in rule 139? Why or why not? If we were to include such an instruction, would the instruction in rule 139 be appropriate to include in rule 139b, or should it be modified in any way? As discussed above, we recognize that the guidance factors set forth under rule 156 of the Securities Act address future investment performance, and similarly, certain SRO rules that would apply to covered investment fund research reports prohibit the prediction or projection of performance.

166

See supra

paragraph accompanying notes 156-158.

D. Role of Self-Regulatory Organizations

1. SRO Content Standards and Filing Requirements for Covered Investment Fund Research Reports

SRO Content Standards

The FAIR Act contemplates that SRO content standards applicable to research reports would apply to covered investment fund research reports.

167

Specifically, the FAIR Act provides that, unless covered investment fund research reports are subject to the content standards in the rules of any SRO related to research reports, these research reports may still be subject to the filing requirements of section 24(b) of the Investment Company Act for the review of investment company sales literature.

168

As discussed in more detail below, we are proposing rule 24b-4 to implement this provision of the FAIR Act. Proposed rule 24b-4 provides that a covered investment fund research report about a registered investment company will not be subject to section 24(b) of the Investment Company Act (or the rules and regulations thereunder), except to the extent the research report is otherwise not subject to the content standards in SRO rules related to research reports, including those contained in the rules governing communications with the public regarding investment companies or substantially similar standards.

169

167

See

section 2(b)(4) of the FAIR Act (A covered investment fund research report shall not be subject to section 24(b) of the Investment Company Act of 1940 (15 U.S.C. 80a-24(b)) or the rules and regulations thereunder, except that such report may still be subject to such section and the rules and regulations thereunder to the extent that it is otherwise not subject to the content standards in the rules of any self-regulatory organization related to research reports, including those contained in the rules governing communications with the public regarding investment companies or substantially similar standards.).

This provision is relevant only to covered investment funds that are investment companies subject to section 24(b) of the Investment Company Act. For example, registered closed-end investment companies, business development companies, and commodity- or currency-based trusts or funds are covered investment funds that are not subject to section 24(b) of the Investment Company Act. A covered investment fund that is not subject to section 24(b) of the Investment Company Act would have no obligations under that section even if research reports concerning the covered investment fund were not subject to the content standards in the rules of any self-regulatory organization related to research reports.

168

See id.

169

See

proposed rule 24b-4.

Currently, the SRO content standards relevant to communications that would be considered covered investment fund research reports under proposed rule 139b include the applicable content standards of FINRA rules 2210, 2241(c)(1), and 2242(c)(1).

170

FINRA's rule governing communications with the public (FINRA rule 2210) contains general content standards that apply broadly to member communications,

171

including broker-dealer research reports. These general content standards require, among other things, that all member communications “must be based on principles of fair dealing and good faith, must be fair and balanced, and must provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry or service.”

172

170

See infra

note 174 (discussing the scope of these rules in more detail, including noting that the scope of certain provisions of FINRA rule 2210, and the scope of FINRA rules 2241(c)(1) and 2242(c)(2) generally, apply only to a certain subset of communications that would be considered covered investment fund research reports under proposed rule 139b).

171

See

FINRA rule 2210(d)(1).

172

See

FINRA rule 2210(d)(1)(A). FINRA rule 2210's general content standards also provide, among other things, that FINRA members may not “make any false, exaggerated, unwarranted, promissory or misleading statement or claim in any communication” nor “publish, circulate or distribute any communication that the member knows or has reason to know contains any untrue statement of a material fact or is otherwise false or misleading.”

See

FINRA rule 2210(d)(1)(B).

The FAIR Act does not explicitly refer to specific content standards in SRO rules. It refers more generally to “the content standards in the rules of any self-regulatory organization related to research reports, including those contained in the rules governing communications with the public regarding investment companies or substantially similar standards.”

173

In order to provide clarity and facilitate consistent and predictable application of proposed rule 24b-4, we interpret section 2(b)(4) of the FAIR Act as

excluding covered investment fund research reports from section 24(b) of the Investment Company Act so long as they continue to be subject to the general content standards in FINRA rule 2210(d)(1) (or substantially similar SRO rules). Accordingly, by operation of proposed rule 24b-4, covered investment fund research reports under proposed rule 139b that otherwise would be subject to section 24(b) of the Investment Company Act would

not

be subject to that section so long as they remain subject to the general content standards of FINRA rule 2210(d)(1).

174

This interpretation is consistent with our belief that it is important for SRO content standards to continue to apply to covered investment fund research reports, especially if, as discussed below, research reports about registered investment companies would no longer be required to be filed pursuant to section 24(b) of the Act or rule 497 under the Securities Act,

175

and therefore would no longer be subject to routine review.

176

173

Section 2(b)(4) of the FAIR Act.

174

A subset of communications that would fall within the definition of “covered investment fund research report” under proposed rule 139b also would be subject to additional content-related requirements under FINRA rules that are applicable to certain research reports, but that are more narrowly applicable than the general content standards of FINRA rule 2210(d)(1). However, under our interpretation, whether or not these additional content standards apply to any given covered investment fund research report would not determine the applicability of section 24(b) to that research report under proposed rule 24b-4. A different interpretation could lead to results that we believe could be inconsistent with section 2(b)(4) of the FAIR Act (

i.e.,

if only communications that are subject to additional FINRA content standards discussed in this footnote (

e.g.,

those applicable to retail communications) were excluded from section 24(b) filing requirements).

Additional FINRA content-related requirements include the content standards of FINRA rule 2210 that apply only to retail communications (or retail communications and correspondence, as those terms are defined in FINRA rule 2210(a)).

See, e.g.,

FINRA rules 2210(d)(2) (Comparisons), 2210(d)(3) (Disclosure of Member's Name). Accordingly, covered investment fund research reports that would meet the definition of institutional communications would not be subject to some of the content standards of FINRA rule 2210.

These additional requirements also include the content standards incorporated in FINRA rules 2241 and 2242, which apply to certain research reports defined in these FINRA rules. The scope of FINRA rules 2241 and 2242 only includes research reports or debt research reports as defined in these rules, and the definitions of “research report” and “debt research report” in these rules are different than the definitions of “research report” set forth in rule 139 and proposed rule 139b. Under FINRA rule 2241, “research report” is defined as any written (including electronic) communication that includes an analysis of equity securities of individual companies or industries (other than an open-end registered investment company that is not listed or traded on an exchange) and that provides information reasonably sufficient upon which to base an investment decision; similarly, under FINRA rule 2242, “debt research report” is defined as any written (including electronic) communication that includes an analysis of a debt security or an issuer of a debt security and that provides information reasonably sufficient upon which to base an investment decision, excluding communications that solely constitute an equity research report as defined in [FINRA] rule 2241(a)(11).”

See

FINRA rules 2241(a)(11), 2242(a)(3).

175

See infra

discussion at notes 177-181 and accompanying text.

176

Broker-dealer communications that are excluded from, or otherwise not subject to FINRA's filing requirements may still be reviewed by FINRA, for example, through examinations, targeted sweeps or spot-checks. FAIR Act section 2(c)(2) provides that nothing in the Act shall be construed as in any way limiting “the authority of any self-regulatory organization to examine or supervise a member's practices in connection with such member's publication or distribution of a covered investment fund research report for compliance with applicable provisions of the Federal securities laws or self-regulatory organization rules related to research reports, including those contained in rules governing communications with the public.”

see also supra

note 140.

179

See supra

note 29.

180

17 CFR 230.497. Rule 497 generally requires investment company prospectuses, including investment company advertisements deemed to be a section 10(b) prospectus pursuant to rule 482, to be filed with the Commission.

181

See supra

notes 29, 180.

As discussed in the Economic Analysis below, we anticipate that certain communications that historically have been treated as investment company sales literature, including rule 482 “omitting prospectus” advertisements, would be published or distributed by a broker-dealer as covered investment fund research reports pursuant to the rule 139b safe harbor.

182

Such communications that previously had been subject to the filing requirements of section 24(b) no longer would be subject to these requirements by operation of proposed rule 24b-4 because they would be subject to the general content standards of FINRA rule 2210(d)(1).

183

182

See infra

section III.C.3.

183

See supra

notes 11-15 and accompanying text.

A communication that previously had been subject to the filing requirements of rule 497 also would no longer be subject to the rule 497 filing requirements if it were published or distributed by a broker-dealer as a covered investment fund research report, because it would no longer be considered to be a section 10(b) prospectus.

See supra

paragraph accompanying notes 141-146.

FINRA rule 2210 requires the filing of certain communications, including retail communications that promote or recommend a specific registered investment company or family of registered investment companies.

184

However, FINRA provides a number of exclusions from the filing requirements.

185

For example, with respect to research reports (as that term is defined in FINRA rule 2241),

186

FINRA currently excludes from filing those that concern only securities that are listed on a national securities exchange, other than research reports required to be filed with the Commission pursuant to section 24(b) of the Investment Company Act.

187

Because covered investment fund research reports would no longer be required to be filed with the Commission pursuant to section 24(b),

proposed rule 24b-4 could have the effect of narrowing the types of communications that would be filed with FINRA (under current FINRA rule 2210) regarding registered investment companies.

184

See

FINRA rule 2210(c)(3) (broker-dealers must file, within 10 business days of first use or publication, retail communications that promote or recommend a specific registered investment company or family of registered investment companies).

See generally,

FINRA rule 2210(c)(1)-(3). In addition to these FINRA filing requirements, as discussed above, such communications would be required to be filed with the Commission (and are deemed to have been filed with the Commission if filed with FINRA).

See supra

notes 179-181 and accompanying text.

185

See generally

FINRA rule 2210(c)(7).

186

See supra

note 11.

187

See

FINRA rule 2210(c)(7)(O) (excluding “[r]esearch reports as defined in Rule 2241 that concern only securities that are listed on a national securities exchange, other than research reports required to be filed with the Commission pursuant to Section 24(b) of the Investment Company Act”).

We note, however, that the FAIR Act's rules of construction provide that the Act shall not be construed as limiting the authority of an SRO to require the filing of communications with the public if the purpose of such communications “is not to provide research and analysis of covered investment funds.”

188

Therefore, even if the exclusion of covered investment fund research reports from the provisions of section 24(b) affects the applicability of the filing requirements or exclusions under FINRA rule 2210 with respect to covered investment fund research reports, it would not affect FINRA's authority to require the filing of a communication that is included in the FAIR Act's definition of “covered investment fund research report” but whose purpose is not to provide research and analysis. In addition, a covered investment fund research report would continue to be subject to FINRA recordkeeping requirements applicable to communications with the public, even if the broker-dealer would not be required to file the research report with FINRA or the Commission.

189

188

See

section 2(c)(2) of the FAIR Act.

189

See

FINRA rule 2210(b)(4)(A) (requiring members to maintain all retail communications and institutional communications for the retention period required by Exchange Act rule 17a-4(b) and in a format and media that comply with Exchange Act rule 17a-4).

We request comment on issues relating to SRO content standards for covered investment fund research reports.

• Should we implement FAIR Act section 2(b)(4) through proposed rule 24b-4? Are there any modifications to the proposed rule that we should consider?

• Do commenters believe that we should incorporate any of the SRO content standards currently applicable to research reports into rule 139b? If so, which ones and why?

2. SRO Limitations

The FAIR Act directs us to provide that SROs may not maintain or enforce any rule that would (i) prohibit the ability of a member to publish or distribute a covered investment fund research report solely because the member is also participating in a registered offering or other distribution of any securities of such covered investment fund; or (ii) prohibit the ability of a member to participate in a registered offering or other distribution of securities of a covered investment fund solely because the member has published or distributed a covered investment fund research report about such covered investment fund or its securities.

190

These limitations on an SRO and any rules relating to research reports that an SRO might adopt would not affect the safe harbor provided by proposed rule 139b. To provide additional context for the proposed safe harbor, however, and in light of Congress's direction that we provide these limitations in implementing the rulemaking required by the FAIR Act, we have set forth these SRO limitations in proposed rule 139b.

191

190

Section 2(b)(3) of the FAIR Act.

191

See

proposed rule 139b(b).

E. Conforming Amendment

Rule 101 of Regulation M under the Exchange Act

192

prohibits any person who participates in a distribution from attempting to induce others to purchase securities covered by the rule during a specified period. It provides an exception for certain research activities—namely, the publication or dissemination of any information, opinion, or recommendation—if the conditions of Securities Act rule 138 or rule 139 are satisfied. In light of our proposal of Securities Act rule 139b, we are proposing a corresponding change to the exception contained within rule 101(b)(1) of Regulation M to permit the publication or dissemination of any information, opinion, or recommendation so long as the conditions of proposed rule 139b are satisfied. The proposed conforming amendment is intended to align the treatment of research under proposed rule 139b with the treatment of research under rules 138 and 139 for purposes of Regulation M.

192

17 CFR 242.101(a).

In the absence of the conforming amendment, rule 101 could prevent the publication or dissemination of a covered investment fund research report under the proposed rule 139b safe harbor by a broker-dealer that is participating in a distribution that is covered by Regulation M. We believe that such a result would be contrary to the mandate of the FAIR Act. As such, the proposed conforming amendment is intended to harmonize treatment of research under the Securitie

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