# Covered Investment Fund Research Reports

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A2018-11497

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** June 8, 2018
- **Citation:** 83 FR 26788

## Text

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,
1

we are proposing new rule 139b under the Securities Act of 1933 (the “Securities Act”).
2

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.
3

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.
4

1
Fair Access to Investment Research Act of 2017, Public Law 115-66, 131 Stat. 1196 (2017) (the “FAIR Act”).

2
15 U.S.C. 77a
et seq.

3

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. . . .”).

4

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”),
5

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.
6

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.”
7

5
15 U.S.C. 80a-1
et seq.

6
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.

7

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
8

or rule 139 under the Securities Act) are satisfied.
9

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.
10

8
17 CFR 230.138.

9

See infra
section II.E.

10

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.
11

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.”
12

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.
13

Although the Commission has previously requested comment as to whether to extend rule 139 to cover investment company research reports,
14

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.
15

11
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 of Regulation AC
infra
at notes 57-58. We note that research reports published or distributed by broker-dealers in reliance on the rule 139 safe harbor may also be subject to other rules and regulations under the federal securities laws, including but not limited to Regulation AC, as well as SRO rules governing their content and use, including but not limited to FINRA rules 2210, 2241, and 2242.

12
Rule 139(a) under the Securities Act [17 CFR 230.139(a)].

13
Sections 5(a) and 5(c) of the Securities Act generally prohibit any person (including broker-dealers) from using the mails or interstate commerce as a means to sell or offer to sell, either directly or indirectly, any security unless a registration statement is in effect or has been filed with the Commission as to the offer and sale of such security, or an exemption from the registration provisions applies.
See
15 U.S.C. 77e(a) and (c). Section 5(b)(1) of the Securities Act requires that any “prospectus” relating to a security to which a registration statement has been filed must comply with the requirements of section 10 of the Securities Act.
See
15 U.S.C. 77e(b)(1). Section 5(b)(2) of the Securities Act requires that any sale of securities (or delivery after sale) must be accompanied or preceded by a prospectus meeting the requirements of section 10(a) of the Securities Act.
See
15 U.S.C. 77e(b)(2).

14

See
Securities Offering Reform, Securities Act Release No. 8501 (Nov. 3, 2004) [69 FR 67391 (Nov. 17, 2004)] (“Securities Offering Reform Proposing Release”).

15
For example, rule 139 is available for research reports regarding issuers that meet the registrant requirements for securities offerings on Form S-3 or Form F-3.
See
rule 139(a)(1)(i)(A)(
1
). To the extent that commodity- or currency-based trusts or funds (as defined in section I.B below) register their securities offering pursuant to the Securities Act and meet the eligibility requirements of Form S-3 or F-3, as well as the other conditions of rule 139, the rule 139 safe harbor would be currently available for a broker-dealer's publication or distribution of research reports pertaining to these issuers.

However, covered investment funds that are registered investment companies and business development companies are not able to register their securities offerings on Form S-3 or Form F-3. Registered investment companies register their securities offerings on forms such as Forms N-1A, N-2, N-3, N-4, and N-6. Publicly-traded business development companies register their securities offerings on Form N-2. However, section 2(a)(3) of the Securities Act provides a safe harbor for broker-dealers with respect to research reports about “emerging growth companies,” as defined in section 2(a)(19) of the Securities Act. Broker-dealers may therefore currently rely on the section (2)(a)(3) safe harbor with respect to research reports about business development companies that are emerging growth companies.

B. FAIR Act

The FAIR Act directs us to propose and adopt rule amendments that would extend the current safe harbor available under rule 139 to a “covered investment fund research report.”
16

The FAIR Act also directs that these amendments shall be “upon such terms, conditions, or requirements as the Commission may determine necessary or appropriate in the public interest, for the protection of

investors, and for the promotion of capital formation.”
17

16

See
section 2(a) of the FAIR Act.

17

See id.

Under the FAIR Act, a “covered investment fund research report” is generally a research report published or distributed by a broker-dealer about a covered investment fund or any of the covered investment fund's securities.
18

The term “covered investment fund” under the FAIR Act includes registered investment companies and business development companies.
19

The term also includes other persons issuing securities in an offering registered under the Securities Act (i) whose securities are listed for trading on a national securities exchange, (ii) whose assets consist primarily of commodities, currencies, or derivative instruments that reference commodities or currencies or interests in the foregoing, and (iii) whose registration statement reflects that its securities are purchased or redeemed, subject to certain conditions or limitations, for a ratable share of its assets (such exchange-listed funds or trusts, “commodity- or currency-based trusts or funds”).
20

However, a “covered investment fund research report” excludes research reports published or distributed by the covered investment fund
itself,
any affiliate of the covered investment fund, or any broker-dealer that is an investment adviser (or an affiliated person of the investment adviser) to the covered investment fund.
21

18

See id.
at section 2(f)(3).
But see infra
note 21 and accompanying text (noting that the definition of “covered investment fund research report” excludes research reports 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).

19

See id.
at section 2(f)(2)(A).

20

See id.
at section 2(f)(2)(B).

21
The FAIR Act definition of “covered investment fund research report” uses the term “affiliate” in connection with a covered investment fund and “affiliated person” in connection with an investment adviser.
See
section 2(f)(3) of the FAIR Act.

The FAIR Act includes a definition for the term “affiliated person,” but not “affiliate.” Because the FAIR Act directs the Commission to revise rule 139 under the Securities Act, we interpret the reference to the term “affiliate” in the definition of “covered investment fund research report” to refer to the term “affiliate” as it would be interpreted under rule 139, which we believe is by reference to rule 405 under the Securities Act. (We believe this to be the case because, for example, rule 139 is available for research reports regarding issuers that register their securities on Form S-3 or F-3 (or that meet the registrant requirements to register their securities offerings on Form S-3 or Form F-3) and that meet the minimum float provisions of General Instruction I.B.1 of such forms.
See
rule 139(a)(1)(i)(A)(
1
)(
i
). General Instruction I.B.1, in turn, refers to the definition of “affiliate” in Securities Act rule 405.) Under rule 405, the term “affiliate” means an affiliate of, or person affiliated with, a specified person, is a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the person specified.
See
rule 405 under the Securities Act [17 CFR 230.405]. The FAIR Act defines “affiliated person” as having the meaning given the term in section 2(a) of the Investment Company Act.
See
section 2(f)(1) of the FAIR Act. Section 2(a) of the Investment Company Act defines an “affiliated person” as: (A) Any person directly or indirectly owning, controlling, or holding with power to vote, five per centum or more of the outstanding voting securities of such other person; (B) any person five per centum or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by such other person; (C) any person directly or indirectly controlling, controlled by, or under common control with, such other person; (D) any officer, director, partner, copartner, or employee of such other person; (E) if such other person is an investment company, any investment adviser thereof or any member of an advisory board thereof; and (F) if such other person is an unincorporated investment company not having a board of directors, the depositor thereof.

The FAIR Act directs us to address the application of certain aspects of current rule 139 to covered investment fund research reports. For example, one of the conditions for using the rule 139 safe harbor for research reports about a specific issuer is that the broker-dealer's publication or distribution of the research report must “not represent the initiation of publication of research reports about such issuer or its securities or reinitiation of such publication following discontinuation of publication of such research reports.”
22

Because many covered investment funds continuously offer their shares for sale (as opposed to engaging in an offering over a discrete period of time), it is difficult for a broker-dealer participating in such a continuous offering to satisfy this condition. In light of this, the FAIR Act prescribes that our extension of the rule 139 safe harbor, with respect to research reports in an offering of covered investment funds that are in “substantially continuous distribution,” cannot be conditioned on whether the broker-dealer's publication or distribution of such research reports constitutes initiation or reinitiation of research about the covered investment fund or its securities.
23

22

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

23

See
section 2(b)(1) of the FAIR Act.

The FAIR Act also permits us to impose conditions on covered investment fund research reports that are similar to the conditions imposed under rule 139.
24

We may set a minimum public float requirement for covered investment funds but may not require a minimum public float that is greater than what is required under rule 139 (currently, $75 million).
25

Similarly, we may set a reporting history requirement for covered investment funds, but may not require a reporting history period for longer than what is required under rule 139 (currently, the 12 months preceding the time of the broker-dealer's first reliance on the rule 139 safe harbor).
26

Moreover, as noted above, we may impose additional conditions that we determine to be necessary or appropriate in the public interest, for the protection of investors, and for the promotion of capital formation.
27

24

See infra
notes 25-27.

25

See
section 2(b)(2)(B) of the FAIR Act.

26

Id.
at section 2(b)(2)(A).

27

See supra
note 17 and accompanying text.

Finally, the FAIR Act includes provisions concerning the ability of SROs to impose requirements on the use and filing of covered investment fund research reports.
28

First, the FAIR Act directs us to provide that covered investment fund research reports will not be subject to section 24(b) of the Investment Company Act and the rules and regulations thereunder,
29

except to the extent that such reports are otherwise not subject to the content standards in the rules of any SRO related to research reports, including those contained in the rules governing communications with the public regarding investment companies or substantially similar standards.
30

The FAIR Act also requires us to provide that SROs: (i) Cannot prohibit the ability of a broker-dealer to publish or distribute a covered investment fund

research report solely because the broker-dealer is participating in a registered offering or other distribution of any securities of the covered investment fund; and (ii) cannot prohibit the ability of a broker-dealer to participate in a registered offering or other distribution of securities of the covered investment fund solely because the broker-dealer has published or distributed a research report about that covered investment fund or its securities.
31

28

See
sections 2(b)(3)-(4), 2(c)(2) of the FAIR Act;
see also
discussion at text accompanying notes 29-31
infra.

29
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.

30

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.

31

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,
32

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

32
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.
33

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.
34

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.

33

See, e.g., infra
section II.A.1 (discussing the “affiliate exclusion” (defined below)).

34

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”).
35

Proposed rule 139b incorporates the same definition as is set forth in the FAIR Act.
36

35

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

36

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.
37

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.

37
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.
38

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.
39

38

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)].

39
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
40

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?

40

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).
41

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,
42

these additional rules and regulations would not necessarily be applicable with respect to all covered investment fund research reports under proposed rule 139b.
43

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?

41

See supra
note 37 and accompanying text;
see also infra
paragraphs accompanying notes 262-269.

42

See id.

43
For example, as discussed above, there are differences in how the FAIR Act and proposed rule 139b, and other rules and regulations, define the term “research report,” and therefore the scope of other rules and regulations that govern broker-dealers' publication and distribution of research reports does not correspond in every respect to the scope of proposed rule 139b.
See infra
section II.A.2 (discussing the definition of “research report” in proposed rule 139b);
see supra
note 11 (discussing the differences in the definition of “research report” in Regulation AC and FINRA rules 2241 and 2242).

• Alternatively, should we require broker-dealers that rely on proposed rule 139b to maintain policies and procedures designed to mitigate conflicts that are raised by the distribution of covered investment funds (in particular, covered investment funds that are registered investment companies) and not addressed by the Commission's rules or SRO rules (such as FINRA rules 2241 and 2242)? To the extent that Commission and SRO rules do not require disclosure of conflicts of interest in covered investment fund research reports, should we require broker-dealers that rely on the proposed rule 139b safe harbor to disclose conflicts of interest in a salient way in covered investment fund research reports? If so, what should the content and format requirements be with respect to such disclosure?

2. Definition of “Research Report”

We are proposing to define the term “research report” in rule 139b as a written communication, as defined in rule 405 under the Securities Act, 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.
44

This definition is identical to the corresponding definition of “research report” in rule 139.
45

We are not proposing to include a definition of “research report” in rule 139b that is identical to that in the FAIR Act for two reasons, discussed in more detail below. First, we believe that the definition we propose is consistent with the FAIR Act, because we would interpret it to have

the same meaning as the definition of “research report” in the FAIR Act.
46

Second, we believe that proposing a definition of “research report” in rule 139b that is identical to the existing definition of “research report” in rule 139 would reduce potential interpretive confusion for market participants who are familiar with the rule 139 definition.

44

See
proposed rule 139b(c)(6).

Rule 405 defines “written communication” to mean that “[e]xcept as otherwise specifically provided or the context otherwise requires, a written communication is any communication that is written, printed, a radio or television broadcast, or a graphic communication as defined in [rule 405].” 17 CFR 230.405.

45

See
rule 139(d) [17 CFR 230.139(d)]. Rule 139 defines “research report” to mean “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.”
See
rule 139(d) [17 CFR 230.139(d)]. A “written communication,” as defined in rule 405, includes a “graphic communication.” As further defined in rule 405, a “graphic communication” includes all forms of electronic media, including electronic communications except those, which at the time of the communication, originate in real-time to a live audience and does not originate in recorded form or otherwise as a graphic communication, although it is transmitted through graphic means.
See
rule 405 [17 CFR 230.405].

46

See infra
notes 49-50 and accompanying text.

The FAIR Act defines the term “research report” as having the meaning given to that term under section 2(a)(3) of the Securities Act but specifies that the term “shall not include an oral communication.”
47

Section 2(a)(3) of the Securities Act, in turn, defines “research report” to mean “a written, electronic, or oral communication 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.”
48

47

See
section 2(f)(6) of the FAIR Act.

48
15 U.S.C. 77b(a)(3).

The proposed rule 139b definition of “research report” tracks the FAIR Act definition of “research report,” except that while it does include “electronic communications,” it does not expressly reference that term. For the following reasons, we believe that this difference would have no effect on the types of communications that would qualify as research reports under the proposed safe harbor. Current Commission rules make clear that all electronic communications (other than telephone and other live communications) are graphic and, therefore, written communications for purposes of the Securities Act.
49

Therefore, the proposed rule 139b definition's reference to a “written communication,” as defined in rule 405, would include a “graphic communication,” which in turn would include electronic communications (other than telephone and other live communications).
50

49

See
Securities Offering Reform Adopting Release,
supra
note 39, at nn.96-97 and accompanying text;
infra
note 50. Among other things, the Securities Offering Reform Adopting Release amended the definition of “research report” in rule 139 to make clear that it continues to apply to information, opinions, or recommendations contained in written communications.
See id.,
at text following n.363.

As the Commission noted in the Securities Offering Reform Adopting Release, the intention of addressing electronic communications under the Securities Act is “to encompass new technologies . . . [and] promote consistent understanding of what constitutes such a communication in view of the technological developments.”
See
Securities Offering Reform Adopting Release,
supra
note 39, at 44732.

50

See supra
note 45 (discussing the current definition of “research report” in rule 139, which references a “written communication” as defined in rule 405, which definition in turn incorporates the term “graphic communication”).

By using the same definition of “research report” in rule 139 and proposed rule 139b we avoid creating ambiguity that may result if market participants are unable to understand, based on the text of the rules, that the term “research report,” though defined in two different ways, would be interpreted identically.

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

• Should we use the definition of “research report” in rule 139 as we have proposed rather than as specified in the FAIR Act? Is our proposed approach appropriate? Is defining “research report” as proposed consistent with section 2(f)(6) of the FAIR Act? Would the proposed definition of “research report” have the intended result of assuring that the definitions of “research report” under the FAIR Act and rule 139b would be interpreted identically? Why or why not?

• Instead of using the rule 139 definition of “research report,” as proposed, would it be preferable for the Commission to incorporate the FAIR Act definition of “research report” into proposed rule 139b? If so, why?

• What, if any, additional modifications to the proposed definition of “research report” would promote clarity? Should we incorporate any additional modifications to the proposed definition for any other purpose?

3. Definition of “Covered Investment Fund”

The FAIR Act defines the term “covered investment fund” to include registered investment companies, business development companies, and certain commodity- or currency-based trusts or funds.
51

We are proposing to define the term “covered investment fund” in rule 139b in substantially the same manner as the FAIR Act, with the addition that we propose to specify in this definition that the term “investment company” includes “a series or class thereof.”
52

51

See supra
notes 19-20 and accompanying text. Based on the definition in section 2(f)(2) of the FAIR Act, the term “covered investment fund” would not include an investment company that is registered solely under the Investment Company Act, such as certain master funds in a master-feeder structure.
See id.

52

See
proposed rule 139b(c)(2). This approach reflects the approach taken in other Commission rules that define the term “fund” to include a separate series of an investment company.
See, e.g.,
rule 22e-4(a)(4) under the Investment Company Act [17 CFR 270.22e-4(a)(4)]; rule 22c-1(a)(3)(v)(A) under the Investment Company Act [17 CFR 270.22c-1(a)(3)(v)(A)] (effective Nov. 19, 2018).

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

• Should we define “covered investment fund” substantially the same as this term is defined in the FAIR Act as proposed? Why or why not? Should we specify in the definition, as proposed, that the term “investment company” includes a “series or class thereof”? What modifications, if any, to this definition do commenters recommend?

• Are there any types of funds, trusts, or other pooled investment vehicles that would not be included within the proposed definition of “covered investment fund” that we should consider including in the definition? If so, why?

4. Non-Exclusivity of Safe Harbor

Broker-dealers publishing or distributing research reports for some covered investment funds, such as commodity- or currency-based trusts or funds that have a class of securities registered under the Exchange Act, may be able to rely on existing rule 139.
53

We do not intend for proposed rule 139b to preclude a broker-dealer from relying on existing rule 139 where appropriate. In order to clarify that a broker-dealer may rely on existing research safe harbors, proposed rule 139b provides that the rule does not affect the availability of any other exemption or exclusion from sections 2(a)(10) or 5(c) of the Securities Act that may be available to a broker-dealer.
54

A broker-dealer therefore would be able to rely on proposed rule 139b to publish or distribute a covered investment fund research report or could choose to rely instead on any other available exemption or exclusion from sections 2(a)(10) or 5(c) of the Securities Act,

including those provided by rules 137,
55

138, and 139, as applicable.

53
Section 803(b)(2)(F) of the Small Business Credit Availability Act, which was enacted on March 23, 2018 as sections 801-803 of the 2018 Consolidated Appropriations Act, directs the Commission to amend rules 138 and 139 to specifically include a business development company as an issuer to which those rules apply. Section 803(b) of the Small Business Credit Availability Act directs the Commission to make these revisions to rules 138 and 139, as well as the other rule revisions that section 803(b)(2) of the Act describes, within one year of enactment, and these revisions would be addressed in a Commission action that is separate from the proposal that this release describes.

54

See
proposed rule 139b(a) (providing, in part, that the rule does not affect the availability of any other exemption or exclusion from sections 2(a)(10) or 5(c) of the Act available to the broker or dealer);
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)).

55
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.
56

To mitigate the risk of research reports being used to circumvent the prospectus requirements of the Securities Act,
57

the Commission has placed conditions on a broker-dealer's publication or distribution of research reports.
58

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”).

56

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”).

57

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).

58
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.
59

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.
60

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

59
Proposed rule 139b(a)(1)-(2).

60

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.
61

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,
62

N-SAR,
63

N-Q,
64

N-PORT,
65

N-MFP,
66

and N-CEN
67

during the immediately preceding 12 months.
68

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
69

and 10-Q
70

and 20-F
71

during the immediately preceding 12 months.
72

The proposed reporting history requirements are consistent with current rule 139.
73

The timeliness

component of the proposed requirement also tracks rule 139.
74

61
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)(
1
), except where expressly permitted by the rules and regulations of the Securities and Exchange Commission under the Federal securities laws.);
see also infra
note 74 and accompanying text (discussing rule 139(a)(1)(i)(A)(
1
)).

62
17 CFR 249.331 and 17 CFR 274.128.

63
17 CFR 249.330 and 17 CFR 274.101.

64
17 CFR 249.332 and 17 CFR 274.130.

65
17 CFR 274.150. Form N-PORT will be filed with the Commission on a monthly basis, but only information reported for the third month of each fund's fiscal quarter on Form N-PORT will be publicly available (and not until 60 days after the end of the fiscal quarter).
See
Investment Company Reporting Modernization, Investment Company Act Release No. 32314 (Oct. 13, 2016) [81 FR 81870 (Nov. 18, 2016)] (“Reporting Modernization Release”). Therefore, we would consider Form N-PORT to have been timely filed for purposes of the proposed timeliness requirement if the public filing of Form N-PORT every third month is timely filed.

66
17 CFR 274.201.

67
17 CFR 249.330 and 17 CFR 274.101.

68
Proposed rule 139b(a)(1)(i)(A)
(1).
Form N-SAR will be rescinded on June 1, 2018, which is the compliance date for Form N-CEN. Form N-Q will be rescinded May 1, 2020. Larger fund groups will begin submitting reports on Form N-PORT by April 30, 2019, and smaller fund groups by April 30, 2020.
See
Reporting Modernization Release,
supra
note 65; Investment Company Reporting Modernization, Investment Company Act Release No. 32936 (Dec. 8, 2017) [82 FR 58731 (Dec. 14, 2017)]. At the time of these compliance dates, covered investment funds would no longer be required to file reports N-SAR and N-Q, and filing these reports would not be required as a condition to rely on the rule 139b safe harbor. Accordingly, we propose that rule 139b, if adopted, would be amended effective May 1, 2020 by removing the reference to Form N-Q.
See infra
section VII (instruction 4 under Text of Proposed Rules and Amendments).

69
17 CFR 249.310.

70
17 CFR 249.308a.

71
17 CFR 249.220f.

72
Proposed rule 139b(a)(1)(i)(A)(
2
).

73
Rule 139(a)(1)(i)(A)(
2
) [17 CFR 230.139(a)(1)(i)(A)(
2
)] (As of the date of reliance on the section, has filed all periodic reports required during the preceding 12 months on Forms 10-K (§ 249.310), 10-Q (§ 249.308a), and 20-F (§ 249.220f) pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)).). In addition, the reporting history requirement is also a consequence of rule 139(a)(1)(i)(A)(
1
), which 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. Rule 139(a)(1)(i)(A)(
1
) and (a)(1)(i)(B)(
1
) [17 CFR 230.139(a)(1)(i)(A)(
1
) and (a)(1)(i)(B)(
1
)]. In order to be eligible for registration on Form S-3 or Form F-3, 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
General Instruction I.A.3(a) to Form S-3 and General Instruction I.A.2 to Form F-3.

74
The timely reporting component in rule 139 is a consequence of the rule 139 requirement that issuers be eligible to register on Form S-3 or Form F-3.
See supra
note 73 (discussing rule 139(a)(1)(i)(A)(
1
));
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.
75

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.
76

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.
77

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.
78

75

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.

76

See, e.g.,
Securities Offering Reform Proposing Release,
supra
note 14.

77
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)(
1
).
See supra
note 26.

The reporting history period required under rule 139(a)(1)(i)(A)(
1
) 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)(
1
) 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)(
2
) 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.

78

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.
79

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.

79
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,
80

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?

80

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,
81

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

traded fund (“ETF”)),
82

must equal or exceed the aggregate market value required by General Instruction I.B.1 to Form S-3.
83

This amount is currently $75 million.
84

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.
85

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.
86

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.
87

81
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).

82

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).

83
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).

84
General Instruction I.B.1 to Form S-3.

85

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.

86

See
proposed rule 139b(a)(1)(i)(B); rule 139(a)(1)(i)(A)(
1
)(
i
) and (a)(1)(i)(B)(
2
)(
i
) [17 CFR 230.139(a)(1)(i)(A)(
1
)(
i
) and (a)(1)(i)(B)(
2
)(
i
)]. 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.

87

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.
88

We continue to view as significant the relationship between public float, information dissemination to the market, and following by investment institutions.
89

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).
90

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.
91

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.
92

88

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).

89

See, e.g.,
S-3 Revisions Adopting Release,
supra
note 75.

90

See infra
section III.C.2.c.

91

See infra
discussion following note 299.

92

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?
93

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?
94

93

See supra
note 83.

94

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”
95

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

95
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).
96

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.”
97

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.
98

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.

96
Rule 139(a)(1)(iii) [17 CFR 230.139(a)(1)(iii)].

97
Section 2(b)(1) of the FAIR Act.

98

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.
99

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.”

99

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

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

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
The Regulation of Securities Offerings, Securities Act Release No. 7607A (Nov. 13, 1998) [63 FR 67174 (Dec. 4, 1998)] (proposal to modernize and clarify the regulatory structure for offerings under the Securities Act of 1933).

We note that, in some cases, concerns about market conditioning in the context of research reports about covered investment funds may be substantially similar to these concerns in the context of operating company issuers. For example, for covered investment funds that are not in continuous distribution, “gun-jumping” concerns,
i.e.,
the failure to comply with restrictions on communications when a securities offering is being contemplated or is in process (similar to those that are applicable to operating companies) could be applicable. For covered investment funds that are in continuous distribution, on the other hand, we understand the role of the conditions of rule 139b more generally as to help mitigate the risk that research reports could be used to circumvent the Securities Act's prospectus requirements.

120

See
1983 Proposing Release,
supra
note 119. As a corollary, the Commission has noted that “The opportunity for the abuses Section 5 was enacted to correct may still be present, however, where a research report covers only a few companies constituting a sub-industry group or where an entire industry is composed of a small number of companies.”
See id.

Accordingly, we are proposing to replicate the language from rule 139's industry representation requirement in rule 139b, with modifications designed to apply the language to the covered investment fund context. Under rule 139's corresponding requirement, an industry research report must include “similar information with respect to a substantial number of issuers in the issuer's industry or sub-industry.”
121

When this section of rule 139 first was proposed, the Commission explained that the term “industry” in this context refers to a broad category of similar businesses, such as the airline or steel

industries.
122

In adopting the rule, the Commission added “sub-industry” to the rule text in order to clarify that the safe harbor would apply to research reports covering a smaller number of companies in a particular industry.
123

While operating companies are typically grouped based on their business category, entities that are included in the definition of “covered investment fund” are typically grouped based either on their type or investment focus.
124

Therefore, the proposed industry representation requirement would require an industry research report to include similar information about a substantial number of issuers either of the same type (
e.g.,
ETFs or mutual funds that are large cap funds, bond funds, balanced funds, money market funds, etc.) or investment focus (
e.g.,
primarily invested in the same industry or sub-industry, or the same country or geographic region).
125

We believe that this proposed requirement tracks rule 139 to the extent practicable and appropriate.

121
Rule 139(a)(2)(iii) [17 CFR 230.139(a)(2)(iii)].

122
1983 Proposing Release,
supra
note 119.

123
1984 Adopting Release,
supra
note 56.

124

See
Investment Company Names, Investment Company Act Release No. 24828 (Jan. 17, 2001) [66 FR 8509 (Feb. 1, 2001)] (registered investment companies are typically categorized based on industry (
e.g.,
sector funds or country or geographic region)).

125
Proposed rule 139b(a)(2)(ii)(A).

Comprehensive List Requirement

Under the proposed rule, a broker-dealer's publication or distribution of an industry research report that conforms to the comprehensive list requirement, rather than the industry representation requirement, also would be eligible for the rule's safe harbor.
126

Rule 139 contains a similar provision,
127

and we are proposing to replicate the language from rule 139's comprehensive list requirement in rule 139b, with some modifications owing to the difference in context and the FAIR Act's affiliate exclusion.
128

126
Proposed rule 139b(a)(2)(ii)(B).

127
Rule 139(a)(2)(iii) [17 CFR 230.139(a)(2)(iii)].

128
Proposed rule 139b(a)(2)(ii)(B).

Like the proposed industry representation requirement, the proposed comprehensive list requirement is designed to result in industry research reports that cover a broad range of investment companies or securities.
129

We are proposing that a comprehensive list of recommended issuers appearing in an industry research report could not include any covered investment fund issuer that is an affiliate of the broker-dealer, or for which the broker-dealer serves as investment adviser (or is an affiliated person of the investment adviser), as this could implicate the proposed affiliate exclusion.
130

As discussed in the context of the proposed industry representation requirement, we believe that including a broad range of issuers in a research report lessens concerns over market conditioning.
131

At the same time, the proposed comprehensive list requirement would permit a different presentation of research about multiple covered investment funds than the industry representation requirement would permit.
132

We understand that the two types of presentations could serve different research needs.

129
1983 Proposing Release,
supra
note 119. We note that when the Commission originally adopted rule 139 in 1970, this rule
only
provided a safe harbor for research reports that included “a comprehensive list of securities, opinions or recommendations concerning the issuer” and did not provide a parallel safe harbor for issuer-specific research reports.
See
1970 Adopting Release,
supra
note 99.

130

See
proposed rule 139b(a)(2)(ii)(B) (excluding from the comprehensive list securities of a covered investment fund that is an affiliate of the broker or dealer, or for which the broker or dealer serves as investment adviser (or for which the broker or dealer is an affiliated person of the investment adviser));
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
requests for comment
infra
at the end of this section II.B.2.c (requesting comment on how these types of research reports might be used and the content that would be included in each type of research report).

We request comment on the proposed content requirements for industry research reports.

• Are the proposed industry representation requirement and the proposed comprehensive list requirement appropriate? Why or why not?

• How would the publication or distribution of industry research reports help investors, and do commenters anticipate that industry research reports would be published or distributed more or less frequently than issuer-specific research reports? Do commenters anticipate that broker-dealers would be more likely to publish or distribute industry research reports that comply with the industry representation requirement, or alternatively the comprehensive list requirement, or both, in relying on the proposed rule 139b safe harbor?

• Are there other conditions that we should consider in addition to the proposed industry representation requirement and the proposed comprehensive list requirement? For example, should we require that there must be a minimum number of funds included in an industry research report for it to qualify under the industry representation requirement, particularly in light of the fact that there may be only a few funds that track a particular sub-industry or geographic region or country? If so, what should that minimum number be? Is there another approach to industry research report content requirements that would be more appropriately tailored to covered investment fund research reports?

• The proposed industry representation requirement would be based on the “type” or “investment focus” of the issuers covered in the research report. Are these the appropriate terms to achieve comparisons of similar entities in industry research reports? Why or why not? Are there other more appropriate terms that could be used to specify subsets of covered investment funds that would be included in industry research reports (
e.g.,
category, asset class, strategy, topic, or investment policy)? Should we include more specific definitions for the terms “type” and “investment focus” in rule 139b, and if so, what should these definitions be? Should we instead identify categories that can qualify for the industry report provisions, such as “legal structure” (
e.g.,
ETF, mutual fund, business development company, interval fund), “asset class” (
e.g.,
international equity, domestic equity, international fixed income, domestic fixed income), “investment focus” (
e.g.,
sector, industry, sub-industry, geographic region), or “strategy” (
e.g.,
passive, active, market-cap-weighted, smart beta, capital preservation, capital appreciation)?

• The proposed comprehensive list requirement would require the research report to contain a list of covered investment funds that are “currently recommended” by the broker-dealer. Is it clear what is meant by the terms “comprehensive list” and “currently recommended” under proposed rule 139b? Would broker-dealers seeking to rely on the proposed safe harbor understand that we interpret these terms in the context of rule 139b to have the same meaning as they do in the context of rule 139? For example, would the term “currently recommended” be interpreted as meaning “available for sale by the broker-dealer,” “given a `buy' recommendation by the broker-dealer,” or something else? Should we further define either of the terms “comprehensive list” or “currently

recommended” as they appear in rule 139b (or, within rule 139b, as these terms apply to certain types of covered investment funds such as registered investment companies), and if so, how?

• Do commenters anticipate that, if a broker-dealer were to rely on the proposed rule 139b safe harbor to publish or distribute research reports that meet the proposed comprehensive list requirement, there would be a sufficient number of “currently recommended” covered investment funds to produce an appropriately broad array of funds included in the report given the affiliate exclusion?

• We are proposing that a comprehensive list could not include any covered investment fund issuer that is an affiliate of the broker-dealer, or for which the broker-dealer serves as investment adviser (or is an affiliated person of the investment adviser), as this could implicate the proposed affiliate exclusion. Should rule 139b instead provide that a comprehensive list of recommended issuers could include issuers that are affiliates of the broker-dealer that is publishing or distributing the research report under certain circumstances? If so, what information, if any, should a broker-dealer be permitted to include about affiliated issuers such that the list can be described as “comprehensive” while continuing to address the goals of the affiliate exclusion? For example, should the rule provide that these issuers could be included in a comprehensive list if the research report were to identify which issuers in the list, if any, were affiliated with the broker-dealer? In addition, or in the alternative, should we permit these issuers to be included in a comprehensive list if disclosure about the affiliated issuers were limited, for example, to basic identifying information such as the name of the covered investment fund, its type and investment focus, and its ticker symbol (if applicable)? As another example, should the rule require that if a comprehensive list includes affiliated issuers and includes performance information, the performance information must be presented in accordance with rule 482 in order to address the concern that the broker-dealer may be incentivized to present more favorably the performance of its affiliated covered investment funds?
133

133

See infra
section 0.

d. Presentation Requirement for Industry Research Reports

Proposed rule 139b also would condition the safe harbor for industry research reports on a presentation requirement. Under the proposed rule, analysis of any covered investment fund issuer or its securities included in an industry research report could not be given materially greater space or prominence in the publication than that given to any other covered investment fund issuer or its securities.
134

134
Proposed rule 139b(a)(2)(iii).

The proposed presentation requirement tracks a parallel “no greater space or prominence” requirement in rule 139.
135

The Commission has stated that the “no greater space or prominence” language is necessary to mitigate the risk of conditioning the market
136

but also that the materiality standard within this presentation requirement provides flexibility.
137

We believe that the concerns underlying the rule 139 presentation requirements apply equally in the context of covered investment fund research reports. We believe that, if the proposed rule were to permit a broker-dealer to rely on the safe harbor even if it were to publish or distribute an industry research report that gives materially greater space or prominence to one issuer than to others, this would create an avenue for circumventing the conditions associated with issuer-specific research reports. The industry should already be familiar with this long-established and well-understood condition, and therefore we believe implementing a similar presentation condition for industry research reports on covered investment funds would be straightforward.

135
Rule 139(a)(2)(iv) [17 CFR 230.139(a)(2)(iv)].

136
1983 Proposing Release,
supra
note 119.

137

Id.

We request comment on the proposed presentation requirement for industry research reports.

• Is the proposed presentation requirement appropriate for covered investment fund industry research reports? Why or why not?

• Is the proposed presentation requirement sufficiently clear? Should we provide guidance as to what compliance with this requirement would entail?

• Would this requirement unduly restrict design flexibility for research reports, or impede broker-dealers' ability to provide material information in research reports?

• Should we consider additional presentation requirements for covered investment fund research reports? Is there another approach that would be more appropriately tailored?

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

Specific statutory provisions and rules apply to advertising the performance of registered investment companies.
138

An advertisement about a covered investment fund that is a registered investment company is deemed 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 so long as it complies with rule 482.
139

Therefore, under the current regulatory framework, a broker-dealer's publication or distribution of a research report that complies with the requirements of rule 482 would not be deemed a non-conforming prospectus in violation of section 5 of the Securities Act.
140

138

See, e.g.,
section 24(g) of the Investment Company Act [15 U.S.C. 80a-24(g)] (directing the Commission to adopt rules or regulations that permit registered investment companies to use prospectuses that (i) include information the substance of which is not included in the statutory prospectus, and (ii) are deemed to be permitted by section 10(b) of the Securities Act); rule 34b-1 under the Investment Company Act [17 CFR 270.34b-1] (requiring that, in order not to be misleading, investment company sales literature must include certain information, including with respect to performance information by incorporating certain related provisions of rule 482 of the Securities Act); rule 156 of the Securities Act [17 CFR 230.156] (providing guidance on what statements or omissions of material fact may be misleading in investment company sales literature); rule 482 of the Securities Act [17 CFR 230.482] (setting forth that for an investment company advertisement to be deemed a prospectus under section 10(b) of the Securities Act, it must meet certain requirements thereunder, including with respect to standardized performance information presentation).

139

See supra
note 101 and accompanying text.

140

See supra
notes 13, 101 and accompanying text. FINRA content standards also would generally require a member's publication or distribution of such a communication (to the extent it presents performance data as permitted by rule 482) to include certain of the standardized performance information specified under rule 482.
See
FINRA rule 2210(d)(5)(A).

Given the breadth of the definition of “research report” under the FAIR Act (and the definition of “research report” that we propose under rule 139b), certain communications by broker-dealers that historically have been treated as advertisements for registered investment companies under rule 482 now could be considered covered investment fund research reports subject to the proposed rule 139b safe harbor.
141

Among other things, rule 482 requires standardized presentation of performance data included in registered open-end investment company

advertisements.
142

Alternatively, if other performance measures are presented, they must be accompanied by certain standardized performance data.
143

Because a broker-dealer's publication or distribution of a covered investment fund research report under proposed rule 139b would be deemed not to constitute an offer for purposes of sections 2(a)(10) and 5(c) of the Securities Act, a covered investment fund research report would no longer need to be deemed to be a section 10(b) prospectus (such as an advertising prospectus under rule 482) for purposes of section 5(b)(1) of the Securities Act. In addition, some communications that previously were considered supplemental sales literature that must be accompanied or preceded by a statutory prospectus under rule 34b-1 under the Investment Company Act now could be considered covered investment fund research reports (which need not be preceded or accompanied by a statutory prospectus).
144

Rule 34b-1 incorporates many of the rule 482 requirements relating to performance disclosure and makes these requirements applicable to supplemental sales literature.
145

We are concerned that this shift in regulatory treatment of research reports about registered investment companies could result in investor confusion if a communication were not easily recognizable as research as opposed to an advertising prospectus or supplemental sales literature. Although there are multiple provisions in proposed rule 139b that aim to limit the risk that broker-dealers could use the proposed safe harbor to circumvent the prospectus requirements of the Securities Act,
146

there could be circumstances where, under the proposed rule, broker-dealers could publish or distribute communications that historically have been viewed as registered investment company advertisements or selling materials.

141

See supra
note 102 and accompanying text.

142

See
rule 482(d)(1)-(4) (for open-end investment companies other than money market funds) and rule 482(e) (for money market funds).

143

See
rule 482(d)(5). These other performance measures are not subject to any prescribed method of computation, but must reflect all elements of return and be accompanied by quotations of standardized measures of total return as provided for in paragraphs (d)(3) and (d)(4) of the rule. Rule 482(d)(5) also includes other requirements for the inclusion of non-standardized performance data, such as presentation and prominence requirements.

144

See
rule 34b-1 under the Investment Company Act. Rule 34b-1 provides that any advertisement, pamphlet, circular, form letter, or other sales literature addressed to or intended for distribution to prospective investors that is required to be filed with the Commission by section 24(b) of the Investment Company Act will have omitted to state a fact necessary in order to make the statements made therein not materially misleading unless it includes certain specified information.

145

See
rule 34b-1(b)(1)-(2).

146

See, e.g., supra
sections II.A.1 (affiliate exclusion) and II.B.1.c (regular course of business requirement). Certain covered investment fund research reports that meet the definition of “research report” in Regulation AC would be subject to the requirements of Regulation AC. Similarly, covered investment fund research reports that meet the definition of “research report” in FINRA rule 2241 or the definition of “debt research report” in FINRA rule 2242 would be subject to the content requirements in those rules as applicable.
See supra
note 58;
infra
section II.D.1.

Research reports published under rule 139 are not required to present performance information in any particular fashion. To the extent the rules we

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2018-11497. Public record. Not legal advice.