# Covered Investment Fund Research Reports

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A2018-26613

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** December 13, 2018
- **Citation:** 83 FR 64180

## Text

SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 230, 242, 249, and 270
[Release Nos. 33-10580; 34-84710; IC-33311; File No. S7-11-18]
RIN 3235-AM24
Covered Investment Fund Research Reports

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rules and technical amendment.

SUMMARY:

The Commission is adopting a new rule under the Securities Act of 1933 to 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 in the rule are satisfied, the publication or distribution of a covered investment fund research report 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 adopting a new rule under the Investment Company Act of 1940 to exclude a covered investment fund research report from the coverage of section 24(b) of the Investment Company Act, except to the extent the research report is otherwise not subject to the content standards in self-regulatory organization rules related to research reports. We are also adopting a conforming amendment to rule 101 of Regulation M, and a technical amendment to Form 12b-25.

DATES:

This rule is effective January 14, 2019 except that amendatory instruction 4 amending § 230.139b(a)(1)(i)(A)(
1
) is effective May 1, 2020. Comments regarding the collection of information requirements within the meaning of the Paperwork Reduction Act of 1995 should be received on or before February 11, 2019.

FOR FURTHER INFORMATION CONTACT:

Asaf Barouk, Attorney-Adviser, John Lee, Senior Counsel; Amanda Hollander Wagner, Branch Chief; Thoreau Bartmann, Senior Special Counsel; 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 adopting 17 CFR 230.139b (“new rule 139b”) under the Securities Act of 1933 [15 U.S.C. 77a
et seq.
]; 17 CFR 270.24b-4 (“new rule 24b-4”) under the Investment Company Act of 1940 [15 U.S.C. 80a-1
et seq.
]; a conforming amendment to 17 CFR 242.101(a) (rule 101) of Regulation M [17 CFR 242.100-242.105]; and a technical amendment to Form 12b-25 under the Securities Exchange Act of 1934 [15 U.S.C. 78a
et seq.
].

Table of Contents

I. Introduction

II. Discussion

A. Scope of 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 and Technical Amendments

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. Rule 139b

3. Rule 24b-4

4. Amendments to Rule 101 of Regulation M and Form 12b-25

5. Effects on Efficiency, Competition, and Capital Formation

6. Alternatives Considered

IV. Paperwork Reduction Act

V. Final Regulatory Flexibility Act Analysis

A. Need for, and Objectives of, the Rules and Rule Amendments

B. Significant Issues Raised by Public Comments

C. Small Entities Subject to the Rules

D. Reporting, Recordkeeping, and Other Compliance Requirements

E. Agency Action To Minimize Effect on Small Entities

VI. Statutory Authority

I. Introduction

As directed by the Fair Access to Investment Research Act of 2017,
1

we are adopting new rule 139b
2

under the Securities Act of 1933 (the “Securities Act”) to extend the current safe harbor available under rule 139 to a “covered investment fund research report.”
3

Rule 139 provides a safe harbor for the publication or distribution of research reports
4

concerning one or more issuers by a broker or dealer (a “broker-dealer”) participating in a registered offering of one of the covered issuers' securities.
5

Rule 139'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 (“BDCs”).
6

The

FAIR Act requires us to revise rule 139 to extend the safe harbor to broker-dealers' publication or distribution of covered investment funds upon such terms, conditions, or requirements, as we may determine necessary or appropriate in the public interest, for the protection of investors, and for the promotion of capital formation.
7

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

2

See
Covered Investment Fund Research Reports, Securities Act Release No. 10498 (May 23, 2018) [83 FR 26788 (June 8, 2018)] (“Proposing Release”).

3

See
section 2(a) of the FAIR Act;
see also
Proposing Release,
supra
note 2, at section I.B. The FAIR Act also includes an interim effectiveness provision that became effective as of July 3, 2018 and by its terms will terminate upon the adoption of new rule 139b.
See
section 2(d) of the FAIR Act.

4

See
Proposing Release,
supra
note 2, at 26789 n.11 and accompanying text.
See also infra
notes 5-6.

5
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.” Rule 139(a) under the Securities Act [17 CFR 230.139(a)]. A broker-dealer's publication or distribution of a research report in reliance on rule 139 would therefore be deemed not to constitute an offer that otherwise could be a non-conforming prospectus in violation of section 5 of the Securities Act. 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).

6
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
). In contrast, registered investment companies register their securities offerings on forms such as Forms N-1A, N-2, N-3, N-4, and N-6. To the extent that commodity- or currency-based trusts or funds (as defined in section II.A.3 below) register their securities offering under the Securities Act and meet the eligibility requirements of Forms S-3 or F-3, as well as the other conditions of rule 139, the rule 139 safe harbor is currently available for a broker-dealer's publication or distribution of research reports pertaining to these issuers.

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 this safe harbor with respect to research reports about BDCs that are emerging growth companies.

7

See
section 2(a) of the FAIR Act.

In May of 2018 we proposed new rules and rule amendments designed to meet the requirements of the FAIR Act. We received seven comment letters on the proposal.
8

Commenters generally supported our proposed implementation of the FAIR Act. However, most commenters requested that we consider eliminating or modifying certain of the conditions in current rule 139, as applied to covered investment fund research reports (such as the minimum public float requirement and the requirement to publish research reports in the regular course of business).
9

Other commenters raised concerns about the potential conflicts of interest that may arise in the context of a broker-dealer's receipt of compensation from covered investment funds included in research reports, and commenters disagreed on the best ways of mitigating these conflicts.
10

Finally, commenters expressed varying views on our request for input on whether research reports that include performance information should be required to present that performance information consistently with the way fund performance must be presented in fund advertisements pursuant to rule 482 and related requirements.
11

8
Comment Letter of Morningstar, Inc. (July 5, 2018) (“Morningstar Comment Letter”); Comment Letter of BlackRock, Inc. (July 9, 2018) (“BlackRock Comment Letter”); Comment Letter of Eversheds Sutherland (US) LLP (July 9, 2018) (“Sutherland Comment Letter”); Comment Letter of Fidelity Investments (July 9, 2018) (“Fidelity Comment Letter”); Comment Letter of the Investment Company Institute (July 9, 2018) (“ICI Comment Letter”); Comment Letter of the Securities Industry and Financial Markets Association (July 9, 2018) (“SIFMA Comment Letter I”); Comment Letter of the Securities Industry and Financial Markets Association (Sept. 14, 2018) (“SIFMA Comment Letter II”).

9

See, e.g.,
SIFMA Comment Letter I; ICI Comment Letter;
see also
BlackRock Comment Letter.

10

See, e.g.,
Morningstar Comment Letter; Fidelity Comment Letter.

11

See, e.g.,
SIFMA Comment Letter I; ICI Comment Letter;
see also
BlackRock Comment Letter.

II. Discussion

Rule 139b's framework is modeled after and generally tracks rule 139. However, rule 139b differs from rule 139 in certain respects. Some of these differences are specifically directed or contemplated by the FAIR Act.
12

Others, 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.
13

For the reasons described below, we believe that the provisions of 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.
14

We believe that maintaining a similar approach in rule 139b to rule 139 with modifications to the extent necessary or appropriate is consistent with the FAIR Act's directive to revise rule 139 to extend the current safe harbor available under rule 139 to broker-dealer's publication or distribution of covered investment fund research reports. We do not believe that the FAIR Act intended for us to make a new or disparate regulatory regime for research reports on covered investment funds that subjects these funds to different conditions where it is not necessary or appropriate for differentiation from research reports on other issuers published under rule 139. Therefore, we have sought to maintain similar treatment and conditions for funds under rule 139b and other issuers subject to rule 139 unless we believed that a deviation was necessary or appropriate for the particular operational or structural characteristics of a type of covered investment fund. In addition to rule 139b, we are also adopting rule 24b-4, a conforming amendment to rule 101 of Regulation M, and a technical amendment to Form 12b-25.
15

12

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

13

See, e.g., infra
section II.B.1.a (discussing reporting history and timeliness requirements for issuer-specific research reports).

14

See supra
note 7 and accompanying text.

15
If any of the provisions of these rules, or the application thereof to any person or circumstance, is held to be invalid, such invalidity shall not affect other provisions or application of such provisions to other persons or circumstances that can be given effect without the invalid provision or application.

A. Scope of Rule 139b

Rule 139b establishes 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.”
16

We define the term “covered investment fund research report,” as well as the “covered investment fund” and “research report” components of this definition.

16
Under the safe harbor, such publication or distribution is 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 is available even if the broker-dealer is participating or may participate in a registered offering of the covered investment fund's securities.

1. Definition of “Covered Investment Fund Research Report”

We are adopting the definition of “covered investment fund research report” as proposed.
17

The definition is consistent with the FAIR Act, which defined the term “covered investment fund research report” to mean a research report published or distributed by a broker-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
18

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
19

of an investment adviser) for the covered investment fund (the “affiliate exclusion”).
20

17

See
rule 139b(c)(3).

18
“Affiliate” is defined in rule 405 under the Securities Act.
See
17 CFR 230.405; Proposing Release,
supra
note 2, at 26790.

19
“Affiliated person” is defined in section 2(a) of the Investment Company Act of 1940 (the “Investment Company Act”).
See
15 U.S.C. 80a-2(a); Proposing Release,
supra
note 2, at 26790; section 2(f)(1) of the FAIR Act and rule 139b(c)(1).

20

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

The affiliate exclusion prohibits two separate categories of research reports from being deemed to be “covered investment fund research reports” under rule 139b's safe harbor. The first category covers research reports published or distributed by the covered investment fund or any affiliate of the covered investment fund. This exclusion prevents 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-dealer that is an investment adviser (or an affiliated

person of an investment adviser) for the covered investment fund.
21

21
Like the first category of exclusion, this second category of exclusion addresses the concern that a person covered by the affiliate exclusion may be able to circumvent the disclosure and prospectus delivery requirements of the Securities Act. For example, this second category helps to limit a person covered by the affiliate exclusion from 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. It also addresses the concern that a broker-dealer that is a covered investment 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 the 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 may benefit not only the fund but also the broker-dealer.

As we noted in the Proposing Release, one factor 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 of the research report.
22

These 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 preparing the information or explicitly or implicitly endorsed or approved the information, also known as the entanglement theory and adoption theory, respectively.
23

22

See
Proposing Release,
supra
note 2, at 26791-92.

23

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)] (“2000 Electronics Release”) (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)] (“Asset-Backed Securities Adopting Release”) (adopting asset-backed securities regulations).

While we did not receive comments on the definition of “covered investment fund research report,” we received comments on the affiliate exclusion embedded in the definition.
24

One commenter raised concerns about the incorporation of the adoption and entanglement theories, which could prohibit broker-dealers from engaging in certain activities designed to ensure the accuracy of research reports.
25

Other commenters suggested that while the entanglement theory may have relevance to research reports under proposed rule 139b, the adoption theory may not.
26

Some commenters requested clarification on whether certain conduct—for example, a covered investment fund providing information or confirmation of certain factual matters such as performance data, holdings, or investment objectives or strategies—is prohibited by the affiliate exclusion.
27

24

See
Morningstar Comment Letter; Fidelity Comment Letter; ICI Comment Letter; SIFMA Comment Letter I;
see also
BlackRock Comment Letter.

25

See
SIFMA Comment Letter I.

26

See
Fidelity Comment Letter; ICI Comment Letter;
see also
BlackRock Comment Letter.

27

See
ICI Comment Letter; SIFMA Comment Letter I;
see also
BlackRock Comment Letter.

As we noted in the Proposing Release, the entanglement and adoption theories are helpful guideposts in establishing whether a research report about a covered investment fund was published or distributed by the fund.
28

However, those theories of liability have been set forth by courts in interpreting the federal securities laws, and how a court would apply such theories with respect to covered investment fund research reports would be based on the facts and circumstances presented.
29

28

See
Proposing Release,
supra
note 2, at 26792.

29

See
2000 Electronics Release,
supra
note 23 (with respect to entanglement theory cases, citing
Elkind
v.
Liggett & Myers, Inc.,
635 F.2d 156 (2d Cir. 1980);
In the Matter of Syntex Corp. Sec. Litig.,
855 F.Supp. 1086 (N.D. Cal. 1993);
In the Matter of Caere Corp. Sec. Litig.,
837 F. Supp. 1054 (N.D. Cal. 1993) and with respect to adoption theory cases, citing
In the Matter of Cypress Semiconductor Sec. Litig.,
891 F. Supp. 1369, 1377 (N.D. Cal. 1995),
aff'd sub nom. Eisenstadt
v.
Allen,
113 F.3d 1240 (9th Cir. 1997);
In the Matter of Presstek, Inc.,
Exchange Act Release No. 39472 (Dec. 22, 1997)).
See also
Asset-Back Securities Adopting Release,
supra
note 23.

Under rule 139b, we believe 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 rule.
30

For example, if a broker-dealer distributes a research report including materials that a person covered by the affiliate exclusion authorized or approved for inclusion in the report, this could (depending on the facts and circumstances) inappropriately circumvent the affiliate exclusion in rule 139b.

30

See
Proposing Release,
supra
note 2, at 26791.
See also
section 5(a), 5(b), and 5(c) of the Securities Act [15 U.S.C. 77e(a), (b), and (c)] (prohibiting both direct and indirect violations of the prospectus requirements); section 48(a) of the Investment Company Act [15 U.S.C. 80a-47(a)] (It shall be unlawful for any person, directly or indirectly, to cause to be done any act or thing through or by means of any other person which it would be unlawful for such person to do under the provisions of this subchapter or any rule, regulation, or order thereunder.); section 208(d) of the Investment Advisers Act of 1940 [15 U.S.C. 80b-8(d)] (It shall be unlawful for any person indirectly, or through or by any other person, to do any act or thing which it would be unlawful for such person to do directly under the provisions of this subchapter or any rule or regulation thereunder.).

Also in relation to the affiliate exclusion, one commenter suggested that the proposal did not adequately address conflicts of interest such as revenue sharing agreements.
31

Other commenters disagreed stating that self-regulatory organization (“SRO”) rules and federal securities laws addressing conflicts of interest would apply to covered investment fund research reports.
32

One commenter stated that additional restrictions are unnecessary because the proposed affiliate exclusion would be broad and effective.
33

One commenter recommended that the final rule should not have any specific revenue sharing agreement requirements, but suggested that if the Commission believes it should address such potential conflicts in the final rule, the final rule should require a general disclosure similar to mutual fund prospectus disclosure alerting investors of potential revenue sharing agreements.
34

31
Morningstar Comment Letter (stating that SRO rules would be inadequate in this respect and that the Commission should require elimination or mitigation of these conflicts).

32

See
Fidelity Comment Letter; ICI Comment Letter; SIFMA Comment Letter I;
see also
BlackRock Comment Letter.

33

See
ICI Comment Letter;
see also
BlackRock Comment Letter.

34

See
Fidelity Comment Letter.

While we appreciate the concerns noted with respect to potential conflicts of interest, and specifically those arising from revenue sharing agreements, we are not adding additional explicit conflicts-of-interest-related restrictions in the final rule. The antifraud provisions of the federal securities laws and certain existing Commission and SRO rules continue to apply to covered investment fund research reports, some of which, depending on the facts and circumstances, may require disclosure of such conflicts.
35

For example, many covered investment fund research reports may be subject to FINRA's research report rules, which require disclosure in a research report if the member or its affiliates have received compensation from the subject company other than for investment banking services in the previous year.

36

Depending on the facts and circumstances, covered investment fund research reports may also need to include information about the compensation received by the broker-dealer from covered investment funds included in the report if such compensation is of the type covered by section 17(b) of the Securities Act.
37

35
We note that the FAIR Act expressly stated that research reports published or distributed under its provisions would continue to be subject to the antifraud and anti-manipulation provisions of the federal securities laws, and rules adopted thereunder, including section 17 of the Securities Act, section 34(b) of the Investment Company Act, and sections 9 and 10 of the Exchange Act.
See
section 2(c)(1) of the FAIR Act.

36

See, e.g.,
FINRA rule 2241(c)(4)(D).
See also, e.g.,
FINRA rule 2210(d)(1)(A) (requiring all member communications with the public to be

based on principles of fair dealing and good faith, be fair and balanced, and provide a sound basis for evaluating the facts in regards to any particular security; and barring members from omitting any material fact or qualification if the omission, in light of the context of the material presented, would cause the communication to be misleading).

37

See
15 U.S.C. 77q(b) (making it unlawful for any person, by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails to publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof).

We understand that disclosure about conflicts of interest created by the receipt of compensation by the broker-dealer from covered investment funds is consistent with current industry practices in communications that are Securities Act section 10(b) prospectuses and are currently styled as “research reports” subject to the requirements of rule 482.
38

Considering current industry practice, and the protections offered by the other regulatory provisions discussed above, we do not believe that additional conflict-of-interest requirements are necessary in rule 139b. Accordingly, we are adopting the definition of covered investment fund research report as proposed.

38
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.

2. Definition of “Research Report”

We are defining, as proposed,
39

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.
40

This definition is identical to the corresponding definition of “research report” in rule 139.
41

As discussed in the Proposing Release, while this definition is not identical to that in the FAIR Act, it is consistent with the FAIR Act because we interpret it to have the same meaning as the FAIR Act's definition of “research report.”
42

We received one comment agreeing with this definition.
43

39

See
Proposing Release,
supra
note 2, at 26792-93.

40

See
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.

41

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].

42

See
section 2(f)(6) of the FAIR Act;
see also
Proposing Release,
supra
note 2, at 26792-93 (explaining that the rule 139b definition tracks the FAIR Act definition except that it does not expressly reference “electronic communications” and that consistent with Commission rules on electronic communications, rule 139b definition's reference to a “written communication,” as defined in rule 405, includes a “graphic communication,” which in turn includes electronic communications (other than telephone and other live communications)).

43

See
SIFMA Comment Letter I (stating that it would reduce potential interpretive confusion for market participants who are familiar with the rule 139 definition).

3. Definition of “Covered Investment Fund”

The FAIR Act defines the term “covered investment fund” to include registered investment companies, BDCs, and certain commodity- or currency-based trusts or funds.
44

We are adopting a definition of the term “covered investment fund” in rule 139b that is substantially the same as the one used in the FAIR Act, with the addition that the definition specifies that the term “investment company” includes “a series or class thereof.”
45

We received no comments on this proposed definition. The final rule adopts the definition as proposed.

44

See
section 2(f)(2)(B) of the FAIR Act. 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”).
See
section 2(f)(2)(B) of the FAIR Act. 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.

45

See
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)].

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 Securities Exchange Act of 1934 (the “Exchange Act”), rather than relying on new rule 139b, instead may be able to rely on rule 139. Rule 139b does not preclude a broker-dealer from relying on existing rule 139 if applicable. In order to clarify that a broker-dealer may rely on existing research safe harbors, we proposed that rule 139b state that it 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.
46

We received no comments on this aspect of the proposed rule and are adopting it as proposed.
47

46

See
proposed rule 139b(a);
see also
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)).

47

See
rule 139b(a).

B. Conditions for the Safe Harbor

As discussed in the Proposing Release, the Commission has previously acknowledged the value of research reports in providing the market and investors with information about reporting issuers.
48

To mitigate the risk of research reports being used to circumvent the prospectus requirements of the Securities Act,
49

the Commission

has placed conditions on a broker-dealer's publication or distribution of research reports.
50

Under Rule 139, these conditions include restrictions on the issuers to which the research may relate, as well as requirements that such reports be published in the regular course of 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”). Rule 139b carries over these conditions for covered investment fund research reports and incorporates certain modifications intended to adapt these conditions to covered investment funds that we discuss below.

48

See
Proposing Release,
supra
note 2, at 26794 (for example, the Commission has recognized that, for public operating entities 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 information about reporting entities into the marketplace).

49

See supra
note 5 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
Securities Offering Reform Adopting Release,
supra
note 23 (discussing how 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);
supra
notes 35-36 and accompanying text (discussing certain rules and regulations under the federal securities laws, as well as certain SRO rules, that help address certain conflicts of interest and abuses identified with analyst research).

50
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
notes 35-36.

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 rule 139b safe harbor, the fund must meet certain reporting history and timeliness requirements. We are adopting as proposed that any such covered investment fund must have been subject to the 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 rule 139b and that these reports have been filed in a timely manner.
51

This requires covered investment funds that are registered investment companies to have been subject to the reporting requirements of the Investment Company Act for a period of at least 12 calendar months prior to a broker-dealer's reliance on the new rule and to have filed in a timely manner all required reports, as applicable, on Forms N-CSR,
52

N-Q,
53

N-PORT,
54

N-MFP,
55

and N-CEN
56

during the immediately preceding 12 calendar months.
57

If the covered investment fund is
not
a registered investment company, it must have been subject to the reporting requirements under section 13 or section 15(d) of the Exchange Act for a period of at least 12 calendar months and have filed all required reports in a timely manner on Forms 10-K
58

and 10-Q
59

and 20-F
60

during the immediately preceding 12 calendar months.
61

51
Rule 139b(a)(1)(i)(A). We believe that this 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 BDCs 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-dealer of a covered investment fund research report, the subject of which is a BDC 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 Commission under the federal securities laws.).

52
17 CFR 249.331 and 17 CFR 274.128.

53
17 CFR 249.332 and 17 CFR 274.130. FormN-Q will be rescinded May 1, 2020. Larger fund groups will begin submitting reports on FormN-PORT by April 30, 2019, and smaller fund groups by April 30, 2020.
See
Investment Company Reporting Modernization, Investment Company Act Release No. 32314 (Oct. 13, 2016) [81 FR 81870 (Nov. 18, 2016)] (“Reporting Modernization Release”); 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 on Form N-Q, and filing these reports would not be required as a condition to rely on the rule 139b safe harbor. Accordingly, rule 139b, as adopted, will be amended effective May 1, 2020 by removing the reference to FormN-Q.
See infra
section VI (instruction 4 under Text of Proposed Rules and Amendments).

54
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
Reporting Modernization Release,
supra
note 53. Therefore, we would consider Form N-PORT to have been timely filed for purposes of the timeliness requirement if the public filing of Form N-PORT every third month is timely filed and publicly available.

55
17 CFR 274.201.

56
17 CFR 249.330 and 17 CFR 274.101.

57
Rule 139b(a)(1)(i)(A)
(1).
As discussed in the Proposing Release, Form N-SAR was rescinded on June 1, 2018, which is the compliance date for Form N-CEN. As such, reliance on new rule 139b is not conditioned on covered investment funds reporting on Form N-SAR and the reference to Form N-SAR, as proposed, is not included in paragraph (a)(1)(i)(A)
(1)
of rule 139b.
See id.; see also
Proposing Release,
supra
note 2, at 26794.

58
17 CFR 249.310.

59
17 CFR 249.308a.

60
17 CFR 249.220f.

61
Rule 139b(a)(1)(i)(A)
(2).

Reporting History

Several commenters requested we eliminate the reporting history requirement for issuer-specific research reports under rule 139b.
62

One commenter suggested that the requirement is unnecessary because funds have “detailed and comprehensive regulatory filing and disclosure obligations” providing investors with “a wealth of information about funds.”
63

Another commenter argued that the reporting history requirement should be eliminated because ensuring compliance with the requirement would create “operational hurdles” for broker-dealers that provide investors with research on a large numbers of funds on a largely automated basis.
64

Commenters also argued that the reporting history requirement unduly restricts research on newer funds.
65

62

See
Fidelity Comment Letter; ICI Comment Letter; SIFMA Comment Letter I;
see also
BlackRock Comment Letter.

63

See
ICI Comment Letter;
see also
BlackRock Comment Letter.

64

See
Fidelity Comment Letter.

65

See
ICI Comment Letter; SIFMA Comment Letter I;
see also
BlackRock Comment Letter.

As discussed in the Proposing Release, rule 139b tracks the reporting history requirement of rule 139.
66

We believe satisfying such a requirement indicates a likelihood that more current and timely information has been disseminated to and digested by the marketplace to inform investors of material information about the fund, including risks, and provides investors with SEC-filed information to compare against the contents of the research report.
67

We also continue to believe that maintaining a reporting history requirement is consistent with the FAIR Act, which permits a reporting history requirement so long as it does not exceed the period required in rule 139.
68

66
Rule 139 predicates issuer-specific research reports on an issuer's eligibility to use Form S-3 or F-3, which are short form or shelf registration statements that are available to register an issuer's securities offering only after it has been subject to and in compliance with the Exchange Act periodic reporting requirements for at least 12 months.

67

See
Proposing Release,
supra
note 2, at 26795 nn.75-78 and accompanying text. The safe harbor would be unavailable to broker-dealers' publication or distribution of research reports about closed-end registered investment companies or BDCs during these covered investment fund issuers' first year of operation.
See supra
note 51.

68

See
Proposing Release,
supra
note 2, at 26795 n.77 (explaining the reporting and timeliness requirements of rule 139).

We do not believe that funds should be treated differently from other issuers subject to the reporting requirement of rule 139. The Commission included a reporting history requirement in rule

139 because it helps to ensure that the market has information, beyond the research report, to allow investors to weigh how much value they will assign to the research report. The fund's reporting history should be particularly important when the broker-dealer publishing the research report is participating or may participate in the fund's offering, as is the case under rule 139b (similar to rule 139). As noted above, one commenter suggested that the reporting history requirement is unnecessary because funds' “detailed and comprehensive regulatory filing and disclosure obligations” provide investors “a wealth of information about funds.”
69

Eliminating the reporting history requirement would reduce the information available to investors when evaluating research reports published or distributed by broker-dealers when those broker-dealers are also participating in the offering of the fund's shares. The requirement also allows time for the market to absorb the previously released periodic reports and for investors to assess an issuer's track record.

69

See
ICI Comment Letter;
see also
BlackRock Comment Letter.

Corporate issuers are subject to, under rule 139, filing and disclosure obligations similar to what is required of covered investment funds under rule 139b. Although funds differ from corporate issuers in many respects, investors would benefit similarly from having access to fund information to evaluate the research reports on which they may consider relying. Accordingly, for the same reasons the Commission determined to include this requirement in rule 139, we have determined to include this requirement in rule 139b.

We also believe that broker-dealers will be able to comply with the reporting history requirement in a manner similar to how they comply with the parallel requirement in rule 139 and that the effect of the requirement on new funds would be similar to the effect on new issuers under rule 139.
70

Other issuers also have “detailed and comprehensive regulatory and disclosure obligations” much like funds. In this regard, we are not persuaded that there is a material difference between covered investment funds and other issuers that would justify treating them in a disparate fashion. We continue to believe that the concerns underlying the reporting history requirement of rule 139 apply to research reports issued under rule 139b, and therefore are not persuaded that the reporting history requirement should be eliminated from rule 139b as suggested by some commenters.

70
We believe that a broker-dealer would be relying on rule 139 or rule 139b because it would be involved in distributing securities of the issuer covered in the report, and would therefore have information about the issuer to confirm it has been subject to filing obligations for the preceding 12 calendar months. For example, this information is accessible through the Commission's publicly available Electronic Data Gathering Analysis, and Retrieval (“EDGAR”) system. Moreover, we believe that broker-dealers that choose to automate publication of research reports may invest in technologies to implement this automation including by leveraging their existing technological infrastructures to verify the reporting history requirement for covered investment funds.

One commenter also requested the reporting history requirement be shortened from 12 months to 25 days after a fund initially starts offerings shares. The commenter argued that this would align with broker-dealers' market practice of waiting 25 days after an initial public offering.
71

71

See
SIFMA Comment Letter I; SIFMA Comment Letter II. Additionally, this commenter presented an example of a new ETF based on a new industry classification standard that has garnered interest from the market and satisfies the minimum public market value requirement, but would be unable to satisfy a 12-month reporting history requirement.
See
SIFMA Comment Letter II. This situation and result equally occurs in the operating company context, where a well-followed operating company that has an initial public offering might satisfy the minimum public market value requirement, but not the reporting history requirement, and thus could not be covered as a rule 139 issuer-specific research report until the 12-month reporting history requirement is also satisfied.

Rule 139 is available only to broker-dealers that both publish or distribute a research report on an issuer and are participating or will participate in a registered offering of the issuer's securities. The 25-day standard referenced by the commenter relates to the issuance of a research report after the prospectus delivery obligation in an initial public offering ends, not while the offering is ongoing and the broker-dealer is participating in it. Accordingly, the prospectus delivery obligation described by the commenter is distinct from the delivery obligation that applies to continuous offerings. Thus, the commenter's suggested provision and rationale do not appropriately apply to a broker-dealer participating in a continuous offering. The 25-day standard referenced by the commenter is premised on statutory provisions addressing prospectus delivery, a different investor protection consideration from rules 139 and 139b. Accordingly, we believe the 25-day standard is inapposite to rule 139b, as rule 139b applies to broker dealers that are participating in the offering of the subject fund's securities, not after the offering has ended. For these reasons, we are adopting the reporting history provision as proposed.

Timeliness

Two commenters opposed the proposed timeliness requirement for issuer-specific research reports.
72

They argued that broker-dealers would face operational hurdles in confirming a covered investment fund's timely filing of periodic reports.
73

One commenter suggested that broker-dealer firms be allowed to accept compliance representations from covered investment funds for the reporting history and timeliness requirements.
74

The other commenter requested that the timeliness requirement apply only when a broker-dealer initiates research coverage on a fund, rather than for each research report.
75

Alternatively, the commenter also requested the Commission to permit broker-dealers to rely on the lack of any Form 12b-25 (indicating that a filing is late) filed by covered investment funds within the prior 12 months.
76

72

See
Fidelity Comment Letter; SIFMA Comment Letter I; SIFMA Comment Letter II.

73

See
Fidelity Comment Letter; SIFMA Comment Letter I. In a subsequent letter, one commenter noted the difficulty broker-dealers would have in identifying reports filed by registered investment companies that are part of series companies, pointing to a lack of functionality in EDGAR's mutual-fund specific search page.
See
SIFMA Comment Letter II. All registered investment company filings are available on EDGAR, however, and there are multiple ways to search the EDGAR system in addition to the mutual-fund specific page the commenter identified—including using a fund's filing number, which can be found in a fund's prospectus, or by using a Central Index Key (“CIK”) number.

74

See
Fidelity Comment Letter.

75

See
SIFMA Comment Letter I.

76

See
SIFMA Comment Letter II.

Satisfaction of the timeliness requirement indicates a greater likelihood that a covered investment fund will make information available in a timely manner to inform investors of material information about the fund, including risks. We believe it is important for covered investment fund investors to have timely information from the fund when evaluating research reports, as it is for operating company investors. Rule 139 requires that an issuer satisfy the reporting history and timeliness requirements at the time the broker-dealer publishes or distributes a research report.
77

Modifying rule 139b to allow confirming the timeliness of a fund's reporting only upon initiation of coverage, or to accept the compliance representations of covered investment funds, would provide less protection to investors than the Commission determined to be appropriate in rule 139. We also do not believe providing disparate treatment between funds and other issuers with respect to reporting

history and timeliness conditions is necessitated by operational or structural differences between the issuer types. As with the 12-month reporting history requirement, we believe that confirming the timeliness of periodic filings for covered investment funds would be substantially similar to confirming the timeliness of periodic filings in the operating company context.
78

We do, however, agree with the commenter that a fund filing a Form 12b-25 (or lack thereof) would serve as a useful indication of the fund's timeliness. We believe that a broker-dealer may rely on the lack of a Form 12b-25 filing as confirmation that a fund's filings are timely under the rule unless the broker-dealer is actually aware through other means that the issuer has not in fact made timely filings. Accordingly, we are adopting the timeliness requirement as proposed.

77

See
rule 139(a)(1)(i)(A)(
1
)-(
2
).

78

See
Proposing Release,
supra
note 2, at 26794-95. A broker-dealer has diligence and investigative obligations under section 11 of the Securities Act in order to be able to claim a due diligence defense available thereunder.
See
Securities Offering Reform Adopting Release,
supra
note 23; rule 176 of the Securities Act [17 CFR 230.176]. Like the reporting history requirement, broker-dealers could confirm the timeliness of a covered investment fund's reports through a check of the Commission's EDGAR system, which is free and readily available. This may allow the leveraging of operating efficiencies for broker-dealers already familiar with the requirement.

b. Market Following Requirement

We are adopting a requirement that, in order for broker-dealers to use the rule 139b safe harbor to publish or distribute issuer-specific research reports, 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 new rule (the “float requirement”). Specifically we are adopting a requirement that the aggregate market value of a covered investment fund, or the net asset value
79

in the case of a registered open-end investment company (other than an exchange-traded fund (“ETF”))
80

i.e.,
a mutual fund, must equal or exceed the aggregate market value required by General Instruction I.B.1 to Form S-3.
81

This amount is currently $75 million.
82

The FAIR Act permits us to set a float requirement for covered investment funds, as long as the minimum public float is not greater than what is required by rule 139.
83

79
For mutual funds, 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 mutual funds, 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).

80

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

81
The new rule refers to General Instruction I.B.1 to Form S-3. Under this instruction, aggregate market value is “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.

82
General Instruction I.B.1 to Form S-3.

83

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

We are adopting the float requirement and level as proposed. However, as discussed below, the final rule includes two changes to the float calculation methodology for most covered investment funds. First, the final rule generally no longer requires that the fund issuer's aggregate market value or net asset value be calculated net of its affiliates' holdings.
84

Second, the minimum float requirement must be satisfied at the initiation (or reinitiation) of research coverage and then once a quarter thereafter. The proposal, on the other hand, would have required that the minimum float requirement be satisfied each time a broker or dealer relied on the safe harbor to publish or distribute a research report on a covered investment fund.

84
However, as discussed below, this change would not apply to the calculation of a commodity- or currency-based trust or fund's float.

Float Level

Several commenters argued that a float requirement should be eliminated or reduced in the context of covered investment funds because such a requirement would limit the extent of research that could be produced.
85

Two commenters argued that for funds, NAV relates to the underlying value of the portfolio and therefore makes it an inapt proxy for market following.
86

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.
87

We continue to view as significant the relationship between public float, information dissemination to the market, and following by investment institutions.
88

While market following for funds that price at or near NAV may not have the same degree of impact on the price of the fund shares that it may have for other issuers, market following serves other purposes as well, including ensuring that a mix of information about the fund's securities is available. We believe that providing a different calculation method for mutual funds is necessary to achieve the intent of the FAIR Act and is also consistent with the goals of the float requirement in rule 139. We also do not believe there is a reason to set the level of the minimum public float requirement based on a different set of considerations than for operating companies (
i.e.,
the level of the security's market following).

85

See
SIFMA Comment Letter; ICI Comment Letter; Fidelity Comment Letter.

86

See
SIFMA Comment Letter; ICI Comment Letter.

87

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”);
see also
Securities Offering Reform, Securities Act Release No. 8501 (Nov. 3, 2004) [69 FR 67391 (Nov. 17, 2004)] (discussing public float of a certain level as a factor indicating that an issuer has a demonstrated market following).

88

See, e.g.,
S-3 Revisions Adopting Release,
supra
note 87.

As noted by commenters, we recognize that the minimum public float requirement may impact the amount of research on covered investment funds. However, we continue to believe that this requirement is consistent with rule 139's framework and intent.
89

As discussed previously, we believe that the intent of the FAIR Act was to extend the rule 139 framework to covered investment funds in a manner consistent with the treatment of other issuers subject to rule 139, except where necessary or appropriate. We do not believe it is necessary or appropriate to treat covered investment funds and other issuers differently here, except with respect to the calculation method for mutual funds as discussed below. We also believe that concern about coverage for smaller issuers—and balancing that concern with investor protection concerns when the broker-dealer distributing the report is participating in the issuer's offering—is not unique to covered investment funds. As discussed in the Proposing Release, 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 limited segment of investors (which the float requirement could help to address).
90

The float requirement is designed to protect investors by excluding research reports on covered

investment funds with a relatively small amount of total assets, which serves as a reasonable proxy for a limited market following.
91

89

See
Proposing Release,
supra
note 2, at 26796.

90

See id.

91
We believe that conditioning the availability of the safe harbor on the aforementioned reporting history and market valuation requirements will help restrict the availability of the safe harbor in situations where we expect the information environment to be most limited: For new funds and for funds with limited trading or interest.
See also infra
discussion in the Economic Analysis at notes 350-354.

With respect to the level of the minimum public float, the float requirement is not intended to include or exclude a certain percentage of funds or other issuers from research coverage. The float requirement is intended to act as a proxy for market following. As we have previously analyzed in other contexts, analyst research coverage of an issuer is one indicia of market following. We have previously observed that analyst coverage drops off significantly with smaller issuers, and few if any issuers with less than $75 million in public float have significant analyst coverage.
92

Moreover, while certain data aggregators provide analyst research report coverage for a number of funds, most funds are not followed by dedicated research analysts akin to the analyst coverage that we have previously identified as being one indicia of market interest and following for operating companies.
93

As a consequence, we have observed that covered investment fund issuers with a public float of less than $75 million generally do not have a market following that would add to the mix of information in the marketplace. Some commenters suggested using a lower public float requirement for funds on the basis of seeking to equalize the percentage of funds that would be subject to coverage with the percentage of issuers similarly subject to coverage in rule 139.
94

Market following, however, appears to be a characteristic related to the size of a particular issuer, not to the statistical distribution of issuers in the market. In other words, there is no reason to believe that equalizing the percentage of issuers covered under rule 139 with the percentage of funds covered under rule 139b would result in a meaningful indication of market following because the result would depend on the distribution of issuers and funds by size. In addition, using a minimum public market value threshold that is the same as the parallel threshold in rule 139 may benefit market participants through regulatory consistency and reduce opportunities for investor confusion.
95

92

See
Simplification of Registration Procedures for Primary Securities Offerings, Securities Act Release No. 6943 (July 16, 1992) [57 FR 32461 (July 22, 1992)] (stating that one indicia of market interest and following of a company is the number of research analysts covering the company and that approximately two-thirds of the newly eligible companies, based on the reduction of the float requirement to $75 million, are followed by at least three research analysts).
See also
Securities Offering Reform Adopting Release,
supra
note 23, at 44728 n.53 (stating that issuers with a market capitalization of between $75 million and $200 million, in most cases, have between zero to five analysts following them, with approximately 50% having zero to two analysts following them).

93
The Commission and the staff intend to monitor changes in analyst research coverage of funds and the impact of the minimum public market value requirement on the availability of research on covered investment funds and may in the future reduce, change, or eliminate the requirement to the extent that empirical evidence demonstrates that a lower threshold or different metric would be consistent with investor protection.

94

See
Fidelity Comment Letter; SIFMA Comment Letter I.

95

See infra
discussion following note 319.

While a broker-dealer publishing a research report about a fund that does not meet the minimum public float could not rely on rule 139b, other methods may be available to provide information about these funds by a broker-dealer participating in the offering, such as choosing to cover a smaller fund in a rule 482 communication.
96

In addition, the public market value requirement is limited to issuer-specific research reports, and does not apply to industry research reports.

96

See
rule 482 [17 CFR 230.482]. Rule 482 sets forth certain filing and other investor protection requirements.
Id.

Float Calculation

While we continue to believe that the float requirement serves a useful purpose, we recognize that the proposed float requirement could pose unique operational challenges for analysts covering certain covered investment funds. Accordingly, as discussed below, we are making certain changes to the timing and method of the float calculation that are designed to address these concerns for covered investment funds.

One commenter stated that calculating a covered investment fund's public float, and determining the specific amount of affiliate holdings to be excluded in calculating the public float as proposed, is a practical challenge for broker-dealers because it was not clear to the commenter that third-party vendors or filings on EDGAR contain data regarding the value of covered investment funds, net of value held by affiliates.
97

This commenter also noted that broker-dealers are unlikely to have information about beneficial owners of funds that are affiliates but hold the fund's shares through another record owner. Commenters also stated that the proposed float requirement more generally creates operational challenges given the need to track and test fluctuating market values to comply with it, given that many funds are continuously offered.
98

97

See
SIFMA Comment Letter II. This commenter stated that broker-dealers satisfy the parallel minimum public float requirement under rule 139 by relying upon third-party data vendors, such as Bloomberg. We understand that third-party service providers do not currently calculate this number for covered investment funds, although they may do so in the future.

98

See
Fidelity Comment Letter; SIFMA Comment Letter I.

We appreciate these concerns and are therefore adopting two modifications to the final rule. First, the final rule does not require that the fund's aggregate market value or net asset value be calculated net of affiliates' holdings for most covered investment funds.
99

However, the final rule, like the proposal, would require that a commodity- or currency-based trust or fund's public float be calculated net of affiliate holdings, as under rule 139. Broker-dealers today can rely on rule 139 to publish research reports regarding these covered investment funds and we believe it appropriate to maintain consistency for issuers that can be covered under both rules, where consistent with the FAIR Act. Otherwise, exactly the same activity could be subject to different standards based on the rule that a broker-dealer chose to use. One commenter argued that determining affiliate ownership for such funds based on Forms 10-K andS-1 may quickly become outdated.
100

We believe that for purposes of calculating affiliate ownership when determining a covered investment fund's public float, broker-dealers may rely on the covered investment fund's most recent ownership disclosures filed with the Commission for identifying the beneficial owners, despite the potential data limitations. As a consequence, we believe that a broker-dealer need not seek to identify unknown beneficial owners held through disclosed record owners, and also does not need to generally exclude record owners from the calculation of public float, except to the extent that they represent known beneficial owners. We believe this approach is reasonable and comparable to that used in the operating company context.

99

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

100

See
SIFMA II Comment Letter.

Unlike rule 139, rule 139b does not permit affiliates of covered investment funds to rely on the safe harbor,

mitigating the risk that a fund with significant affiliate holdings would be the subject of market moving research by those same affiliates. We also appreciate that there is more limited information currently available regarding the holdings of affiliates of covered investment funds relative to operating companies, as noted by commenters.
101

That many covered investment fund are continuously offered also adds operational challenges. A covered investment fund's investor base, and thus potential affiliates, may change day to day, making it more difficult to identify affiliate holdings. In addition, covered investment funds are subject to unique legal provisions that generally restrict affiliate ownership and provide additional legal protections when affiliate ownership is permitted.
102

Accordingly, not requiring a broker-dealer to identify and exclude affiliate holdings is designed to address these challenges and appropriately tailors this requirement for covered investment funds.
103

101

See
SIFMA Comment Letter II (noting that third party vendors do not currently provide float information net of affiliates for funds, and that for certain funds whose ownership is held in street name, affiliate ownership may be “unknowable”).

102

See, e.g.,
Investment Company Act sections 12, 17, and 57 and rules thereunder.

103
The instructions to Form S-3 discuss methodologies for calculating float net of affiliates. When calculating float for purposes of rule 139b, those instructions related to the exclusion of affiliate ownership must be disregarded.

Second, the final rule will permit a broker-dealer to satisfy the minimum float requirement when it initiates (or reinitiates) coverage and then once a quarter thereafter (so long as it continues issuing or distributing research on that fund), rather than each time the broker-dealer publishes or distributes a research report, as proposed.
104

We recognize that in the operating company context where most issuers are not engaged in a continuous distribution, broker-dealers can rely on other research report rules that do not include a public float requirement. The requirement in proposed rule 139b that a covered investment fund have the requisite public float each time the broker-dealer publishes a research report could therefore have involved greater operational challenges than those associated with the corresponding requirement in rule 139. A broker-dealer would generally only need to comply with the requirement in rule 139 for a discrete period of time while the issuer is in distribution, but would have been required to comply with the corresponding requirement in rule proposed 139b every time the broker-dealer published a research report about a covered investment fund that was in continuous distribution where the broker-dealer is participating in the offering. We believe that requiring a broker-dealer to determine the float upon initiation or reinitiation of coverage will ensure that the float requirement is met at the outset of research coverage. We are requiring a quarterly re-assessment of the float requirement to mitigate the risk that a covered investment fund's float declines over time and no longer meets the float requirement. We believe a quarterly assessment is appropriate as it aligns with the quarterly reporting schedule of most funds, and balances the risks of only periodically verifying a fund's float with the costs of more frequent or continuous assessments.

104

See
rule 139b(a)(1)(i)(B). If a broker-dealer were to cease publication or distribution of a covered fund research report and then initiate coverage again, this provision would require the fund's float to be above the minimum at the time that the broker or dealer begins relying on the safe harbor provided by rule 139b once more.

We believe these adjustments appropriately tailor rule 139 to covered investment funds. For the reasons discussed below, we believe that the changes to the calculation and time of testing of the minimum public float requirement for covered investment funds under rule 139b are necessary or appropriate in the public interest, and for the protection of investors, and for the promotion of capital formation as they allow appropriately tailoring of rule 139 in applying it to covered investment funds while considering their unique structure and operational aspects.

We proposed that the float threshold be calculated in terms of NAV rather than aggregate market value for mutual funds in order to reflect the market structure differences between mutual funds and all other covered investment funds.
105

Absent this modification, the float requirement would categorically exclude broker-dealers from relying on rule 139b in their publication or distribution of mutual fund issuer-specific research reports, which would appear inconsistent with the FAIR Act's directives. Mutual funds redeem their shares each day and therefore must compute their net asset value each day, providing a timely and reliable measure of the fund's size, akin to other issuers' public float; and investors' ability to purchase and redeem fund shares at net asset value provides timely share prices akin to the price discovery that occurs in a public trading market. As discussed further below, for other types of covered investment funds, such as closed-end funds and BDCs, which may or may not have public float, we believe it is appropriate, and consistent with the FAIR Act, to provide the same public float requirements—the manner of calculation and amount—as applies to issuer-specific research reports under rule 139. Accordingly, we are adopting this NAV calculation method as proposed.

105

Id.
at 26796 n.86.

Non-Traded Funds

Finally, one commenter suggested that we revise rule 139b to permit an issuer-specific research report to cover a non-traded closed-end fund or BDC that does not have a “public float,” and thus which, under proposed rule 139b, could not be included in an issuer-specific research report.
106

This commenter noted that the proposed rule did not extend the NAV calculation method beyond open-end funds, but pointed to a footnote in the proposal that discussed the potential for non-traded BDCs or CEFs to be able to use a variant of the NAV approach, and asked that we amend the final rule to allow them to do so.
107

106

See
Sutherland Comment Letter.

107

Id.
The commenter argued that all non-traded covered investment funds that have a net asset value (less the value of shares held by affiliates) that equals or exceeds the aggregate market value required in General Instruction I.B.1. to Form S-3 should be covered by new rule 139b.

Although under the proposed rule the NAV calculation method was only available to mutual funds, we acknowledge that the Proposing Release discussion was inconsistent with the proposed rule text in that the Proposing Release discussed the possibility of non-traded BDCs and CEFs calculating a NAV based on their last publicly disclosed share price for purposes of proposed rule 139b.
108

108

Compare
Proposing Release,
supra
note 2, at 26796 n.83 (“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).”)
with
proposed rule 139b(a)(1)(i)(B): “The aggregate market value of voting and non-voting common equity held by non-affiliates of the covered investment fund, or, in the case of a
registered open-end investment company
(
emphasis added)
(other than an exchange-traded fund) its net asset value (subtracting the value of shares held by affiliates), equals or exceeds the aggregate market value specified in General Instruction I.B.1 of Form S-3.”

We decline to amend the rule text to allow the NAV calculation method for non-traded BDCs and closed-end funds. We believe that it is inappropriate for non-traded BDCs and closed-end funds to satisfy the float requirement using a

NAV calculation because doing so would undermine the purpose of the requirement. As discussed previously, historically, the Commission has used public float as a proxy for a security's market following.
109

We believe that the NAV method for mutual funds acts as an effective proxy for market following for mutual funds because mutual funds redeem their shares daily and therefore must compute their net asset value each day, providing a timely and reliable measure of the fund's size, akin to other issuers' public float; and investors' ability to purchase and redeem fund shares at net asset value provides timely share prices akin to the price discovery that occurs in a public trading market. Non-traded BDCs and CEFs do not have an equivalent daily metric available, and often compute NAV on a significantly more infrequent basis, such as quarterly.

109

See supra
note 87 and accompanying text.

In addition, we do not believe that providing a different calculation method for non-traded closed-end funds and non-traded BDCs is appropriate, because such funds do not have the same kind of structural differences that necessitate different treatment provided to open-end funds. For example, unlike mutual funds, non-traded closed-end funds and BDCs could meet the float requirement if they chose to be listed and would not have to undertake any structural changes. By opting not to list, non-traded BDCs and closed-end funds are similar to non-listed operating company issuers that, by choosing not to list, cannot meet the public float requirement of rule 139.

Finally, we do not believe that our approach is inconsistent with the statute or congressional intent. Specifically, we note that the FAIR Act includes an interim effectiveness provision, whereby if the Commission has not adopted a covered investment fund research report rule within 270 days of the Act's enactment, broker-dealers could begin publishing or distributing covered investment fund research reports provided that certain rule 139 conditions are satisfied.
110

One such specified condition is that an issuer-specific research report about a covered investment fund must satisfy the existing public float requirement of rule 139 during this interim effectiveness. As such, even during the interim effectiveness period provided under the FAIR Act and as a result of the conditions in rule 139, non-traded BDCs and CEFs would not be able to satisfy the public float requirement and thus by congressional design would not receive the benefit of the FAIR Act's safe harbor. In light of the reasons discussed above, we have determined not to amend the proposed rule text as the commenter recommended to expressly include non-traded BDCs and CEFs within the safe harbor.

110

See supra
note 3; section 2(d) of the FAIR Act. The FAIR Act's interim effectiveness provision became effective as of July 3, 2018 and by its terms will terminate upon the adoption of a covered investment fund research report rule. Currently, at least one broker-dealer is issuing covered investment fund research reports in reliance on the interim effectiveness provision.
See, e.g.,
Rachel Evans,
In a Passive World, Bank of America's New ETF Team Picks Stocks
(Oct. 17, 2018),
available at https://www.bloomberg.com/news/articles/2018-10-17/in-a-passive-world-bank-of-america-s-new-etf-team-picks-stocks?srnd=etfs.

c. Regular-Course-of-Business Requirement

We are adopting as proposed a condition to rule 139b that a broker-dealer's publication or distribution of research reports be “in the regular course of its business”
111

(the “regular-course-of-business” requirement). Although the 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).
112

111
Rule 139b(a)(1)(ii).

112
Rule 139(a)(1)(iii) [17 CFR 230.139(a)(1)(iii)].

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.”
113

Accordingly, rule 139b incorporates the “initiation or reinitiation” requirement from rule 139 and specifies that it applies only to research reports regarding a covered investment fund that does not have a class of securities in substantially continuous distribution.
114

Determining whether a class of securities is in substantially continuous distribution would be based on an analysis of the relevant facts and circumstances.

113
Section 2(b)(1) of the FAIR Act.

114

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

One commenter asked for clarification that the scope and meaning of “substantially continuous distribution” includes traded registered closed-end investment companies and BDCs engaged in at-the-market (“ATM”) offering programs over consecutive quarters pursuant to rule 415(a)(4) under the Securities Act.
115

Determining whether a class of securities is in “substantially continuous distribution” is an analysis based on the relevant facts and circumstances. With respect to traded funds that offer ATM programs over consecutive quarters pursuant to rule 415(a)(4) under the Securities Act, we believe that a covered investment fund that engages in ongoing distributions of its shares on a frequency consistent with open-end investment companies is in substantially continuous distribution, but one that does so on a less frequent basis may not be.

115

See
Sutherland Comment Letter. This commenter also asked for clarification regarding non-traded registered closed-end investment companies and non-traded BDCs offering shares on a continuous basis under Securities Act rule 415(a)(1)(ix). Although these funds would not be covered in issuer-specific research reports because they would not have the requisite public float, we believe that a “continuous” offering under rule 415(a)(1)(ix) would include a “substantially continuous offering” for purposes of rule 139b.
See infra
section II.B.2.b.

One commenter asked that we clarify whether broker-dealers that have published and distributed communications styled as “research reports” in compliance with rule 482 would meet the regular-course-of-business requirement.
116

This commenter also mentioned that some broker-dealers have published and distributed research reports on other issuers (such as non-covered investment funds, or on operating companies) in reliance on the rule 139 safe harbor. We believe that a broker-dealer can satisfy the regular-course-of-business requirement through either of the methods discussed by this commenter.
117

A broker-dealer publishing or distributing an issuer-specific research report can satisfy the regular-course-of-business requirement if at the time of reliance on rule 139b it has distributed or published at least one research report about the issuer or its securities, or has distributed or published at least one such report following a period of discontinued coverage. In addition, the condition may be satisfied by publishing or distributing research reports on a covered investment fund when a broker-dealer is

not participating in the offering of that fund.
118

116

See
Fidelity Comment Letter.

117

See also
Securities Offering Reform Adopting Release,
supra
note 23, at 44763-64. There is no minimum time period for the broker or dealer to have distributed or published research reports, only that the particular broker or dealer has initiated or reinitiated coverage.
Id.

118
This would also include other types of research or rule 482 stylized “research reports,” discussed below.

One commenter indicated that broker-dealers should not be required to have a traditional research department in order to rely on the rule.
119

A traditional research department is not a requirement to meet the condition, but would be a factor in indicating compliance with the regular-course-of-business requirement. We discussed a number of other factors that may evidence compliance with this condition in the Proposing Release.
120

119

See
SIFMA Comment Letter I (also asking the Commission to clarify that the regular-course-of-business requirement would definitively be satisfied where the research is produced by traditional research analysts within a traditional research department—regardless of whether it previously produced research on a particular type of security).

120

See
Proposing Release,
supra
note 2, at 26796-99 (These factors included whether the broker-dealer: Has a compliance structure in place with relevant policies and procedures governing their publication of research and their distribution of registered investment company advertisements; has a research department with research analysts covering particular issuers or industries; maintains policies and procedures governing its research protocols; and regularly publishes or distributes research on any other type of company or business other than covered investment funds.).

Several commenters expressed concerns that the regular-course-of-business requirement was too restrictive.
121

For example, one commenter stated that requiring broker-dealers to satisfy the regular-course-of-business requirement by having a history of publishing or distributing research on the same types of securities as covered in the research report is inconsistent with the FAIR Act and congressional intent, and may preclude coverage by new broker-dealer entrants.
122

We do not believe that the regular-course-of-business requirement is inconsistent with the FAIR Act, congressional intent, or would preclude new broker-dealer entrants from relying on the rule 139b safe harbor, as suggested by the commenter. We believe the FAIR Act and congressional intent are clear in their directive to extend the rule 139 safe harbor to covered investment fund research reports. Rule 139 includes a regular-course-of-business requirement, and we believe it is appropriate for rule 139b to also include the same type of requirement. Commenters did not identify, and we are not aware of, any distinguishable differences in the operation of covered fund issuers that would necessitate different treatment from other issuers subject to rule 139 with respect to a regular-course-of-business requirement.

121

See
SIFMA Comment Letter I; ICI Comment Letter; Fidelity Comment Letter;
see also
BlackRock Comment Letter.

122

See
SIFMA Comment Letter I.

Moreover, broker-dealers that wish to newly begin publishing or distributing research reports on funds could meet this condition through any of the methods discussed above.
123

Once a broker-dealer has established a history of issuing such research reports pursuant to any of these (or potentially other) methods in the regular course of business, it could satisfy the condition and begin relying on rule 139b.

123

See supra
notes 116-118 and accompanying text.

Similarly, another commenter stated that in place of the regular-course-of-business requirement, we should require broker-dealers' policies and procedures to include rule 139b compliance.
124

We are not incorporating this suggested change. Maintaining policies and procedures to comply with rule 139b is one of several factors we would assess in determining whether the broker-dealer has engaged in research report publication and distribution in the regular course of business, but such a factor alone does not establish that the regular-course-of-business requirement has been met.

124

See
ICI Comment Letter;
see also
BlackRock Comment Letter.

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.
125

We continue to believe requiring that research reports be published or distributed in the regular course of a broker-dealer's business under rule 139b, consistent with the requirements of rule 139, could reduce the potential that covered investment fund research reports could be used to circumvent the prospectus requirements of the Securities Act.
126

For the reasons discussed in this section, we are adopting the regular-course-of-business requirement as proposed.

125

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)].

126

See
Proposing Release,
supra
note 2, at 26797;
see also
Securities Offering Reform Adopting Release,
supra
note 23.

2. Industry Research Reports

Rule 139b sets forth conditions for industry research reports that parallel the corresponding conditions under rule 139 and are intended to provide appropriate parameters to address the risk of circumvention of the prospectus requirements of the Securities Act.
127

127

See supra
notes 49-50 and accompanying text;
see also supra
paragraph accompanying notes 12-15.

a. Reporting Requirement

Under the rule 139b 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 reporting requirement generally tracks an existing requirement for industry research reports under rule 139 but has been modified so that it would be applicable to industry research reports that include covered investment fund issuers.
128

Like the parallel provision of rule 139, the reporting requirement under rule 139b helps ensure that there is publicly available information about the relevant issuers and that investors are able to use such information in making their investment decisions. Commenters did not present any concerns regarding the reporting requirement for purposes of industry research reports, and we are adopting it as proposed.

128

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.).

b. Regular-Course-of-Business Requirement

Under rule 139b, as proposed, a broker-dealer must publish or distribute research reports in the regular course of its business in order to rely on the new rule's safe harbor.
129

The regular-course-of-business requirement for industry research reports similarly applies to issuer-specific research reports,
130

and it also tracks an existing requirement for industry research reports under rule 139.
131

129
Rule 139b(a)(2)(iv) (the broker-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).

130

See supra
section II.B.1.c.

131

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

Like the parallel provision in rule 139, rule 139b's regular-course-of-business requirement for industry research reports includes the requirement that, at the time of publication or distribution of the

industry research report, the broker-dealer is including similar information about the issuer or its securities in similar reports.
132

However, unlike rule 139, the “similar information” requirement under rule 139b applies 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.”
133

We believe that the “similar information” requirement is akin to the “initiation or reinitiation” requirement, in that both would have the effect of limiting a broker-dealer's ability to rely on the rule 139b 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 “initiation or reinitiation” requirement, we are also excluding covered investment funds from the “similar information” requirement if they have a class of securities in substantially continuous distribution.

132
Rule 139b(a)(2)(iv).

133

See supra
notes 113-114 and accompanying text.

We provided guidance in section II.B.1.c above on how a broker-dealer can meet the regular-course-of-business requirement in the context of issuer-specific research reports, and such guidance would be equally applicable in meeting the requirement in the context of industry research reports. We are adopting the requirement as proposed for the reasons discussed in this section and in the similar section for issuer-specific research reports.

c. Content Requirements for Industry Research Reports

Rule 139b's safe harbor for publication or distribution of industry research reports is also conditioned on certain content requirements. We are adopting these requirements as proposed.

Specifically, under rule 139b, 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”),
134

or alternatively contain a comprehensive list of covered investment fund securities currently recommended by the broker-dealer (the “comprehensive list requirement”).
135

These requirements are designed to result in industry research reports that cover a broad range of investment companies or securities.
136

At the same time, the comprehensive list requirement would permit a different presentation of research about multiple covered investment funds than the industry representation requirement would permit.
137

Because the affiliate exclusion applies to all covered investment fund research reports—
i.e.,
both issuer-specific research reports and industry research reports—a broker-dealer seeking to rely on rule 139b by satisfying either the industry representation requirement or the comprehensive list requirement cannot include any covered investment fund issuer that is an affiliate of the broker-dealer, or for which the broker-dealer serves as an investment adviser (or is an affiliated person of the investment adviser) in a covered investment fund research report, including industry research reports.
138

134
Rule 139b(a)(2)(ii)(A).

135
Rule 139b(a)(2)(ii)(B).

136

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

137
Under 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.

138

See
rule 139b(a)(2)(ii)(B) (excluding from the comprehensive list securities of a covered investment fund that is an affiliate of the broker-dealer, or for which the broker-dealer serves as investment adviser (or for which the broker-dealer is an affiliated person of the investment adviser));
see also supra
section II.A.1. In the final rule, we also made a change to rule 139b(a)(2)(ii) to clarify that the industry research report provisions are with respect to covered investment fund research reports and the affiliate exclusion set forth therein. Thus, a broker-dealer cannot include a covered investment fund issuer in any industry specific report (
i.e.,
industry representation requirement or the comprehensive list requirement) if the broker-dealer's relationship to the issuer meets any of the affiliations designated in the affiliated exclusion.

Several commenters argued that a broker-dealer should be able to include affiliated funds in industry research reports about covered investment funds.
139

Another commenter argued that industry research reports with a substantial number of funds should satisfy the purposes of the affiliate exclusion if they contain similar information about each fund and no particular fund is afforded materially greater space or prominence.
140

Another commenter suggested that, in some instances, because affiliated funds may be as or more suitable than non-affiliated funds, broker-dealers should be allowed to include affiliated funds in industry research reports.
141

Several commenters also argued that we should permit broker-dealers to include both affiliated and non-affiliated funds in industry research reports, but only provide the rule 139b safe harbor for the non-affiliated funds included in the report. They suggested that any information about affiliated funds included in such a report not benefit from the safe harbor, and thus any discussions of those funds be subject to the requirements of rule 482.
142

139

See
ICI Comment Letter; Fidelity Comment Letter; SIFMA Comment Letter I;
see also
BlackRock Comment Letter.

140

See
SIFMA Comment Letter I.

141

See
Fidelity Comment Letter.

142

See
SIFMA Comment Letter I; Fidelity Comment Letter.

We believe extending the rule 139b safe harbor to affiliated funds in industry research reports (whether industry representation or comprehensive list reports) would not be consistent with the intent and plain language of section 2(f)(3) of the FAIR Act.
143

We also believe that allowing for a mix of affiliated funds and non-affiliated funds to appear together in a single research report, as suggested by commenters, in reliance on two separate and distinct characterizations of that communication (
i.e.,
under rule 139b such a research report would be deemed not an offer under the Securities Act, and under rule 482 such a research report would be deemed to be a 10(b) omitting prospectus) would be an untenable regulatory framework. Not only would there be differing presentation, liability, and filing standards for the different portions of the report, but we believe that it could create challenges for regulators and others and confusion for investors because the information presented for each type of fund would likely differ.

144

Accordingly, we clarify that broker-dealers may not selectively apply the rule 139b safe harbor to certain aspects of a research report. The safe harbor must apply to the entirety of the report or it does not apply at all. Broker-dealers may, however, instead choose to issue a rule 482 communication that is styled as an industry research report about affiliated funds or about affiliated and non-affiliated funds; in either case, such a communication would be subject to the requirements of rule 482 and not gain the benefit of the rule 139b safe harbor.

143
This section excludes from the definition of covered investment fund research report any 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-dealer that is an investment adviser (or an affiliated person of an investment adviser) for the covered investment fund.

144
For example, communications subject to rule 482 must be filed with the Commission pursuant to section 24(b) of the Investment Company Act. 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. 17 CFR 270.24b-3. Unless the entirety of the research report was filed, reviewing isolated and selective portions of a research report related to affiliated

funds may not allow for effective review of such materials.

One commenter raised the concern that excluding affiliated funds from an industry research report subject to the comprehensive list requirement may create a false impression that an affiliated fund is excluded because it does not meet an investor's criteria.
145

We acknowledge this possibility. If a broker-dealer is concerned that a research report purporting to include a comprehensive list of funds may confuse investors, the broker-dealer could include an explanation of why affiliated funds are excluded from the research report. For example, a broker-dealer could include a statement in the report indicating that it does not include information about affiliated funds due to relevant securities regulations.

145

See
Fidelity Comment Letter.

One commenter argued that rule 139b should not include industry report content requirements because covered investment funds do not have the same market conditioning or “gun-jumping” concerns as securities covered in research reports published or distributed in reliance on rule 139.
146

Since many covered investment funds continuously distribute their securities, conditioning the market concerns can remain throughout the offering for issuers covered under rule 139b. Market conditioning is a concern that information about a fund or its securities might supersede the information provided in their offering prospectus. With respect to research reports, this concern is heightened for issuer-specific research reports and therefore they are subject to more stringent conditions than industry research reports. Market conditioning, however, remains a concern for industry research reports, as well. The content requirements for industry reports are designed to help ensure that industry reports become a part of the mix of information in the marketplace, rather than circumventing the prospectus requirements of the Securities Act or the issuer-specific conditions.

146

See
ICI Comment Letter (citing an SEC staff report issued in 1969 noting that “gun-jumping” concerns primarily arise during the pre-filing stage of a securities offering and casting doubt on the doctrine's applicability to non-participants in a securities offering). This commenter made the same argument regarding industry report presentation requirements.
See infra
note 152.
See also
BlackRock Comment Letter. Rule 139b is not limited to non-participants. Broker-dealers participating in the distribution of the covered investment fund's securities may rely on the rule provided the applicable conditions are satisfied.

The language from rule 139's industry representation requirement is replicated 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.”
147

As discussed in the Proposing Release, 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.
148

Therefore, the 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).
149

We believe that this requirement tracks rule 139 to the extent practicable and appropriate, and we did not receive comments on this aspect of the proposal. For the reasons discussed above, we are adopting the industry research report content requirements as proposed.

147
Rule 139(a)(2)(iii) [17 CFR 230.139(a)(2)(iii)].

148

See
Proposing Release,
supra
note 2, at 26800.

149
Rule 139b(a)(2)(ii)(A).

d. Presentation Requirement for Industry Research Reports

As proposed, the rule 139b safe harbor for industry research reports is conditioned on a presentation requirement. Under the new rule, analysis of any covered investment fund issuer or its securities included in an industry research report cannot be given materially greater space or prominence in the publication than that given to any other covered investment fund issuer or its securities.
150

150
Rule 139b(a)(2)(iii).

We believe that the concerns underlying the rule 139 presentation requirements apply equally in the context of covered investment fund research reports.
151

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.

151

See
Proposing Release,
supra
note 2, at 26801.

One commenter argued that rule 139b should not include industry report presentation requirements because covered investment funds do not have the same market conditioning or “gun-jumping” concerns as those securities covered in research reports published or distributed in reliance of rule 139.
152

As discussed above, market conditioning remains a concern for industry research reports.
153

The presentation requirements for industry reports are designed to help ensure that industry reports become a part of the mix of information in the marketplace, rather than circumventing the prospectus requirements of the Securities Act or the issuer-specific conditions. For the same reasons discussed above, we disagree with this commenter.
154

Accordingly, we are adopting this requirement as proposed.

152

See
ICI Comment Letter;
see also
BlackRock Comment Letter.

153

See supra
note 146 and accompanying paragraph.

154

See id.

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

The proposed rule would not have required standardized performance presentation for covered investment fund research reports. However, the Commission requested comment on whether the final rule should require research reports about registered investment companies to be subject to standardized performance presentation requirements. The Commission expressed its concern that not including standardized performance measures in research reports could lead to investor confusion. The Commission also noted its longtime recognition that investors tend to consider investment performance to be a particularly significant factor in evaluating or comparing investment companies and had previously identified a number of circumstances in which performance could be disclosed in a misleading manner.
155

155

See
Proposing Release,
supra
note 2, at 26802. Additionally, the Commission noted its concern that rule 482 or rule 34b-1 could be circumvented by recasting registered investment company

advertisements or selling materials as research reports.
Id.

In a change from the proposal, we are adopting a condition in rule 139b that if fund performance information is included in a research report, it must be presented in accordance with certain standardized presentation requirements dependent on the type of covered investment fund covered.
156

For research reports that include registered open-end fund performance, we are requiring that fund performance be presented according to the presentment and timeliness requirements of rule 482.
157

For research reports that include closed-end fund performance, one commenter argued for standardized presentation requirements for all covered investment funds and recommended that closed-end funds comply with the requirements of Form N-2 instead of rule 482, which does not offer any standardized performance requirements for closed-end funds.
158

We agree with the commenter, and are therefore requiring that closed-end fund performance be presented in a manner that is in accordance with the instructions to item 4.1(g) of Form N-2, although other historical measures of performance may also be included if any other measurement is set out with no greater prominence.

156
Rule 139b(a)(3).

157

See id.
(requiring that a research report discussing fund performance of a registered open-end management investment company must present it in accordance with the performance requirements of paragraphs (d) and (e) of rule 482 [17 CFR 230.482] and must also comply with the timeliness requirement of performance data in paragraph (g) of rule 482).

158

See
ICI Comment Letter;
see also
BlackRock Comment Letter.

Specific statutory provisions and rules apply to advertising the performance of registered investment companies.
159

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.
160

Therefore, 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.
161

As discussed in the Proposing Release, given the breadth of the definition of “research report” under the FAIR Act (and the definition of “research report” 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 rule 139b safe harbor.
162

Among other things, rule 482 requires standardized presentation of performance data included in registered open-end investment company advertisements.
163

Alternatively, if other performance measures are presented, they must be accompanied by certain standardized performance data.
164

159

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).

160

See
rule 482 under the Securities Act [17 CFR 230.482].

161

See id.
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).

162

See
Proposing Release,
supra
note 2, at 26801.

163

See
rule 482(d)(1)-(4) under the Securities Act (for open-end investment companies other than money market funds) [17 CFR 230.482(d)(1)-(4)]; rule 482(e) under the Securities Act (for money market funds) [17 CFR 230.482(e)].

164

See
rule 482(d)(5) [17 CFR 230.482(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.
See id.

Because a broker-dealer's publication or distribution of a covered investment fund research report under rule 139b is 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 under rule 34b-1 under the Investment Company Act that must be accompanied or preceded by a statutory prospectus now could be considered covered investment fund research reports (which need not be preceded or accompanied by a statutory prospectus).
165

Rule 34b-1 incorporates many of the rule 482 requirements relating to performance disclosure and makes these requirements applicable to supplemental sales literature.
166

As discussed in the Proposing Release, 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,
167

there could be circumstances where, under rule 139b, broker-dealers publish or distribute communications that historically have been viewed as registered investment company advertisements or selling materials.

165

See
section 2(a)(10)(a) of the Securities Act; rule 139b(a).
See also
rule 34b-1 under the Investment Company Act [17 CFR 270.34b-1]. 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.

166

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

167

See, e.g., supra
sections II.A.1 (affiliate exclusion) and II.B.1.c and II.B.2.b (regular-course-of-business requirements). 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 infra
section II.D.1.

We received two comment letters addressing this issue.
168

One commenter suggested that the presentation of performance information in research reports about registered investment companies should not be subject to the standardized performance requirements of rule 482.
169

This commenter stated that because rule 482 is intended to apply to advertisements, such presentation requirements might undermine analysis or insights that a

research analyst may seek to convey about one or more covered investment funds by highlighting a particular aspect of performance information. This commenter also stated that SRO rules would address the investor confusion concern raised by the Commission. We disagree that applying standardized performance presentation requirements would undermine a research analyst's analysis or insights because rule 482 does not preclude non-standardized performance information. Rather, it requires standardized performance information to be presented if non-standardized performance information is presented. We believe SRO rules may address some investor confusion concerns, but we believe requiring presentation performance requirements would more fully address these concerns.

168

See
SIFMA Comment Letter I; ICI Comment Letter;
see also
BlackRock Comment Letter.

169
SIFMA Comment Letter I.

Another commenter stated that the Commission should require that fund-specific performance information in covered investment fund research reports be presented in accordance with the applicable standardization requirements.
170

This commenter stated that investors tend to consider fund performance a significant factor in evaluating or comparing funds and that standardized fund performance reporting requirements have served investors well. Furthermore, this commenter noted that discrepancies in performance between a broker-dealer's research report and what a fund may report or disclose in regulatory filings or advertisements would risk confusing investors. We agree with both of the commenter's points. This commenter also noted that if the final rule does not require standardized presentation requirements for fund performance information, the Commission should require a clear and prominent disclosure whenever fund-specific performance is not in accordance with these standards.

170
ICI Comment Letter. This commenter also suggested the disclosure of Form N-2 performance data for closed-end funds.
See also
BlackRock Comment Letter.

The final rule thus requires that a research report that includes open-end fund performance information must present this information in accordance with rule 482 presentment and timeliness requirements. A research report must present closed-end fund performance information in accordance with the instructions to item 4.1(g) set forth in Form N-2 (although other historical measures of performance may also be included if the other measurement is set out with no greater prominence than the measurement that is in accordance with the instructions to item 4.1(g) of Form N-2).

Rule 139b(a)(3) requirements would not preclude research report analysts from presenting performance information in their preferred manner; rather, it requires that standardized performance information also be included if non-standardized performance information is presented. To satisfy this requirement, analysts may choose to present non-standardized performance information in a way they believe highlights a particular insight or analysis, so long as it is presented alongside the standardized performance information consistent with rule 482 requirements or Form N-2, if applicable.
171

171

See
rule 139b(a)(3).

As noted in the proposal, covered investment fund research reports relying on the rule 139b safe

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2018-26613. Public record. Not legal advice.