Feb. 15, 2019
A Small Entity Compliance Guide for Broker-Dealers[*]
Introduction
On November 30, 2018, the Commission adopted new rules that provide a safe harbor for an unaffiliated broker or dealer (“broker-dealer”) seeking to publish or distribute research reports about covered investment funds.[1] Covered investment funds include mutual funds, exchange-traded funds, registered closed-end funds, business development companies, and commodity- or currency-based trusts and funds. An unaffiliated broker-dealer can rely on this new safe harbor even if the broker-dealer is participating in the offering of securities covered in the research report. These rules were adopted in response to the directives set forth in the Fair Access to Investment Research Act of 2017 (FAIR Act).
New rule 139b sets forth certain conditions in order for an unaffiliated broker-dealer to rely on the safe harbor to publish or distribute research reports on a covered investment fund or its securities (“covered investment fund research reports”). If the conditions of new rule 139b are met, 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.
Highlights
Conditions of Rule 139b
- Affiliate exclusion. The rule requires that a covered investment fund research report not be published or distributed by the covered investment fund or any affiliate of the covered investment fund, or any broker-dealer that is an investment adviser (or any affiliated person of an investment adviser) for the covered investment fund.
- Issuer-specific reports. An issuer-specific report is a covered investment fund research report about a specific covered investment fund. In order for a broker-dealer to publish or distribute an issuer-specific report, it must meet certain conditions including:
- Each 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. 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, N-Q[2], N-PORT, N-MFP, and N-CEN during the immediately preceding 12 calendar months. 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 and 10-Q and 20-F during the immediately preceding 12 calendar months. .
- The covered investment fund must have a $75 million minimum public market value at the initial publication or distribution of a covered investment research report (or reinitiation thereof) and on a quarterly basis thereafter. For most covered investment funds, this calculation need not be calculated net of affiliates.
- A broker-dealer must meet the rule’s regular-course-of-business requirements, which means that a broker-dealer, at the time of reliance on rule 139b, must have published or distributed 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.
- Industry reports. An industry report is a covered investment fund research about a substantial number of covered investment funds. In order for a broker-dealer to publish or distribute an industry report, it must meet certain conditions including:
- Each covered investment fund included in an industry 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.
- As with issuer-specific reports, a broker-dealer must publish or distribute research reports in the regular course of its business to rely on this safe harbor.
- The industry reports either must include similar information about a substantial number of covered investment fund issuers 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). Alternatively, an industry report may contain a comprehensive list of covered investment fund securities currently recommended by the broker-dealer (the “comprehensive list requirement”).
- Disclosure of standardized performance requirement. If fund performance information is included in a covered investment fund research report, for open-end and closed-end funds, it must be presented according to certain standardized presentation requirements.
Filing requirements
New rule 24b-4 provides that a covered investment research report will not be subject to the filing requirements of section 24(b) of the Investment Company Act (or the rules and regulations thereunder) except to the extent the research report is otherwise not subject to the content standards in self-regulatory organization (“SRO”) rules related to research reports. By operation of the new rule, a covered investment fund research report that otherwise would be subject to section 24(b) of the Investment Company Act would not be subject to that section so long as the research report remains subject to the general content standards of FINRA rule 2210(d)(1) (or substantially similar SRO rules).
Other Resources
The adopting release for these amendments can be found on the Commission’s website at: https://www.sec.gov/rules/final/2018/33-10580.pdf.
Contacting the SEC Staff
The Division of Investment Management’s Chief Counsel’s Officeis available to assist small entities and others with questions regarding the new rule and rule amendments. You can contact the Office for this purpose at:
202-551-6825 orIMOCC@sec.gov
[1] See new rule 139b under the Securities Act of 1933 (“Securities Act”) and new rule 24b-4 under the Investment Company Act of 1940 (“Investment Company Act”). As part of this rulemaking, the Commission also adopted a conforming amendment to rule101 of Regulation M, as well as a technical amendment to Form 12b-25.
[2] Effective May 1, 2020, Form N-Q will be rescinded and 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.
[*] This guide was prepared by the SEC staff as a “small entity compliance guide” under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, as amended. The guide summarizes and explains rules adopted by the SEC, but is not a substitute for any rule itself. Only the rule itself can provide complete and definitive information regarding its requirements.
