By Amanda Maine, J.D.
The SEC has adopted amendments to implement the Fair Access to Investment Research Act of 2017 (FAIR Act). The new rules and amendments are intended to promote research on mutual funds, exchange‑traded funds, registered closed-end funds, business development companies, and similar covered investment funds by reducing obstacles to providing research on these kinds of funds. Under the new rules, a broker or dealer can publish or distribute research reports under certain conditions similar those that exist under safe harbor for research reports about public companies.
Rule 139b. New Rule 139b is modeled on Securities Act Rule 139, which provides a safe harbor for the publication or distribution of research reports concerning one or more issuers by a broker or dealer participating in a registered offering of one of the covered issuers’ securities. 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. Rule 139b does not preclude a broker-dealer from relying on existing Rule 139 if applicable.
Conditions. The final rule release outlines several conditions for the safe harbor to apply. A covered investment fund that publishes or distributes issuer-specific reports 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 must have filed these reports in a timely manner. A covered investment fund that is the subject of an issuer-specific report must satisfy a minimum public market value threshold at the date of reliance on the new rule (the “float requirement”).
Regarding industry research reports, to be eligible for the safe harbor the report 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”) or contain a comprehensive list of covered investment fund securities currently recommended by the broker-dealer (the “comprehensive list requirement”). The rule also states that 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.
Change from proposal. The proposed rule would not have required a standardized performance presentation for covered investment fund research reports. However, the final rule states 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.
Rule 24b-4. Under new Rule 24b-4, a covered investment fund research report about a registered investment company will not be subject to Investment Company Act Section 24(b) except to the extent the research report is otherwise not subject to the content standards in self-regulatory organizations’ rules related to research reports, including those contained in the rules governing communications with the public regarding investment companies or substantially similar standards. Covered investment fund research reports under Rule 139b that otherwise would be subject to the filing requirements of investment company sales literature under Section 24(b) would not be subject to that section so long as they remain subject to the general content standards of FINRA Rule 2210(d)(1), the release states.
The release is No. 33-10580.