Summary 

On May 23, 2018, the SEC issued proposed rules and amendments designed to promote research on “covered investment funds,” which include mutual funds, exchange-traded funds, registered closed-end funds, business development companies and certain exchange-listed commodity- or currency-based trusts or funds. The proposal would establish a safe harbor for an unaffiliated broker-dealer participating in a securities offering of a covered investment fund to publish or distribute a research report under certain conditions. If the conditions are satisfied, the publication or distribution of the research report would not constitute an offer for sale of the covered investment fund’s securities for purposes of the Securities Act of 1933 (1933 Act), even if the broker-dealer is participating or may participate in a registered offering of the covered investment fund’s securities. The proposal was issued in accordance with the Fair Access to Investment Research Act of 2017 (FAIR Act), which was signed into law on October 6, 2017 and directed the SEC to propose and adopt rule amendments to extend the current safe harbor of Rule 139 under the 1933 Act—applicable to research reports about other issuers or their securities—to include “covered investment fund research reports.”

The SEC specifically proposed: 

1. New Rule 139b under the 1933 Act, which would establish a safe harbor for an unaffiliated broker-dealer participating in a securities offering of a covered investment fund to publish or distribute a covered investment fund research report;

2. New Rule 24b-4 under the Investment Company Act of 1940 (1940 Act), which would generally exclude a covered investment fund research report from the filing requirements of Section 24(b) of the 1940 Act; and

3. A conforming amendment to Rule 101 of Regulation M, which would permit distribution participants, such as brokers or dealers, to provide information about covered securities if certain conditions are satisfied.

Scope of Proposed Rule 139 (b) 

A “covered investment fund” includes (1) registered investment companies (or series or classes thereof), (2) business development companies and (3) others issuing securities in a registered offering if: (a) the securities are listed on a national securities exchange; (b) the issuer’s assets consist primarily of commodities, currencies or certain derivative instruments; and (c) the issuer’s registration statement reflects that its securities are purchased or redeemed for a ratable share of its assets. A “research report” is a written communication containing information, opinions or recommendations with respect to securities of an issuer or an analysis of a security of an issuer, regardless of whether the communication provides information reasonably sufficient on which to base an investment decision. A “covered investment fund research report,” in turn, means a research report published or distributed by a broker or dealer about (1) a covered investment fund or (2) any securities issued by the fund. The term excludes a research report that is published or distributed by (1) the covered investment fund itself or any affiliate of the covered investment fund, or (2) any broker or dealer that is an investment adviser (or an affiliated person of an investment adviser) for the covered investment fund. Of the two foregoing categories of excluded research reports, the former is intended to prevent use of the safe harbor to avoid applicability of the 1933 Act’s prospectus requirements, among other things, and the latter addresses the concern that a broker-dealer that is a fund’s adviser, or an affiliated person thereof, may have financial incentives—such as promotion of the covered fund to increase sales—that could give rise to a conflict of interest.

Two Types of Covered Investment Fund Research Reports and Other Conditions

For a broker-dealer to rely on proposed Rule 139b, the research report must cover either a specific issuer (“issuerspecific research report”) or a substantial number of issuers in an industry or sub-industry (“industry research report”). Other conditions for reliance on the proposed safe harbor are intended to track current Rule 139’s conditions, to the extent practicable. For instance, as to both types of research reports, a broker-dealer is required to publish or distribute research reports in the regular course of its business, which tracks an existing requirement under Rule 139.

Issuer Specific Research Reports 

Issuer-specific research reports must satisfy certain reporting history, reporting timeliness and minimum public market value requirements that are consistent generally with the conditions for reliance on current Rule 139. For instance, for a covered investment fund that is a registered investment company, the fund would need to have (1) been subject to the 1940 Act’s reporting requirements for a period of at least 12 calendar months prior to reliance on the proposed rule, and (2) timely filed all required reports during the immediately preceding 12 months. In addition, the covered investment fund that is the subject of the report must have a minimum aggregate market value of $75 million.

Industry Research Reports 

Under the proposed safe harbor, each covered investment fund included in an industry research report must be subject to the reporting requirements of Section 30 of the 1940 Act (or Securities Exchange Act of 1934 reporting requirements for funds that are not registered under the 1940 Act). As with issuer-specific reports, this proposed reporting requirement is intended to “assure that there is publicly available information about the relevant issuers and that investors are able to use such information in making their investment decisions.” Industry research reports are also subject to certain content and presentation requirements.

Proposed Rule 24b-4 

Proposed Rule 24b-4 under the 1940 Act would exclude a covered investment fund research report from the filing requirements of Section 24(b) of the 1940 Act, except to the extent that the research report is not otherwise subject to self-regulatory organization—e.g., FINRA—content standards applicable to research reports. A covered investment fund research report would continue to be subject to FINRA recordkeeping requirements applicable to communications with the public, even if the broker-dealer would not be required to file the research report with FINRA or the SEC.

Proposed Amendment to Rule 101 of Regulation M

The proposed conforming amendment to Rule 101 of Regulation M would permit distribution participants, such as broker-dealers, to publish or disseminate any information, opinion or recommendation relating to a covered security so long as the conditions of Proposed Rule 139b are satisfied.¹

Request for Comment 

The SEC has requested comments on all aspects of the proposed rules, and specifically seeks comments on the proposed definitions of “covered investment fund research report,” “research report” and “covered investment fund.” Additionally, the SEC has requested comments on the following: (1) the proposed reporting history and timeliness requirements of an issuer-specific research report; (2) the proposed minimum market value requirement of an issuer-specific research report; (3) the regular-course-of-business requirement of both issuer-specific and industry research reports; (4) the reporting requirement of industry research reports; (5) the proposed content requirements for industry reports; and (vi) the proposed presentation requirement for industry research reports.

The public comment period on the proposed amendments will be open until July 9, 2018.

The SEC’s proposing release for new Rules 139b and 24b-4 and the proposed changes to Rule 101 of Regulation M is available at: https://www.sec.gov/rules/proposed/2018/33-10498.pdf

_{1 Alternatively, if the conditions of Rule 138 or Rule 139 under the 1933 Act are satisfied, permission would be similarly granted.}