Research Re-Imagined

SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION

Compliance & Legal Society Annual Seminar

JW Marriott Grande Lakes Orlando, FL

TA Panel: Research Re-Imagined

March 17, 2020

CLE Outline

By:

Dana G. Fleischman Partner Latham & Watkins LLP

By:

Dana G. Fleischman Partner Latham & Watkins LLP

I. KEY EVENTS IN THE DEVELOPMENT OF U.S. RULES RELATING TO RESEARCH ANALYST CONFLICTS OF INTEREST

Following the “technology boom” in the late 1990s, which was alleged by some to have been fueled by glowing research reports prepared by analysts who were employed by broker-dealers with an interest in obtaining or retaining investment banking business of the issuers that were the subject of the reports, various regulators moved to adopt more stringent rules and regulations designed to prevent investment banking personnel and investment banking considerations from influencing such research analysts and the content of their research reports.

A. FINRA Research Conflicts Rules.2

1. On May 10, 2002, the Securities and Exchange Commission (the “SEC”) issued Release No. 34-45908 approving changes proposed by the NASD and the NYSE to their rules governing equity research analysts (in particular, approving new NASD Rule 2711 and changes to NYSE Rules 472 and 351) (the “May 2002 Research Rules”). On June 26, 2002, the NASD and NYSE issued a joint memorandum containing a discussion and interpretation of certain of the May 2002 Research Rules. See NASD Notice to Members 02-39 and NYSE Information Memo 02-26.

2. On October 3, 2002, the NYSE and the NASD issued a joint press release announcing new rule proposals intended to further strengthen the May 2002 Research Rules. The SEC approved the new rule proposals on July 29, 2003 (See SEC Release No. 34-48252) (the “July 2003 Research Rules,” and together with the May 2002 Research Rules, the “Legacy Research Rules”). In March 2004, the NASD and NYSE issued a second joint memorandum

1 This outline is of necessity summary in nature and should not be relied on as legal advice. The information contained in this outline is current as of January 17, 2020. The author gratefully acknowledges the assistance of Brett Ackerman, an associate of Latham & Watkins LLP, in the preparation of this outline. 2 “FINRA” refers to the Financial Industry Regulatory Authority, Inc., which was formed in July 2007 to consolidate the National Association of Securities Dealers, Inc. (the “NASD”), and the member regulation, enforcement and arbitration functions of the New York Stock Exchange, Inc. (the “NYSE”). For purposes of this outline, the legacy rules of the NASD and NYSE are referred to as NASD Rules and NYSE Rules, respectively, irrespective of whether such rules have since been adopted by FINRA as part of the consolidated FINRA rulebook (See footnote 4). In addition, this outline refers to the NASD or the NYSE, respectively, in connection with activities taken by such entities prior to the formation of FINRA.

providing further interpretive guidance with respect to the Legacy Research Rules. See NASD Notice to Members 04-18 and NYSE Information Memo 04-10.

3. On April 21, 2005, the SEC approved additional amendments to the Legacy Research Rules with respect to analyst participation in roadshows and other matters.

4. A “Joint Report by NASD and the NYSE on the Operation and Effectiveness of the Research Analyst Conflict of Interest Rules” (the “Joint Report”) was issued in December 2005. The Joint Report includes a review of the Legacy Research Rules and recommends certain changes to them, in some cases, suggesting the elimination or modification of certain current requirements to enhance information flow to investors and minimize burdens on member firms. The Joint Report further noted that the NYSE and the NASD would monitor the extent to which firms have adopted The Bond Market Association’s (“BMA”) Guiding Principles to Promote the Integrity of Fixed Income Research (the “BMA Guiding Principles”).3

5. In July 2006, the NASD and the NYSE published a joint notice to members noting that they had conducted examinations of certain member organizations to assess how those firms have addressed conflicts of interest with respect to fixed income research and had found many instances in which firms had failed to adhere to the BMA Guiding Principles. See NASD Notice to Members 6-36 (July 2006); NYSE Information Memo 6-55 (Aug. 2006).

6. On October 17, 2006, the SEC issued Release No. 34-54616 giving notice of immediate effectiveness and publishing for comment joint rule changes by the NASD and NYSE to codify certain interpretations contained in NASD Notices to Members 02-39 and 04-18 and NYSE Information Memos 02-26 and 04-10, including those relating to the definitions of “research report” and “public appearance” and the disclosures required in connection with the distribution of third party research. In conjunction with the codification of the prior interpretive positions, the NASD and NYSE also issued two additional interpretations with respect to the inclusion of research analyst information in pitch materials and participation by research analysts in roadshows and other widely attended sales force or investor presentations. See NASD Notice to Members 07-04 and NYSE Information Memo 07-11.

3 The BMA Guiding Principles were published in May 2004 by the BMA (which, in 2006, merged with the former Securities Industry Association to form SIFMA) and provided a “best practices” guide for firms in connection with the publication of fixed income research. Although based on the equity research conflict rules, the BMA Guiding Principles were specifically tailored to address the significant differences between the fixed income and equity markets.

2 7. On January 9, 2007, the SEC published for comment proposed rule changes by the NASD and NYSE to implement certain recommendations made in the Joint Report relating to disclosure of conflicts, quiet periods, restrictions on review of research reports by non- research personnel and restrictions on personal trading by research analysts (the “Joint Report Proposal”). See SEC Release No. 34-55072.

8. On February 6, 2008, the SEC issued Release No. 34-57279 granting accelerated approval of a proposed rule change by FINRA to amend requirements regarding the review of third party research reports. The SEC also issued Release No. 34-57278 granting accelerated approval of a proposed rule change by FINRA to amend the exemption relating to foreign research analysts.

9. On October 14, 2008, as part of the process for developing FINRA’s new, consolidated rulebook,4 FINRA issued Regulatory Notice 08-55 seeking comment on proposed FINRA Rules 1223 and 2240 regarding research analyst conflicts of interest (the “October 2008 Proposal”). Although the October 2008 Proposal was not ultimately adopted, it served as the basis for FINRA’s later proposals regarding a consolidated rule to address equity research conflicts of interest.

10. On January 15, 2009, the SEC approved FINRA Rule 5280, which codifies with certain modifications NASD Interpretive Material (“IM”) 2110-4 (Trading Ahead of Research Reports) in the consolidated FINRA rulebook.

11. In March 2011, FINRA sought comment on a concept proposal to apply objectivity safeguards and disclosure requirements to the publication and distribution of debt research reports. See FINRA Regulatory Notice 11-11 (Mar. 2011). This proposal introduced the concept of a tiered approach that generally would provide retail debt research recipients with most of the same protections provided to recipients of equity research, while exempting from many of those requirements debt research provided solely to institutional investors.

12. In February 2012, following its review of comments to FINRA Regulatory Notice 11-11, FINRA published FINRA Regulatory Notice 12-09 seeking additional comments on a revised debt research conflicts rule proposal.

13. FINRA published a further revised proposal addressing debt research conflicts in October 2012 in response to comments received on the prior

4 The FINRA rulebook includes (1) FINRA Rules, (2) NASD Rules and (3) rules incorporated from the NYSE (“Incorporated NYSE Rules”). For more information about the FINRA rulebook consolidation process and the continuing applicability of NASD Rules and Incorporated NYSE Rules pending completion of the rulebook consolidation process, See Information Notice 3/12/08 and Information Notice 12/8/08.

3 proposal set forth in FINRA Regulatory Notice 12-09. See FINRA Regulatory Notice 12-42 (Oct. 2012).

14. On November 14, 2014, FINRA filed with the SEC a proposal to adopt NASD Rule 2711 (Research Analysts and Research Reports) as a FINRA rule, with several modifications; amend NASD Rule 1050 (Registration of Research Analysts) and Incorporated NYSE Rule 344 to create an exception from the research analyst qualification requirement; and re- designate NASD Rule 2711 as FINRA Rule 2241 in the consolidated FINRA rulebook (the “Equity Research Rule”). See SEC Release No. 34-73622 (the “Equity Rule Proposal”). At a substantive level, the new Equity Research Rule is largely in line with the Legacy Research Rules but significantly expands member firm obligations in certain key areas. Moreover, the Equity Research Rule combines a principle-based approach that allows member firms a certain degree of flexibility to design and implement policies and procedures specifically tailored to meet each such firm’s particular circumstances, but tempers that flexibility by mandating the inclusion of certain express prescriptive provisions that establish minimum standards.

15. On November 14, 2014, FINRA also filed with the SEC a proposal to adopt new FINRA Rule 2242, which would address, for the first time, conflicts of interest relating to the publication and distribution of debt research reports (the “Debt Research Rule”). See SEC Release No. 34-73623 (the “Debt Rule Proposal”).

16. On July 16, 2015, the SEC issued orders approving both the Equity Research Rule and the Debt Research Rule. See SEC Release Nos. 34-75471 and 34-75472.

17. FINRA published Regulatory Notice 15-30 (the “Equity Research Notice”) and Regulatory Notice 15-31 (the “Debt Research Notice”) on August 26, 2015, setting the effective dates for the Equity Research Rule at September 25, 2015 for certain provisions and December 24, 2015 for the remaining provisions, and at February 22, 2016 for the Debt Research Rule.

18. On June 7, 2016, FINRA amended the Debt Research Rule to clarify the application of the Rule with respect to: (a) the consent requirement for institutional debt research reports distributed to non-U.S. investors by non-U.S. affiliates of members; (b) the consent requirement for institutional debt research reports distributed to specified persons for informational purposes unrelated to investing in debt securities; (c) the scope of the institutional debt research report exemption when distributing third-party debt research reports to eligible institutional investors; and (d) the disclosure requirements for debt research analysts in public appearances.

19. In April 2017, FINRA published Regulatory Notice 17-16 requesting comments on a proposal to establish a limited safe harbor for certain written

4 analysis prepared by sales and trading or principal trading personnel but which, depending on its content, may rise to the level of a “research report” under the Research Rules (the “Desk Commentary Proposal”). The Desk Commentary Proposal also included proposed exemptions for (1) desk commentary authors from compliance with the registration and qualification requirements applicable to equity research analysts under NASD Rule 1050 and (2) associated persons who review equity desk commentary from the requirement to register as “research principals” under NASD Rule 1022. However, based in part on member feedback, FINRA staff has since indicated that it does not intend to proceed with the Desk Commentary Proposal.

20. On February 6, 2018, FINRA published Regulatory Notice 18-05 in which it sought, among other things, comments as to whether U.S. Treasury securities should be subject to the Debt Research Rule and FINRA Rule 5280 (Trading Ahead of Research Reports).

B. Sarbanes-Oxley. On July 30, 2002, President Bush signed into law the Sarbanes- Oxley Act of 2002 (the “Sarbanes-Oxley Act”), which contains provisions intended to address analyst conflicts of interest. See Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (2002). Most of the provisions set forth in the Sarbanes-Oxley Act were already addressed by the May 2002 Research Rules. The remaining provisions were addressed by the July 2003 Research Rules.

C. SEC Regulation AC.

1. On February 6, 2003, the SEC adopted Regulation Analyst Certification (“Regulation AC”). See SEC Release No. 34-47384. Regulation AC, which became effective April 14, 2003, applies to research reports and public appearances relating to both debt and equity securities (note that the Legacy Research Rules applied solely to activities of equity research analysts).

2. Regulation AC requires research analysts to certify that the views they express in research reports and public appearances accurately reflect their personal views and to disclose whether they have received any compensation with respect to such views.

3. The staff of the SEC’s Division of Market Regulation5 issued a notice containing their responses to certain frequently asked questions regarding Regulation AC on August 6, 2003. This notice was amended on April 25, 2005. The modified notice contains additional SEC staff responses to questions regarding the application of Regulation AC to non-U.S. broker-dealers, including those which provide research to U.S.

5 On November 14, 2007, the SEC changed the name of the Division of Market Regulation to the Division of Trading and Markets. Historical citations herein, however, continue to refer to such Division as the Division of Market Regulation.

5 persons in reliance on Rule 15a-6 under the Securities Exchange Act of 1934 (the “Exchange Act”).

D. The Global Research Settlement.

1. On April 28, 2003, the SEC, NYSE, NASD, NASAA, the New York Attorney General and various state securities regulators (collectively, the “Regulators”) announced that enforcement actions against ten of the largest investment banking firms (specifically, Bear, Stearns & Co. Inc.; Credit Suisse First Boston LLC; Goldman, Sachs & Co.; Lehman Brothers Inc.; J.P. Morgan Securities Inc.; Merrill Lynch, Pierce, Fenner & Smith Incorporated; Morgan Stanley & Co. Incorporated; Citigroup Global Markets Inc. (formerly, Salomon Smith Barney Inc.); UBS Warburg LLC; and U.S. Bancorp Piper Jaffray Inc.; collectively, the “Global Settlement Firms”) had been completed and the terms of the agreement in principle reached with the firms in December 2002 had been finalized (the “Global Research Settlement”).6

2. The Global Research Settlement relates to charges by the Regulators that the Global Settlement Firms were engaged in acts and practices that created or maintained inappropriate influence by investment banking personnel over equity research analysts, which created conflicts of interest that were not adequately managed or disclosed. While neither admitting nor denying the allegations made, the Global Settlement Firms agreed to pay the Regulators an aggregate of approximately $1.4 billion, a portion of which is comprised of civil penalties and disgorgement in connection with prior activities and the remainder of which will be used to fund investor education programs and to pay for the procurement of independent research. The Global Research Settlement was entered by the U.S. District Court for the Southern District of New York (the “Court”) on October 31, 2003 (the “Entry Date”).

3. The Global Settlement Firms and the Regulators subsequently agreed to amend certain provisions of the Global Research Settlement, which amendments were entered by the Court on September 24, 2004.

6 Two other firms involved in related enforcement actions, Deutsche Bank Securities Inc. and Thomas Weisel Partners LLC, reached a settlement with the Regulators on August 26, 2004 and agreed to pay a total of $87.5 million and $12.5 million, respectively. The terms of these two settlement agreements are substantially the same as the settlements entered into with the other ten firms and, for purposes of this outline, the terms “Global Research Settlement” and “Global Settlement Firms” include these two additional firms.

6 4. On November 2, 2004, the staff of the SEC’s Division of Market Regulation issued an interpretive letter addressing a number of questions regarding the Global Research Settlement (the “SEC Interpretive Letter”).7

5. The Global Research Settlement provides that if certain terms8 of the Global Research Settlement have not been superseded by an intervening industry- wide rule or interpretation within five years after the Entry Date (i.e., by October 31, 2008), it is the expectation of the Global Settlement Firms and the Regulators that the SEC would agree (subject to Court approval) to an amendment or modification of each such term “unless the SEC believes such amendment or modification would not be in the public interest.”

6. On August 3, 2009, the Global Settlement Firms, after various discussions with the Regulators, submitted a motion proposing certain modifications for the Court’s consideration. On March 15, 2010, the Court entered an order (the “March 2010 Order”) approving all of the requested modifications, other than those proposed changes that would have permitted certain additional communications between research and investment banking personnel regarding particular companies in the presence of a chaperone, and regarding market or industry trends, conditions or developments outside the presence of a chaperone.

E. Dodd-Frank Research Study. On July 21, 2010, President Obama signed into law the Dodd- Frank Wall Street Reform and Consumer Protection Act (the “Dodd- Frank Act”). Among the numerous provisions that impact broker-dealers and the trading of securities, is a requirement that the Director of the Government Accountability Office (“GAO”) conduct a study “(1) to identify and examine potential conflicts of interest that exist between the staffs of investment banking and equity and fixed income securities analyst functions within the same firms and (2) to make recommendations to Congress designed to protect investors in light of such conflicts.”9 The study was published in January 2012. See Securities Research: Additional Actions Could Improve Regulatory Oversight of Analyst Conflicts of Interest, GAO 12-209 (Jan. 2012).

F. CFTC Research Rules. In response to Section 731 and 732 of the Dodd-Frank Act, the U.S. Commodity Futures Trading Commission (the “CFTC”) adopted rules in April 2012 (the “CFTC Research Conflicts Rules”) that apply rules similar to the Legacy Research Rules to swap dealers, major swap participants, futures

7 See Letter to Dana G. Fleischman from James A. Brigagliano, November 2, 2004 (available at http://www.sec.gov/divisions/marketreg/mr-noaction/grs110204.htm). 8 In particular, the provisions set forth in Sections I and II of the Addendum to the Global Research Settlement (referred to herein as the “structural reforms”). 9 See Section 919A of the Dodd-Frank Act.

7 commission merchants, and introducing brokers. See 77 Fed. Reg. 20128 (Apr. 3, 2012).

G. The Jumpstart Our Business Startups Act (“JOBS Act”). On April 5, 2012, President Obama signed the JOBS Act into law. The JOBS Act modified certain rules relating to analyst research reports and analyst interactions with respect to a category of issuers called emerging growth companies (“EGCs”).10 On August 22, 2012, the staff of the SEC’s Division of Trading and Markets published a series of frequently asked questions regarding the research-related provisions of the JOBS Act (the “JOBS Act FAQs”).11

H. Toys“R”Us Settlement. On December 11, 2014, FINRA announced that it entered into settlement agreements with ten firms in connection with the 2010 planned initial public offering (“IPO”) of Toys“R”Us (the “Toys Settlement”). The Toys Settlement relates to charges by FINRA that the 10 firms allowed their equity research analysts to solicit investment banking business and offered favorable research coverage in order to secure a role in the proposed Toys“R”Us IPO. While neither admitting nor denying the allegations made, the ten firms collectively agreed to pay FINRA a total of $43.5 million in sanctions. On May 27, 2015, FINRA staff issued a set of FAQs on research and conflicts of interest that further expand upon the views expressed by FINRA in the context of the Toys Settlement (the “Toys FAQs”).12 FINRA’s views regarding “pre-mandate” interactions between research analysts and company management are reflected in the new Equity Research Rule and Debt Research Rule.

I. The Fair Access to Investment Research Act of 2017. On October 6, 2017, the Fair Access to Investment Research Act was signed into law (the “FAIR Act”). The FAIR Act requires that the SEC amend Rule 139 under the Securities Act of 1933 (the “Securities Act”) to cover certain investment fund research reports.

On November 30, 2018, in response to the FAIR Act’s mandate, the SEC adopted Rule 139b under the Securities Act to establish a non-exclusive safe harbor for broker-dealers that participate in offerings by certain funds to publish or distribute research reports on such funds without those research reports being deemed offers to sell the fund’s securities. The effective date for the Rule 139b safe harbor was January 14, 2019.

On August 16, 2019, the SEC approved changes to FINRA Rule 2241 in response to the FAIR Act. Specifically, FINRA amended Rule 2241 to eliminate the quiet period restrictions on publishing a research report or making a public appearance concerning a covered investment fund that is the subject of such a report. FINRA

10 See Section 3(a)(80) of the Exchange Act. 11 See https://www.sec.gov/divisions/marketreg/tmjobsact-researchanalystsfaq.htm. 12 See https://www.finra.org/rules-guidance/key-topics/research-analyst-rules/faq. Note that NASD Rule 2711, which is referenced in the Toys FAQs, has since been replaced by FINRA Rule 2241.

8 also amended FINRA Rule 2210 (“Communications with the Public”) to create a filing exemption for covered investment fund research reports that qualify for the Rule 139b safe harbor.

J. Treasury Report. In October 2017, the U.S. Department of the Treasury (“Treasury”) published a report entitled A Financial System that Creates Economic Opportunities: Capital Markets (the “Treasury Report”). Among other things, Treasury recommended a holistic review of the Global Research Settlement and the SEC and FINRA Research Rules with the objective of harmonizing a single set of rules for financial institutions.

K. House Financial Services Committee Resolution. In July 2018, the House Financial Services Committee passed, by a vote of 58-0, House Resolution 6139, which would require the SEC to study, among other things, the Global Research Settlement’s impact on the availability of research coverage of small issuers.13 The bill was reintroduced in 2019 as House Resolution 2919, passed in the House by a voice vote on July 9, 2019 and referred to the Senate on July 10, 2019.14

II. FINRA RESEARCH CONFLICT RULES

A. Equity Research Rule.

1. Key Definitions.

a. The term “research report” is defined in the Equity Research Rule to mean any written (including electronic) communication that includes an analysis of equity securities of individual companies or industries (other than an open-end registered investment company that is not listed or traded on an exchange) and that provides information reasonably sufficient upon which to base an investment decision. [FINRA Rule 2241(a)(11)]

b. The following communications are excluded from the term “research report”:

i. discussions of broad-based indices;

ii. commentaries on economic, political or market conditions;

iii. technical analyses concerning the demand and supply for a sector, index or industry based on trading volume and price;

13 See https://www.congress.gov/bill/115th-congress/house-bill/6139/text. 14 See https://www.congress.gov/bill/116th-congress/house-bill/2919/all-info.

9 iv. statistical summaries of multiple companies’ financial data, including listings of current ratings;

v. recommendations regarding increasing or decreasing holdings in particular industries or sectors; and

vi. notices of ratings or price target changes, provided that recipients are directed to the most recent research report on the subject company that includes the applicable disclosures required under the Equity Research Rule and the research report does not contain materially misleading disclosures (including disclosures that are out of date or no longer applicable). [FINRA Rule 2241(a)(11)(A)] c. The following communications are excluded from the term “research report” even if they include an analysis of an individual equity security and information reasonably sufficient upon which to base an investment decision:

i. any communications distributed to less than 15 persons;

ii. periodic reports or other communications prepared for investment company shareholders or discretionary investment account clients that discuss individual securities in the context of a fund’s or account’s past performance or the basis for previously made discretionary investment decisions; and

iii. internal communications not given to current or prospective customers. [FINRA Rule 2241(a)(11)(B)] d. The term “research report’ also excludes communications that constitute statutory prospectuses that are filed as part of a registration statement and communications that constitute private placement memoranda and comparable offering-related documents prepared in connection with investment banking services transactions, other than those that purport to be research. [FINRA Rule 2241(a)(11)(C)-(D)] e. The term “research analyst” is defined in the Equity Research Rule to mean an associated person who is primarily responsible for, and any associated person who reports directly or indirectly to a research analyst in connection with, the preparation of the substance of a research report, whether or not any such person has the job title of “research analyst.” [FINRA Rule 2241(a)(8)] f. The term “public appearance” is defined in the Equity Research Rule to mean any participation in a conference call, seminar, forum

10 (including an interactive electronic forum) or other public speaking activity before 15 or more persons or before one or more representatives of the media, a radio, television or print media interview, or the writing of a print media article, in which a research analyst makes a recommendation or offers an opinion concerning an equity security. [FINRA Rule 2241(a)(7)]

The term does not include a password protected Webcast, conference call or similar event with 15 or more existing customers, provided that (1) all of the event participants previously received the most current research report or other documentation that contains the required applicable disclosures, and (2) the research analyst appearing at the event corrects and updates during the event any disclosures in the research report that are inaccurate, misleading or no longer applicable. [FINRA Rule 2241(a)(7)]

g. The term “investment banking services” is defined in the Equity Research Rule to mean, without limitation, acting as an underwriter, participating in a selling group in an offering for the issuer or otherwise acting in furtherance of a public offering of the issuer; acting as a financial adviser in a merger or acquisition; providing venture capital or equity lines of credit or serving as placement agent for the issuer or otherwise acting in furtherance of a private offering of the issuer. [FINRA Rule 2241(a)(5)]

2. Identifying and Managing Conflicts of Interest.

a. In general, a member must establish, maintain and enforce written policies and procedures reasonably designed to identify and effectively manage conflicts of interest related to:

i. the preparation, content and distribution of research reports;

ii. public appearances by research analysts; and

iii. the interaction between research analysts and those outside of the research department, including investment banking and sales and trading personnel, subject companies and customers. [FINRA Rule 2241(b)(1)]

b. A member’s written policies and procedures must be reasonably designed to promote objective and reliable research that reflects the truly held opinions of research analysts and to prevent the use of research reports or research analysts to manipulate or condition the market or favor the interests of the member or a current or prospective customer or class of customers. [FINRA Rule 2241(b)(2)]

11 Such policies and procedures are required to cover the following topics: i. Pre-Publication Review of Research by Internal Research Personnel. Members must establish, maintain, and enforce policies and procedures that prohibit pre-publication review, clearance or approval of research reports by persons engaged in investment banking services activities and restrict or prohibit such review, clearance or approval by other persons not directly responsible for the preparation, content and distribution of research reports, other than legal and compliance personnel. [FINRA Rule 2241(b)(2)(A)]

Sections of a draft research report may be provided to non- investment banking personnel for factual review so long as: (1) the sections of the report submitted do not contain the research summary, the research rating or the price target; (2) a complete draft of the report is provided to legal or compliance personnel before sections of the report are submitted to non-investment banking personnel; and (3) if, after submitting sections of the report to non-investment banking personnel, the research department intends to change the proposed rating or price target, it must first provide written justification to, and receive written authorization from, legal or compliance personnel for the change. [FINRA Rule 2241, Supplementary Material .05] ii. Pre-Publication Review of Research by the Subject Company. Members must establish, maintain and enforce policies and procedures that prohibit pre-publication review of a research report by a subject company for purposes other than verification of facts. [FINRA Rule 2241(b)(2)(N)]

Sections of a draft research report may be provided to the subject company for factual review so long as: (1) the sections of the report submitted do not contain the research summary, the research rating or the price target; (2) a complete draft of the report is provided to legal or compliance personnel before sections of the report are submitted to the subject company; and (3) if, after submitting sections of the report to the subject company, the research department intends to change the proposed rating or price target, it must first provide written justification to, and receive written authorization from, legal or compliance personnel for the change. [FINRA Rule 2241, Supplementary Material .05]

12 iii. Research Coverage Decisions. Members must establish, maintain and enforce policies and procedures that restrict or limit input by the investment banking department into research coverage decisions. [FINRA Rule 2241(b)(2)(B)] iv. Supervision of Analysts. Members must establish, maintain and enforce policies and procedures that prohibit persons engaged in investment banking activities from supervision or control of research analysts, including influence or control over research analyst compensation evaluation and determination. [FINRA Rule 2241(b)(2)(C)] v. Research Budget Decisions. Members must establish, maintain and enforce policies and procedures that limit determination of the research department budget to senior management not engaged in investment banking services activities. [FINRA Rule 2241(b)(2)(D)] vi. Research Analyst Compensation. Members must establish, maintain and enforce policies and procedures that prohibit research analyst compensation based on specific investment banking services transactions or contributions to a member’s investment banking services activities. [FINRA Rule 2241(b)(2)(E)] vii. Research Analyst Compensation Committee Requirements. Members must establish, maintain and enforce policies and procedures that require that the compensation of a research analyst who is primarily responsible for preparation of the substance of a research report be reviewed and approved at least annually by a committee that reports to a member’s board of directors (or a senior executive officer if there is no board). Such committee may not have representation from the member’s investment banking department. [FINRA Rule 2241(b)(2)(F)]

The committee must consider the following factors in reviewing a research analyst’s compensation, if applicable: (1) the research analyst’s individual performance, including the analyst’s productivity and the quality of the analyst’s research; (2) the correlation between the research analyst’s recommendations and the performance of the recommended securities; and (3) the overall ratings received from clients, sales force and peers independent of the member’s investment banking department, and other independent ratings services. [FINRA Rule 2241(b)(2)(F)(i)- (ii)]

13 viii. Information Barriers. Members must establish, maintain and enforce policies and procedures that implement information barriers or other institutional safeguards reasonably designed to ensure that research analysts are insulated from review, pressure or oversight by persons engaged in investment banking services activities or other persons, including sales and trading personnel, who might be biased in their judgment or supervision. [FINRA Rule 2241(b)(2)(G)]

Although the rule does not expressly require physical separation, FINRA stated in the Equity Rule Proposal that it would generally expect physical separation except in extraordinary circumstances.

ix. No Retaliation. Members must establish, maintain and enforce policies and procedures that prohibit direct or indirect retaliation or threat of retaliation against research analysts employed by the member or its affiliates by persons engaged in investment banking services activities or other employees as the result of an adverse, negative, or otherwise unfavorable research report or public appearance by the research analyst that may adversely affect the member’s present or prospective business interests. [FINRA Rule 2241(b)(2)(H)]

x. Post-Offering Research Quiet Periods. Members must establish, maintain and enforce policies and procedures that define quiet periods of at least:

 Ten days after an IPO in which the member has acted as an underwriter or dealer; and

 Three days after a secondary offering in which the member has acted as a manager or co-manager. [FINRA Rule 2241(b)(2)(I)]

Such quiet periods, however, are not mandated in respect of an IPO or secondary offering of an EGC issuer.15 Pursuant to an amendment approved in August 2019 to implement the provisions of the FAIR Act, the quiet periods also do not apply to any offering of the securities of a “covered investment fund” that is the subject of a “covered investment

15 Note that, as a practical matter, the research quiet periods for both EGCs and non-EGCs is typically extended to 25 days after an IPO due to SEC rules relating to the delivery (or “availability”) period for prospectuses and other considerations.

14 fund research report” (as such terms are defined in Securities Act Rule 139b).

In addition, the Equity Research Rule does not prevent members from publishing or otherwise distributing a research report, or prevent a research analyst from making a public appearance, concerning the effects of significant news or a significant event on the subject company within such ten- and three-day periods, and provided that legal or compliance personnel authorize publication of that research report before it is issued or authorize the public appearance before it is made. [FINRA Rule 2241(b)(2)(I)(iii)]

The three-day period also does not prevent a member from publishing or otherwise distributing a research report pursuant to Rule 139 under the Securities Act regarding a subject company with “actively-traded securities,” as defined in Rule 101(c)(1) of SEC Regulation M, and will not prevent a research analyst from making a public appearance concerning such a company.16

xi. Personal Trading Restrictions. Members must establish, maintain and enforce policies and procedures that restrict or limit research analyst account trading in securities, any derivatives of such securities and funds whose performance is materially dependent upon the performance of securities covered by the research analyst.

Members must ensure that research analyst accounts, supervisors of research analysts and associated persons with the ability to influence the content of research reports do not benefit in their trading from knowledge of the content or timing of a research report before the intended recipients of such research have had a reasonable opportunity to act on the information in the research report.17

Members must prohibit the purchase or sell any security or any option on or derivative of such security in a manner

16 FINRA has indicated that it did not believe it was able to completely eliminate post-offering research quiet periods for non-EGCs given the requirements set forth in the Sarbanes-Oxley Act. See Part IV. 17 For purposes of the Equity Research Rule, an “associated person with the ability to influence the content of a research report” is an associated person who is required to review the content of the research report or has exercised authority to review or change the research report prior to publication or distribution. This term, however, does not include legal or compliance personnel who may review a research report for compliance purposes, but are not authorized to dictate a particular recommendation, rating or price target. [FINRA Rule 2241, Supplementary Material .08]

15 inconsistent with the research analyst’s recommendation as reflected in the most recent research report published by the member, subject to financial hardship exceptions as defined by the firm.

Members must also prohibit a research analyst account from purchasing or receiving any security before an issuer’s IPO if the issuer is principally engaged in the same types of business as companies that the research analyst follows. [FINRA Rule 2241(b)(2)(J)] xii. No Promises of Favorable Coverage. Members must establish, maintain and enforce policies and procedures that prohibit explicit or implicit promises of favorable research, a particular research rating or recommendation or specific research content as inducement for the receipt of business or compensation. [FINRA Rule 2241(b)(2)(K)] xiii. Solicitation and Marketing. Members must establish, maintain and enforce policies and procedures that restrict or limit activities by research analysts that can reasonably be expected to compromise their objectivity, including (1) prohibiting participation in pitches and other solicitations of investment banking services transactions, and (2) participation in roadshows and other marketing on behalf of an issuer related to an investment banking services transaction. [FINRA Rule 2241(b)(2)(L)]

FINRA interprets the solicitation restriction to prohibit the inclusion in pitch materials any information about a member’s research capacity in a manner that suggests, directly or indirectly, that the member might provide favorable research coverage. In this regard, FINRA would consider the publication in a pitch book or related materials of a research analyst’s industry ranking to imply the potential outcome of future research because of the manner in which such rankings are compiled. On the other hand, a member would be permitted to include in the pitch materials the fact of coverage and the name of the research analyst because such information alone does not imply favorable coverage. [FINRA Rule 2241, Supplementary Material .01(a)]

FINRA notes that this provision does not restrict a research analyst from attending a pitch meeting in connection with an initial public offering of an EGC issuer that also is attended by investment banking personnel, provided that the research

16 analyst does not engage in otherwise prohibited conduct in such meetings, including efforts to solicit investment banking business. [FINRA Rule 2241, Supplementary Material .01(b)]

No research analyst may engage in any communication with a current or prospective customer in the presence of investment banking department personnel or company management about an investment banking services transaction. [FINRA Rule 2241, Supplementary Material .03(a)]

Any written or oral communication by a research analyst with a current or prospective customer or internal personnel related to an investment banking services transaction must be fair, balanced and not misleading, taking into consideration the overall context in which the communication is made. [FINRA Rule 2241, Supplementary Material .03(b)]

xiv. Investment Banking Direction of Analyst Activities. Members must establish, maintain and enforce policies and procedures that prohibit investment banking department personnel from directly or indirectly (1) directing a research analyst to engage in sales or marketing efforts related to an investment banking services transaction, and (2) directing a research analyst to engage in any communication with a current or prospective customer about an investment banking services transaction. [FINRA Rule 2241(b)(2)(M)]

3. Content and Disclosure in Research Reports.

a. Price Targets and Ratings. Members must establish, maintain and enforce policies and procedures reasonably designed to ensure that purported facts in a research reports are based on reliable information and any recommendation, rating or price target has a reasonable basis and is accompanied by a clear explanation of any valuation method used and a fair presentation of the risks that may impede achievement of the recommendation, rating or price target. [FINRA Rule 2241(c)(1)]

i. Members that employ a rating system must clearly define in each research report the meaning of each rating in the system, including the time horizon and any benchmarks on which a rating is based. The definition of each rating must be consistent with its plain meaning. [FINRA Rule 2241(c)(2)]

17 ii. Irrespective of the rating system a member employs, a member must include in each research report that includes a rating the percentage of all securities rated by the member to which the member would assign a “buy,” “hold” or “sell” rating. A member must also disclose in each research report the percentage of subject companies within each of the “buy,” “hold” and “sell” categories for which the member has provided investment banking services within the previous 12 months. [FINRA Rule 2241(c)(2)(A)-(B)]

iii. If a research report contains either a rating or price target for a subject company’s security, and the member has assigned a rating or price target to such security for at least one year, the research report must include a line graph of the security’s daily closing prices for the period that the member has assigned any rating or price target or for a three-year period, whichever is shorter. [FINRA Rule 2241(c)(3)] b. Potential Conflicts of Interest. Members must disclose in any research report at the time of publication or distribution of the report:

i. if the research analyst or a member of the research analyst’s household has a financial interest in the debt or equity securities of the subject company (including, without limitation, whether it consists of any option, right, warrant, future, long or short position), and the nature of such interest;

ii. if the research analyst has received compensation based upon (among other factors) the member’s investment banking revenues;

iii. if the member or any of its affiliates (1) managed or co- managed a public offering of securities for the subject company in the past 12 months; (2) received compensation for investment banking services from the subject company in the past 12 months; or (3) expects to receive or intends to seek compensation for investment banking services from the subject company in the next three months;

iv. if, as of the end of the month immediately preceding the date of publication or distribution of a research report (or the end of the second most recent month if the publication or distribution date is less than 30 calendar days after the end of the most recent month), the member or its affiliates have received from the subject company any compensation for

18 products or services other than investment banking services in the previous 12 months;18

v. if the subject company is, or over the 12-month period preceding the date of publication or distribution of the research report has been, a client of the member, and if so, the types of services provided to the issuer (such services, if applicable, must be identified as either investment banking services, non-investment banking securities-related services or non- securities services);

vi. if the member or its affiliates beneficially own 1% or more of any class of common equity securities of the subject company;19

vii. if the member was making a market in the securities of the subject company at the time of publication or distribution of the research report;

viii. if the research analyst received any compensation from the subject company in the previous 12 months; and

ix. any other material conflict of interest of the research analyst or member that the research analyst or an associated person of the member with the ability to influence the content of a research report knows or has reason to know at the time of the publication or distribution of a research report. [FINRA Rule 2241(c)(4)]

A member or research analyst will not be required to make a disclosure noted above to the extent such disclosure would reveal material nonpublic information regarding specific potential future investment banking transactions. [FINRA Rule 2241(c)(5)]

18 A member may satisfy the disclosure requirement with respect to receipt of non-investment banking services compensation by an affiliate by implementing policies and procedures reasonably designed to prevent the research analyst and associated persons of the member with the ability to influence the content of research reports from directly or indirectly receiving information from the affiliate as to whether the affiliate received such compensation. However, a member must disclose receipt of non-investment banking services compensation by its affiliates from the subject company in the past 12 months when the research analyst or an associated person with the ability to influence the content of a research report has actual knowledge that an affiliate received such compensation during that time period. [FINRA Rule 2241, Supplementary Material .04] 19 For purposes of this provision and the corresponding provision in respect of public appearances, “beneficial ownership” may be computed in accordance with the same standards used to compute ownership for purposes of the reporting requirements under Section 13(d) of the Exchange Act. [FINRA Rule 2241, Supplementary Material .06]

19 c. Formatting Requirements for Disclosures.

i. The conflict disclosures required by FINRA Rule 2241(c) must be presented on the front page of research reports or the front page must refer to the page on which the disclosures are found. Electronic research reports may provide a hyperlink directly to the required disclosures. All disclosures and references to disclosures must be clear, comprehensive and prominent. [FINRA Rule 2241(c)(6)]

ii. A member that distributes a research report covering six or more subject companies (a “compendium report”) may direct the reader in a clear manner as to where the reader may obtain applicable current disclosures required by the Equity Research Rule. Electronic compendium reports may include a hyperlink directly to the required disclosures. Paper-based compendium reports must provide either a toll free number to call or a postal address to request the required disclosures and may also include a web address where the disclosures can be found. [FINRA Rule 2241(c)(7)]

4. Disclosure in Public Appearances.

a. Potential Conflicts of Interest. A research analyst must disclose in public appearances:

ii. if the member or its affiliates beneficially own 1% or more of any class of common equity securities of the subject company;

iii. if, to the extent the research analyst knows or has reason to know, the member or any affiliate received any compensation from the subject company in the previous 12 months;

iv. if the research analyst received any compensation from the subject company in the previous 12 months;

v. if, to the extent the research analyst knows or has reason to know, the subject company currently is, or during the 12- month period preceding the date of publication or distribution of the research report, was, a client of the

20 member (in such cases, the research analyst also must disclose the types of services provided to the subject company, if known by the research analyst); and

vi. any other material conflict of interest of the research analyst or member that the research analyst knows or has reason to know at the time of the public appearance. [FINRA Rule 2241(d)(1)]

As with disclosures in research reports, a member or research analyst will not be required to make a disclosure to the extent such disclosure would reveal material nonpublic information regarding specific potential future investment banking transactions. [FINRA Rule 2241(d)(2)]

b. Recordkeeping Requirements. Members must maintain records of public appearances by research analysts sufficient to demonstrate compliance by those research analysts with the applicable disclosure requirements for public appearances. Such records must be maintained for at least three years from the date of the public appearance. [FINRA Rule 2241(d)(3)]

5. Termination of Coverage. Members must promptly notify their customers if they intend to terminate coverage of a subject company. Such notice must be made using the member’s ordinary means to disseminate research reports on the subject company to its various customers. The notice must also be accompanied by a final research report, comparable in scope and detail to prior research reports, and include a final recommendation or rating. If impracticable to provide a final research report, recommendation or rating, a member must disclose to its customers its reason for terminating coverage. [FINRA Rule 2241(f)]

6. Distribution of Member Research Reports. Members must establish, maintain and enforce written policies and procedures reasonably designed to ensure that a research report is not distributed selectively to internal trading personnel or a particular customer or class of customers in advance of other customers that the member has previously determined are entitled to receive the research report. [FINRA Rule 2241(g)]

FINRA notes that with respect to the distribution of member research reports, a member may provide different research products and services to different classes of customers. For example, a member may offer one research product for those with a long-term investment horizon (“investor research”) and a different research product for those customers with a short- term investment horizon (“trading research”). These products may lead to different recommendations or ratings, provided that each is consistent with the meaning of the member’s ratings system for each respective product.

21 However, a member may not differentiate a research product based on the timing of receipt of a recommendation, rating or other potentially market moving information, nor may a member label a research product with substantially the same content as a different product as a means to allow certain customers to trade in advance of other customers. In addition, a member that provides different research products and services for different customers must inform its other customers that its alternative research products and services may reach different conclusions or recommendations that could impact the price of the equity security. [FINRA Rule 2241, Supplementary Material .07]

7. Distribution of Third-Party Research Reports.

a. A registered principal or supervisory analyst must review for compliance with the applicable provisions of the Equity Research Rule and approve by signature or initial all third-party research reports distributed by a member. Members may not distribute third- party research if they know or have reason to know such research is not objective or reliable. [FINRA Rule 2241(h)(1)-(2)]

b. Members must establish, maintain and enforce written policies and procedures reasonably designed to ensure that any third-party research it distributes contains no untrue statement of material fact and is otherwise not false or misleading. For purposes of this provision, a member’s obligation to review a third-party research report extends to any untrue statement of material fact or any false or misleading information that should be known from reading the report or is known based on information otherwise possessed by the member. [FINRA Rule 2241(h)(3)]

c. Members must accompany any third-party research report they distribute with, or provide a web address that directs a recipient to, disclosure of any material conflict of interest that can reasonably be expected to have influenced the choice of a third- party research provider or the subject company of a third-party research report, including those disclosures referenced in paragraphs 3(b)(iii), 3(b)(vi), 3(b)(vii) and 3(b)(ix) above. [FINRA Rule 2241(h)(4)]

d. A member is not required to review a third-party research report to determine that it contains no untrue statement of material fact and is otherwise not false or misleading if such research report is an independent third-party research report. [FINRA Rule 2241(h)(5)]

The term “independent third-party research report” is defined in the Equity Research Rule to mean a third-party research report, in respect of which the person producing the report has (1) no affiliation or business or contractual relationship with the

22 distributing member or that member’s affiliates that is reasonably likely to inform the content of its research reports; and (2) makes content determinations without any input from the distributing member or that member’s affiliates. [FINRA Rule 2241(a)(3)]

e. A member is not considered to have “distributed” a third-party research report for purposes of the disclosure requirements set forth in paragraph 7(c) above where the research is an independent third- party research report and is made available by a member (1) upon request; (2) through a member-maintained website; or (3) to a customer in connection with a solicited order in which the registered representative has informed the customer, during the solicitation, of the availability of independent research on the solicited equity security and the customer requests such independent research. [FINRA Rule 2241(h)(6)]

f. A member must ensure that a third-party research report is clearly labeled as such and that there is no confusion on the part of the recipient as to the person or entity that prepared the research report. [FINRA Rule 2241(h)(7)]

8. Joint Due Diligence. As noted in paragraph 2(a)(iii) above, members must establish, maintain and enforce written policies and procedures reasonably designed to identify and effectively manage conflicts of interest related to the interaction between research analysts and those outside of the research department, including investment banking and sales and trading personnel, subject companies and customers. FINRA interprets this provision to also require members to prohibit the performance of joint due diligence by research analysts and investment banking personnel prior to the selection by the issuer of underwriters for an investment banking services transaction.20 [FINRA Rule 2241, Supplementary Material .02]

9. Exemptions from Equity Research Rule.

a. Limited Investment Banking Activity. The provisions regarding pre-publication review, coverage input, supervision and control, budget determinations, compensation committee requirements, and establishment of information barriers relating to “review, pressure and oversight” do not apply to members that that over the previous three years, on average per year, have participated in 10 or fewer investment banking services transactions as manager or co-manager

20 Note that this limitation regarding joint due diligence prior to the selection of underwriters is actually narrower than the comparable provision in the Global Research Settlement, which (as amended in March 2010) permits research analysts and investment bankers to engage in joint due diligence activities prior to the award of an investment banking mandate in certain limited circumstances and subject to legal/compliance chaperoning requirements.

23 and generated $5 million or less in gross investment banking revenues from those transactions, provided that such members do establish information barriers or other institutional safeguards reasonably designed to ensure that research analysts are insulated from pressure by persons engaged in investment banking services activities or other persons, including sales and trading personnel, who might be biased in their judgment or supervision.

For the purposes of this exemption, the term “investment banking services transactions” includes the underwriting of both corporate debt and equity securities but not municipal securities. [FINRA Rule 2241(i)]

b. Exemption for Good Cause. FINRA may in exceptional and unusual circumstances, conditionally or unconditionally grant an exemption from any requirement of the Equity Research Rule for good cause shown after taking into account all relevant factors, to the extent such exemption is consistent with the purposes of the Rule, the protection of investors, and the public interest. [FINRA Rule 2241(j)]

B. Debt Research Rule.

1. Key Definitions.

a. The term “debt research report” is defined in the Debt Research Rule to mean any written (including electronic) communication that includes an analysis of a debt security or an issuer of a debt security and that provides information reasonably sufficient upon which to base an investment decision, excluding communications that solely constitute an equity research report as defined in FINRA Rule 2241(a)(11). [FINRA Rule 2242(a)(3)]

b. The following communications are excluded from the term “debt research report” if they are limited to the following and if they do not include an analysis of, or recommend or rate, individual debt securities or issuers:

i. discussions of broad-based indices;

ii. commentaries on economic, political or market conditions;

iii. commentaries on or analyses of particular types of debt securities or characteristics of debt securities;

iv. technical analyses concerning the demand and supply for a sector, index or industry based on trading volume and price;

24 v. recommendations regarding increasing or decreasing holdings in particular industries or sectors or types of debt securities; and

vi. notices of ratings or price target changes, provided that the member simultaneously directs the readers of the notice to the most recent debt research report on the subject company that includes all current applicable disclosures required by the Debt Research Rule and that such debt research report does not contain materially misleading disclosures, including disclosures that are outdated or no longer applicable. [FINRA Rule 2242(a)(3)(A)] c. The following communications are excluded from the term “debt research report” even if they include an analysis of an individual debt security or issuer and information reasonably sufficient upon which to base an investment decision:

i. statistical summaries of multiple companies’ financial data, including listings of current ratings that do not include an analysis of individual companies’ data;

ii. an analysis prepared for a specific person or a limited group of fewer than 15 persons;

iii. periodic reports or other communications prepared for investment company shareholders or discretionary investment account clients that discuss individual debt securities in the context of a fund’s or account’s past performance or the basis for previously made discretionary investment decisions; and

iv. internal communications that are not given to current or prospective customers. [FINRA Rule 2242(a)(3)(B)] d. The term “debt research report” also excludes communications that constitute statutory prospectuses that are filed as part of the registration statement and communications that constitute private placement memoranda and comparable offering-related documents prepared in connection with investment banking services transactions, other than those that purport to be research. [FINRA Rule 2242(a)(3)(C)-(D)] e. “Debt Security” is defined in the Debt Research Rule to mean any “security” as defined in Section 3(a)(10) of the Exchange Act, except for (1) any “equity security” as defined in Section 3(a)(11) of the Exchange Act, (2) any “municipal security” as defined in Section 3(a)(29) of the Exchange Act, (3) any “security- based

25 swap” as defined in Section 3(a)(68) of the Exchange Act, and (4) any “U.S. Treasury Security” as defined in paragraph (p) of FINRA Rule 6710. [FINRA Rule 2242(a)(4)]

f. The term “debt research analyst” is defined in the Debt Research Rule to mean an associated person who is primarily responsible for, and any associated person who reports directly or indirectly to a debt research analyst in connection with, the preparation of the substance of a debt research report, whether or not any such person has the job title of “research analyst.” [FINRA Rule 2242(a)(1)]

2. Identifying and Managing Conflicts of Interest.

a. In general, a member must establish, maintain and enforce written policies and procedures reasonably designed to identify and effectively manage conflicts of interest related to:

i. the preparation, content and distribution of debt research reports;

ii. public appearances by debt research analysts; and

iii. the interaction between debt research analysts and those outside of the research department, including investment banking department personnel, sales and trading personnel, principal trading personnel, subject companies and customers. [FINRA Rule 2242(b)(1)]

b. A member’s written policies and procedures must be reasonably designed to promote objective and reliable debt research that reflects the truly held opinions of debt research analysts and to prevent the use of debt research reports or debt research analysts to manipulate or condition the market or favor the interests of the member or a current or prospective customer or class of customers. [FINRA Rule 2242(b)(2)]

Such policies and procedures are required to cover the following topics:

i. Pre-Publication Review of Research by Internal Research Personnel. Members must establish, maintain and enforce policies and procedures that prohibit pre-publication review of debt research reports by (1) investment banking personnel; (2) principal trading personnel; and (3) sales and trading personnel. [FINRA Rule 2242(b)(2)(A)]

Members must also restrict or prohibit pre-publication review by other persons not directly responsible for debt

26 research reports (except legal and compliance). [FINRA Rule 2242(b)(2)(B)]

Sections of a draft debt research report may be provided to non-investment banking personnel, non-principal trading personnel, non-sales and trading personnel for factual review if (1) the sections of the draft debt research report submitted do not contain the research summary, recommendation or rating; (2) a complete draft of the debt research report is provided to legal or compliance personnel before sections of the report are submitted to non-investment banking personnel, non-principal trading personnel, non-sales and trading personnel; and (3) if, after submitting sections of the draft debt research report to non-investment banking personnel, non-principal trading personnel, non-sales and trading personnel, the research department intends to change the proposed rating or recommendation, it must first provide written justification to, and receive written authorization from, legal or compliance personnel for the change. [FINRA Rule 2242, Supplementary Material .05] ii. Pre-Publication Review of Research by the Subject Company. Members must establish, maintain and enforce policies and procedures that prohibit pre-publication review of a debt research report by a subject company for purposes other than verification of facts. [FINRA Rule 2242(b)(2)(N)]

Sections of a draft debt research report may be provided to the subject company for factual review, if (1) the sections of the draft debt research report submitted do not contain the research summary, recommendation or rating; (2) a complete draft of the debt research report is provided to legal or compliance personnel before sections of the report are submitted to the subject company; and (3) if, after submitting sections of the draft debt research report to the subject company, the research department intends to change the proposed rating or recommendation, it must first provide written justification to, and receive written authorization from, legal or compliance personnel for the change. [FINRA Rule 2242, Supplementary Material .05] iii. Research Coverage Decisions. Members must establish, maintain and enforce policies and procedures that restrict or limit input by investment banking, sales and trading and principal trading personnel into debt research coverage decisions. [FINRA Rule 2242(b)(2)(C)]

27 iv. Supervision of Analysts. Members must establish, maintain and enforce policies and procedures that limit supervision of a debt research analyst to persons not engaged in (1) investment banking services transactions (such personnel are also precluded from input into the compensation of debt research analysts); (2) principal trading activities (such personnel are also precluded from input into the compensation of debt research analysts); or (3) sales and trading. [FINRA Rule 2242(b)(2)(D)] v. Research Budget Decisions. Members must establish, maintain and enforce policies and procedures that limit the determination of the debt research department budget to senior management not engaged in investment banking services or principal trading activities.

The determination of the debt research department budget must be made without regard to specific revenues or results derived from investment banking activities. However, revenues and results of the firm as a whole may be considered in determining the debt research department budget and allocation of debt research department expenses.

Nothing requires a member to prohibit any personnel from providing to senior management input regarding the demand for and quality of debt research, including product trends and customer interest. [FINRA Rule 2242(b)(2)(E)] vi. Debt Research Analyst Compensation. Members must establish, maintain and enforce policies and procedures that prohibit debt research analyst compensation based on specific investment banking services or specific trading transactions or contributions to a member’s investment banking services or principal trading activities. [FINRA Rule 2242(b)(2)(F)] vii. Debt Research Analyst Compensation Committee Requirements. Members must establish, maintain and enforce policies and procedures that require the compensation of a debt research analyst who is primarily responsible for the substance of a research report be reviewed and approved at least annually by a committee that reports to a member’s board of directors (or a senior executive officer if there is no board).

Such committee may not have representation from investment banking personnel or persons engaged in

28 principal trading activities. Sales and trading personnel, but not personnel engaged in principal trading activities, may provide input to debt research management into the evaluation of the debt research analyst in order to convey customer feedback. [FINRA Rule 2242(b)(G)]

The committee must consider the following factors when reviewing a debt research analyst’s compensation, if applicable: (1) the debt research analyst’s individual performance, including the analyst’s productivity and the quality of the debt research analyst’s research; and (2) the overall ratings received from customers and peers (independent of the member’s investment banking department and persons engaged in principal trading activities) and other independent ratings services. [FINRA Rule 2242(b)(2)(G)(i)-(ii)] viii. Information Barriers. Members must establish, maintain and enforce policies and procedures that implement information barriers or other institutional safeguards reasonably designed to ensure that research analysts are insulated from review, pressure or oversight by persons engaged in (1) investment banking services; (2) principal trading or sales and trading activities; and (3) other persons who might be biased in their judgment or supervision. [FINRA Rule 2242(b)(2)(H)]

Although the rule does not expressly require physical separation, FINRA stated in the Debt Rule Proposal that it would generally expect physical separation except in extraordinary circumstances. ix. No Retaliation. Members must establish, maintain and enforce policies and procedures that prohibit direct or indirect retaliation or threat of retaliation against debt research analysts by any employee of the member as the result of an adverse, negative, or otherwise unfavorable debt research report or public appearance by the debt research analyst that may adversely affect the member’s present or prospective business interests. [FINRA Rule 2242(b)(2)(I)] x. Personal Trading Restrictions. Members must establish, maintain and enforce policies and procedures that restrict or limit debt research analyst account trading in securities, any derivatives of such securities and any fund whose performance is materially dependent upon the performance of securities covered by the debt research analyst.

29 Members must ensure that debt research analyst accounts, supervisors of debt research analysts and associated persons with the ability to influence the content of debt research reports do not benefit in their trading from knowledge of the content or timing of a debt research report before the intended recipients of such debt research have had a reasonable opportunity to act on the information in the debt research report.21

Members must prohibit a debt research analyst account from engaging in the purchase or sale of any security or any option on or derivative of such security in a manner inconsistent with the research analyst’s recommendation as reflected in the most recent debt research report published by the member, subject to financial hardship exceptions as defined by the firm. [FINRA Rule 2241(J)]

xi. No Promises of Favorable Coverage. Members must establish, maintain and enforce policies and procedures that prohibit explicit or implicit promises of favorable debt research, a particular debt research rating or recommendation or specific debt research content as inducement for the receipt of business or compensation. [FINRA Rule 2242(b)(2)(K)]

xii. Solicitation and Marketing. Members must establish, maintain and enforce policies and procedures that restrict or limit activities by debt research analysts that can reasonably be expected to compromise their objectivity, including (1) prohibiting participation in pitches and other solicitations of investment banking services transactions; and (2) participation in roadshows and other marketing on behalf of an issuer related to an investment banking services transaction. [FINRA Rule 2242(b)(2)(L)]

FINRA interprets the solicitation restriction to prohibit in pitch materials any information about a member’s debt research capacity in a manner that suggests, directly or indirectly, that the member might provide favorable debt research coverage. In this regard, FINRA would consider the

21 For purposes of the Debt Research Rule, an “associated person with the ability to influence the content of a debt research report” is an associated person who is required to review the content of the debt research report or has exercised authority to review or change the debt research report prior to publication or distribution. This term, however, does not include legal or compliance personnel who may review a debt research report for compliance purposes but are not authorized to dictate a particular recommendation or rating. [FINRA Rule 2242, Supplementary Material .07]

30 publication in a pitch book or related materials of an analyst’s industry ranking to imply the potential outcome of future research because of the manner in which such rankings are compiled. On the other hand, a member would be permitted to include in the pitch materials the fact of coverage and the name of the debt research analyst because such information alone does not imply favorable coverage. [FINRA Rule 2242, Supplementary Material .01]

No debt research analyst may engage in any communication with a current or prospective customer in the presence of investment banking department personnel or company management about an investment banking services transaction. [FINRA Rule 2242, Supplementary Material .02(a)]

Any written or oral communication by a debt research analyst with a current or prospective customer or internal personnel related to an investment banking services transaction must be fair, balanced and not misleading, taking into consideration the overall context in which the communication is made. [FINRA Rule 2242, Supplementary Material .02(b)]

xiii. Investment Banking Direction of Analyst Activities. Members must establish, maintain and enforce policies and procedures that prohibit investment banking department personnel from directly or indirectly (1) directing a debt research analyst to engage in sales or marketing efforts related to an investment banking services transaction; and (2) directing a debt research analyst to engage in any communication with a current or prospective customer about an investment banking services transaction. [FINRA Rule 2242(b)(2)(M)]

3. Content and Disclosure in Debt Research Reports.

a. Price Targets and Ratings. Members must establish, maintain and enforce policies and procedures reasonably designed to ensure that: (i) purported facts in a debt research reports are based on reliable information; and (ii) any recommendation or rating has a reasonable basis and is accompanied by a clear explanation of any valuation method used and a fair presentation of the risks that may impede achievement of the recommendation or rating. [FINRA Rule 2242(c)(1)]

31 i. Members that employ a rating system must clearly define in each research report the meaning of each rating in the system, including the time horizon and any benchmarks on which a rating is based. The definition of each rating must be consistent with its plain meaning. [FINRA Rule 2242(c)(2)]

ii. Irrespective of the rating system a member employs, a member must include in each debt research report limited to the analysis of an issuer of a debt security that includes a rating of the subject company the percentage of all subject companies rated by the member to which the member would assign a “buy,” “hold” or “sell” rating. A member must disclose in each debt research report the percentage of subject companies within each of the “buy,” “hold” and “sell” categories for which the member has provided investment banking services within the previous 12 months. [FINRA Rule 2242(c)(2)(A)-(B)]

iii. If a debt research report limited to the analysis of an issuer of a debt security contains a rating for the subject company, and the member has assigned a rating to such subject company for at least one year, the debt research report must show each date on which a member has assigned a rating and the rating assigned on such date. The member must include this information for the period that the member has assigned any rating or for a three-year period, whichever is shorter. [FINRA Rule 2242(c)(3)] b. Potential Conflicts of Interest. FINRA members must disclose in any debt research report at the time of publication or distribution of the report:

i. if the debt research analyst or a member of the debt research analyst’s household has a financial interest in the debt or equity securities of the subject company (including, without limitation, any option, right, warrant, future, long or short position), and the nature of such interest;

ii. if the debt research analyst has received compensation based upon (among other factors) the member’s investment banking, sales and trading or principal trading revenues;

32 in the past 12 months; or (3) expects to receive or intends to seek compensation for investment banking services from the subject company in the next three months;

iv. if, as of the end of the month immediately preceding the date of publication or distribution of a debt research report (or the end of the second most recent month if the publication date is less than 30 calendar days after the end of the most recent month) the member or its affiliates have received from the subject company any compensation for products or services other than investment banking services in the previous 12 months;22

v. if the subject company is, or over the 12-month period preceding the date of publication or distribution of the debt research report has been, a client of the member, and if so, the types of services provided to the issuer (such services, if applicable, shall be identified as either investment banking services, non-investment banking securities-related services or non-securities services);

vi. if the member trades or may trade as principal in the debt securities (or in related derivatives) that are the subject of the debt research report;

vii. if the debt research analyst received any compensation from the subject company in the previous 12 months; and

viii. any other material conflict of interest of the debt research analyst or member that the debt research analyst or an associated person of the member with the ability to influence the content of a debt research report knows or has reason to know at the time of the publication or distribution of a debt research report. [FINRA Rule 2242(c)(4)]

A member or debt research analyst will not be required to make a disclosure noted above to the extent such disclosure would reveal

22 A member may satisfy the disclosure requirement with respect to receipt of non-investment banking services by an affiliate by implementing policies and procedures reasonably designed to prevent the debt research analyst and associated persons of the member with the ability to influence the content of debt research reports from directly or indirectly receiving information from the affiliate as to whether the affiliate received such compensation. However, a member must disclose compensation received by its affiliates from the subject company (including any foreign sovereign) in the past 12 months when the debt research analyst or an associated person with the ability to influence the content of a debt research report has actual knowledge that an affiliate received such compensation during that time period. [FINRA Rule 2242, Supplementary Material . 04]

33 material nonpublic information regarding specific potential future investment banking transactions. [FINRA Rule 2242(c)(5)]

c. Formatting Requirements for Disclosures.

i. The conflict disclosures required by FINRA Rule 2242(c) must be presented on the front page of debt research reports or the front page must refer to the page on which the disclosures are found. Electronic debt research reports may provide a hyperlink directly to the required disclosures. All disclosures and references to disclosures must be clear, comprehensive and prominent. [FINRA Rule 2242(c)(6)]

ii. A member that distributes a debt research report covering six or more subject companies (a “compendium report”) may direct the reader in a clear manner as to where the reader may obtain applicable current disclosures required by the Debt Research Rule. Electronic compendium reports must include a hyperlink to the required disclosures. Paper-based compendium reports must provide either a toll-free number to call or a postal address to request the required disclosures and also may include a web address of the member where the disclosures can be found. [FINRA Rule 2242(c)(7)]

4. Disclosure in Public Appearances.

a. Potential Conflicts of Interest. A debt research analyst must disclose in public appearances:

i. if the debt research analyst or a member of the debt research analyst’s household has a financial interest in the debt or equity securities of the subject company (including, without limitation, whether it consists of any option, right, warrant, future, long or short position), and the nature of such interest;

ii. if, to the extent the debt research analyst knows or has reason to know, the member or any affiliate received any compensation from the subject company in the previous 12 months;

iii. if the debt research analyst received any compensation from the subject company in the previous 12 months;

iv. if, to the extent the debt research analyst knows or has reason to know, the subject company currently is, or during the 12-month period preceding the date of publication or distribution of the debt research report, was, a client of the member (in such cases, the debt research analyst also must

34 disclose the types of services provided to the subject company, if known by the debt research analyst); and

v. any other material conflict of interest of the debt research analyst or member that the debt research analyst knows or has reason to know at the time of the public appearance. [FINRA Rule 2242(d)(1)]

As with disclosures in debt research reports, a member or debt research analyst will not be required to make a disclosure required to the extent such disclosure would reveal material nonpublic information regarding specific potential future investment banking transactions. [FINRA Rule 2242(d)(2)]

b. Recordkeeping Requirements. Members must maintain records of public appearances by debt research analysts sufficient to demonstrate compliance by those debt research analysts with the applicable disclosure requirements. Such records must be maintained for at least three years from the date of the public appearance. [FINRA Rule 2242(d)(3)]

5. Distribution of Member Debt Research Reports. A member must establish, maintain and enforce written policies and procedures reasonably designed to ensure that a debt research report is not distributed selectively to trading personnel or a particular customer or class of customers in advance of other customers that the member has previously determined are entitled to receive the debt research report. [FINRA Rule 2242(f)]

FINRA notes that with respect to distribution of member debt research reports, a member may provide different debt research products and services to different classes of customers. For example, a member may offer one debt research product for those with a long-term investment horizon (“investor research”) and a different debt research product for those customers with a short-term investment horizon (“trading research”). These products may lead to different recommendations or ratings, provided that each is consistent with the meaning of the member’s ratings system for each respective product. However, a member may not differentiate a debt research product based on the timing of receipt of a recommendation, rating or other potentially market moving information, nor may a member label a debt research product with substantially the same content as a different debt research product as a means to allow certain customers to trade in advance of other customers. In addition, a member that provides different debt research products and services for different customers must inform its other customers that receive a research product that its alternative debt research products and services may reach different conclusions or recommendations that could impact the price of the debt security. [FINRA Rule 2242, Supplementary Material .06]

35 6. Distribution of Third-Party Debt Research Reports.

a. A member may not distribute third-party debt research if it knows or has reason to know such research is not objective or reliable. [FINRA Rule 2242(g)(1)]

b. A member must establish, maintain and enforce written policies and procedures reasonably designed to ensure that any third-party debt research report it distributes contains no untrue statement of material fact and is otherwise not false or misleading. For the purposes of this provision, a member’s obligation to review a third-party debt research report extends to any untrue statement of material fact or any false or misleading information that: should be known from reading the debt research report; or is known based on information otherwise possessed by the member. [FINRA Rule 2242(g)(2)]

c. A member must accompany any third-party debt research report it distributes with, or provide a web address that directs a recipient to, disclosure of any material conflict of interest that can reasonably be expected to have influenced the choice of a third-party debt research report provider or the subject company of a third- party debt research report, including those disclosures referenced in paragraphs 3(b)(iii), 3(b)(vi), and 3(b)(vii). [FINRA Rule 2242(g)(3)]

d. A member is not required to review a third-party debt research report to determine that it contains no untrue statement of material fact and is otherwise not false or misleading if such debt research report is an independent third-party debt research report. [FINRA Rule 2242(g)(4)]

The term “independent third-party debt research report” means a third-party debt research report, in respect of which the person producing the report (1) has no affiliation or business or contractual relationship with the distributing member or that member’s affiliates that is reasonably likely to inform the content of its research reports; and (2) makes content determinations without any input from the distributing member or that member’s affiliates. [FINRA Rule 2242(a)(6)]

e. A member is not considered to have “distributed” a third-party research report for purposes of the disclosure requirements set forth in paragraph 6(c) above where the research is an independent third- party debt research report and made available by a member (1) upon request; (2) through a member-maintained website; or (3) to a customer in connection with a solicited order in which the registered representative has informed the customer, during the solicitation, of the availability of independent debt research on the solicited debt

36 security and the customer requests such independent debt research. [FINRA Rule 2242(g)(5)]

f. A member must ensure that a third-party debt research report is clearly labeled as such and that there is no confusion on the part of the recipient as to the person or entity that prepared the debt research report. [FINRA Rule 2242(g)(6)]

7. Joint Due Diligence. As noted in paragraph 2(a)(iii) above, members must establish, maintain and enforce written policies and procedures reasonably designed to identify and effectively manage conflicts of interest related to the interaction between debt research analysts and those outside of the research department, including investment banking department personnel, sales and trading personnel, principal trading personnel, subject companies and customers. FINRA interprets this provision to also require members to prohibit the performance of joint due diligence by the debt research analyst in the presence of investment banking department personnel prior to the selection of underwriters for an investment banking services transaction. [FINRA Rule 2242, Supplementary Material .09]

8. Exemptions from Debt Research Rule.

a. Limited Investment Banking Activity. The provisions regarding pre-publication review by investment banking personnel, coverage input by investment banking personnel, supervision and control by investment banking personnel, budget determinations by investment banking personnel, compensation committee requirements, and establishment of information barriers relating to “review, pressure and oversight” by investment banking personnel or other persons who might be biased in their judgment do not apply to members that over the previous three years, on average per year, have participated in 10 or fewer investment banking services transactions as manager or co-manager and generated $5 million or less in gross investment banking revenues from those transactions, provided that such members do establish information barriers or other institutional safeguards reasonably designed to ensure debt research analysts are insulated from pressure by persons engaged in investment banking services activities or other persons, including persons engaged in principal trading or sales and trading activities, who might be biased in their judgment or supervision.

37 b. Limited Principal Trading Exemption. The provisions regarding pre-publication review by sales and trading, principal trading personnel and other persons not directly responsible for the preparation of debt research reports, coverage input by sales and trading and principal trading personnel, supervision by sales and trading and principal trading personnel, budget determinations by principal trading personnel, compensation committee requirements, and establishment of information barriers relating to “review, pressure, and oversight” by sales and trading or principal trading personnel or other persons who might be biased in their judgment or supervision do not apply to members where (1) in absolute value on an annual basis, the member’s trading gains or losses on principal trades in debt securities are $15 million or less over the previous three years, on average per year; and (2) the member employs fewer than 10 debt traders, provided that with respect to this exemption, such members do establish information barriers or other institutional safeguards reasonably designed to ensure debt research analysts are insulated from pressure by persons engaged in principal trading or sales and trading activities or other persons who might be biased in their judgment or supervision. [FINRA Rule 2242(i)]

c. Institutional Investor Exemption. Except as otherwise provided in the Debt Research Rule,23 the provisions of the Debt Research Rule do not apply to the distribution of a debt research report to:

i. A qualified institutional buyer where, pursuant to FINRA Rule 2111(b) (1) the member or associated person has a reasonable basis to believe that the qualified institutional buyer is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies involving a debt security or debt securities; and (2) such qualified institutional buyer has affirmatively indicated that it is exercising independent judgment in evaluating the member’s recommendations pursuant to FINRA Rule 2111 and such affirmation covers transactions in debt securities;

23 In particular, the institutional investor exemption does not exempt a member from the requirements to establish, maintain and enforce written policies and procedures that (1) prohibit pre-publication review of debt research reports by investment banking personnel and subject companies, (2) implement information barriers that insulate debt research analysts from pressure by investment banking and other personnel, (3) prohibit retaliation, (4) prohibit promises of favorable coverage, (5) prohibit participation by debt research analysts in pitches, roadshows and other activities that could reasonably be expected to compromise their objectivity, (6) prohibit investment banking personnel from directing debt research analysts to engage in sales and marketing activities and customer communications regarding investment banking services transactions, and (7) prohibit analyst communications with investors in the presence of investment banking personnel or company management. [FINRA Rule 2242(j)(2)]

38 so long as the member has provided written disclosure to the qualified institutional buyer that the member may provide debt research reports that are intended for institutional investors and that are not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors; or

ii. A person that meets the definition of “institutional account” in FINRA Rule 4512(c); provided that such person, prior to receipt of a debt research report, has affirmatively notified the member in writing that it wishes to receive institutional debt research and forego treatment as a retail investor for the purposes of the Debt Research Rule. [FINRA Rule 2242(j)]

Institutional debt research must contain certain specific disclosures, including that the report is “intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.” [FINRA Rule 2242(j)(3)] d. Distribution of Institutional Debt Research to Non-U.S. Investors. The requirements of FINRA Rule 2241(j)(1)(A) and (B) do not apply to the distribution of an institutional debt research report by a non-U.S. affiliate of a member to a non-U.S. investor, provided that:

i. The non-U.S. investor is not a customer of the member;

ii. The non-U.S. investor is a customer of the non-U.S. affiliate of the member; and

iii. The non-U.S. affiliate of the member has a reasonable basis to believe that the customer meets the definition of “institutional account” in Rule 4512(c). [FINRA Rule 2242, Supplementary Material .12] e. Distribution of Institutional Debt Research for Informational Purposes. A member may distribute institutional debt research reports to (1) regulators for regulatory purposes; (2) academics for academic purposes; (3) issuers for the purpose of enhancing knowledge of their industry and competitors and market and economic factors; and (4) media organizations for news gathering purposes for informational purposes unrelated to investing in debt securities, provided that the member does not distribute the reports prior to their publication and the member has disclosed that

i. The member may provide the recipient debt research reports that were prepared for institutional investors and are not subject to all of the independence and disclosure standards

39 applicable to debt research reports prepared for retail investors; and

ii. The institutional debt research reports would be provided only for informational purposes and not for the purpose of making an investment decision related to debt securities. [FINRA Rule 2242, Supplementary Material .13]

f. Public Appearances by Research Analysts. A member or debt research analyst will not be required to make a disclosure required by the Debt Research Rule where attendance at the public appearance is limited to institutional investors eligible to receive institutional debt research pursuant to paragraph (j) of the Debt Research Rule. Members must maintain records of public appearances by debt research analysts sufficient to demonstrate that attendance at the public appearance was limited to institutional investors eligible to receive institutional debt research pursuant to paragraph (j) of the Debt Research Rule. Such records must be maintained for at least three years from the date of the public appearance. [FINRA Rule 2242, Supplementary Material .14]

g. Exemption for Good Cause. FINRA may in exceptional and unusual circumstances, conditionally or unconditionally grant an exemption from any requirement of the Debt Research Rule for good cause shown after taking into account all relevant factors, to the extent such exemption is consistent with the purposes of the Rule, the protection of investors, and the public interest. [FINRA Rule 2242(k)]

C. Registration and Continuing Education Requirements.

1. Research analysts (defined for this purpose as an associated person whose primary job function is to provide investment research and who is primarily responsible for the preparation of the substance of a research report or whose name appears on a research report) and supervisory analysts are required to be registered with, and qualified (including by passing a Research Analyst Qualification Examination) and approved by, FINRA. [NYSE Rule 344; NASD Rule 1050]

2. All registered persons who function as research analysts and supervisory analysts are required to participate in the Firm Element of the Continuing Education Program that includes training in applicable rules and regulations, ethics, and professional responsibility. [FINRA Rule 1250(b)]

3. The Research Analyst Qualification Examination consists of two parts: an analysis part (“Series 86”) and a regulatory part (“Series 87”). The rules do not contain a “grandfather” provision and a prerequisite for taking the Series

40 86/87 is having passed the General Securities Registered Representative Examination (“Series 7”), the Limited Registered Representative (“Series 17”), or the Canada Module of Series 7 (“Series 37” or “Series 38”). Certain exemptions from the Series 86 (but not the Series 87) are available to analysts who have passed Levels I and II of the Chartered Financial Analyst (“CFA”) Examination and to analysts who prepare only technical research reports and have passed Levels I and II of the Chartered Market Technician (“CMT”) Examination. [NASD Rule 1050; NASD Notices to Members 05-14, 05-13 and 04-25; NYSE Information Memos 05-16 and 04-16]

4. Foreign research analysts employed by non-U.S. affiliates of member firms may be subject to FINRA registration and licensing requirements if they are deemed “associated persons” of the member firm. Registration requirements do not apply to an associated person who (i) is a foreign research analyst, (ii) resides outside the United States and (iii) contributes, partially or entirely, to the preparation of globally-branded or foreign affiliate research reports but does not contribute to the preparation of a member’s research, including a mixed-team report, that is not globally-branded. Eligibility for the exemption is further conditioned upon the member meeting certain supervisory, disclosure and recordkeeping requirements. [NASD Rule 1050(f); NYSE Rule 344/02]

5. FINRA has indicated that the registration requirements for research analysts are intended to apply only to equity research analysts,24 but is considering whether debt research analysts should be subject to the same or similar registration requirements.

III. FINRA RULE 5280

A. Background – NASD IM-2110-4.

1. NASD IM-2110-4, the precursor to FINRA Rule 5280, stated that it would be conduct inconsistent with just and equitable principles of trade for a member to establish or adjust an inventory position in an exchange-listed security traded over-the-counter or a derivative of such security in anticipation of the issuance of a research report on that security.

2. NASD IM-2110-4 further recommended, but did not require, that firms establish policies and procedures to develop and implement effective internal controls to isolate specific information with research and other departments so as to prevent the trading department from utilizing advance knowledge of the issuance of research reports. Those members that chose not to establish such procedures bore the burden to show that change in inventory positions in advance of research reports were not purposeful.

24 See - https://www.finra.org/rules-guidance/key-topics/research-analyst-rules/faq.

41 B. FINRA Rule 5280.

1. Similar to NASD IM-2110-4, FINRA Rule 5280 prohibits any member from establishing, increasing, decreasing or liquidating an inventory position in a security or a derivative of such security based on non-public advance knowledge of the content or timing of a research report in that that security.

2. In contrast to NASD IM-2110-4, however, FINRA Rule 5280’s prohibition applies with respect to inventory position in any security, including debt, or a derivative thereof, irrespective of whether the security is exchange listed.

In its response to SIFMA’s comments, FINRA also clarified that the term “research report” for purposes of Rule 5280 is broader than the definition of “research report” in the Legacy Research Rules. FINRA interprets the term “research report” for purposes of Rule 5280 to cover any written information from the research department that a reasonable person would expect to result in a transaction based on that information. In the same response, FINRA also declined a request by SIFMA to narrow Rule 5280 to cover only those actions taken by a member firm to adjust its inventory based upon advance non-public knowledge of material investment conclusions, such as ratings or price targets.

3. FINRA Rule 5280 also differs from NASD IM 2110-4 in that it applies the prohibition only to circumstances where a member establishes or adjusts its inventory based on non-public advance knowledge. For example, as FINRA noted when it proposed Rule 5280, when a member’s trading desk adjusts an inventory position in anticipation of a research report because of a publicly discernible trend that the issuance of a member’s report tends to follow an earning announcement, the prohibitions of the rule would not be triggered. However, if the trading desk is a recipient of non-public advance information regarding the content or specific timing of a research report in that security, then the Rule’s prohibition would apply even if the trading desk’s knowledge of a publicly discernible trend might arguably provide an alternative basis for the trading desk to adjust its inventory position.

4. Finally, FINRA Rule 5280 eliminates the option to establish internal controls to manage the flow of information between research and trading departments and instead mandates that firms establish policies and procedures reasonably designed to restrict or limit the information flow between research department personnel, or other persons with knowledge of the content or timing of a research report, and trading department personnel, so as to prevent trading department personnel form utilizing nonpublic advance knowledge of the issuance or content of a research report for the benefit of the member or any other person.

42 In its comment letter, SIFMA requested that FINRA confirm that this requirement is not meant to (i) limit or restrict communication between sales and trading personnel and research department personnel concerning an analyst’s published view or (ii) require that such communications must be pre-cleared or monitored. In its response, FINRA stated that it believed that its proposal set forth an unambiguous supervision standard, and further noted that, absent ambiguity in the Rule’s standard, it did not think it appropriate to opine on the adequacy of one or more elements of potentially many approaches that could satisfy the Rule’s supervision requirement.

IV. SARBANES-OXLEY ACT

A. Analyst Restrictions and Protections.

The SEC (or at the SEC’s direction, a registered securities association or national securities exchange) must adopt rules reasonably designed to address conflicts of interest that may arise when securities analysts recommend equity securities in research reports and public appearances, including rules:

1. Restricting the pre-publication clearance or approval of research reports by persons employed by the broker-dealer who are engaged in investment banking activities, or persons not directly responsible for investment research, other than legal and compliance staff. [Section 501(a)(1)(A)]

2. Limiting the supervision and compensatory evaluation of securities analysts to officials employed by the broker-dealer who are not engaged in investment banking activities. [Section 501(a)(1)(B)]

3. Prohibiting a broker-dealer and persons employed by the broker-dealer who are involved with investment banking activities from retaliating against a securities analyst employed by that broker-dealer as a result of an unfavorable research report that might adversely affect the investment banking relationship of the broker-dealer with the issuer that is the subject of the research report. [Section 501(a)(1)(C)]

4. Defining periods during which brokers or dealers that have participated, or are to participate, in a public offering of securities as underwriters or dealers should refrain from publishing or distributing research reports relating to such securities or the issuer of those securities. [Section 501(a)(2)]

5. Establishing internal safeguards to assure that securities analysts are separated by appropriate informational barriers within the firm from the review, pressure, or oversight of those whose involvement in investment banking activities might potentially bias their judgment or supervision. [Section 501(a)(3)]

6. Addressing other issues as the SEC (or such association or exchange) deems appropriate. [Section 501(a)(4)]

43 B. Disclosure.

The SEC (or at the SEC’s direction, a registered securities association or national securities exchange) must adopt rules reasonably designed to require securities analysts to disclose in public appearances, and broker-dealers to disclose in research reports, any conflicts of interest that are known or should have been known by the analyst or broker-dealer (as applicable) at the time of the appearance or distribution of the report. These disclosures must include the following:

1. The extent to which the analyst has debt or equity investments in the issuer that is the subject of the appearance or report. [Section 501(b)(1)]

2. Whether any compensation has been received by the broker-dealer, any of its affiliates, or the analyst, from the issuer that is the subject of the appearance or report (subject to certain exemptions as the SEC may determine to be appropriate and necessary to prevent disclosure of material nonpublic information regarding specific potential future transactions by the issuer). [Section 501(b)(2)]

3. Whether the issuer of the securities being recommended in the appearance or report is or has been a client of the broker-dealer at any time during the one-year period preceding the date of the appearance or the distribution of the report, and if so, stating the types of services that were provided to the issuer. [Section 501(b)(3)]

4. Whether the analyst received compensation for a research report based in any part on the investment banking revenues of the broker-dealer. [Section 501(b)(3)]

5. Such other disclosures of material conflicts of interest as the SEC (or such association or exchange) determines to be appropriate. [Section 501(b)(5)]

C. Implementation.

The SEC (or at the SEC’s direction, a registered securities association or national securities exchange) was required to adopt the foregoing rules within one year of the enactment of the Sarbanes-Oxley Act (i.e., by July 30, 2003). [Sections 501(a) and (b)]

Many of the provisions of the Legacy Research Rules (which have since been replaced by the Equity Research Rule discussed in Part II above) were adopted to fulfill this requirement.

V. SEC REGULATION AC

SEC Regulation AC, which applies to research on both debt and equity securities, requires research analysts to certify the truthfulness of the views they express in research reports and public appearances and to disclose whether they have received any compensation

44 related to the specific recommendations or views expressed in those reports and appearances.

A. Certain Defined Terms.

1. Covered Person. A covered person of a broker-dealer means an associated person of a broker-dealer, but does not include:

a. An associated person if

i. the associated person has no officers or employees in common with the broker-dealer who can influence the activities of research analysts or the content of research reports, and

ii. the broker-dealer maintains and enforces written policies and procedures reasonably designed to prevent the broker-dealer, any controlling persons, officers, and employees of the broker-dealer from influencing the activities of research analysts and the content of research reports prepared by the associated person.

b. An associated person that is an investment adviser, if such adviser is

i. not registered with the SEC as an investment adviser because of the prohibition against such registration set forth in Section 203A of the Investment Advisers Act of 1940 (i.e., an adviser regulated or required to be regulated as such in the state in which it maintains its principal office and place of business that does not have assets under management of at least $25 million or act as an adviser to a registered investment company), and

ii. not registered or required to be registered with the SEC as a broker- dealer.

2. Foreign Security. Foreign security means a security issued by a foreign issuer for which a U.S. market is not the principal trading market.

3. Public Appearance. Public appearance means any participation by a research analyst in a seminar, forum (including an interactive electronic forum), or radio or television or other interview, in which the research analyst makes a specific recommendation or provides information reasonably sufficient upon which to base an investment decision about a security or an issuer.

45 4. Research Analyst. Research analyst means any natural person who is primarily responsible for the preparation of the content of a research report.

5. Research Report. Research report means a written communication (including an electronic communication) that includes an analysis of a security or an issuer and provides information reasonably sufficient upon which to base an investment decision.

In its release adopting Regulation AC, the SEC declined to provide a list of all communications that would or would not be deemed to be a research report. It did state, however, that, in general, the following would not be research reports if they do not include an analysis of, or recommend or rate, individual securities or companies:

a. Reports discussing broad-based indices, such as the Russell 2000 or S&P 500 index;

b. Reports commenting on economic, political, or market conditions;

c. Reports commenting on or analyzing particular types of debt securities or characteristics of debt securities;

d. Technical analysis concerning the demand and supply for a sector, index, or industry based on trading volume and price; and

e. Reports that recommend increasing or decreasing holdings in particular industries or sectors or types of securities.

The SEC also stated that the following generally would not be research reports even if they recommend or rate individual securities or companies:

a. Statistical summaries of multiple companies’ financial data (including listings of current ratings) that do not include any analysis of individual companies’ data;

b. An analysis prepared for a specific person or a limited group of fewer than 15 persons;

c. Periodic reports or other communications prepared for investment company shareholders or discretionary investment account clients discussing past performance or the basis for previously made discretionary investment decisions; and

d. Internal communications that are not given to customers.

46 6. Third Party Research Analyst. Third party research analyst means:

a. With respect to a broker-dealer, any research analyst not employed by that broker- dealer or any associated person of that broker-dealer; and

b. With respect to a covered person of a broker-dealer, any research analyst not employed by that covered person, by the broker-dealer with whom that covered person is associated, or by any other associated person of the broker-dealer with whom that covered person is associated.

B. Research Report Certifications.

1. Required Certification. Rule 501 of Regulation AC requires that any broker- dealer or covered person that publishes, circulates, or provides a research report prepared by a research analyst to a U.S. person must include in the research report a clear and prominent certification by the analyst as to the following statements:

a. The views expressed in the research report accurately reflect the analyst’s personal views on the securities or issuers that are the subject of the report, and

b. Either:

i. No part of the analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report (“related compensation”), or

ii. All or part of the analyst’s compensation consists of related compensation. If the analyst received such related compensation, the research report must also disclose the amount, source, and purpose of such compensation and include cautionary language that the receipt of related compensation could influence the recommendation.

2. Third Party Research Exemption. Broker-dealers or covered persons that publish, circulate, or provide a research report prepared by a third party research analyst to a U.S. person are exempt from the certification requirements if:

a. The employer of the third party research analyst has no officers or employees in common with the broker-dealer or covered person, and

b. The broker-dealer (or, with respect to a covered person, the broker- dealer with whom the covered person is associated) maintains and

47 enforces written policies and procedures reasonably designed to prevent the broker-dealer, any controlling persons, officers, and employees of the broker-dealer from influencing the activities of the third party research analyst and the content of research reports prepared by the third party research analyst.

C. Public Appearance Certifications.

1. Required Certifications. Rule 502 of Regulation AC provides that if a broker-dealer publishes, circulates, or provides a research report prepared by a research analyst employed by the broker-dealer or covered person to a U.S. person, the broker-dealer must make a record, within 30 days after any calendar quarter in which the research analyst makes a public appearance, that includes the following certifications by the analyst:

a. The views expressed by the analyst in all public appearances during the quarter accurately reflected the analyst’s personal views at that time about any securities or issuers discussed in the appearance, and

b. No part of the analyst’s compensation consists of related compensation.

2. Failure to Obtain Certifications. If the broker-dealer does not obtain these certifications from the analyst, the broker-dealer must promptly notify its designated examining authority of such fact in writing and, for 120 days following this notification, disclose in any research reports prepared by the analyst and published, circulated, or provided to a U.S. person that the research analyst did not provide the required certifications.

3. Analyst Employed by a Foreign Person. In the case of a research analyst who is employed outside the United States by a foreign person located outside the United States, the public appearance certification requirement applies solely to public appearances made while the research analyst is physically present in the United States.

4. Obligation to Maintain Records. A broker-dealer must preserve the records required by Rule 502 in accordance with SEC Rule 17a-4 for a period of not less than 3 years (the first 2 years of which must be in an accessible place).

D. Exemption for Certain Foreign Research Reports.

Rule 503 of Regulation AC provides an exemption from the requirements of Regulation AC for a foreign person that prepares a research report concerning a foreign security, provided that the foreign person (i) is located outside the United States, (ii) is not associated with a registered broker-dealer, and (iii) provides the report to U.S. persons solely in accordance with SEC Rule 15a-6(a)(2).

48 E. Exclusion for News Media.

Regulation AC does not apply to any person who is the publisher of any bona fide newspaper, news magazine, or business or financial publication of general and regular circulation and is not registered or required to be registered with the SEC as a broker-dealer or investment adviser.

F. SEC Staff Notice Regarding Frequently Asked Questions Concerning Regulation AC.

In a notice issued on August 6, 2003, the staff of the SEC’s Division of Market Regulation responded to a number of questions regarding the application of Regulation AC. This notice was modified on April 25, 2005, primarily to answer additional questions relating to the application of Regulation AC to non-U.S. broker-dealers. Certain topics covered in the notice are summarized below.

1. Form of Certifications. It must be clear that the analyst primarily responsible for the preparation of the content of a research report has certified the report. Regulation AC, however, does not specifically require that the name of the certifying analyst appear in the actual certification.

2. Supervision and Oversight. If a supervisor materially changes or edits a draft research report (e.g., reclassifies a rating) after certification by the research analyst, the report would have to be re-certified by the analyst. If, as a result of changes made by the supervisor, the research analyst were no longer able to certify the research report, the report could be distributed if another natural person who was primarily responsible for the preparation of the report’s content, such as the supervisor, certified the report.

3. Research Reports. Written communications to nondiscretionary investment account clients where the advisor provides an analysis that is sufficient to support an investment decision are not excluded from the definition of “research report” because nondiscretionary investment account clients may act on such communications, even where the communications are backward-looking.

4. Third Party Research. The third party exception in Regulation AC contemplates that the third party research will be clearly and unambiguously identified as such and is not available if the third party research is provided to clients under the broker-dealer’s own name or brand. The exception is available if the broker-dealer provides clearly and unambiguously identified third party research even if the third party research is accompanied with a cover letter on the broker-dealer’s letterhead or is contained in a wrapper or folder bearing the name of the broker-dealer.

5. Associated Persons and Covered Persons. A broker-dealer’s written policies and procedures would not be sufficient to exclude an associated person from the definition of “covered person” where there is a common officer who is

49 in a position to influence research of the broker-dealer. Regulation AC requires both structural and informational separation in order for an associated person not to be considered a “covered person.” A separately identifiable department within a broker-dealer would still be subject to Regulation AC even if the independence criteria were otherwise satisfied.

6. Public Appearances. Participation by a research analyst in a conference call or webcast with clients, whether or not password-protected, is a public appearance under Regulation AC. It would, however, not be considered a public appearance if the conference call or webcast is limited to a group of fewer than 15 persons. Participation by a research analyst in a telephone interview with a member of the media would be considered a public appearance.

7. Research Analyst Compensation. Regulation AC is not intended to address or prohibit performance-based compensation or otherwise prescribe how analysts may be compensated. It requires that a research report contain a statement by the research analyst certifying whether his or her compensation was, is, or will be related to the specific recommendations or views expressed by the research analyst in the research report. If all or part of his or her compensation is related to such recommendations or views, the statement must also include the source, amount, and purpose of such recommendations or views expressed.

8. Foreign Broker-Dealers and Rule 15a-6. Regulation AC applies to all broker-dealers (foreign and domestic) that provide research to U.S. persons. Rule 503, however, provides an exemption to foreign persons not associated with a registered broker-dealer who prepare and provide research reports concerning foreign securities solely in accordance with SEC Rule 15a-6(a)(2).

VI. GLOBAL RESEARCH SETTLEMENT

A. Summary of the Structural Reforms Mandated by the Global Research Settlement.

Pursuant to the Global Research Settlement, the Global Settlement Firms agreed to make a number of structural reforms intended to insulate research personnel from improper investment banking influence.25 (For purposes of the Global Research Settlement, the term “research” refers solely to equity research.) In addition, although not parties to the Global Research Settlement, affiliates of the Global

25 The firms were also required to (i) adopt and implement policies and procedures reasonably designed to ensure that its personnel do not seek to influence the contents of research reports or the activities of research personnel for the purpose of obtaining or retaining investment banking business, and (ii) retain an independent monitor to review the implementation and effectiveness of the policies and procedures adopted by them to achieve compliance with the structural reforms and other requirements of the Global Research Settlement.

50 Settlement Firms (including foreign affiliates, but not including certain investment adviser affiliates) are also subject to the structural reform requirements of the Global Research Settlement to the extent their activities relate to research with respect to U.S. issuers or non-U.S. issuers with a U.S. principal trading market if such research is distributed to U.S. investors. As noted above, the original terms of the Global Research Settlement were substantially modified by the March 2010 Order. As so modified, the principal structural reforms required by the Global Research Settlement are summarized below.26

1. The research and investment banking functions within the firm must be physically separated.

2. Research budget and allocation of research expenses must be determined by the firm’s senior management without input from investment banking personnel and without regard to specific revenues or results derived from investment banking.

3. Investment banking personnel may not have any input into company- specific research coverage decisions and investment banking revenues or potential revenues may not be taken into account in making company- specific coverage decisions.

4. The firm must create an oversight committee comprised of research management and, if desired, others (but not investment banking personnel) to review changes in ratings and material changes in price targets, and to monitor the overall quality and accuracy of the firm’s research reports.

5. After the firm receives an investment banking mandate relating to a public offering of securities, research personnel may communicate with investors orally regarding such offering, provided that such research personnel do not appear jointly with company management or investment banking personnel in those communications. In addition:

a. Oral communications by research personnel with investors in which a recommendation or view regarding the offering is expressed by research personnel must have a reasonable basis; and

b. Oral communications regarding the offering to 10 or more investors must be “fair and balanced” (within the meaning of NASD Rule 2210(d)(1)) (the “fair and balanced standard”).27

26 Many of the original provisions that were modified or deleted by the March 2010 Order (including, e.g., those relating to analyst compensation, analyst evaluations, termination of research coverage, and solicitation of investment banking business) are now addressed by the Equity Research Rule. 27 NASD Rule 2210 has since been re-designated as FINRA Rule 2210.

51 6. Firewalls must be put in place that are reasonably designed to prevent all communication between investment banking and research personnel other than those expressly permitted by the Global Research Settlement. Among the permitted types of communications are:

a. Investment bankers may seek, through research management or in the presence of internal legal or compliance staff (i.e., on a “chaperoned” basis), the views of research analysts about the merits of a proposed transaction or a potential candidate for a transaction (so-called “vetting” communications), or about market or industry trends, conditions or developments. In addition, communications with investment bankers regarding market or industry trends, conditions or developments may be initiated by research analysts (again, through research management or in the presence of internal legal or compliance staff) if such communications are consistent with those an analyst might have with investing customers. Under no circumstances, however, may any such communications be made for the purpose of having research personnel identify specific potential investment banking transactions.

b. Research analysts may communicate their views about a proposed transaction or potential candidate for a transaction to the firm’s commitment committee (or subgroup thereof) in connection with the review of that transaction by the committee. Although investment banking personnel working on the transaction may participate with research analysts in these discussions, research analysts also must be given the opportunity to express their views to the committee (or subgroup) outside the presence of such investment banking personnel.

c. Research analysts may assist the firm in confirming the adequacy of disclosure in offering or other disclosure documents for a transaction based on the analysts’ communications with the company and other third parties (including, e.g., suppliers, customers, accountants, vendors and regulatory authorities). However, if investment banking personnel are present or otherwise participate in any such communications by research personnel with the company and other third parties, then:

i. such joint communications must be for the due diligence purpose of gathering or confirming information about the company or otherwise related to the proposed transaction;

ii. the joint communications must either take place after the receipt of an investment banking mandate, or (in the case of a transaction other than an IPO) be in connection with a block bid or competitive secondary or follow-on offering or

52 similar transaction where the issuer or selling shareholder has contacted the firm to request that the firm submit a transaction proposal;

iii. in situations in which the joint communications take place after the receipt of an investment banking mandate, such communications must be held in the presence of internal legal or compliance staff or underwriters’ or other counsel on the transaction who are knowledgeable regarding research and investment banking conflicts and the terms of the Global Research Settlement; and

iv. in situations in which the joint communications take place prior to the receipt of an investment banking mandate under the circumstances described in clause (ii) above (i.e., a competitive situation, other than an IPO, where the firm is responding to a request for proposal from the company or selling shareholder), the firm’s legal or compliance staff reasonably believes that the firm will not have a meaningful opportunity to conduct separate due diligence communications with the relevant parties prior to the award of the mandate and such communications must be held in the presence of internal legal or compliance staff.28

If research personnel later communicate the results of their company and third party due diligence efforts to investment banking personnel, such communications may only be made in the presence of internal legal or compliance staff or underwriters’ or other counsel on the transaction who are knowledgeable regarding research and investment banking conflicts and the terms of the Global Research Settlement.

d. After the firm receives an investment banking mandate, or (in the case of a transaction other than an IPO) in connection with a block bid or competitive secondary or follow-on offering or similar transaction where the issuer or selling shareholder has contacted the firm to request that the firm submit a transaction proposal, research analysts may:

i. communicate their views on pricing and structuring of an investment banking transaction to personnel in the firm’s equity capital markets group;

28 As noted in Part II, the new Equity Research Rule prohibits pre-mandate joint due diligence and is thus stricter than this provision of the Global Research Settlement.

53 ii. provide to equity capital markets personnel information obtained from investing customers relevant to the structuring and pricing of the transaction; and

iii. independently, or with members of the firm’s equity capital markets group, participate in efforts to educate the firm’s sales force regarding investment banking transactions (including assisting in the preparation of internal-use memoranda for use in presentations with the sales force regarding investment banking transactions); provided that research analysts may not appear jointly with company management or investment banking personnel (other than members of the firm’s equity capital markets group) in such sales force communications.

In addition:

(1) oral communications by research personnel with the firm’s sales force in which a recommendation or view regarding the transaction is expressed by research personnel must have a reasonable basis;

(2) oral communications to 10 or more members of the sales force must be fair and balanced; and

(3) all internal-use memoranda (or portions thereof) that are identified as being the views of research personnel (“internal-use research memoranda”) must comply with the fair and balanced standard. e. Research personnel may attend or participate in widely-attended conferences or other widely-attended events also attended by investment banking personnel or in which investment banking personnel also participate. f. Research and investment banking management may attend meetings or sit on certain firm committees at which general business plans (including those of research and investment banking) and other matters of general firm interest are discussed. g. Research and investment banking personnel may attend or participate in widely- attended firm or regional meetings at which matters of general firm interest are discussed. h. Research and investment banking personnel may engage in communications with each other on an unrestricted and unchaperoned basis about matters not related to research or investment banking.

54 B. Independent, Third Party Research Requirements.

In addition to the structural reforms summarized above, the Global Settlement Firms also were obligated to procure, through an independent consultant acceptable to the Regulators, research prepared by independent third parties on common stock (and equivalents) listed on a U.S. national securities exchange and covered in the firm’s research reports (the “Independent Research Requirement”). The period during which the Independent Research Requirement was applicable has now expired in accordance with the original terms of the Global Research Settlement.

C. Other Mandated Disclosures.

In addition to the disclosures required under applicable law (including pursuant to the FINRA requirements summarized above), each of the Global Settlement Firms also agreed to include disclosures in its research reports designed to put recipients on notice of the potential conflicts of interest arising from the firm’s investment banking activities and cautioning such recipients that the report should be considered as only a single factor in making an investment decision.

D. Voluntary Initiative Regarding IPO Allocations.

Although not technically part of the Global Research Settlement, the Global Settlement Firms also entered into a voluntary initiative on April 28, 2003 pursuant to which they each agreed to implement policies and procedures reasonably designed to prevent the allocation of securities in “hot” IPOs to executive officers and directors of U.S. public companies or non-U.S. public companies with a U.S. principal equity trading market (the “IPO Allocation Initiative”).

The IPO Allocation Initiative also contained an undertaking by each of the firms to inform nonpublic companies, prior to the award of an IPO mandate, that the firm may have allocated hot IPOs to the company’s executive officers or directors (or members of their immediate family) and that the company’s board of directors may wish to obtain information from such officers or directors concerning such allocations in connection with its consideration of the firm as an underwriter in the company’s IPO. In addition, the IPO Allocation Initiative contained certain provisions designed to prevent investment banking personnel from having input into specific IPO allocation decisions.

The IPO Allocation Initiative became effective six months after its entry and provided that it would expire five years thereafter. Accordingly, the IPO Allocation Initiative expired pursuant to its own terms on October 28, 2008.29

29 FINRA Rule 5131, which became effective May 27, 2011, was adopted to address certain of the issues that led to the IPO Allocation Initiative.

55 E. SEC Staff Interpretive Guidance Regarding the Global Research Settlement.

In the SEC Interpretive Letter, the staff of the SEC’s Division of Market Regulation addressed a number of questions regarding the Global Research Settlement. Certain topics covered in the SEC Interpretive Letter are summarized below.

1. Education and Information Access.

a. Investment Banking personnel may listen (in “listen-only” mode, not identified as being present) from a remote location on widely disseminated research communications to the sales force, such as “morning calls,” daily notes, and blast voicemails that are in a non- deal context or that relate to a publicly announced deal.

b. Investment banking personnel (including members of the equity capital markets group) may not listen in on, or otherwise access, any research call with any individual investor or group of investors.

c. Investment banking personnel may have access to an analyst’s detailed models on covered companies if such models have been widely disseminated (including, e.g., via website posting) by research to investing customers or the sales force and investment banking does not communicate with research in obtaining the models or in any other way not permitted by the Global Research Settlement. Settling firms must maintain records sufficient to show that such models have been widely disseminated to investing customers or the sales force. (Following issuance of the letter, the staff clarified that this response was intended to apply outside the vetting context and thus was not meant to limit permissible communications that take place between investment banking and research in that context or in certain other circumstances under appropriate conditions.)

2. Communications Between Research and Investment Banking.

a. Certain communications may occur between research personnel and investment banking personnel so long as they are chaperoned by internal legal or compliance staff. Legal or compliance personnel dedicated to the research department, as well as other legal or compliance personnel within the firm (such as control room personnel) who are properly trained specifically regarding research and investment banking conflicts and the terms of the Global Research Settlement, may act as chaperones. However, legal or compliance personnel that are primarily engaged in supporting the firm’s investment banking department may not function as chaperones.

56 b. After the vetting process has been initiated by investment banking, research may continue to communicate its views to investment banking on the merits of the proposed transaction or potential candidate for the transaction, without specific additional prompting, so long as such communications are effected through research management or chaperoned by legal or compliance personnel, and are not made for the purpose of having the analyst identify a specific potential transaction.

c. After the firm has received an investment banking mandate, research analysts may, from a remote location, listen to (in “listen-only” mode, not identified as being present), or view a live webcast of an investment banking or company sponsored road show or other widely attended presentation to investors or the sales force.

d. Investment banking personnel may ask research management for research’s written coverage plan, including information on initiations, terminations, and any final determination not to pick up coverage on a company. After a final, independent decision has been made regarding its coverage plan, research management may provide such coverage plan to investment banking whether or not an inquiry was initiated by investment banking.

3. Participation in Conferences.

a. Research and investment banking personnel may communicate with each other regarding the planning of a widely-attended firm- sponsored conference with regard to general conference logistics, selection of speakers, and arrangements for investment banking personnel to appear on a panel at a research-hosted conference (and vice-versa), so long as (i) the final agenda is set by the department hosting the conference, (ii) such communications do not relate to attendee invitations, and (iii) such communications are chaperoned by legal or compliance personnel unless they occur solely between investment banking management and research management.

b. Research and investment banking personnel may participate in social or athletic events organized in connection with a conference that are open to large groups of conference participants. However, research and investment banking personnel may not (i) arrange or influence seating (or athletic pairings, foursomes, or similar arrangements) in order to place particular corporate clients and bankers or analysts together, (ii) participate together in groupings where corporate clients or potential corporate clients also participate, or (iii) participate jointly in limited invitation small group socials or athletic events organized with corporate clients (or prospective clients) in connection with a conference.

57 F. FINRA Rule 2241 and the Global Research Settlement.

The terms of the Global Research Settlement provide that if the “SEC adopts a rule or approves an SRO rule or interpretation with the stated intent to supersede any of the provisions of this settlement, the SEC or SRO rule or interpretation will govern with respect to that provision of the settlement and such provision will be superseded.” However, in connection with the adoption of the new Equity Research Rule, FINRA expressly stated that it did not believe the Global Research Settlement should be modified through FINRA rulemaking and the Equity Research Rule is not intended to supersede any provision of the Global Research Settlement. Accordingly, the bifurcated (and inherently confusing) regulatory scheme applicable to Global Settlement Firms and those firms not subject to the Global Research Settlement continues.

VII. GOVERNMENTAL STUDIES AND RESEARCH HARMONIZATION EFFORTS

A. GAO Dodd-Frank Research Study.

1. Research Study Mandate.

Pursuant to Section 919A of the Dodd-Frank Act, the GAO was required to conduct a study (i) to identify and examine potential conflicts of interest that exist between the staffs of the investment banking and equity and fixed income securities analyst functions within the same firm; and (ii) to make recommendations to Congress designed to protect investors in light of such conflicts. In conducting the study, the GAO was required to consult with state attorneys general, state securities officials, the SEC, FINRA, NYSE Regulation, investor advocates, brokers, dealers, retail investors, institutional investors, and academics.

2. Considerations. In conducting the study, the GAO was required to consider:

a. The potential for investor harm resulting from conflicts, including consideration of the forms of misconduct engaged in by the several securities firms and individuals that entered into the Global Research Settlement;

b. The nature and benefits of the undertakings to which those firms agreed in enforcement proceedings, including firewalls between research and investment banking, separate reporting lines, dedicated legal and compliance staffs, allocation of budget, physical separation, compensation, employee performance evaluations, coverage decisions, limitations on soliciting investment banking business, disclosures, transparency, and other measures;

58 c. Whether any such undertakings should be codified and applied permanently to securities firms, or whether the SEC should adopt rules applying any such undertakings to securities firms; and

d. Whether to recommend regulatory or legislative measures designed to mitigate possible adverse consequences to investors arising from the conflicts of interest or to enhance investor protection or confidence in the integrity of the securities markets.

3. Findings / Recommendations. The GAO completed its report in January 2012 and concluded, among other things:

a. The Global Research Settlement imposes, in some areas, more stringent requirements on the Global Settlement Firms than the FINRA rules impose on other broker-dealers engaged in research and investment banking, because the Global Research Settlement resulted from enforcement actions involving analyst conflicts.

b. By establishing, in effect, separate but different requirements for addressing analyst conflicts, FINRA’s research rules and the Global Research Settlement raise the question of whether any of the Global Research Settlement’s remaining terms need to be adopted as SEC or FINRA rules to better protect investors.

c. Through some of its more stringent requirements, the Global Research Settlement potentially affords greater protections to investors in some areas than the FINRA rules but imposes greater burdens on broker-dealers. Whether these burdens are appropriate in comparison to the greater protections of the requirements has yet to be determined and documented.

d. To the extent that any of the Global Research Settlement’s remaining terms provide an effective way of furthering investor protection, by not assessing their codification the SEC may be missing an opportunity to provide consistent investor protection.

e. To help ensure that investors consistently are protected from potential conflicts of interest between research analysts and investment bankers employed by the same broker-dealers, the Chairman of the SEC should direct the appropriate divisions or offices to formally assess and document in a recommendation whether any of the Global Research Settlement’s remaining terms should be codified as industry- wide rules.

B. Treasury Report.

1. In October 2017, Treasury published a report entitled A Financial System that Creates Economic Opportunities: Capital Markets. The Treasury

59 Report purported to conduct an extensive review of the regulatory framework for capital markets and identified areas for reform to better serve issuers, investors, and intermediaries.

2. With respect to research specifically, Treasury recommended a holistic review of the Global Research Settlement and the SEC and FINRA Research Rules with the objective of harmonizing a single set of rules for financial institutions.

3. According to the Treasury Report, Treasury’s recommendations were based on discussions with smaller public companies and assertions that sell-side research coverage of their firms has become sparse, or has even been discontinued, due in part to the increase in regulation and compliance costs caused by the Global Research Settlement.

4. Treasury also noted that one current cross-border issue with respect to research relates to the unbundling of financial research services and payments under the EU’s Markets in Financial Instruments Directive. Treasury recommended that the U.S. agencies continue to engage and cooperate bilaterally and multilaterally with other jurisdictions to work toward coherent regulation and supervision that protects consumers, manages systemic risk, and enhances financial stability.

C. Improving Investment Research for Small and Emerging Issuers Act.

In July 2018, the U.S. House of Representatives’ Committee on Financial Services unanimously approved H.R. 6139, which would require the SEC to carry out a study regarding, among other things, the factors related to the demand for research by institutional and retail investors, the availability of research, costs of research, and the impact on the availability of research coverage to smaller issuers due to the Global Research Settlement. On July 11, 2018, the bill was received in the Senate and referred to the U.S. Senate Committee on Banking, Housing and Urban Affairs.

VIII. CFTC RESEARCH RULES

On April 3, 2012, the CFTC adopted final rules to implement Sections 731 and 732 of the Dodd-Frank Act. The final rules establish provisions to address potential conflicts of interest in connection with research reports issued by swap dealers, major swap participants, introducing brokers, and futures commission merchants.30

A. Key Definitions.

1. “Research report” means any written communication (including electronic) that includes an analysis of the price or market for any

30 In the adopting release, the CFTC acknowledges that many elements of the rule were adapted from NASD Rule 2711.

60 derivative, and that provides information reasonably sufficient upon which to base a decision to enter into a derivatives transaction. The term does not include:

a. Communications distributed to fewer than 15 persons;

b. Commentaries on economic, political, or market conditions;

c. Statistical summaries of multiple companies’ financial data, including listings of current ratings;

d. Periodic reports or other communications prepared for investment company shareholders or commodity pool participants that discuss individual derivatives positions in the context of a fund’s past performance or the basis for previously-made discretionary decisions;

e. Any communications generated by an employee of the business trading unit that is conveyed as a solicitation for entering into a derivatives transaction, and is conspicuously identified as such; and

f. Internal communications that are not given to current or prospective customers. [CFTC Rule 23.605(a)(9); CFTC Rule 1.71(a)(9)]

2. “Research analyst” means an employee who is primarily responsible for, and any employee who reports directly or indirectly to such research analyst in connection with, preparation of the substance of a research report relating to any derivative, whether or not any such person has the job title of “research analyst.” [CFTC Rule 23.605(a)(7); CFTC Rule 1.71(a)(7)]

3. “Research department” means any department or division that is principally responsible for preparing the substance of a research report relating to any derivative on behalf of a firm, including a department or division contained in an affiliate of a firm. [CFTC Rule 23.605(a)(8); CFTC Rule 1.71(a)(8)]

4. “Derivative” means a contract for the purchase or sale of a commodity for future delivery; a security futures product; a swap; any agreement, contract, or transaction described in Section 2(c)(2)(C)(i) or 2(c)(2)(D)(i) of the Commodity Exchange Act (the “CEA”); any commodity option authorized under Section 4c of the CEA; and (vi) any leverage transaction authorized under Section 19 of the CEA. [CFTC Rule 23.605(a)(4); CFTC Rule 1.71(a)(4)]

B. Restrictions on Interactions with the Research Department.

1. Non-research personnel shall not direct a research analyst’s decision to publish a research report, and non-research personnel shall not direct the

61 views and opinions expressed in a research report. [CFTC Rule 23.605(c)(1)(i); CFTC Rule 1.71(c)(1)(i)]

2. No research analyst may be subject to the supervision or control of any employee of the firm’s business trading unit or clearing unit, and no employee of the business trading unit or clearing unit may have any influence or control over the evaluation or compensation of a research analyst [CFTC Rule 23.605(c)(1)(ii); CFTC Rule 1.71(c)(1)(ii)]

3. Except in certain limited circumstances, non-research personnel, other than the board of directors and any committee thereof, shall not review or approve a research report of the firm before its publication. [CFTC Rule 23.605(c)(1)(iii); CFTC Rule 1.71(c)(1)(iii)]

4. Non-research personnel may review a research report before its publication as necessary only to verify the factual accuracy of information in the research report, to provide for non- substantive editing, to format the layout or style of the research report, or to identify any potential conflicts of interest, provided that certain conditions are satisfied [CFTC Rule 23.605(c)(1)(iv); CFTC Rule 1.71(c)(1)(iv)]

C. Restrictions on Analyst Communications; No Promises of Favorable Coverage.

1. Any written or oral communication by a research analyst to a current or prospective customer relating to any derivative must not omit any material fact or qualification that would cause the communication to be misleading to a reasonable person. [CFTC Rule 23.605(c)(2); CFTC Rule 1.71(c)(2)]

2. The firm may not directly or indirectly offer favorable research, or threaten to change research, to an existing or prospective counterparty as consideration or inducement for the receipt of business or compensation. [CFTC Rule 23.605(c)(4); CFTC Rule 1.71(c)(4)]

D. Restrictions on Analyst Compensation; No Retaliation.

1. A firm may not consider as a factor in reviewing or approving a research analyst’s compensation his or her contributions to the firm’s trading or clearing business. Except for communicating client or customer feedback, ratings, and other indicators of research analyst performance to research department management, no employee of the business trading unit or clearing unit of the firm may influence the review or approval of a research analyst’s compensation [CFTC Rule 23.605(c)(3); CFTC Rule 1.71(c)(3)]

2. No firm and no employee of a firm who is involved with the firm’s pricing, trading, or clearing activities (as applicable), may, directly or indirectly, retaliate against or threaten to retaliate against any research analyst employed by the firm or its affiliates as a result of an adverse, negative, or otherwise unfavorable research report or public appearance written or made,

62 in good faith, by the research analyst that may adversely affect the firm’s present or prospective pricing, trading, or clearing activities (as applicable) [CFTC Rule 23.605(c)(6); CFTC Rule 1.71(c)(6)]

E. Disclosure Requirements.

1. A firm must disclose in research reports and a research analyst must disclose in public appearances whether the research analyst maintains a financial interest in any derivative of a type, class, or, category that the research analyst follows, and the general nature of the financial interest. [CFTC Rule 23.605(c)(5)(i); CFTC Rule 1.71(c)(5)(i)]

2. Disclosures and references to disclosures would be required to be clear, comprehensive, and prominent. [CFTC Rule 23.605(c)(5)(ii); CFTC Rule 1.71(c)(5)(ii)]

3. Firms would be required to maintain records of public appearances by research analysts sufficient to demonstrate compliance by those research analysts with the applicable disclosure requirements. [CFTC Rule 23.605(c)(5)(iii); CFTC Rule 1.71(c)(5)(iii)]

F. Third Party Research.

1. A firm that distributes or makes available any independent third-party research report must accompany the research report with, or provide a Web address that directs the recipient to, the current applicable disclosures, as they pertain to the firm. [CFTC Rule 23.605(c)(5)(iv)(B); CFTC Rule 1.71(c)(5)(iv)(B)]

2. Each firm must establish written policies and procedures reasonably designed to ensure the completeness and accuracy of all applicable disclosures. [CFTC Rule 23.605(c)(5)(iv)(B); CFTC Rule 1.71(c)(5)(iv)(B)]

3. The third party research disclosure requirements would not apply to independent third-party research reports made available by a firm to its customers (i) upon request; or (ii) through a Web site maintained by the firm. [CFTC Rule 23.605(c)(5)(iv)(C); CFTC Rule 1.71(c)(5)(iv)(C)]

IX. THE JOBS ACT

A. Exception from the Definition of “Offer” for Certain Research Reports on EGCs.

1. Section 105(a) of the JOBS Act amended Securities Act Section 2(a)(3) to provide an exception from the definition of “offer” for purposes of Sections 2(a)(10) and 5(c) of the Securities Act for research reports issued by a broker-dealer regarding an EGC that is the subject of a proposed public offering of common equity securities.

63 2. For purposes of this exception, a “research report” is defined expansively to include any “written, electronic, or oral communication that includes information, opinions, or recommendations with respect to securities of an issuer or an analysis of a security or an issuer, whether or not it provides information reasonably sufficient upon which to base an investment decision.”

B. Restrictions on Analyst Communications.

1. Section 105(b) of the JOBS Act amends Section 15D of the Exchange Act to prohibit the SEC or FINRA from adopting or maintaining any rule or regulation in connection with an IPO of an EGC that:

a. Restricts based on “functional role” which employees of a broker-dealer may arrange for communications between research analysts and prospective investors; or

b. Prohibits research analysts from participating in communications with company management in the presence of non-research personnel (e.g., investment banking and sales force personnel).

2. In the JOBS Act FAQs, the SEC staff clarified that an associated person of a broker-dealer, including investment banking personnel, may arrange communications between analysts and investors. This activity would include, for example, an investment banker forwarding a list of clients to the analyst that the analyst could, at his or her own discretion and with appropriate controls, contact. In turn, an analyst could forward a list of potential clients it intends to communicate with to investment banking as a means to facilitate scheduling. Investment bankers can also arrange, but not participate in, calls between analysts and clients.

C. Analyst Participation in Pitches / Roadshows.

1. Section 105(b) of the JOBS Act also permits analysts to participate in any communication with the management of an EGC concerning an IPO that is also attended by any other associated person of a broker, dealer, or member of a national securities association whose functional role is other than analyst.

2. In the JOBS Act FAQs, the SEC staff clarified that while Section 105(b) allows research analysts of non-Global Settlement Firms to attend investment banking pitch meetings to EGC management with respect to an IPO, it does not override existing FINRA prohibitions on analysts soliciting investment banking business.

3. The JOBS Act FAQs offer the following examples of permissible activity by a research analyst of a non-Global Settlement Firm pursuant to Section 105(b):

64 a. Before a firm is formally retained to underwrite an offering, research analysts in attendance at such meetings could, for example, introduce themselves, outline their research program and the types of factors that the analyst would consider in his or her analysis of a company, and ask follow-up questions to better understand a factual statement made by the EGC’s management.

b. After the firm is formally retained to underwrite the offering, research analysts could participate in presentations by the management of an EGC to educate the firm’s sales force about the company and discuss industry trends, provide information obtained from investing customers, and communicate their views.

4. The JOBS Act FAQs also state that Section 105(b) of the JOBS Act does not affect existing FINRA rules which prohibit research analysts from participating in roadshows or otherwise engaging in communications with customers about an investment banking transaction in the presence of investment bankers or the company’s management.

D. Post-Offering Communications.

1. Section 105(d) of the JOBS Act prohibits the SEC or FINRA from adopting or maintaining any rule or regulation that prohibits any broker-dealer from publishing or distributing any research report or making a public appearance with respect to the securities of an EGC either:

a. Within any prescribed period of time following the date of the EGC’s IPO; or

b. Within any prescribed period of time prior to the expiration date of any agreement between the broker-dealer and the EGC or its shareholders that restricts or prohibits the sale of securities held by the EGC or its shareholders after the IPO date.

2. The JOBS Act FAQs note that although the JOBS Act does not explicitly permit publication or distribution of a research report or public appearance relating to an EGC following a secondary offering or after expiration, termination or waiver of a lock-up agreement, the SEC staff believes that the intent of Congress in adopting this provision was to fully address all the research quiet periods imposed by FINRA relating to EGCs. In October 2012, FINRA adopted changes to prior NASD Rule 2711 to implement this interpretation and new FINRA Rule 2241 eliminates the lock-up related research quiet periods for both EGCs and non-EGCs.

E. The JOBS Act and the Global Research Settlement.

In the JOBS Act FAQs, the SEC Staff confirmed that the JOBS Act does not amend or modify the Global Research Settlement. The SEC Staff noted that if the Global

65 Settlement Firms were to seek an amendment or modification of the Global Research Settlement in light of the JOBS Act, one or more of the Global Settlement Firms would have to make an application to the Court and, under the terms of the Global Research Settlement, the SEC would have an opportunity to consider any such request and the SEC could support or oppose a proposed amendment or modification after considering whether it would be in the public interest.

X. RESEARCH REPORTS ON COVERED INVESTMENT FUNDS

A. Background. The FAIR Act directed the SEC to extend the current safe harbor set forth in Rule 139 to apply to a “covered investment fund research report.” Rule 139 provides a safe harbor for the publication or distribution of research reports concerning one or more issuers by a broker-dealer participating in a registered offering of one of the covered issuers’ securities. Previously, the safe harbor was not available for a publication or distribution of research reports pertaining to specific registered investment companies or business development companies (“BDCs”).

B. Rule 139b. New Rule 139b, which became effective January 14, 2019, establishes a safe harbor that allows the publication or distribution of “covered investment fund research reports” by unaffiliated broker-dealers participating in a securities offering of a “covered investment fund” without the research reports being deemed an offer to sell securities for purposes of Section 2(a)(10) or 5(c) of the Securities Act.

1. Covered Investment Fund. A covered investment fund means:

a. An investment company (or a series or class thereof) registered under, or that has filed an election to be treated as a BDC under, the U.S. Investment Company Act of 1940 (the “Investment Company Act”) and that has filed a registration statement under the Securities Act for the public offering of a class of its securities, which registration statement has been declared effective by the SEC; or

b. A trust or other person: (i) issuing securities in an offering registered under the Securities Act and which class of securities is listed for trading on a national securities exchange; (ii) the assets of which consist primarily of commodities, currencies, or derivative instruments that reference commodities or currencies, or interests in the foregoing; and (iii) that provides in its registration statement under the Securities Act that a class of its securities are purchased or redeemed, subject to conditions or limitations, for a ratable share of its assets.

2. Covered Investment Fund Research Report. A covered investment fund research report is defined as 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

66 extent that the research report is published or distributed by the covered investment fund or any affiliate of the covered investment fund, or any research report published or distributed by any broker or dealer that is an investment adviser (or any affiliated person of an investment adviser) for the covered investment fund.

3. Issuer-Specific Research Reports. 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 and other requirements:

a. The covered investment fund must have been subject to the relevant reporting and timely filing requirements under the Investment Company Act and/or the Exchange Act for at least 12 calendar months prior to a broker-dealer’s reliance on Rule 139b.

b. The covered investment fund that is the subject of a report must satisfy a minimum aggregate market value threshold at the date of reliance on the rule. Currently, the threshold (which refers to the threshold specified in General Instruction I.B.1 of Securities Act Form S-3) is $75 million. How the threshold is actually calculated (including, e.g., whether both affiliate and non-affiliate holdings are counted) depends on the particular type of covered investment fund at issue.

c. The broker-dealer’s publication or distribution of research reports must be “in the regular course of its business” and, in the case of a research report regarding a covered investment fund that does not have a class of securities in substantially continuous distribution, such publication or distribution does not represent the initiation of publication of research reports about such covered investment fund or its securities or re-initiation of such publication following discontinuation of publication of such research reports.

4. Industry Research Reports. Rule 139b also sets forth conditions for industry research reports that parallel the corresponding conditions under Rule 139 and, according to the SEC, are intended to address the risk of circumvention of the prospectus requirements of the Securities Act.

a. 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 15(d) of the Exchange Act).

67 b. A broker-dealer must publish or distribute research reports in the regular course of its business.

c. Industry research reports either must include similar information about a substantial number of covered investment fund issuers of the same type or investment focus, or alternatively contain a comprehensive list of covered investment fund securities currently recommended by the broker-dealer.

5. Presentation Requirements. 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.

C. Regulation M. The SEC adopted a conforming amendment to Rule 101 of Regulation M in order to align the treatment of Rule 139b research with research issued during the restricted period for a Regulation M distribution in accordance with the Rule 138 and 139 research safe harbors. This amendment was also effective January 14, 2019.

XI. SELECTED RESEARCH-RELATED ENFORCEMENT ACTIONS BY U.S. REGULATORS

A. Toys Settlement

1. Factual Allegations

a. In April 2010, Toys“R”Us invited 10 firms (specifically, Barclays Capital Inc.; Citigroup Global Markets Inc.; Credit Suisse Securities (USA), LLC; Goldman, Sachs & Co.; JP Morgan Securities LLC; Deutsche Bank Securities Inc.; Merrill Lynch, Pierce, Fenner & Smith Inc.; Morgan Stanley & Co., LLC; Wells Fargo Securities, LLC; and Needham & Company LLC) to compete for a role in its planned IPO.

b. In connection with its underwriter selection process, Toys“R”Us asked equity research analysts from the 10 firms to make separate presentations to Toys“R”Us’ management and sponsors for the purpose of ensuring that the analysts’ views on key issues, including valuation factors, were aligned with the views expressed by the firms’ investment bankers.

c. According to FINRA, each of the firms understood that the performance of its analyst at the presentations would be a key factor in determining whether the firm received an underwriting role in the IPO.

68 d. Toys“R”Us offered each of the 10 firms various roles in the IPO, but eventually decided not to proceed with the offering.

2. Findings.

a. FINRA found that the analyst presentations and the valuation confirmations constituted impermissible promises of favorable research coverage and impermissible solicitation activity in furtherance of investment banking business.31

b. FINRA also found that six of the firms had inadequate supervisory procedures related to research analyst participation in investment banking pitches.

3. Principal Implications.

a. During a “solicitation period” where the issuer has stated that it will consider research analyst views as part of the underwriter selection process, a firm may not indicate to a prospective investment banking client its analyst’s positive views of the company or the company’s prospects, even if such views are honestly held, or the positive prospective valuation the analyst may give the company.

b. In the context of a meeting requested by a company during the solicitation period for the purpose of obtaining a research analyst’s views as part of the underwriter selection process, an analyst from a soliciting investment bank may not communicate to the issuer his or her views about the issuer or the issuer’s industry, such as views about valuation or comparable companies.

c. During the solicitation period, substantive communications between research analysts of soliciting firms and company management should be “one way” such that the analyst is gathering information from the company and not providing information to the company.

d. When providing their views to company management, investment bankers of soliciting firms should not state or imply that the views expressed represent the views of their firms’ research analysts.

4. Toys FAQs.

In May 2015, FINRA issued the Toys FAQs (which were revised in July 2015) to further clarify certain of the concepts expressed by FINRA in the context of the Toys Settlement. In the Toys FAQs, FINRA outlines three

31 As an example of the promise of favorable coverage, FINRA noted in its press release regarding the matter, that certain analysts voiced a positive outlook on the company and its potential IPO during their presentations.

69 stages during which analyst communications with issuers take place and states that each such stage carries with it a different level of risk that the analyst communications may be deemed to violate FINRA prohibitions with respect to solicitation and promises of favorable research coverage. FINRA notes that whether a particular communication between a research analyst and an issuer violates one or both of these prohibitions will depend on the context and content of the communication.

a. Pre-IPO Period. FINRA believes the risk of violating the research conflict rules in connection with communications between a research analyst and an issuer are lower in the period before it has determined to proceed with an IPO (the “Pre-IPO Period”). However, FINRA cautions that a Pre-IPO Period is not a safe harbor for all analyst communications with an issuer. For example, answering questions from an issuer as to how an analyst would value or “position” the issuer would not only carry increased risk of violating these provisions even in a Pre-IPO Period, but the questions may also be indicia that the issuer has already determined to proceed with an IPO.

b. Solicitation Period. FINRA noted that the greatest risk of violating the research conflict rules occurs in the “Solicitation Period” for an IPO. In general, FINRA considers the Solicitation Period for an IPO to begin when the issuer makes known that it intends to proceed with an IPO and ends when there is a bona fide awarding of the underwriting mandates.32

While typically the Solicitation Period for an IPO will commence with a request for proposal from an issuer or other communication that will expressly indicate an intent to proceed with an IPO, firms must carefully assess the context and content of a request for information from an analyst by. an issuer during an ostensible Pre- IPO Period to assess the risk of complying with the request.

Subject to applicable requirements (e.g., chaperones for Global Settlement Firms) and a firm’s policies and procedures to insulate research analysts from investment banking pressure, FINRA believes it would not be inconsistent with the research conflict rules for investment bankers to consult with analysts about valuation and other views during a Solicitation Period. However, investment banking personnel may not convey to the issuer that a valuation is either the research analyst’s valuation or a joint valuation of the bankers and the research analyst. Absent a repudiation in a manner

32 To the extent an issuer determines mandates on a rolling basis, the Solicitation Period would end for a particular firm when it has been informed that it has been awarded a role in the offering or has been rejected for a role.

70 consistent with FINRA Regulatory Notice 11-41, bankers may not convey a valuation to an issuer where there has been a request from the issuer or tacit understanding that the valuation of the bankers and research analyst will be aligned or that any valuation presented will reflect the analyst’s views.

FINRA believes that investment bankers or other non-research personnel could provide to an issuer at its request during a Solicitation Period previously published research reports, provided that the request is unsolicited and the research reports have been previously published and generally made available to clients. Such previously published research reports may also be provided to the issuer by a research analyst during a Solicitation Period if the issuer’s request to the research analyst is unsolicited and the research reports have been previously published and generally made available to clients. While responding to such a direct request from the issuer may carry elevated risk for the research analyst, FINRA believes such risk to be commensurate with the risk of bona fide vetting or due diligence communications during the Solicitation Period (i.e., it must be carefully managed). However, if research or non-research personnel were to provide only its selection of research reports or to comment on the reports, these actions would carry significantly elevated risk of being viewed as impermissible. c. Post-Mandate Period. Similar to the Pre-IPO Period, FINRA believes that, depending on the facts and circumstances, the risks associated with communications between a research analyst and an issuer are lower following the award of the underwriting mandates (the “Post-Mandate Period”). With appropriate policies and procedures, FINRA believes it would generally be appropriate during the Post-Mandate Period (including in situations in which the issuer has not yet assigned specific roles or economics) for a research analyst to communicate with the issuer his or her views about valuation, pricing and structuring of the transaction, even if the valuation or pricing assessment is positive. FINRA also notes, however, that there is no safe harbor for such communications in a Post-Mandate Period, and therefore firms must continue to consider the context and issuer expectations in evaluating the permissibility of communications between the research analyst and the issuer during such period. d. Follow-On Offerings. FINRA notes that, while the same risk management principles apply to follow on offerings, the risks associated with communications between a research analyst and an issuer may be lower during the Solicitation Period for a follow-on offering than for an IPO. For example, where an analyst already covers an issuer and has no reason to know that the issuer intends to

71 conduct a follow on offering, FINRA believes a firm could effectively manage the risk of violating the research conflict rules by maintaining effective information barriers to prevent the analyst from learning of the intended offering and by limiting the analyst’s post-IPO communications with the issuer to ordinary course communications for the benefit of the firm’s research customers. Moreover, where a firm has existing coverage and there is a post- IPO market valuation of the issuer, FINRA would not expect an analyst, in the ordinary course of discharging his or her research function, to share with the issuer a valuation or conclusions not contained in a published research report.

B. Certain Additional Recent Enforcement Actions

1. In Re Monness, Crespi, Hardt & Co, Inc. [MCH] File No. 3-16025 (Aug. 20, 2014).

a. According to the SEC order, beginning in at least 2006 until early 2012, MCH, a registered broker-dealer and equity research firm, failed to establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information.

b. The SEC alleged that while MCH’s compliance manual contained policies and procedures regarding the prohibition on insider trading and the protection of confidential information, the firm failed to enforce two of its insider trading procedures that (a) prohibited a research analyst and anyone else aware of an upcoming research report from trading in the issuer’s securities prior to publication of such research report; and (b) required all MCH officers, directors, and employees to submit a report of every securities transaction in which they, their families, or their trusts participated.

c. The SEC also claimed that MCH did not have written policies and procedures that specifically addressed the risks posed by its “Corporate Access” or “Idea Dinner” programs, two programs that the firm had established and provided as services to its existing and prospective customers and which the SEC claimed posed a risk that MCH personnel and customers might have access to, and misuse, material nonpublic information.

d. The SEC noted that the mere establishment of policies and procedures alone is not sufficient to prevent the misuse of material nonpublic information. It also is necessary to implement measures to monitor compliance with and enforcement of those policies and procedures.

72 e. Without admitting or denying the SEC’s findings, MCH agreed to a cease and desist order and paid a monetary civil penalty to the SEC in the amount of $150,000.

2. Citigroup Global Markets, Inc. [CGMI] (FINRA Letter of Acceptance, Waiver and Consent No. 2013036054901 (Nov. 24, 2014)).

a. FINRA found that from January 2005 to February 2014, CGMI failed to meet its supervisory obligations regarding communications between equity research analysts and clients and internal sales and trading staff, including with respect to the potential selective dissemination of non-public research information.

i. One example cited by FINRA was CGMI’s failure to supervise certain communications by its equity research analysts at “idea dinners” that were also attended by some of CGMI’s institutional clients and sales and trading personnel. At these dinners, according to FINRA, CGMI research analysts discussed stock picks, which, in some instances, were inconsistent with the analysts’ published research.

ii. FINRA also noted that an equity research analyst employed by a CGMI affiliate in Taiwan (“Citi Taiwan”) selectively disseminated information concerning Apple Inc. to certain CGMI clients, which was then selectively disseminated to additional CGMI clients by a FINRA-registered equity salesperson employed by Citi Taiwan.

iii. During this period, CGMI issued approximately 100 internal warnings concerning communications by equity research analysts. However, when CGMI detected violations involving selective dissemination and client communications, FINRA found that there were lengthy delays before the firm disciplined the research analysts and the disciplinary measures eventually taken lacked the severity necessary to deter repeat violations of CGMI policies.

iv. FINRA also found that CGMI permitted one of its equity research analysts to participate in the preparation of presentation materials relating to two IPO roadshows.

b. Without admitting or denying any of FINRA’s findings, CGMI agreed to pay $15 million for failing to adequately supervise research analyst communications and for permitting one of its research analysts to participate indirectly in two investment banking-related roadshows.

73 3. JMP Securities LLC [JMP] (FINRA Letter of Acceptance, Waiver and Consent No. 201303933301 (Aug. 17, 2015)).

a. FINRA found that from January 1, 2010 through December 31, 2013, JMP violated various disclosure provisions in prior NASD Rule 2711 by failing to present certain required disclosures in a clear, comprehensive and prominent manner; omitting from certain research reports required disclosures concerning conflicts of interest relating to investment banking relationships with the subject company; and failing to adopt adequate supervisory procedures.

b. As to the requirement to provide disclosures in a clear, comprehensive and prominent manner, FINRA alleged that JMP used a defective boilerplate statement that failed to sufficiently specify whether it expected to receive or intended to seek compensation for investment banking services from a subject company in the next three months and instead only stated that the reader of the research report should assume that JMP will solicit business from the covered company in the research report. FINRA also alleged that JMP failed to disclose that it managed or co- managed an IPO for a subject company in the past 12 months in eight research reports, that it received compensation from the subject company in the past 12 months in one research report, and that it made a market in the securities of the subject company in eight research reports.

c. In addition, FINRA found that JMP’s written supervisory procedures failed to conform to prior NASD Rule 2711(d)(2) concerning compensation to research analysts based on specific investment banking services transactions.

d. Without admitting or denying any of FINRA’s findings, JMP agreed to pay a fine in the amount of $125,000.

4. William Blair & Company [William Blair] (FINRA Letter of Acceptance, Waiver and Consent No. 2013038534001 (Aug. 17, 2015)).

a. FINRA found that from January 1, 2010 through September 25, 2013, William Blair violated several disclosure provisions in prior NASD Rule 2711 by failing to present the required disclosures in a clear, comprehensive and prominent manner; omitting from certain research reports required disclosures concerning conflicts of interest relating to financial relationships with the subject company; failing to define the meaning of certain research ratings; failing to direct readers where applicable disclosures could be found in certain compendium research reports; publishing research reports within 10 calendar days following a secondary offering for which it acted as a

74 manager; and failing to adequately implement written supervisory procedures.

b. As to the requirement to provide disclosures in a clear, comprehensive and prominent manner, FINRA alleged that William Blair used indefinite or conditional language that it sought to seek compensation for investment banking services from a subject company that lacked specificity and that it commingled the required disclosures with other disclosures and disclaimers not required by prior NASD Rule 2711.

c. FINRA also found that William Blair omitted from certain research reports that it managed a public offering for the subject company in the past 12 months and that it also improperly published research reports during a quiet period following a secondary offering in two instances. FINRA further found that William Blair used research ratings in at least two reports that were not defined or sufficiently explained.

d. Finally, FINRA found that William Bair failed to implement written supervisory policies to ensure that required disclosures were sufficiently clear, comprehensive, and prominent and concerning the definition of research ratings, disclosures in compendium research reports, and the publication of research during quiet periods.

e. Without admitting or denying any of FINRA’s findings, William Blair agreed to pay a fine in the amount of $350,000.

5. In re Marwood Group Research LLC [Marwood], File No. 3-16970 (Nov. 24, 2015).

a. According to the SEC order, Marwood provided hedge funds and other clients with regulatory updates and analysis about potential timing and developments for future government actions or rulemaking decisions. The SEC claimed that in gathering content for these “research notes,” Marwood encouraged its analysts to maintain relationships with government employees and since government employees often are familiar with confidential matters at their agencies, such interactions increased the likelihood that Marwood employees could acquire material nonpublic information in the course of their work.

b. Marwood’s written policies and procedures prohibited the acquisition and dissemination of material nonpublic information and required employees to bring it to the attention of the compliance department if they encountered anything confidential. Nonetheless,

75 the SEC claimed that Marwood drafted research notes and distributed them directly to clients who could have used any information contained therein to inform securities trading decisions without bringing the information to the compliance department’s attention so it could be properly vetted to determine whether any such information constituted material nonpublic information ripe for insider trading.

c. The SEC found that Marwood violated Section 15(g) of the Exchange Act, which requires every registered broker or dealer to “establish, maintain, and enforce written policies and procedures reasonably designed, taking into consideration the nature of such broker’s or dealer’s business, to prevent the misuse in violation of…[the Exchange Act] or the rules or regulations thereunder, of material nonpublic information by such broker or dealer or any person associated with such broker or dealer.” The order also found that Marwood violated Section 204A of Investment Advisers Act of 1940.

d. In settlement of the matter, Marwood agreed to admit wrongdoing and to comply with certain undertakings, including with respect to the retention of an independent compliance consultant. Marwood also agreed to pay a civil money penalty in the amount of $375,000.

6. In re Canaccord Genuity Inc. [Canaccord], File No. 3-17178 (Mar. 24, 2016).

a. In its press release announcing its settlement in this action, the SEC remarked on its significance by stating that this case represents the “first action against a registered broker-dealer for violating Section 5(b) of the Securities Act by initiating research coverage while it was seeking, or had been invited, to participate in underwriting an offering for that issuer.”

b. The SEC found that, after the issuer cancelled a secondary stock offering it had planned for January 2012 for which Canaccord was to act as the lead underwriter, the issuer began discussions with another investment bank in March 2012 about attempting another offering. In an email to the issuer’s CEO about those discussions, the CFO stated that he told the Canaccord banker that he needed Canaccord’s research analyst to initiate coverage in order to avoid restrictions on Canaccord’s ability participate in the May offering, and that the Canaccord banker responded that once the issuer provided feedback about Canaccord’s status and share of underwriting fees, he would ask Canaccord’s head of research to have the research analyst publish an initiation report the following week. The Canaccord banker then allegedly emailed the issuer’s

76 CFO that based on his conversations with members of Canaccord’s commitment committee he believed that Canaccord would participate in the May offering if the issuer gave Canaccord the status and share of underwriting fees it was seeking. Later that day, the issuer’s CFO informed the Canaccord banker that he obtained clearance that Canaccord would receive the status it wanted and expected that he could get Canaccord the share of underwriting fees it sought. Ultimately, Canaccord initiated research coverage about the issuer with a “Buy” rating and a twelve month price target of $22, more than 60% above the issuer’s then-current stock price.

c. Citing to a 1969 SEC release, the SEC remarked that “a broker or dealer that publishes research on an issuer or its securities is subject to Section 5(b)(1): (a) while seeking to participate in the underwriting of the issuer’s securities offering; (b) after having been invited to participate by the issuer in the underwriting of its securities offering; or (c) after reaching an understanding with the issuer that it will participate as a managing underwriter in the issuer’s securities offering.” Noting that Canaccord’s issuance of a research report in this context did not meet the safe harbor criteria of Securities Act Rule 139, the SEC found that Canaccord “willfully violated Section 5(b)(1) of the Securities Act” and Canaccord agreed to pay the SEC $550,198 to settle the action.

7. In re Charles Grom, File No. 3-17119 (Feb. 17, 2016).

The SEC charged a former Deutsche Bank research analyst with certifying a rating on a stock that was inconsistent with his personal view. An SEC investigation alleged that Grom certified that a March 29, 2012 research report about discount retailer Big Lots accurately reflected his own beliefs about the company and its securities. However, in private communications with Deutsche Bank research and sales personnel, Grom allegedly indicated that he did not downgrade Big Lots from a “BUY” recommendation in his report because he wanted to maintain his relationship with Big Lots management. According to the SEC’s order instituting a settled administrative proceeding, Grom violated the analyst certification requirement of Regulation AC.

8. SEC v. Afriyie, S.D.N.Y. (Apr. 13, 2016); US v. Afriyie, S.D.N.Y. (Apr. 14, 2016).

a. In parallel civil and criminal suits brought by the SEC and the U.S. Department of Justice, John Afriyie, an research analyst, was charged with violating U.S. insider trading laws. The suits allege that Afriyie found out about an impending acquisition of The ADT Corporation when a prospective acquirer approached the investment firm where he was employed and discussed potential debt financing

77 for the acquisition. Afriyie subsequently accessed several highly confidential, deal-related documents on his firm’s computer network and purchased thousands of high-risk, out-of-the-money ADT call options in his mother’s account in anticipation that ADT’s stock price would rise when the transaction was publicly announced. Following the announcement of the ADT deal, Afriyie sold all of the ADT options in his mother’s account thereby realizing profits in excess of $1.5 million.

b. On January 30, 2017, a jury found Afriyie guilty of one count of securities fraud and one count of wire fraud, which verdict is under appeal. In November 2018, Afriyie was ordered to disgorge his trading profits (with interest) in the amount of $1.67 million and to pay a civil penalty of nearly $1.58 million.

9. Stephens, Inc. [Stephens] (FINRA Letter of Acceptance, Waiver and Consent No. 2014041823201 (April 27, 2016)).

a. FINRA censured Stephens for inadequately supervising firm-wide internal “flash” emails sent by its research analysts to convey information about companies and industries the firm covered. According to FINRA, Stephens’ firm-wide flash email program was designed as an expeditious way for research analysts to share publicly available news and insights regarding covered companies with its sales and trading personnel for discussion with firm customers interested in those companies.

b. FINRA alleged that from at least August 2013 through January 2016, Stephens did not adequately supervise the content and dissemination of the flash emails, and that the firm failed to establish, maintain, and enforce adequate written supervisory procedures concerning trading in connection with these flash emails. FINRA also found instances of firm personnel forwarding flash emails marked “internal use only” to customers, or cutting and pasting the text of an internal-use email into a separate communication sent to a customer. While these practices were contrary to firm policy, FINRA alleged that the firm lacked effective monitoring or supervisory systems to detect or prevent them.

10. SEC v. Bonan Huang and Nan Huang, Case No. 16-2390 (3d Cir, Apr. 10, 2017).

a. In January 2015, the SEC charged two data analysts employed by Capital One with engaging in an alleged insider trading scheme involving the use of credit card data improperly obtained from their

78 employer.33 According to the SEC, over the span of several years, the two employees had access to firm databases, which contained confidential information about the credit card activity of millions of Capital One’s customers, and were able to create targeted searches that aggregated data showing purchases made by Capital One’s customers at numerous merchants. Utilizing this data, the SEC claimed that the employees were able to ascertain information that they used to trade options on the stock of such merchants ahead of corporate sales and earnings announcements. The SEC alleged that the employees made thousands of trades, which ultimately netted them more than $2.8 million in profit.

b. Bonan Huang reached a settlement with the SEC and agreed to pay approximately $4.7 million in disgorgement and penalties. The SEC obtained a jury verdict against Nan Huang, finding that the employee violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and ordering the employee to pay $13.5 million in disgorgement and penalties. Nan appealed the verdict, arguing that the SEC did not show that the nonpublic data obtained was “material.” The Third Circuit, however, affirmed the decision noting that the data allowed Nan to make revenue projections in advance of the companies’ quarterly earnings announcements and, having obtained “early and nonpublic insight as to whether the companies were likely to under- or over-perform” analyst expectations, was able to predict whether the stocks would rise or fall after the announcements.

11. In re Wm Smith & Co. [WSC] and William S. Smith [Smith] File No. 3-18046 (June 26, 2017).

a. The SEC alleged that WSC failed to monitor appropriately trading by its employees and to safeguard properly nonpublic information generated by its research analysts. According to the SEC, as part of their duties, the WSC analysts had access to information regarding the upcoming publication of WSC research reports, including price targets, analysis of the target companies’ filings, and other information learned from the target companies that was not contained in public filings and was included in research reports. Smith, the owner of WSC, reviewed draft research reports prior to their publication.

b. Although the firm maintained policies and procedures regarding the use of material nonpublic information, the SEC charged that Smith and WSC failed to adequately enforce such policies, including by allowing personal trading in securities covered by WSC research

33 See SEC v. Bonan Huang and Nan Huang, Case No. 15-CV-269 (Jan 22, 2015).

79 analysts. The SEC also alleged that notwithstanding the firm’s written policies, on numerous occasions WSC research analysts and Smith disclosed to WSC sales and trading personnel the analysts’ unpublished views and analyses that appeared in subsequent WSC research reports. The SEC also found the WSC sales and trading personnel publicly disseminated material nonpublic information related to nonpublic research analysis, and sometimes Smith knew of and approved of such emails.

c. The SEC censured WSC and Smith. In addition, WSC was required to pay a $50,000 fine and Smith was required to pay a $35,000 fine.

12. SEC v Jason Napodano et al., Case No. 17-CV-6917 (N.D. Ill. 2017).

a. The SEC alleged that Napodano, who was the head of a research division covering small cap companies within LBMZ Securities, Inc. (“LBMZ”), misled investors in penny stocks by representing that he wasn’t trading or holding positions in the companies he was writing about while secretly trading the same stocks based on nonpublic information about the publication date of his research. According to the complaint, two other investment bankers along with Napodano traded on nonpublic information that they and Napodano shared about certain small cap issuers. Napodano agreed to a permanent bar with respect to penny stocks and also agreed to pay full disgorgement of his insider trading profits plus interest totaling approximately $161,485 and a penalty of $143,865. The two investment bankers also agreed to settle charges and pay disgorgement of their insider trading profits, pre-judgment interest and penalties. Each of the investment bankers also agreed to be barred from working in the securities industry.

b. In a separate action, LBMZ agreed to be censured and pay a $240,000 penalty without admitting or denying the SEC’s findings that the firm failed to enforce policies and procedures designed to prevent its employees from misusing nonpublic information. In its settlement order, the SEC noted that “[a]lthough LBMZ had policies and procedures calling for monthly reviews of its employees’ brokerage statements, reviews of its employees’ internal and external communications, and the creation of information barriers around its investment banking division, it did not obtain or review complete brokerage records for many employees, conducted a minimal review of employee communications, and did not create meaningful information barriers around the investment banking division.”

80 13. Matthew Nemer [Nemer] (FINRA Disciplinary Proceeding No. 2016051925301 (Sept. 27, 2017).

a. FINRA alleged that Nemer, a research analyst at Wells Fargo Securities LLC (“Wells”), covered a company that had previously informed him they were interested in hiring him. According to FINRA, Nemer exchanged numerous e- mails with the covered company to arrange a possible meeting and expressed his interest to work at the subject company. After such communications, FINRA found that Nemer authored a research report in which he raised his earnings estimate and price target for the company and thereafter published several other reports on the company. Nemer did not disclose to Wells or in these research reports that he was in employment discussions with the covered company.

b. FINRA also found that Nemer received material nonpublic information from the company, which he did not report to Wells as required by internal policies and procedures. After receiving an offer of employment from the covered company, Nemer published an additional research report on the company in which he failed to disclose that he had accepted an offer of employment from the company.

c. FINRA concluded, among other things, that Nemer (i) violated FINRA Rule 2241(c)(4)(I) by failing to disclose a material conflict of interest relating to the employment discussions, (ii) violated 2241(c)(4)(A) by failing to disclose a financial interest in the securities of a covered company (his employment offer included stock options) and (iii) violated FINRA Rule 2241(e) by publishing misleading research reports. Nemer received a two-year suspension and was fined $20,000.

14. Matthew B. Marietta [Marietta] (FINRA Letter of Acceptance, Waiver and Consent No. 2019061078801 (February 19, 2019)).

a. Without admitting or denying the findings of FINRA, Marietta consented to sanctions and to the entry of findings that he authored research reports about a company without disclosing to his member firm that he was engaged in employment discussions with the company.

b. FINRA alleged that Marietta’s firm issued a research report authored by Marietta in which he expressed the view that the company’s intention to hire a full-time investor relations representative was a positive development. Thereafter, FINRA claimed that Marietta began speaking with the company about potentially becoming the company’s investor relations

81 representative. Without disclosing that he was engaged in employment discussions with the company, Marietta’s firm issued three more research reports on the company, authored by Marietta.

c. Marietta received a 14-month suspension and agreed to a $10,000 fine.

15. Robert W. Baird & Co. Incorporated [Baird] (FINRA Letter of Acceptance, Waiver and Consent No. 2017052842901 (June 7, 2019)).

a. FINRA claimed that Baird published seven research reports about an issuer without disclosing that the research analyst who authored the reports was engaged in employment discussions with the issuer that constituted an actual, material conflict of interest. FINRA alleged that the subject company’s CEO called Baird to inform them that they had met with the research analyst about potential employment.

b. FINRA claimed that Baird’s failure to disclose an actual, material conflict of interest in seven research reports violated NASD Rule 2711(h)(1)(C). Baird consented to a censure and a $150,000 fine.

16. In re ICO Rating, File No. 3-19366 (August 20, 2019).

a. From December 2017 through July 2018, the SEC alleged that ICO Rating (which is the trade name for an unincorporated organization formed in September 2016 and based in Russia) maintained a website that billed the entity as a rating agency that issues independent analytical research on initial coin offerings (“ICOs”).

b. The SEC claimed that during the relevant period, ICO Rating derived a significant portion of web traffic to its website from the United States, contracted with a U.S. provider to host its website in the United States, published all of its content in English with figures quoted in U.S. Dollars, hosted and sent employees to attend conferences in the United States, and implemented no measures to block or otherwise deter United States persons from accessing and viewing its website or social media accounts.

c. The SEC claimed that the research reports, ratings, and social-media postings publicized offerings of blockchain-based digital assets, including “tokens” or “coins” that were investment contracts, which are securities pursuant to Section 2(a)(1) of the Securities Act.

d. The SEC found that ICO Rating violated Section 17(b) of the Securities Act by touting ICOs that involved the offer and sale of securities, through both its own website and its social media accounts, without disclosing that it received compensation from an

82 issuer for doing so, or the amount thereof. ICO Rating agreed to pay disgorgement of $106,998 and a civil penalty of $162,000.

17. In re TherapeuticsMD, File No. 3-19362 (August 20, 2019).

a. The SEC alleged that TherapeuticsMD, a public company that had been developing a hormone drug therapy and that had submitted certain information to the Food and Drug Administration (“FDA”), made selective disclosures to sell-side research analysts who covered the company concerning potential approval of a product by the FDA.

b. The first selective disclosure allegedly followed a meeting with the FDA that the SEC claimed was made to at least six sell-side analysts, after which the company’s stock price increased by almost 20 percent.

c. The second selective disclosure allegedly followed the release of an issuer report on Form 8-K, which the SEC claimed included little detail about the status of an FDA approval, and where the SEC claimed that less than an hour after the 8-K release, company executives held a call with analysts, disclosing specific details about the discussions with the FDA. The analysts published notes that afternoon and evening containing details from the call, which the SEC said caused the company’s stock to recover from losses earlier in the day following release of the 8-K.

d. The SEC found that TherapeuticsMD violated Section 13(a) of the Exchange Act and Regulation FD. TherapeuticsMD agreed to pay a penalty of $200,000.

XII. SELECTED RECENT INTERNATIONAL DEVELOPMENTS

A. European Regulations.

1. Market Abuse Regulation (“MAR”). On July 3, 2016, MAR came into force across the EU and replaced the previous civil regime on insider trading and market manipulation. MAR also imposes certain requirements in connection with the provision of “investment recommendations,” including rules relating to the presentation of recommendations, the disclosure of conflicts of interest, and rules regarding dissemination of recommendations produced by third parties. The definition of an “investment recommendation” is very broad and captures a wide range of materials, including potentially informal recommendations such as sales notes. This definition is broader than the definition of “investment research” under MiFID II (See below).

83 2. Markets in Financial Instruments Directive II (“MiFID II”) – Research Unbundling.

a. Background

i. MiFID II came into force on January 3, 2017, and contains specific provisions concerning the offering and receipt of “inducements”, which can include research. The general inducements rule prohibits MiFID investment firms from providing benefits to, or receiving benefits from, third parties in connection with the provision of an investment service or an ancillary service to a client, unless the benefits are designed to enhance the quality of the relevant service, and do not impair compliance with the firm’s duty to act honestly, fairly and professionally, in accordance with the best interests of its clients.

ii. A further specific prohibition on inducements prohibits a MiFID investment firm providing portfolio management or independent investment advice services (i.e., asset managers) from accepting and retaining benefits received from third parties in relation to the firm’s provision of portfolio management or investment advice services to its underlying clients, other than certain minor non-monetary benefits. As the specific prohibition on inducements would prevent broker-dealers from receiving research (which cannot qualify as a minor non-monetary benefit), there is a specific carve-out for investment research.

iii. Investment research is defined as research material or services concerning one or several financial instruments or other assets, or the issuers or potential issuers of financial instruments, or be closely related to a specific industry or market such that it informs views on financial instruments, assets or issuers within that sector, which: (i) explicitly or implicitly recommends or suggests an investment strategy; (ii) provides a substantiated opinion as to the present or future value or price of such instruments or assets, or otherwise contains analysis and original insights and reaches conclusions based on new or existing information that could be used to inform an investment strategy and be relevant and capable of adding value to the recipient investment firm’s decisions on behalf of clients being charged for that research; and (iii) is intended for distribution channels or for the public.

84 iv. MiFID II permits an EU asset manager to receive investment research, as long as it either pays for research directly from the manager’s own resources ort from a separate client- funded research payment account (or “RPA”) funded by client assets, or pay for research themselves from their own proprietary assets. The rationale behind this approach is that forcing broker-dealers to price and charge for services separately (so- called “research unbundling”) will promote best execution and better quality research.

v. The unbundling requirement has had a significant impact on the research market, both within the EU and globally. A majority of EU asset managers have chosen to pay for research themselves. Many sell-side firms have scaled down their research desks, and now have a more focused offering, while larger asset managers have brought research capabilities in-house. Many research providers outside the EU have ended up unbundling research costs in order to meet requests from EU asset managers (who must pay separately for research regardless of whether it is coming from an EU provider or elsewhere).

vi. In September 2019, the Financial Conduct Authority of the United Kingdom (the “FCA”) published feedback from an initial review of the MiFID II research unbundling provisions. 34 The FCA found that the way in which most asset managers have implemented the rules has improved accountability and scrutiny over both research and execution costs. It found a reduction of approximately 20%-30% in the budgets firms set for externally produced equity research. Interestingly, the FCA found no evidence of a material reduction in research coverage or quality, including in relation to smaller issuers. However, the FCA did find that valuation and pricing models are still evolving, and plans to keep these under review.

b. U.S. Regulatory Response to MiFID II’s Unbundling Requirement.

i. SEC No-Action Letters.35 MiFID II’s requirement to split a bundled commission into a definable research charge separate and apart from the actual trade execution charge causes particular issues under the U.S. regulatory

34 See https://www.fca.org.uk/publications/multi-firm-reviews/implementing-mifid-ii-multi-firm-review- research-unbundling-reforms. 35 See https://www.sec.gov/news/press-release/2017-200-0.

85 framework. In particular, the receipt of “special compensation” or a separately definable charge for the provision of research by a U.S. broker-dealer potentially subjects the broker-dealer to further regulation and oversight by the SEC as an investment adviser.36 Investment adviser status brings with it a number of additional burdensome regulatory obligations, including fiduciary duties and certain principal trading restrictions. As a result, U.S. broker-dealers sought guidance and regulatory relief from the SEC to help them address the challenges posed by the new MiFID II requirements. On October 26, 2017, the SEC issued three no-action letters that offered a certain degree of relief for U.S. broker-dealers looking to continue to provide research to EU asset managers subject to MiFID II’s unbundling requirements.

(1) Investment Adviser Status.37 In the first of the three SEC no-action letters issued on Oct. 26, 2017, the staff of the SEC’s Division of Investment Management stated that it will not recommend the SEC take enforcement action against a U.S. broker-dealer (or a non-U.S. broker-dealer relying on the exemption from broker-dealer registration provided by SEC Rule 15a-6) that receives direct “hard dollar” payments (or payments through an RPA) from EU asset managers that are expressly subject to MiFID II, or from subadvisers to such entities that are contractually obligated to comply with MiFID II requirements, without complying with the provisions of the Investment Advisers Act applicable to entities that fall within the definition of “investment adviser” under that act. The no-action relief, however, was granted on a temporary basis and was set to expire on July 3, 2020 (30 months following the January 3, 2018, implementation date of the MiFID II unbundling requirements). The temporary nature of the measure was intended to

36 Under Section 202(a)(11) of the U.S. Investment Advisers Act of 1940 (the “Advisers Act”), the term “investment adviser” is defined as “any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities; but does not include … any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor. . . .” 37 See https://www.sec.gov/divisions/investment/noaction/2017/sifma-102617-202a.htm.

86 provide the SEC with sufficient time to better understand the evolution of business practices post- MiFID II implementation.

On November 4, 2019, SEC staff issued a new letter that extended the expiration date of the original letter to July 3, 2023 (the “Extension Letter”).38 The staff stated that the additional period “will allow for the staff to continue to monitor and assess the evolving impact of MiFID II and evaluate whether any additional guidance or recommendations to the Commission for regulatory actions are appropriate. It will allow additional time for the EU authorities or regulators in individual member states to continue their evaluation of the effects of MiFID II and potentially modify their rules. Finally, it will allow additional time for market-based solutions with respect to payments for research in the U.S. and Europe to evolve further, and for greater transparency regarding research payments and practices to develop.”

The SEC staff also reiterated in the Extension Letter that the temporary relief applies to a situation after the UK exits the EU in which an investment manager is subject to compliance with research-related provisions under UK law that are substantially similar to MiFID II and its implementing rules and regulations.

(2) Trade Aggregation Issues.39 The second no-action letter, which was also issued by the staff of the SEC’s Division of Investment Management, provides that investment advisers may continue to aggregate client orders for purchases and sales of securities where (as a result of the MiFID II unbundling requirements) some clients may pay different amounts for research but all clients will continue to receive the same average price for the security and the same execution costs. According to the staff, the no-action relief is intended to provide “clarity and consistency to investment advisers by permitting the continued aggregation of orders while addressing the differing

38 See https://www.sec.gov/investment/sifma-110419. 39 See https://www.sec.gov/divisions/investment/noaction/2017/ici-102617-17d1.htm.

87 arrangements regarding the payment for research that will be required by MiFID II.”

(3) Section 28(e) Safe Harbor.40 The third no-action letter was issued by the staff of the SEC’s Division of Trading and Markets and permits continued reliance by a money manager on the safe harbor provided by Section 28(e) of the Exchange Act. The no-action relief allows a money manager to continue to purchase research services from a broker-dealer by paying higher commissions for trade execution without breaching its fiduciary duty to obtain best execution for its clients, if the money manager makes payments for research to an executing broker-dealer out of client assets alongside payments for execution through the use of an RPA that conforms to the requirements for RPAs in MiFID II. The relief is only available if all other applicable conditions of Section 28(e) are met (including, e.g., that the research payments are for services eligible for the safe harbor and the executing broker-dealer is legally obligated by contract with the money manager to pay for research through the use of an RPA in connection with a client commission arrangement).

ii. CFTC Staff Interpretive Letter. On December 11, 2017, in response to a request from the Futures Industry Association (the “FIA”) for guidance regarding the impact of MiFID II’s unbundling requirement on the requirement to register as a commodity trading advisor (or “CTA”), the CFTC staff issued an interpretation that a futures commission merchant, swap dealer, or introducing broker that offers commodity trading advice that is “solely incidental” to the conduct of its business or “solely in connection with its business” would not be in violation of the CEA for failing to register as a CTA even if such futures commission merchant, swap dealer, or introducing broker receives separate (or unbundled) payments from investment managers for such commodity trading advice. According to the CFTC staff, the analysis of whether the commodity trading advice is “solely incidental” or “solely in connection with” a firm’s business must be performed based upon the particular facts and circumstances of the relationship between the parties and, although direct payment for commodity trading advice may be one factor,

40 See https://www.sec.gov/divisions/marketreg/mr-noaction/2017/sifma-amg-102617-28e.pdf.

88 receipt of separate compensation would not be dispositive on its own.

c. European Regulatory Response. In what appears to be a coordinated effort with the SEC, on October 26, 2017 (i) the European Commission (the “EC”) published a set of FAQs setting out its views on two specific issues concerning how EU asset managers may continue to receive “bundled” research from non-EU broker-dealers without breaching the obligations imposed on them under MiFID II and (ii) the Financial Conduct Authority of the FCA issued a statement indicating its support of the SEC and EC actions and suggesting a possible alternative path for compliance with the MiFID II unbundling requirements.

i. The EC Guidance.41 The FAQs issued by the EC clarify the EC’s position on two important issues. First, the EC explains that an EU asset manager (or its subadviser in a non-EU country) may pay a non-EU broker-dealer a single commission for research and execution services, provided that the payment attributable to research can be identified. Therefore, unbundling is not required when receiving research and execution services from a non-EU broker-dealer, so long as the amount of the payment attributable to the research is separately identifiable. However, the EC guidance also provides that EU asset managers that have chosen to use the RPA option to pay for research must still comply with all of the RPA requirements, including maintaining a clear audit trail of payments made to research providers and being able at all times to identify the amount spent on research with a particular non-EU broker- dealer in relation to each client. Second, the EC guidance addresses the question of whether non-EU broker-dealers are required by MiFID II to separate out research charges. The EC explains that it is the EU asset manager (or its non-EU subadviser) that is responsible for ensuring compliance with the MiFID II research requirements. In the absence of a separate research invoice, the EU asset manager may need to consult with third parties, including the non-EU broker-dealer, to determine the charge attributable to the research provided. The EC guidance also emphasizes that the supply of and charges for research must not be influenced or conditioned by levels of payment for execution services. Thus, the EC guidance confirms that

41 See https://ec.europa.eu/info/sites/info/files/non-eu-brokers-dealers.pdf.

89 non-EU broker-dealers are not required by MiFID II to separate out research charges, but in practice EU asset managers will likely seek their assistance in helping them assign an appropriate cost.

ii. The FCA Statement.42 The FCA statement emphasizes the need to keep investors’ interests in focus and reiterates its support for continued access by EU firms to research produced by broker-dealers in the United States and in other non-EU jurisdictions. The FCA statement also provides that “arrangements in which a UK asset manager pays the EU entity of a broker for global research content, or research is circulated within a buy-side group, can also be an acceptable way of achieving this, provided that they do not influence the firm’s order routing decisions, execution costs and ability to act in its clients’ best interests.” The FCA statement, however, does not consider or address possible transfer pricing issues and other potential tax and other internal complications arising from such an approach.

3. MiFID II – Corporate Access Rules.

Like research, the facilitation of “corporate access” meetings between investors and company management is viewed by EU regulators as an “inducement” that should be separately paid for by EU asset managers, unless the service is deemed to be a “minor non-monetary benefit.” In general, corporate access services provided by a third party financial institution must be separately paid for where it is by nature exclusive (such as one-on-one meetings or field trips with company management), involves the allocation of valuable resources by the financial institution arranging the access and/or has value to the recipient. It is the obligation of the EU asset manager to determine whether the corporate access meeting has value or is simply a minor non-monetary benefit, and a record of such determination must be maintained. If the service cannot be viewed as a minor non- monetary benefit, and thus must be separately paid for, it cannot be paid out of an RPA since the EU regulators have expressly stated that corporate access services do not constitute “research” under their rules. Guidance issued in connection with MiFID II cautions that financial institutions should ensure that their pricing for research and other provided services, and payments received from firms purchasing such other services, are not indirectly subsidizing a charge for the corporate access service. The EU guidance notes, however, if a company’s investor relations office organizes an investor road show to support a capital raising event and is freely and publicly open to analysts from investment firms and other investors it could

42 See https://www.fca.org.uk/news/statements/fca-statement-mifid-ii-inducements-and-research.

90 qualify as an acceptable minor non-monetary benefit.43 A recent FCA review of the MiFID II inducement rules found a general increase in the proportion of corporate access meetings arranged directly between an issuer and asset manager without broker intermediation. The FCA also noted, however, that practices are still evolving and that corporate access fees vary significantly. Although the FCA considers it possible that some of these services are being under-charged in a way that poses a conflict of interest or inducement risk, it did not see direct evidence of conflicts of interest in how brokers offered corporate access services when conducting its review.44

4. UK IPO Reform.

a. On July 1, 2018, new rules adopted by the FCA to change the timing and sequencing of the availability of information in the UK IPO process, and to help enable the production of “unconnected” research, went into effect. The new rules seek to ensure that an approved prospectus or registration document is published before any “connected” research (i.e., research prepared by firms participating in the IPO), and that unconnected analysts have access to the same information from the issuer as connected analysts in order to produce their research. The rules aim to address the FCA’s concerns that investors do not have access to the prospectus sufficiently early in the process for the document to play its proper role in informing investor decisions. The FCA was particularly concerned that investor education relating to UK IPOs is largely driven by connected research, while unconnected analysts lack access to appropriate information to produce unconnected research on the offering.

b. Accordingly, in connection with UK IPOs, the new rules require that:

i. If a relevant firm (such as an underwriter or syndicate bank) is allowing its analysts access to an issuer then, prior to the firm’s analysts communicating with the issuer, the firm must ensure a range of unconnected analysts will have the opportunity either (1) to join the firm’s analysts in any communication with the issuer, before any connected research is published; or (2) to have access to the issuer, such that those unconnected analysts are given access to all of the

43 See https://www.esma.europa.eu/sites/default/files/library/esma35-43- 349_mifid_ii_qas_on_investor_protection_topics.pdf. 44 See https://www.fca.org.uk/publications/multi-firm-reviews/implementing-mifid-ii-multi-firm-review- research-unbundling-reforms.

91 information given to the firm’s analysts that is relevant for producing investment research on the issuer’s offering.

ii. The firm must select a range of unconnected analysts that, in the firm’s reasonable opinion, has a reasonable prospect of enabling investors to undertake a better-informed assessment of the value of the issuer’s shares, as compared with a situation in which only connected research is available.

iii. A firm must not impose any restrictions on access to the issuer by unconnected analysts that would unreasonably prevent, limit, or discourage those analysts from producing unconnected research.

iv. The firm must not disseminate its connected research until either (1) if unconnected analysts have been briefed at the same time as the firm’s analysts, one day after the publication of the approved prospectus or registration document; or (2) if connected and unconnected analysts have not been briefed simultaneously, seven days after the publication of the approved prospectus or registration document.

v. The firm must keep written records of the information given to its analysts, as well as to unconnected analysts, to show the information is identical. The firm must also keep a written record of its assessment and decision-making process relating to the range of unconnected analysts selected to have access to the issuer. c. Alongside these new rules, the FCA also introduced new guidance to clarify that it considers certain analyst interactions with issuers as activities that might compromise the analyst’s objectivity. The FCA noted that it is common for analysts within prospective syndicate banks to meet with the issuer’s management and advisers around the time that underwriting mandates are being considered. The FCA emphasized that during these meetings analysts can come under pressure to produce favorable research on an IPO to help their firm secure a mandate to manage the offering and its desired position in the syndicate. The new guidance indicates that the FCA would regard analyst interactions with an issuer before both: (i) the bank has accepted a mandate to carry out underwriting or placing services for the issuer; and (ii) the bank’s position in the syndicate has been confirmed by the issuer in writing, as “participating in pitches for new business.” Such interaction between the analyst and issuer is

92 prohibited by the FCA as an activity inconsistent with the maintenance of the analyst’s objectivity.

B. Hong Kong Regulations.

1. Rules on Research in Relation to Initial Public Offerings. In 2011, the Hong Kong Securities and Futures Commission (the “SFC”) amended the Code of Conduct for Persons Licensed by or Registered with the SFC (the “SFC Code of Conduct”)45 to introduce new rules on investment research in relation to IPOs (also referred to as “pre-deal research”). The new rules, among other things:

a. Extended the existing research analyst guidelines (which includes, among other things, conflicts of interest requirements and other disclosure requirements) in the SFC Code of Conduct to cover research on listing applicants the securities of which are to be listed on the Stock Exchange of Hong Kong (the “SEHK”). Previously, only issuers with listed securities on SEHK were covered.

b. Required firms employing research analysts preparing pre-deal research on a listing applicant to establish, maintain and enforce a set of written policies and control procedures to ensure that these analysts are not provided by the firm with any material information or forward looking information that is not expected to be included in the prospectus or publicly available. In addition, research analysts are prohibited from seeking such information, and sponsors are required to take steps to ensure that such information is contained in the prospectus or a similar document.

2. Discussion on the Introduction of a “Pay-for-Advice” Model. In November 2016, the SFC issued a Consultation Paper on whether a “pay-for-advice” model should be introduced in Hong Kong after noting that certain jurisdictions (particularly European jurisdictions implementing the so-called “research unbundling” provisions of MiFID II) are moving towards this direction. Under the pay-for-advice model, sell-side financial advisers would no longer be permitted to earn commissions in return for recommending or selling investment products, and buy-side investors would need to pay financial advisers if they want such advice. In the SFC’s consultation paper, the SFC acknowledged that a pay-for-advice model is currently uncommon in Hong Kong. The SFC subsequently concluded in papers issued in November 2017 and May 2018 that, while it did not find a compelling reason to introduce a pay-for-advice model in Hong Kong, it will keep under active consideration the merits of pay-for-advice models

45 See https://www.sfc.hk/web/EN/assets/components/codes/files-current/web/codes/code-of-conduct-for- persons-licensed-by-or-registered-with-the-securities-and-futures-commission/code-of-conduct-for- persons-licensed-by-or-registered-with-the-securities-and-futures-commission.pdf.

93 taking into account local and international market and regulatory developments.

3. Recent enforcement action in relation to disclosures in research reports. In January 2020, the SFC reprimanded and fined a licensed firm for non-compliance with certain regulatory requirements in relation to research reports distributed by the firm.46

a. The firm issued two research reports on a listed company with which an affiliate in the firm’s group of companies had an investment banking relationship (the affiliate had acted as underwriter and listing sponsor for the listed company’s Hong Kong IPO).

b. The SFC identified numerous failings by the firm but one particularly notable area of non-compliance was the firm’s failure to adequately disclose its investment banking relationship in a research report.

c. Paragraph 16.5(d) of the SFC Code of Conduct states that a firm that has an investment banking relationship with an issuer or a new listing applicant should disclose that fact in the research report. Any compensation or mandate for investment banking services received within the preceding 12 months would constitute an investment banking relationship. Paragraphs 16.3(f) and 16.10 of the SFC Code of Conduct require such disclosure to be complete, timely, clear, concise, specific and prominent.

d. An affiliate within the firm’s group of companies entered into an IPO listing sponsorship agreement with a prospective listed company in August 2015. The research report issued by the firm in November 2015 disclosed only that the firm and its group companies may have received compensation and a mandate of investment banking services from the listed company.

e. In its Statement of Disciplinary Action against the firm, the SFC stated the following (emphasis added): “The disclosure made in the research report is incomplete and lacks specificities of the sponsorship agreement. For instance, it did not stipulate the amount of compensation and the agreement that [the firm] would engage in the promotion of the listing shares, which included issuing research reports before listing.”

f. While it seems apparent that in this case the firm’s disclosure in its research report was not adequate because it was not sufficiently

46 See https://www.sfc.hk/edistributionWeb/gateway/EN/news-and- announcements/news/openAppendix?refNo=20PR1&appendix=0.

94 specific, the part of the extract in bold text above has caught the attention of many investment banking legal teams in Hong Kong. The SFC Code of Conduct does not prescribe this level of disclosure (i.e., the amount of compensation received in connection with the investment banking relationship) and there is no current market practice for research reports to disclose information about the amount of compensation received from an investment banking relationship with a listed company.

g. Since the SFC’s expectations as articulated in this enforcement action are not reflected in the SFC Code of Conduct or in current market practice, the general consensus in the market is that the relevant text about disclosing the “amount of compensation” likely was included in the Statement of Disciplinary Action in error. However, since the Statement of Disciplinary Action is an official SFC document, market participants are treating this seriously. It is unclear whether the SFC’s statement is intended to serve as formal guidance and have broader application to market participants, and banks are continuing to consider the implications of the SFC’s statement.

C. Singapore Regulations.

1. Guidelines on Addressing Conflicts of Interest From a Related Corporation. Singapore’s financial regulator, the Monetary Authority of Singapore (the “MAS”), has specific guidelines on addressing conflicts of interest arising from a related corporation issuing or promulgating research analyses or research reports (the “Guidelines”).47 The Guidelines were issued pursuant to and with reference to the Securities and Futures Act (Cap. 289).

a. The Guidelines apply to all Financial Institutions (as such term is defined in the Guidelines) but they expressly focus on the conflicts of interest that may arise from the issuing or promulgating of research analyses or research reports by a related corporation. Research analyses or research reports refer to analyses or reports that contain opinions or recommendations about a clearly identifiable investment product.

b. The Guidelines contain non-exhaustive examples of the types of conflicts they address, and the practices expected of the Financial Institutions in addressing such conflicts. Specifically, the Guidelines set out two types of written, internal policies which the Financial

47 See https://www.mas.gov.sg/-/media/MAS/Regulations-and-Financial-Stability/Regulations-Guidance- and-Licensing/Securities-Futures-and-Fund-Management/Regulations-Guidance-and- Licensing/Guidelines/SFA--SFA04G06--Guidelines-on-Addressing-Conflicts-of-Interest--8Oct2018.pdf.

95 Institutions should establish and implement, in respect of conflicts arising from: (i) trading activities and financial interests of the Financial Institution; and (ii) influence from business relationships of the Financial Institution and other external parties.

c. For trading activities and financial interests, the Guidelines are clear that a Financial Institution may hold stakes in specified products or other investment products that allow it to benefit from favorable research analyses or recommendations issued by its related corporation. However, conflicts of interest arise when the Financial Institution has an incentive or is in a position to influence the outcome of the related corporation’s research recommendations. To mitigate this risk, Financial Institutions should have proper segregation policies between the related corporation and its own business functions, and personal trading procedures for staff with access to non-public information (including a “blackout period” for trading around the time of a report issuance).

d. Regarding influence from business relationships, the Guidelines specify that a Financial Institution’s business relationships should not prejudice the research analyses and recommendations of its related corporation. Financial Institutions should therefore put in place procedures to manage or eliminate any undue influence of issuers, institutional investors and other external parties on its related corporations.

2. Guidelines on Provision of Financial Advisory Service. On July 10, 2019, the MAS issued new guidelines regarding the provision of financial advisory services. Financial advisory services are regulated in Singapore under the Financial Advisers Act (Cap. 110) and include services such as the advising of others by issuing or promulgating analyses or reports concerning investment products (i.e. providing research reports).48 The new guidelines provide greater clarity on the two-stage test the MAS applies to determine whether a person or entity is required to hold a financial adviser’s license for providing such services.

a. The first stage is assessing whether the activity amounts to providing financial advice:

i. In general, the MAS considers a communication to be financial advice if it expresses an opinion on the merits of

48 See https://www.mas.gov.sg/-/media/MAS/Regulations-and-Financial-Stability/Regulations-Guidance- and-Licensing/Financial-Advisers/Guidelines/Guidelines-on-Provision-of-Financial-Advisory-Service- 10-July-2019.pdf.

96 buying, selling or holding a particular investment product or a class of investment products.

ii. The provision of factual information is generally not considered financial advice. However, such a communication may be considered financial advice if the information is presented with the intention of inducing a person to buy, sell or hold a particular investment product or a class of investment products (e.g., comparing the historical returns of two investment products without any mention of their relative risk profiles, in order to induce a person to buy the product with the higher historical return).

iii. The MAS has stated that it does not intend to consider “passive distribution conduits” that distribute research reports to be providing financial advice. Examples include publishers, information service providers or internet portal operators that only (i) reproduce or distribute research reports from MAS-regulated Financial Institutions; (ii) attribute the reports to those institutions; (iii) do not modify the contents of the reports; and (iv) do not endorse or comment on the reports.

b. The second stage is determining whether a person is “carrying on business” in such activity. Under this component, the factors that the MAS takes into consideration include (i) whether the advice is given systematically and with continuity; and (ii) whether the person is remunerated for the advice.

c. If a person meets both above criteria, he/she is likely to be required to comply with the licensing and business conduct requirements under the Financial Advisers Act.

* * *

Questions regarding this outline may be directed to Dana G. Fleischman at Latham & Watkins LLP.