FINRA Issues Proposed Safe Harbor Exemption for Desk Commentary

On April 11, 2017, the Financial Industry Regulatory Authority (“FINRA”) issued Regulatory Notice 17-16 proposing a safe harbor exemption from many of the research rules for certain desk commentary.  Firms may also decide that other desk commentary outside the proposal is not research, but if the desk commentary fits within the safe harbor it will be clearly exempt from the research rules.  To be eligible, the commentary will have to meet author, content and recipient conditions.  The author must be a sales & trading or principal trading person who is not required to be registered as a research analyst, to report directly to the research department or to prepare research.  The content must be “limited to brief observations (not including a rating, price target or earnings estimate) regarding recent, current, or near term expected trading activity, trading ideas or opportunities, market conditions, economic statistics or company results, or regarding a recent recommendation or research report”.  And the recipient must be an “institutional account” under FINRA Rule 4512(c) who meets the applicable suitability standards under FINRA Rule 2111.  The institutional account will need to consent, but the consent can be obtained by means of a notice to the account from which no objection is made, and there will be a 90-day transition period from the effective date of the amendments.  Desk commentary will need to carry “health warnings” indicating that it is not subject to the same standards as research.  Of course, the firm will still need to manage conflicts with research analysts and those producing research, and shield such persons from retaliation by desk personnel.  Equity desk commentary will still need to comply with FINRA Rule 2241 to further mitigate the influence of investment banking on research.  FINRA is also careful to note that the institutional debt research exemption, Rule 2242(j), will remain but is not the same as the proposed desk exemption.  Comments are due by May 30, 2017.  The “desk commentary” issue is one with which FINRA examiners have dealt for some time, and the clear safe harbor exemption from many of the research rules largely will be welcomed by FINRA members.  It remains to be seen, however, whether the conditions – particularly defining the content requirements, such as the definitions of “brief observations” and things like “trading activity” are sufficiently definite to prevent examiners from asserting potential violations.%*TXF9M7lU4AS)K5145z&tuj