June 19, 2018 / 10:17 PM / in 9 months

SEC proposal paves way for research reports on investment companies

NEW YORK (Thomson Reuters Regulatory Intelligence) - As the popularity of exchange-traded funds (ETFs) has exploded in recent years, the number of firms publishing research reports on them and other pooled registered investment vehicles, such as mutual funds and business development companies, has been limited to a handful. This is all about to change once new rules mandated by Congress and proposed by the SEC last month take effect.

A trader talks on the phone as he stands in front of the DAX board at the Frankfurt stock exchange September 16, 2008.

The traditional Wall Street broker-dealers and investment banks have long provided research reports on securities — mostly common stocks and debt. Under current law, however, the publishing of a research report on a mutual fund or ETF is considered an offering for sale and thus requires the firm to file a registration statement for the offering.

This has restricted the broker-dealers from providing research on ETFs and pooled investment vehicles. In a bipartisan effort to fill what many see as a void and harmonize the rules, the U.S. Congress and President Donald Trump have mandated that the Securities Exchange Commission fix the problem.

Below we review legislation passed by Congress and resulting rule proposals by the SEC which will allow broker-dealers to finally publish research reports on registered investment companies.


Last fall, Trump signed into law the Fair Access to Investment Research Act of 2017 (FAIR Act)(here) which mandated the SEC to establish and implement a safe harbor for research reports issued by broker-dealers on ETFs, registered investment companies, business development companies, and closed-end funds.

Kenneth Bentsen, Jr., CEO of the financial industry trade group Securities Industry and Financial Markets Association (SIFMA), greeted the act’s passage by saying it reduced obstacles to research on ETFs and registered investment companies. “As the ETF market continues to grow, this bill’s clarifications will allow broker-dealers to produce more research on ETFs, provide consumers with greater access to information and contribute to capital formation,” he said.

The FAIR Act will allow broker-dealers to essentially provide the same type of research reports on ETFs and mutual funds as they do for stocks and bonds, even if the firm is involved in underwriting or an offering of that ETF, which is also the case for stocks and bonds.

A provision in the FAIR Act required the SEC to amend its rules within 270 days of enactment. This is despite criticisms and court rulings on some other SEC regulations that the agency failed to conduct sufficient analyses.

But politicians have also criticized the SEC for foot-dragging with regards to some of the requirements mandated under Dodd-Frank. Thus, the FAIR Act’s 270-day mandate might be seen as a new tool for Congress to push the regulator.


The SEC announced in May the proposed rules and amendments[here], titled "Covered Investment Fund Research Reports," that would harmonize the treatment of research on mutual funds, ETFs, registered closed-end funds, business development companies, and similar covered investment funds with research on other public entities.

“The proposed changes are intended to provide investors with greater access to research to aid them in making investment decisions,” SEC Chairman Jay Clayton said at the time. “This congressional mandate recognizes the critical role that mutual funds and similar investment products play in helping Main Street investors meet their financial goals.”

Under the proposed Securities Act Rule 139b[here], a research report on an ETF or covered fund would not be considered an offer to sell a security that is the subject of an offering even if the firm is participating in a registered offering. This is consistent with the current "safe harbor" under Rule 139 of the Securities Act[here].

This safe harbor allows broker-dealers to publish and distribute research reports on corporate issuers without such reports being considered offers for sale. In addition, the SEC proposed a new Investment Company Act provision, Rule 24b-4[here], which would exempt covered investment fund research reports from filing requirements, except when such reports are otherwise not subject to the content standards of self-regulatory organizations.

Comments on the proposal must be submitted to the SEC within 30 days of publication(here) of the proposal in the Federal Register.


Firms that are already publishing research reports for securities will soon be able to publish reports about covered funds and ETFs. Processes and policies and procedures related to the analyst certification, as well as the distribution of such research will be required.

Firms must be careful not to publish or distribute a fund research report solely because the firm is also participating in a registered offering of the fund, nor should the firm participate in a registered offering solely because the firm has published a research report about the fund.

Firms should be mindful that the FAIR Act and the proposed rules have limits. The safe harbor will not apply to research reports published or distributed by an ETF itself or its affiliates. It also will not apply to a broker-dealer that is also an investment adviser of the ETF or an affiliated person of the investment adviser or ETF.

The FAIR Act and proposed rules also will not limit the applicability of the anti-fraud or anti-manipulation provisions of the securities laws.

The FAIR Act adopts the definition of “affiliated person” in the Investment Company Act. Therefore, a broker-dealer that is also an affiliated person of a covered fund or its adviser will not be able to rely on safe harbor. The definition of affiliated persons also includes persons who own 5 percent or more of an issuers’ securities. Therefore, broker-dealers may face compliance challenges related to the publishing of research and the firm’s ownership stakes in the securities.

This could be problematic particularly in cases where a new fund is launched and is sponsored by a firm.

Firms looking to publish research reports on covered funds should not find the proposed rules overly burdensome, particularly if a firm’s compliance department is already involved in the publication or distribution of research reports involving debt or other equity securities.

New entrants should be careful to conduct a complete review of all the associated rules, disclosure requirements, and safeguards such as Rule 501 or Reg AC[here].

With the continued popularity of ETFs and the massive shift in ownership trends by both institutional and especially retail investors away from individual securities to such covered funds, Congress and the SEC proposed rules related to safe harbor extension on research reports will likely be welcomed by firms and their clients.

(Todd Ehret is a Senior Regulatory Intelligence Expert for Thomson Reuters Regulatory Intelligence. He has more than 20 years’ experience in the financial industry where he held key positions in trading, operations, accounting, audit, and compliance for broker-dealers, asset managers, and hedge funds.)

This article was produced by Thomson Reuters Regulatory Intelligence and initially posted on June 8. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters

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