Interpretive Letter to Amy Natterson Kroll, Bingham McCutchen LLP
February 8, 2013
Amy Natterson Kroll
Bingham McCutchen LLP
2020 K Street NW
Washington, DC 20006-1806
Re: Request for Interpretive Guidance Under NASD Rule 2711
Dear Ms. Kroll:
By letter dated December 18, 2012, you request guidance regarding the application of an interpretation of NASD Rule 2711 in NASD Notice to Members 04-18 to "globally branded" research distributed by two affiliated FINRA members to each other's customers.1 More specifically, you ask whether a FINRA member must treat as its own research for the purposes of NASD Rule 2711 globally branded research reports produced by an affiliated FINRA broker-dealer whose research is already subject to that Rule. For the reasons set forth below, FINRA staff believes that under such circumstances the distributing FINRA member need not treat its affiliate's research as its own; rather, it may treat it as third-party research.
Based upon your letter and subsequent conversations, we understand the facts to be as follows.
Morgan Stanley Smith Barney LLC (MSSB) is a registered broker-dealer and FINRA member that publishes research reports. MSSB is rebranding many of its materials and intends to use both the names "Morgan Stanley" and "Morgan Stanley Wealth Management" on its research reports. MSSB research reports will include disclosure that Morgan Stanley Wealth Management is the trade name of MSSB and also will specify that the Regulation AC certification is being made by a Morgan Stanley Wealth Management research analyst. MSSB has a US affiliate, Morgan Stanley & Co. (MSCO), that also is a registered broker-dealer and FINRA member that publishes research reports. MSCO will use only the trade name "Morgan Stanley" on its research reports. MSSB and MSCO distribute each other's research reports to their respective customers and treat them for the purposes of NASD Rule 2711 as third-party research reports.
MSSB and MSCO each has its own research department with its own research analysts, supervisory analysts, research management and legal and compliance infrastructure. Neither firm directs or otherwise informs the content of the other's research reports. All research policies, coverage decisions, compensation, hiring and other personnel decisions are made by each firm independent of the other. Each firm has adopted and implemented its own written supervisory procedures reasonably designed to ensure compliance with the applicable FINRA rules, including NASD Rule 2711. Each firm also has its own legal and compliance personnel assigned to research issues.
Each firm's research analysts, as defined in NASD Rule 2711, are registered pursuant to NASD Rule 1050 only with their respective firms. The research reports prepared at each firm are reviewed and approved by dedicated supervisory analysts at the respective firms. Each firm employs its own technology and human resources to ensure compliance with the disclosure requirements of NASD Rule 2711, including required disclosures when distributing independent or affiliate third-party research.
In Notice to Members 04-18, FINRA states that the determination of whether a research report is considered a product of the member or of a third party depends on two factors: (1) whether the report appears to be the product of a member or (2) whether a "research analyst" associated with a member is involved in producing the research report. The Notice concludes that "[t]he SROs consider research reports that meet either of these above factors to be reports produced by the member that must meet all of the SRO Rules' requirements." As an example of the first factor, the Notice states that if a member issues a "globally-branded" research report, all of the SRO Rules would apply to that report. The Notice defines "globally-branded" to be the "use of a single marketing identity that encompasses the member and its affiliates." Finally, the Notice notes that "a research report distributed by a member that is produced either by an independent third party or non-member affiliate must include the Third-Party Research Disclosures" (emphasis added).
In issuing that guidance, FINRA staff contemplated that a globally branded research report would be prepared by a non-member affiliate. Thus, FINRA staff was concerned that research reports with a common marketing identity prepared by a non-member would appear to a recipient to be the product of the member, yet would not be subject to the objectivity safeguards and disclosure requirements of NASD Rule 2711.
FINRA staff does not believe the same concern presents where a common marketing identity is shared by two affiliated FINRA members, each of which has its own independent research apparatus and personnel and is subject to the full panoply of FINRA rules intended to promote objective, transparent and reliable research. Under these circumstances, the research report is produced pursuant to the rigorous structural and content standards of NASD Rule 2711 and also carries the material conflicts disclosures pertaining to the distributing member required by the Rule's third-party research provisions.
We trust that this letter is responsive to your request. Please note that the opinions expressed herein are staff opinions only and have not been reviewed or endorsed by the FINRA Board of Governors. This letter responds only to the issues you have raised based on the facts as you have described them and NASD Rule 2711, and does not address any other rule or interpretation of FINRA, or all the possible regulatory and legal issues involved. In addition, you should be aware that any changes in the facts as you have described them or any amendments to NASD Rule 2711 will require further consideration and may cause us to reach a different conclusion.
If you have any questions on this matter, please contact me at (202) 728-8451.
Very truly yours,
cc: Michael D. Solomon, Senior Vice President and Regional Director – New York District Office
Ornella Bergeron, Managing Surveillance Director, ROOR
1 Your letter refers to both Notice to Members 04-18 and NYSE Information Memorandum 04-10, each of which include a Joint Memorandum of NASD and the New York Stock Exchange that provides guidance to NASD Rule 2711 and NYSE Rules 472 and 351 (SRO Rules). After the creation of FINRA as a result of the consolidation of the member regulation operations of NASD and NYSE, FINRA adopted in its rulebook Incorporated NYSE Rule 472 and 351. This letter provides guidance only with respect to NASD Rule 2711 and Incorporated NYSE Rule 472. For ease of reference, we refer only to NASD Rule 2711, but the guidance applies equally to Incorporated NYSE Rule 472.