On November 30, 2018, the Securities and Exchange Commission (SEC) adopted a new rule under the Securities Act of 1933 (Securities Act), Rule 139b, to extend the current safe harbor under Rule 139 to a “covered investment fund research report.” The SEC adopted Rule 139b to promote research on qualifying investment funds in furtherance of the mandate in the Fair Access to Investment Research Act of 2017 (FAIR Act), which required the SEC to expand the current safe harbor under Rule 139 to cover research reports on qualifying investment funds.
New Rule 139b under the Securities Act establishes a non-exclusive safe harbor for unaffiliated broker-dealers participating in a securities offering of a “covered investment fund”1 to publish or distribute a “covered investment fund research report.”2 A broker-dealer’s publication or distribution of research reports that satisfy certain conditions under the rule would be deemed for purposes of sections 2(a)(10) and 5(c) of the Securities Act not to constitute an offer for sale or offer to sell the covered investment fund’s securities. The rule becomes effective 30 days after its publication in the Federal Register.
SEC Chairman Jay Clayton stated that the changes from the rule “are intended to provide investors with greater access to research to aid them in making investment decisions.”
Issuer-Specific Research Reports
An unaffiliated broker-dealer may publish issuer-specific research if the covered investment fund meets the following requirements:
Reporting History and Timeliness Requirements. The covered investment fund is required to have been subject to reporting requirements under the Investment Company Act of 1940 (1940 Act) and/or the Securities Exchange Act of 1934 (Exchange Act) to file certain periodic reports for at least 12 calendar months prior to a broker-dealer’s reliance on Rule 139b, and these reports are required to have been filed in a timely manner.3
Market Following Requirement. The minimum public market value of a covered investment fund, or the net asset value in the case of a registered open-end investment company (other than an exchange-traded fund), must be at least $75 million.
Regular-Course-of-Business Requirement. A broker-dealer’s publication or distribution of research reports must be “in the regular course of its business.”4 Furthermore, for a research report regarding a covered investment fund that does not have a class of securities in substantially continuous distribution, such publication or distribution may not represent either the initiation of publication of research reports about such covered fund or its securities or the re-initiation of such publication following a discontinuation of publication.
Industry Research Reports
An unaffiliated broker-dealer may publish industry research that includes a covered investment fund if the following requirements are met:
Reporting Requirement. Each covered investment fund included in an industry research report must be subject to the reporting requirements of section 30 of the 1940 Act (or, for covered investment funds that are not registered investment companies under the 1940 Act, the reporting requirements of section 13 or section 15(d) of the Exchange Act).
Regular-Course-of-Business Requirement. A broker-dealer’s publication or distribution of research reports must be “in the regular course of its business.” Furthermore, for a research report regarding a covered investment fund that does not have a class of securities in substantially continuous distribution, the broker-dealer would also be required to include similar information about the issuer or its securities in similar reports at the time the broker-dealer publishes or distributes the research report.
Content Requirements. Industry research reports must include either similar information about a substantial number of covered investment fund issuers of the same type (e.g., money market fund, bond fund, balanced fund, etc.) or investment focus (e.g., primarily invested in the same industry, or the same geographic region), or alternatively contain a comprehensive list of covered investment fund securities currently recommended by the broker-dealer.
Presentation Requirement for Industry Research Reports. 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.
Presentation of Performance Information in Research Reports About Registered Investment Companies
If fund performance information is included in a research report, it must be presented in accordance with certain standardized presentation requirements dependent on the type of covered investment fund covered. For research reports that include registered open-end fund performance, fund performance must be presented according to the presentment and timeliness requirements of Rule 482 of the Securities Act.5
Self-Regulatory Organization Content Standards and Filing Requirements for Covered Investment Fund Research Reports
New Rule 24b-4 under the 1940 Act provides that a covered investment fund research report about a registered investment company will not be subject to the filing requirements of Section 24(b) of the 1940 Act or rules thereunder, except to the extent the research report is otherwise not subject to the content standards in self-regulatory organization rules related to reports, such as those contained in FINRA rules governing communications with the public regarding investment companies.
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1 “Covered investment fund” includes registered investment companies (including a series or class thereof), business development companies, and certain commodity- or currency-based trusts or funds.
2 “Covered investment fund research report” means 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 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-dealer that is an investment adviser (or an affiliated person of an investment adviser) for the covered investment fund. “Research report” means a written 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.
3 Thus, for example, this requires covered investment funds that are registered investment companies to have been subject to the reporting requirements of the 1940 Act for a period of at least 12 calendar months prior to a broker-dealer’s reliance on the new rule and to have filed in a timely manner all required reports, as applicable, on Forms N-CSR, N-Q, N-PORT, N-MFP, and N-CEN during the immediately preceding 12 calendar months.
4 The SEC noted that a broker-dealer could satisfy the regular-course-of-business requirement if at the time of its reliance on Rule 139b it had distributed or published at least one research report about the issuer or its securities.
5 For research reports that include closed-end fund performance, fund performance must comply with the requirements of Form N-2 instead of rule 482, which does not offer any standardized performance requirements for closed-end funds.
