SEC Proposals Promote Distribution of Research on Investment Funds

Investment Management Update

Date: June 11, 2018

Key Notes:

  • The Securities and Exchange Commission (SEC) is promoting research on investment funds by proposing new Rule 139b under the Securities Act of 1933 (Securities Act), which would allow unaffiliated brokers or dealers to publish research reports for certain “covered investment funds” without those reports being considered offers for sale.
  • The SEC is also proposing new Rule 24b-4 under the Investment Company Act of 1940, as amended (1940 Act), which would exempt a covered investment fund research report from the filing requirements of Section 24(b) of the 1940 Act.
  • In addition, the SEC proposes a conforming amendment to Rule 101 of Regulation M that would permit distribution participants to provide information about covered securities if certain conditions are satisfied.

The SEC recently proposed several amendments in an effort to implement directives under the Fair Access to Investment Research Act of 2017 (FAIR Act). These amendments would extend the current Rule 139 safe harbor provisions to “covered investment fund research reports,” i.e., research reports that unaffiliated broker-dealers publish about securities of registered investment companies and business development companies. Under the safe harbor, such reports are not considered offers for sale. However, the FAIR Act mandates that the safe harbor only apply to research reports for securities that have been continuously distributed and precludes extending the safe harbor to initiating or re-initiating research reports. Finally, covered investment fund research reports will not be subject to the filing requirements of Section 24(b) of the 1940 Act.

Proposed Rule 139b

The safe harbor under proposed Rule 139b applies only to unaffiliated broker-dealers’ reports on registered investment companies, business development companies, or commodity- or currency-based funds (each a “covered investment fund”). To preserve the Securities Act’s prospectus requirements and mitigate conflicts of interest, the proposed rule does not apply to research reports distributed by a covered investment fund, or affiliate thereof, or by a broker-dealer that is an investment adviser (or an affiliated person of the investment adviser) of the covered investment fund.

For the broker-dealer to rely on proposed Rule 139b, the covered investment fund described in an issuer-specific report must have timely met the 1940 Act’s reporting requirements for at least 12 calendar months. It also must have a minimum aggregate market value of $75 million and a class of securities in substantially continuous distribution. Likewise, the proposed Rule 139b safe harbor applies to industry research reports (covering a number of issuers in an industry) only when the following conditions are met:

  • Each covered investment research fund included in the report must be subject to the reporting requirements of Section 30 of the 1940 Act.
  • The broker-dealer distributing the report must publish research reports in its regular course of business.
  • The report must include similar information about a substantial number of covered investment fund issuers of the same type or investment focus or contain a comprehensive list of covered investment fund securities recommended by the broker-dealer.
  • The broker-dealer publishing the report must give equal treatment to all covered investment fund issuers or securities.

The proposed rule requires those issuing reports to comply with antifraud provisions and does not permit the use of performance projections. The SEC believes these conditions track those that are already in place under Rule 139.

Proposed Rule 24b-4

Proposed Rule 24b-4 mandates that the self-regulatory organization (SRO) standards apply to covered investment fund research reports as well. These standards require that reports are based on principles of fair dealing and good faith, are fair and balanced, and provide a sound basis for evaluating the facts with respect to an issuer or security. Any limitations on an SRO prohibiting members from distributing a covered investment fund research report or participating in a registered offering would not impact the safe harbor under proposed Rule 139b.

Conforming Amendment

The SEC also proposes an amendment to Rule 101 of Regulation M under the Securities Exchange Act of 1934 (Exchange Act) to correspond with proposed Rule 139b. The conforming amendment would allow the publication of any information, opinion or recommendation that meets the requirements of proposed Rule 139b. The amendment harmonizes the treatment of research under the Securities Act and Exchange Act.


The proposed amendments promote investor access to information through a safe harbor that eliminates certain hurdles to the distribution of research reports. The SEC has placed conditions on the safe harbor’s applicability to ensure that the research provided is fair and accurate and to avoid impermissible conflicts of interest. The SEC is currently taking comments on the proposed rules.


For more information, please contact:

Andrew J. Davalla

Donald S. Mendelsohn

Philip B. Sineneng

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