Complying With ‘FAIR Act,’ SEC Eases Fund Research Distribution Restrictions

The SEC says these changes are needed to reduce obstacles to providing research on investment funds, and to harmonize the treatment of such research with research on other public companies.

The Securities and Exchange Commission has adopted rules and amendments designed to promote easier sharing of research on mutual funds, exchange‑traded funds, registered closed-end funds, business development companies, and similar covered investment funds.

According to SEC Chairman Jay Clayton, the changes reduce obstacles to providing research on investment funds by harmonizing the treatment of such research with research on other public companies. He adds that the Commission took this action “in furtherance of the mandate in the Fair Access to Investment Research Act of 2017 (FAIR Act).”

“These rules will promote greater access to research for investors in funds,” Clayton says. “Our response to this legislation is crafted to facilitate more informed decisions, which in turn should improve the quality of a market that has become important to our Main Street investors.”

The rules and amendments “generally establish a safe harbor for a broker or dealer to publish or distribute research reports on investment funds under certain conditions.” According to an SEC synopsis, this safe harbor is established by the new Rule 139b and is “similar to a regulatory safe harbor that currently exists for research reports about public companies.”  

Under the final rule, if certain conditions for the safe harbor are satisfied, the publication or distribution of fund research in itself would be deemed not to be an offer for sale or offer to sell the covered investment fund’s securities for purposes of Sections 2(a)(10) and 5(c) of the Securities Act of 1933.

With respect to the Investment Company Act of 1940, SEC will now exclude a covered investment fund research report from the coverage of Section 24(b) of the Investment Company Act (or the rules and regulations thereunder), “except to the extent the research report is otherwise not subject to the content standards in self-regulatory organization rules related to research reports, including those contained in the rules governing communications with the public regarding investment companies or substantially similar standards.”

Another rule amendment made final by SEC would “permit distribution participants, such as brokers or dealers, to publish or disseminate any information, opinion, or recommendation relating to a covered security if the conditions of Rule 139b (or, alternatively, the conditions of Rule 1388 or Rule 139 under the Securities Act) are satisfied.” According to the SEC, this proposed conforming amendment is intended to align the treatment of research under proposed Rule 139b with the treatment of research under Rules 138 and 139 for purposes of Regulation M.