consultation discussion
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As part of an ongoing effort to facilitate capital formation, the U.S. Financial Industry Regulatory Authority Inc. (FINRA) is consulting on ways to reduce needless compliance costs in the brokerage sector and promote capital raising, including possible changes to the rules governing the provision of investment research.

On Thursday, the U.S. industry self-regulatory organization launched a new consultation on potential reforms to modernize its rules to support capital raising activities — focusing on a couple of specific areas, including dealer standards, the rules around research and the activities of so-called “limited purpose” brokers, which typically facilitate private placements to institutional investors.

Among other things, the SRO is consulting on possible changes to the rules around the disclosure of conflicts of interest by research analysts and the rules regarding the required separation between investment banking and research.

These rules — which were adopted in response to widespread concerns about the integrity of investment research and the inherent conflicts between providing independent insight to investors and winning investment banking mandates — haven’t been revisited for a long time, the consultation noted. And, since they were adopted, research coverage has declined, particularly for smaller issuers. Also, regulators in the U.K. and Europe have revised their own rules around research-related conflicts.

Now, FINRA is seeking feedback on whether to reform its rules in this area, including its requirements on conflict disclosure, quiet periods and exemptions. It also wants input on how the rules may impede capital formation without enhancing investor protection, as well as how they could be made more effective.

Additionally, the SRO is looking for feedback on its rules and guidance around securities offerings and trading standards, including the rules that apply to underwriting conflicts, IPO allocations and distribution.

Finally, FINRA is consulting on potentially expanding the sorts of activities that limited purpose dealers can engage in, such as participating in secondary offerings and selling new issues to accredited investors that don’t meet the existing wealth threshold.

The deadline for feedback is May 19.