Quick Answer
No member shall, directly or indirectly, give, permit to be given, or offer to give anything of value to any person to influence or reward that person's action in connection with publication or circulation, in electronic or other public media, of matter that has, or is intended to have, an effect on any security's market price. Three exceptions apply.
This rule does not ban paying for coverage. It bans paying to influence or reward coverage that has, or is intended to have, an effect upon the market price of a security, unless the payment falls inside one of three exceptions.
What Payment Does the Payments for Publicity Rule Prohibit?
The prohibition opens "Except as provided" and continues "no member shall", so it binds the firm. The act is to give, permit to be given, or offer to give, directly or indirectly, anything of value to any person.
The purpose element is what makes the payment unlawful: influencing or rewarding the action of that person in connection with the publication or circulation of any matter that has, or is intended to have, an effect upon the market price of any security.
The media where that publication happens are described in an open list: any electronic or other public media, including any investment service or similar publication, Web site, newspaper, magazine or other periodical, radio, or television program.
Exam Tip: Gotchas
- Rewarding is named beside influencing. A payment made after the article ran is inside the prohibition, so a scenario that stresses the timing of the cheque has not escaped it.
- Intent alone completes the price element. The matter must have, or be intended to have, an effect upon the market price, so a price that never moved does not save the payer.
- The media list is open but the class is not. The named channels illustrate any electronic or other public media, so a channel the list omits is inside the rule only where it is itself public media.
- Anything of value is broader than cash. The rule names anything of value given, permitted to be given, or offered, whether directly or indirectly.
Which Payments Fall Outside the Prohibition?
The exception paragraph disapplies the prohibition for compensation paid to a person in connection with the publication or circulation of three things, and each carries its own condition.
| Exception | The condition it carries |
|---|---|
| Paid advertising | The communication must be clearly distinguishable as paid advertising |
| A disclosed payment | The communication must disclose the receipt of compensation and the amount of it, in accordance with the Securities Act's paid-publicity disclosure provision |
| A research report | The communication must be a research report as that term is defined in the research report definition rule |
Exam Tip: Gotchas
- The disclosure exception requires the amount. Disclosing that the writer was paid, without the amount, does not meet the condition.
- Being labelled an advertisement is not enough by itself. The communication must be clearly distinguishable as paid advertising, which is a test about how it reads rather than a label buried in small print.
- The research report exception borrows a definition. A communication that falls outside the research report definition falls outside this exception, whatever the firm calls it.
What Does the Disclosure Exception Borrow From the Securities Act?
The disclosure exception requires the communication to disclose the compensation in accordance with the Securities Act's paid-publicity disclosure provision. The standard that provision sets is fully disclosing the receipt, whether past or prospective, of the consideration and the amount of it.
Exam Tip: Gotchas
- A prospective payment counts. The disclosure must cover consideration received or to be received, and the receipt disclosed may be past or prospective.
What Counts as a Research Report?
A research report is any written, including electronic, communication that includes an analysis of equity securities of individual companies or industries and that provides information reasonably sufficient upon which to base an investment decision.
The main sentence carries a parenthetical carve-out: an open-end registered investment company that is not listed or traded on an exchange is outside the phrase "individual companies or industries".
Exam Tip: Gotchas
- Both halves of the definition must be present. A piece with analysis but no information reasonably sufficient upon which to base an investment decision is outside the term, and so is a data dump with no analysis.
- The fund carve-out is qualified. It applies to an open-end registered investment company that is not listed or traded on an exchange, so the listing status decides it.
- The communication has to be written. Electronic writing counts, and the definition names it, but a purely oral recommendation is not this term.
Which Communications Are Not Research Reports?
The definition then states four exclusion branches, and they do not work the same way.
The first branch excludes communications that are limited to a listed set of six things.
- Discussions of broad-based indices
- Commentaries on economic, political or market conditions
- Technical analyses concerning the demand and supply for a sector, index or industry based on trading volume and price
- Statistical summaries of multiple companies' financial data, including listings of current ratings
- Recommendations regarding increasing or decreasing holdings in particular industries or sectors
- Notices of ratings or price target changes
The last of those six carries a proviso. The member must simultaneously direct the readers of the notice to the most recent research report on the subject company that includes all current applicable disclosures required by that rule, and that report must not contain materially misleading disclosures, including disclosures that are outdated or no longer applicable.
The second branch excludes three communications even if they include an analysis of an individual equity security and information reasonably sufficient upon which to base an investment decision.
- Any communication distributed to fewer than 15 persons
- Periodic reports or other communications prepared for investment company shareholders or discretionary investment account clients that discuss individual securities in the context of a fund's or account's past performance or the basis for previously made discretionary investment decisions
- Internal communications that are not given to current or prospective customers
The third branch excludes communications that constitute statutory prospectuses that are filed as part of a registration statement.
The fourth branch excludes communications that constitute private placement memoranda and comparable offering-related documents prepared in connection with investment banking services transactions, other than those that purport to be research.
Exam Tip: Gotchas
- The first branch requires the communication to be limited to those items. One paragraph of single-company analysis takes the piece back out of that exclusion.
- The second branch works the opposite way. Its three communications are excluded even where the analysis and the sufficient information are both present.
- The fourth branch carries a carve-back. An offering document that purports to be research is not excluded by it.
- The distribution threshold is fewer than 15 persons. A communication sent to exactly that number of readers is not below the line the rule draws.
What Should You Check on Exam Day?
- Ask what the payment was for. Influencing or rewarding publication is the element, and payment after the fact still counts.
- Check the price element as intent or effect, since matter intended to move a price is enough.
- Run the three exceptions in order and confirm each condition, especially that a disclosure names the amount.
- Test a communication against both halves of the research report definition before applying that exception.
- On an exclusion question, ask whether the branch requires the piece to be limited to a list or excludes it despite the analysis.