Could FINRA’s Debt Research Rule Prevent Next Sub-Prime Mortgage Crisis?

Equity research reports -documents that disclose to prospective stock investors the risks and conflicts associated with the stocks, among other things – have long been regulated by the Financial Industry Regulatory Agency (FINRA). The reports are strictly regulated in part to prevent investment firms from distributing equity research in situations where the firm has a conflict related to the equity.

During the sub-prime mortgage crisis and subsequent collapse of several large investment firms, it became clear that the same rules did not apply for debt research. In 2005, the National Association of Securities Dealers (NASD) and the New York Stock Exchange (NYSE) promised to investigate which investment firms were adhering to voluntary guiding principles on debt research and conflicts checks.

The investigation revealed numerous gaps in investment firms’ policies and procedures on debt research conflicts – some of which may have directly contributed to the sub-prime mortgage crisis. Some outraged investors have argued that the investments firms’ actions amount to securities fraud.

FINRA Rule on Debt Research May Create a Clearer Picture for Debt Securities Investors

FINRA has suggested it would crackdown on debt research transparency at some point, and that point appears to be now. FINRA recently proposed a rule that would create a “two-tiered” approach to debt research regulation. Recipients of retail debt research would be entitled to the same protections offered to recipients of equities research. However, debt research distributed only to institutional investors would be exempt from the new requirements. FINRA’s proposed rule is not without precedent. The Securities Exchange Commission already requires similar disclosures for debt and equity research and regulators in other countries have mandated similar rules for their exchanges.

Securities fraud and other actions that manipulate the decisions of larger and smaller investors may never be eradicated completely. Investing in stock and debt securities is not without risk, but transparency by those with the most influence over investment decisions is necessary for a level playing field. Contact an experienced securities fraud lawyer if you believe you have been the victim of securities fraud.