[Federal Register Volume 76, Number 149 (Wednesday, August 3, 2011)]
[Notices]
[Pages 46870-46889]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-19645]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64984; File No. SR-FINRA-2011-035]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt
FINRA Rules 2210 (Communications With the Public), 2212 (Use of
Investment Companies Rankings in Retail Communications), 2213
(Requirements for the Use of Bond Mutual Fund Volatility Ratings), 2214
(Requirements for the Use of Investment Analysis Tools), 2215
(Communications With the Public Regarding Security Futures), and 2216
(Communications With the Public About Collateralized Mortgage
Obligations (CMOs)) in the Consolidated FINRA Rulebook
July 28, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on July 14, 2011, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I, II
and III below, which Items have been prepared by FINRA. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to adopt NASD Rules 2210 and 2211 and NASD
Interpretive Materials 2210-1 and 2210-3 through 2210-8 as FINRA Rules
2210 and 2212 through 2216, and to delete paragraphs (a)(1), (i), (j)
and (l) of Incorporated NYSE Rule 472, Incorporated NYSE Rule
Supplementary Material 472.10(1), (3), (4) and (5), and 472.90, and
Incorporated NYSE Rule Interpretations 472/01 and 472/03 through 472/
11. The proposed rule change would renumber NASD Rules 2210 and 2211
and NASD Interpretive Materials 2210-1 and 2210-4 as FINRA Rule 2210,
NASD Interpretive Material 2210-3 as FINRA Rule 2212, NASD Interpretive
Material 2210-5 as FINRA Rule 2213, NASD Interpretive Material 2210-6
as FINRA Rule 2214, NASD Interpretive Material 2210-7 as FINRA Rule
2215, and NASD Interpretive Material 2210-8 as FINRA Rule 2216.
The text of the proposed rule change is available on FINRA's Web
site at http://www.finra.org, at the principal office of FINRA and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
As part of the process of developing a new consolidated rulebook
(``Consolidated FINRA Rulebook''),\3\
[[Page 46871]]
FINRA is proposing to adopt NASD Rules 2210 and 2211 and NASD
Interpretive Materials 2210-1 and 2210-3 through 2210-8 as FINRA Rules
2210 and 2212 through 2216, and to delete paragraphs (a)(1), (i), (j)
and (l) of Incorporated NYSE Rule 472, Incorporated NYSE Rule
Supplementary Material 472.10(1), (3), (4) and (5), and 472.90, and
Incorporated NYSE Rule Interpretations 472/01 and 472/03 through 472/
11.
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\3\ The current FINRA rulebook consists of (1) FINRA Rules; (2)
NASD Rules; and (3) rules incorporated from NYSE (``Incorporated
NYSE Rules'') (together, the NASD Rules and Incorporated NYSE Rules
are referred to as the ``Transitional Rulebook''). While the NASD
Rules generally apply to all FINRA members, the Incorporated NYSE
Rules apply only to those members of FINRA that are also members of
the NYSE (``Dual Members''). The FINRA Rules apply to all FINRA
members, unless such rules have a more limited application by their
terms. For more information about the rulebook consolidation
process, see Information Notice, March 12, 2008 (Rulebook
Consolidation Process).
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Current Rules Governing Communications With the Public
NASD Rules 2210 and 2211, and the Interpretive Materials that
follow Rule 2210, generally govern all FINRA members' communications
with the public. Incorporated NYSE Rule 472 governs communications with
the public of members that also are members of the New York Stock
Exchange.
NASD Rule 2210 divides communications into six separate categories,
as follows:
[rtarr8] Advertisement generally includes written (including
electronic) retail communications that do not have a limited audience,
such as newspaper, magazine, television and radio advertisements,
billboards and Web sites.
[rtarr8] Sales literature generally includes written (including
electronic) retail communications that have a more targeted audience,
such as brochures, performance reports, telemarketing scripts, seminar
scripts and form letters.
[rtarr8] Correspondence includes written letters, electronic mail,
instant messages and market letters sent to: (i) One or more existing
retail customers; and (ii) fewer than 25 prospective retail customers
within a 30 calendar-day period.
[rtarr8] Institutional sales material includes communications that
are distributed or made available only to institutional investors. NASD
Rule 2211 defines the term ``institutional investor'' generally to
include registered investment companies, insurance companies, banks,
registered broker-dealers, registered investment advisers, certain
retirement plans, governmental entities, and individual investors and
other entities with at least $50 million in assets.
[rtarr8] Independently prepared reprint includes reprints of
articles from independent publications, as well as reports published by
independent research firms.
[rtarr8] Public appearance includes unscripted participation in
live events, such as interviews, seminars and call-in television and
radio shows.
These definitions are important because the principal approval,
filing and content standards apply differently to each category. For
example, members generally must have a principal approve all
advertisements, sales literature and independently prepared reprints
prior to use. This pre-use approval requirement does not apply to: (1)
Institutional sales material or (2) correspondence, unless it is sent
to 25 or more existing retail customers within a 30 calendar-day period
and includes an investment recommendation or promotes a product or
service of the member. While such communications do not require
principal pre-use approval, members still must establish and maintain
policies and procedures to supervise them for compliance with
applicable standards.
Members must file with the FINRA Advertising Regulation Department
(``Department'') for review certain advertisements and sales
literature. For example, advertisements and sales literature concerning
investment companies, variable insurance products and public direct
participation programs, and advertisements concerning government
securities, must be filed within 10 business days of first use, but
members are not required to file independently prepared reprints,
correspondence or institutional sales material. The filing requirements
also differ based on the member using the material and its content.
Members that previously have not filed advertisements with the
Department must file all advertisements at least 10 business days prior
to first use for a one-year period following the date the first
advertisement was filed. Additionally, under NASD Rule 2210 and related
Interpretive Materials, all members must file advertisements concerning
collateralized mortgage obligations (``CMOs'') and security futures,
and advertisements and sales literature concerning registered
investment companies that include unpublished or self-created rankings
or performance comparisons, at least 10 business days prior to first
use, and must withhold them from publication until any changes
specified by the Department have been made.
Incorporated NYSE Rule 472 requires an ``allied member, supervisory
analyst or qualified person'' to approve prior to use each
advertisement, sales literature or other similar type of
communication.\4\ The NYSE Rule 472 definitions of ``advertisement''
and ``sales literature'' are similar to those used in NASD Rule 2210.
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\4\ NYSE Rule 472(a)(1).
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The communications rules include both general and specific content
standards. Certain general standards apply to all communications, such
as requirements that communications be fair and balanced, and provide a
sound basis for evaluating the facts in regard to any particular
security, industry or service, and prohibitions on omitting material
facts whose absence would make the communication misleading. More
particular content standards apply to specific issues or securities.
Proposed Rule Change
Reorganization of Rules
The proposed rule change would create a new FINRA Rule 2210 that
would encompass, subject to certain changes, the provisions of current
NASD Rules 2210 and 2211, NASD Interpretive Materials 2210-1 and 2210-
4, and the provisions of Incorporated NYSE Rule 472 that do not pertain
to research analysts and research reports. Each of the other
Interpretive Materials that follow NASD Rule 2210 would receive its own
FINRA rule number and would adopt the same communication categories
used in FINRA Rule 2210.\5\
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\5\ Proposed FINRA Rule 2211 (Communications with the Public
About Variable Insurance Products), which would replace NASD
Interpretive Material 2210-2, is the subject of a separate proposed
rule change. See Securities Exchange Act Release No. 61107 (December
3, 2009), 74 FR 65180 (December 9, 2009) (Notice of Filing File No.
SR-FINRA-2009-070).
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Communication Categories
The proposed rule change would reduce the number of current
communication categories from six to three, as follows:
[rtarr8] Institutional communication would include communications
that fall within the current definition of ``institutional sales
material'' under NASD Rule 2211(a)(2): Written (including electronic)
communications that are distributed or made available only to
institutional investors. ``Institutional investor'' generally would
have the same definition as under NASD Rule 2211(a)(3).\6\
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\6\ FINRA has modified the definition of ``institutional
investor'' in proposed FINRA Rule 2210 to clarify that the term
includes multiple employee benefit plans and multiple qualified
plans offered to employees of the same employer, provided that the
plans in the aggregate have at least 100 participants. FINRA also
has added a Supplementary Material to clarify that a member's
internal written (including electronic) communications that are
intended to educate or train registered persons about the products
or services offered by a member are considered institutional
communications pursuant to paragraph (a)(3) of proposed FINRA Rule
2210. See proposed FINRA Rule 2210.01. Accordingly, such internal
communications are subject to both the provisions of proposed FINRA
Rule 2210 and NASD Rule 3010(d) (Review of Transactions and
Correspondence). See also Securities Exchange Act Release No. 64736
(June 23, 2011), 76 FR 38245 (June 29, 2011) (Notice of Filing File
No. SR-FINRA-2011-028) (proposing, among other things, to adopt NASD
Rule 3010(d) as FINRA Rule 3110(b)(4), subject to certain changes).
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[[Page 46872]]
[rtarr8] Retail communication would include any written (including
electronic) communication that is distributed or made available to more
than 25 retail investors within any 30 calendar-day period. ``Retail
investor'' would include any person other than an institutional
investor, regardless of whether the person has an account with the
member.
[rtarr8] Correspondence would include any written (including
electronic) communication that is distributed or made available to 25
or fewer retail investors within any 30 calendar-day period.
The proposal would eliminate the current definitions of
``advertisement,'' ``sales literature,'' ``institutional sales
material,'' ``public appearance'' and ``independently prepared
reprint'' in NASD Rule 2210, as well as all of the definitions in NASD
Rule 2211.\7\ The proposal also would eliminate the definitions of
``communication,'' ``advertisement,'' ``market letter'' and ``sales
literature'' in Incorporated NYSE Rule 472.
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\7\ NASD Rule 2211 currently defines the terms
``correspondence,'' ``institutional sales material,''
``institutional investor,'' ``existing retail customer,''
``prospective retail customer'' and ``market letter.''
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Communications that currently qualify as advertisements and sales
literature generally would fall under the definition of ``retail
communication.'' In addition, to the extent that a member distributed
or made available a communication that currently qualifies as an
independently prepared reprint to more than 25 retail investors within
a 30 calendar-day period, the communication also would fall under the
definition of ``retail communication.'' Communications that currently
qualify as ``institutional sales material'' would fall within the
definition of ``institutional communication.'' Some communications that
currently qualify as ``correspondence'' would continue to fall within
that definition. However, communications sent to more than 25 retail
investors within a 30 calendar-day period in all cases would be
considered retail communications.\8\
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\8\ The definition of ``correspondence'' in NASD Rule 2211
currently includes market letters as well as written letters and
electronic mail messages that are sent to one or more existing
retail customers and fewer than 25 prospective retail customers
within a 30 calendar-day period. ``Market letter'' is defined to
include any communication excepted from the definition of ``research
report'' pursuant to NASD Rule 2711(a)(9)(A). See NASD Rule
2211(a)(5). FINRA revised the definition of ``correspondence'' to
include market letters in February 2009 in order to allow members to
send market letters to traders and other investors who base their
decisions on timely market analysis without having to have a
principal approve them in advance. Previously, members were required
to approve market letters prior to use. See Regulatory Notice 09-10
(February 2009). Proposed FINRA Rule 2210 would continue to allow
members to send retail communications that are excepted from the
definition of ``research report'' pursuant to NASD Rule
2711(a)(9)(A) without having a registered principal approve the
communication prior to use, provided that a member supervises and
reviews such communications in the same manner as correspondence.
See proposed FINRA Rule 2210(b)(1)(D).
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Although the proposal would eliminate the terms ``public
appearance'' and ``independently prepared reprint,'' as discussed
below, the proposal would retain with respect to these communication
categories much of the substance of the exceptions from the filing
requirements and limited application of the content standards.
Approval, Review and Recordkeeping Requirements
Currently NASD Rule 2210(b)(1)(A) requires a registered principal
of the member to approve each advertisement, item of sales literature
and independently prepared reprint before the earlier of its use or
filing with the Department. Proposed FINRA Rule 2210(b)(1)(A) would
require an appropriately qualified registered principal of the member
to approve each retail communication before the earlier of its use or
filing with the Department. The principal registration required to
approve particular communications would depend upon the permissible
activities for each principal registration category.\9\ The proposed
rule change would eliminate Incorporated NYSE Rule 472(a)(1), which
requires an ``allied member, supervisory analyst, or qualified person''
to approve in advance each advertisement, sales literature or other
similar type of communication by an NYSE member firm.\10\
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\9\ Currently NASD Rule 1022(g) permits a General Securities
Sales Supervisor to approve sales literature as defined in NASD Rule
2210, but does not permit persons within this category to approve
advertisements. FINRA separately sought comment on a proposal that
would amend the General Securities Sales Supervisor registration
category to remove the restriction on approving advertisements, and
to permit persons within this registration category to approve
retail communications as defined in proposed FINRA Rule 2210. See
Regulatory Notice 09-70 (December 2009).
\10\ The term ``allied member'' was largely deleted from the
Incorporated NYSE Rules in 2008, and thus is not being carried over
as part of proposed FINRA Rule 2210(b)(1)(A). See Regulatory Notice
08-64 (October 2008).
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NASD Rule 2210(b)(1)(B) permits a Series 16 supervisory analyst
approved pursuant to Incorporated NYSE Rule 344 to approve research
reports on debt and equity securities.\11\ Proposed FINRA Rule
2210(b)(1)(B) would continue this provision without substantive
change.\12\
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\11\ FINRA separately sought comment on a proposal that would
adopt a stand-alone permissive registration category for Supervisory
Analysts. See Regulatory Notice 09-70 (December 2009).
\12\ NASD Rule 2210(b)(1)(C) currently requires a registered
principal qualified to supervise security futures activities to
approve each advertisement or item of sales literature concerning
security futures. This requirement would continue going forward with
respect to retail communications concerning security futures.
Nevertheless, this provision is being eliminated as redundant given
the requirement under proposed FINRA Rule 2210(b)(1)(A) that an
appropriately qualified principal approve each retail communication.
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NASD Rule 2210(b)(1)(D) provides an exception from the principal
approval requirements of NASD Rule 2210(b)(1)(A) for an advertisement,
item of sales literature, or independently prepared reprint, if at the
time that a member intends to publish or distribute it: (i) another
member has filed it with the Department and has received a letter from
the Department stating that it appears to be consistent with applicable
standards; and (ii) the member using the communication in reliance on
this exception has not materially altered it and will not use it in a
manner that is inconsistent with the conditions of the Department's
letter. Proposed FINRA Rule 2210(b)(1)(C) would preserve this exception
for retail communications.
Proposed FINRA Rule 2210(b)(1)(D) would except from the principal
approval requirements of proposed FINRA Rule 2210(b)(1)(A) three
additional categories of retail communications, provided that the
member supervises and reviews such communications in the same manner as
required for supervising and reviewing correspondence pursuant to NASD
Rule 3010(d). These communications include: (i) Any retail
communication that is excepted from the definition of ``research
report'' pursuant to NASD Rule 2711(a)(9)(A); (ii) any retail
communication that is posted on an online interactive electronic forum;
and (iii) any retail communication that does not make any financial or
investment
[[Page 46873]]
recommendation or otherwise promote a product or service of the member.
The first category generally carries forward a current exception
from the principal pre-use approval requirements for market
letters.\13\ The second category codifies a current interpretation of
the rules governing communications with the public that allows members
to supervise communications posted on interactive electronic forums in
the same manner as is required for supervising correspondence.\14\ The
third category broadens a current principal pre-use approval exception
for correspondence that is sent to 25 or more existing retail customers
within any 30 calendar-day period and that does not make any financial
or investment recommendation or otherwise promote a product or service
of the member.\15\ Unlike the current principal pre-use approval
exception, this exception would apply to all retail communications.\16\
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\13\ See NASD Rules 2211(a)(1), (a)(5) and (b)(1)(A); see also
Regulatory Notice 09-10 (February 2009).
\14\ See Regulatory Notice 10-06 (January 2010).
\15\ See NASD Rule 2211(b)(1)(A).
\16\ Thus, the current rules require firms to make the
determination of whether correspondence that is sent to 25 or more
existing retail customers within a 30 calendar-day period requires
principal pre-use approval because it makes a financial or
investment recommendation or otherwise promotes a product or service
of the member. FINRA would expect firms to apply the same analysis
going forward regarding principal pre-use approval with respect to
all retail communications. FINRA generally considers this exception
to cover communications that are more administrative or
informational in nature, such as communications that inform
investors that their account statement is available online, or the
date on which a security in an investor's portfolio is expected to
pay a dividend. Communications that are intended to educate
investors about products or services, however, do not fall within
this exception.
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Proposed FINRA Rule 2210(b)(1)(E) would allow FINRA, pursuant to
the FINRA Rule 9600 Series, to grant an exemption from the principal
approval requirements of paragraph (b)(1)(A) for good cause shown after
taking into consideration all relevant factors, provided that the
exemption is consistent with the purposes of FINRA Rule 2210, the
protection of investors, and the public interest.
Proposed FINRA Rule 2210(b)(1)(F) would provide that,
notwithstanding any other provision of FINRA Rule 2210, a registered
principal must approve a communication prior to the member filing it
with the Department. Currently NASD Rule 2210(b)(1)(A) requires a
principal to approve an advertisement, item of sales literature or
independently prepared reprint before the earlier of its use or filing
with the Department. Proposed FINRA 2210(b)(1)(F) is intended to
clarify that an appropriately qualified principal must approve any
communication that is filed with the Department, even if a
communication otherwise would come under an exception to the principal
approval requirements of proposed FINRA Rule 2210(b)(1)(A).
NASD Rule 2211(b)(1) and NASD Rule 3010(d) impose certain
supervisory and review requirements with regard to a member's
correspondence and institutional sales material.\17\ Proposed FINRA
Rules 2210(b)(2) and (3) generally would maintain the supervision and
review standards for correspondence and institutional communications
that are currently found in NASD Rules 2211 and 3010(d).
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\17\ These rules require each member to establish written
procedures that are appropriate to its business, size, structure and
customers for the review by a registered principal of correspondence
and institutional sales material. The procedures must be in writing
and be designed to reasonably supervise each registered
representative. Where such procedures do not require review of all
such communications prior to use or distribution, they must include
provision for the education and training of associated persons as to
the member's procedures, documentation of such education and
training, and surveillance and follow-up to ensure that such
procedures are implemented and adhered to. Evidence of such
implementation must be maintained and made available to FINRA upon
request.
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Currently NASD Rule 2210(b)(2) requires members to maintain all
advertisements, sales literature and independently prepared reprints in
a separate file for a period beginning on the date of first use and
ending three years from the date of last use. The file must include:
(i) A copy of the communication and the dates of first and last use;
(ii) the name of the registered principal who approved the
communication and the date approval was given, unless such approval was
not required pursuant to NASD Rule 2210(b)(1)(D);\18\ and (iii) for any
communication for which principal approval was not required pursuant to
NASD Rule 2210(b)(1)(D), the name of the member that filed the
communication with the Department and a copy of the corresponding
Department review letter. NASD Rule 2211(b)(2) requires members to
maintain records of institutional sales material for a period of three
years from the date of last use, including the name of the person who
prepared each such communication. NASD Rules 3010(d)(3)\19\ and
3110(a)\20\ require members to retain correspondence of registered
representatives as prescribed by SEA Rule 17a-4.
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\18\ As noted above, NASD Rule 2210(b)(1)(D) creates an
exception from the principal approval requirements of NASD Rule
2210(b)(1)(A) for any advertisement, item of sales literature or
independently prepared reprint if, at the time that a member intends
to publish or distribute it: (i) Another member has filed it with
the Department and has received a letter from the Department stating
that it appears to be consistent with applicable standards; and (ii)
the member using it in reliance on this exception has not materially
altered it and will not use it in a manner that is inconsistent with
the conditions of the Department's letter.
\19\ FINRA is proposing to adopt NASD Rule 3010(d)(3) as FINRA
Rule 3110.11 (Retention of Correspondence and Internal
Communications), subject to certain changes, in the Consolidated
FINRA Rulebook. See Securities Exchange Act Release No. 64736 (June
23, 2011), 76 FR 38245 (June 29, 2011) (Notice of Filing File No.
SR-FINRA-2011-028 (Proposed Rule Change to Adopt the Consolidated
FINRA Supervision Rules).
\20\ The SEC has approved the adoption of the general
recordkeeping requirements of NASD Rule 3110(a) as FINRA Rule 4511,
subject to certain changes. FINRA Rule 4511 becomes effective on
December 5, 2011. See Securities Exchange Act Release No. 63784
(January 27, 2011), 76 FR 5850 (February 2, 2011) (Order Approving
File No. SR-FINRA-2010-052); Regulatory Notice 11-19 (April 2011).
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Proposed FINRA Rule 2210(b)(4)(A) would set forth the record-
keeping requirements for retail and institutional communications;
generally, these requirements would mirror current record-keeping
requirements. This provision incorporates by reference the record-
keeping format, medium and retention period requirements of SEA Rule
17a-4.\21\
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\21\ SEA Rule 17a-4(b) requires broker-dealers to preserve
certain records for a period of not less than three years, the first
two in an easily accessible place. Among these records, pursuant to
SEA Rule 17a-4(b)(4), are ``[o]riginals of all communications
received and copies of all communications sent (and any approvals
thereof) by the member, broker or dealer (including inter-office
memoranda and communications) relating to its business as such,
including all communications which are subject to rules of a self-
regulatory organization of which the member, broker or dealer is a
member regarding communications with the public. As used in this
paragraph (b)(4), the term communications includes sales scripts.''
SEA Rule 17a-4(f) permits broker-dealers to maintain and preserve
these records on ``micrographic media'' or by means of ``electronic
storage media,'' as defined in the rule and subject to a number of
conditions.
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Proposed FINRA Rule 2210(b)(4)(A) specifies that such records would
have to include:
A copy of the communication and the dates of first and (if
applicable) last use;
The name of any registered principal who approved the
communication and the date that approval was given;
In the case of a retail communication or institutional
communication that is not approved prior to first use by a registered
principal, the name of the person who prepared or distributed the
communication;\22\
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\22\ To the extent clerical staff is employed in the preparation
or distribution of the communication, the records should include the
name of the person on whose behalf the communication was prepared or
distributed.
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[[Page 46874]]
Information concerning the source of any statistical
table, chart, graph or other illustration used in the communication;
and
For retail communications that rely on the exception under
proposed FINRA Rule 2210(b)(1)(C), the name of the member that filed
the retail communication with the Department and a copy of the
Department's review letter.
Proposed FINRA Rule 2210(b)(4)(B) cross-references NASD Rules
3010(d)(3) \23\ and 3110(a) \24\ with respect to correspondence record-
keeping requirements.
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\23\ See supra note 18.
\24\ See supra note 19.
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Filing Requirements and Review Procedures
Proposed FINRA Rule 2210(c) generally incorporates the filing
requirements in NASD Rule 2210(c), subject to certain changes.
NASD Rule 2210(c)(5)(A) currently requires a member that previously
has not filed advertisements with the Department or another self-
regulatory organization to file its initial advertisement with the
Department at least 10 business days prior to use. This filing
requirement continues for a year after the initial filing. Proposed
FINRA Rule 2210(c)(1)(A) would trigger the new member one-year filing
requirement beginning on the date reflected in the Central Registration
Depository (CRD[reg]) system that the firm's FINRA membership became
effective, rather than on the date a member first files an
advertisement with the Department. Although proposed FINRA Rule 2210 no
longer defines the term ``advertisement,'' this new member filing
requirement would only apply to retail communications that currently
fall under the ``advertisement'' definition, such as generally
accessible Web sites, print media communications, and television and
radio commercials.
NASD Rule 2210(c)(5)(B) currently authorizes the Department to
require a member to file all of its advertisements and/or sales
literature, or the portion of the member's material relating to
specific types or classes of securities or services, with the
Department at least 10 business days prior to use, if the Department
determines that the member has departed from NASD Rule 2210's
standards. Proposed FINRA Rule 2210(c)(1)(B) would carry forward this
authority and apply it to all of a member's communications (rather than
just advertisements or sales literature).
NASD Rule 2210(c)(4) currently requires members to file certain
communications at least 10 business days prior to first use and to
withhold them from use until any changes specified by the Department
have been made. These communications include advertisements and sales
literature for certain registered investment companies that include
self-created rankings, advertisements concerning CMOs, and
advertisements concerning security futures.
Proposed FINRA Rule 2210(c)(2) would revise the categories of
communications that fall within this pre-use filing requirement. These
include retail communications concerning any registered investment
company that include self-created rankings, retail communications
concerning security futures, and retail communications that include
bond mutual fund volatility ratings. The requirement to file retail
communications concerning security futures prior to first use would not
apply to: (i) Retail communications that are submitted to another self-
regulatory organization having comparable standards pertaining to such
communications, and (ii) retail communications in which the only
reference to security futures is contained in a listing of the services
of a member.
Proposed FINRA Rule 2210(c)(3) would revise the categories of
communications that must be filed within 10 business days of first use
or publication. Similar to NASD Rule 2210(c)(2), proposed FINRA Rule
2210(c)(3) would require retail communications concerning registered
investment companies and public direct participation programs to be
filed within 10 business days of first use. However, the proposal for
the first time would require that all retail communications concerning
closed-end registered investment companies be filed with FINRA.
Currently NASD Rule 2210 requires members to file within 10 business
days of first use advertisements and sales literature concerning
closed-end funds that are distributed during the fund's initial public
offering (``IPO'') period, as well as all advertisements and sales
literature concerning continuously offered (interval) closed-end
funds.\25\ The proposed filing requirement also would apply to retail
communications that are distributed after a closed-end fund's IPO
period. FINRA believes that investors deserve the same protections
concerning retail communications about closed-end funds that are
distributed after the IPO period as those that are distributed during
the IPO period.
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\25\ See ``Ask the Analyst,'' Regulatory & Compliance Alert
(Winter 1999) p. 13.
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Proposed FINRA Rule 2210(c)(3)(C) would require members to file
within 10 business days of first use all retail communications
concerning government securities. Currently this requirement only
applies to advertisements concerning such securities.\26\ Consistent
with current requirements, proposed FINRA Rule 2210(c)(3)(D) would
require members to file within 10 business days of first use templates
for written reports produced by, or retail communications concerning an
investment analysis tool, as such term is defined in proposed FINRA
Rule 2214.\27\
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\26\ See NASD Rule 2210(c)(2)(C).
\27\ See NASD Rule 2210(c)(2)(D).
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Proposed FINRA Rule 2210(c)(3)(E) would require members to file
within 10 business days of first use retail communications concerning
CMOs that are registered under the Securities Act of 1933 (``Securities
Act''). Currently members are required only to file advertisements
concerning CMOs, but must file them at least 10 business days prior to
first use.\28\
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\28\ See NASD Rule 2210(c)(4)(B).
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Under proposed FINRA Rule 2210(c)(3)(F), members would have to file
within 10 business days of first use all retail communications
concerning any security that is registered under the Securities Act and
that is derived from or based on a single security, a basket of
securities, an index, a commodity, a debt issuance or a foreign
currency, not included within the requirements of paragraphs (c)(1),
(c)(2) or sub-paragraphs (A) through (E) of paragraph (c)(3). The
purpose of this provision is to require the filing of retail
communications concerning publicly offered structured products, such as
exchange-traded notes or registered grantor trusts that currently are
not required to be filed. This provision excludes retail communications
that are already subject to a separate filing requirement found
elsewhere in proposed paragraph (c), such as retail communications
concerning registered investment companies or public direct
participation programs.
Consistent with current rules, proposed FINRA Rule 2210(c)(4)
provides that, if a member has filed a draft version or ``story board''
of a television or video retail communication pursuant to a filing
requirement, then the member also must file the final filmed version
within 10 business days of first use or broadcast.\29\
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\29\ See NASD Rule 2210(c)(6).
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[[Page 46875]]
Proposed FINRA Rule 2210(c)(5) specifies that a member must provide
with each filing the actual or anticipated date of first use, the name,
title and CRD[reg] number of the registered principal who approved the
communication, and the date of approval. These requirements generally
carry forward the current requirements of NASD Rule 2210(c)(1).
Proposed FINRA Rule 2210(c)(6) provides that each member's written
communications may be subject to a spot-check procedure, and that
members must submit requested material within the time frame specified
by the Department. This provision is consistent with current rules.\30\
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\30\ See NASD Rule 2210(c)(7).
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Proposed FINRA Rule 2210(c)(7) generally duplicates the current
exclusions from the filing requirements under NASD Rule 2210(c)(8),
with certain modifications. Proposed paragraph (c)(7)(A) would continue
the current filing exclusion for retail communications that previously
have been filed with the Department and that are to be used without
material change.\31\ Proposed paragraph (c)(7)(B) would add an
exclusion for retail communications that are based on templates that
were previously filed with the Department, the changes to which are
limited to updates of more recent statistical or other non-narrative
information.\32\ Proposed paragraph (c)(7)(C) would exclude retail
communications that do not make any financial or investment
recommendation or otherwise promote a product or service of the
member.\33\
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\31\ See NASD Rule 2210(c)(8)(A).
\32\ This exclusion is based in part on an earlier staff
interpretation concerning how NASD Rule 2210's approval, record-
keeping and filing requirements apply to statistical updates
contained in pre-existing templates. See Letter from Thomas M.
Selman, NASD, to Forrest R. Foss, T. Rowe Price Associates, Inc.,
dated January 28, 2002. If a member changed the template's
presentation in any material respect, however, this exclusion would
not apply.
\33\ This filing exception would have the same scope as the
proposed exception from the principal pre-use approval requirements
for retail communications that do not make any financial or
investment recommendation or otherwise promote a product or service
of the member. See proposed FINRA Rule 2210(b)(1)(D)(iii).
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Proposed paragraphs (c)(7)(D), (E), (G) and (H) would preserve for
retail communications the current filing exclusions for advertisements
and sales literature that do no more than identify a national
securities exchange symbol of the member or identify a security for
which the member is a registered market maker; advertisements and sales
literature that do no more than identify the member or offer a specific
security at a stated price; certain ``tombstone'' advertisements
governed by Securities Act Rule 134 and press releases that are made
available only to members of the media.\34\
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\34\ See NASD Rules 2210(c)(8)(C), (D), (F) and (G).
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Proposed paragraph (c)(7)(F) would modify the current filing
exclusion for prospectuses and other documents that have been filed
with the SEC or any state.\35\ The current filing exclusion does not
cover investment company omitting prospectuses published pursuant to
Securities Act Rule 482. As modified, this filing exclusion also would
not cover free writing prospectuses that are filed with the SEC
pursuant to Securities Act Rule 433(d)(1)(ii).\36\ As discussed in
Regulatory Notice 10-52, FINRA is concerned that broadly disseminated
free writing prospectuses present the same investor protection concerns
as communications regulated by NASD Rules 2210 and 2211. Accordingly,
FINRA interprets NASD Rules 2210 and 2211 to apply to free writing
prospectuses distributed by a broker-dealer in a manner reasonably
designed to lead to broad unrestricted dissemination.\37\ This proposed
modification would codify the guidance provided in that Regulatory
Notice.
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\35\ See NASD Rule 2210(c)(8)(E).
\36\ Securities Act Rule 433(d)(1)(ii) requires any offering
participant, other than the issuer, to file with the SEC a free
writing prospectus if it is used or referred to by such offering
participant and distributed by or on behalf of such person in a
manner reasonably designed to lead to its broad unrestricted
dissemination.
\37\ See Regulatory Notice 10-52 (October 2010).
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Proposed paragraph (c)(7)(I) would maintain the filing exclusion
for reprints of independently prepared articles or reports currently
found in NASD Rule 2210(c)(8)(H).\38\
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\38\ The filing exclusion for reprints of independently prepared
articles or reports incorporates the conditions currently included
in the definition of ``independently prepared reprint.'' See NASD
Rule 2210(a)(6)(A). This filing exclusion would also cover
independently prepared investment company reports described in NASD
Rule 2210(a)(6)(B).
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Proposed paragraphs (c)(7)(J) and (K) would maintain the current
filing exclusions for correspondence and institutional sales
material.\39\ Proposed paragraph (c)(7)(L) would exclude from filing
communications that refer to types of investments solely as part of a
listing of products or services offered by the member.\40\
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\39\ See NASD Rules 2210(c)(8)(I) and (J).
\40\ NASD Rule 2210(c)(9) similarly excludes from the filing
requirements material that refers to investment company securities,
direct participation programs, or exempted securities solely as part
of a listing of products or services offered by the member.
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Proposed paragraph (c)(8) would provide that communications
excluded from the filing requirements pursuant to paragraphs (c)(7)(H)
through (K) would be deemed filed with FINRA for purposes of Section
24(b) of the Investment Company Act of 1940 and Rule 24b-3 thereunder.
This provision is consistent with NASD Rule 2210(c)(8).
Proposed FINRA Rule 2210(c)(9)(A) would allow FINRA to exempt
pursuant to the FINRA Rule 9600 Series, a member from the pre-use
filing requirements of paragraph (c)(1)(A) for good cause shown.\41\
Proposed paragraph (c)(9)(B) would allow FINRA to grant an exemption
from the filing requirements of paragraph (c)(3) for good cause shown
after taking into consideration all relevant factors, provided that the
exemption is consistent with the purposes of Rule 2210, the protection
of investors, and the public interest. Generally this relief would be
limited to the same extent as in proposed paragraph (b)(1)(E), which
would authorize FINRA to grant exemptive relief from the principal
approval requirements in proposed FINRA Rule 2210(b)(1)(A) for retail
communications, subject to the same standards.
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\41\ This provision is consistent with NASD Rule 2210(c)(10).
---------------------------------------------------------------------------
Content Standards
Proposed FINRA Rule 2210(d) reorganizes but largely incorporates
the current content standards applicable to communications with the
public that are found in NASD Rule 2210(d), NASD IM-2210-1, NASD IM-
2210-4 and Incorporated NYSE Rules 472(i) and (j), subject to certain
changes. Content standards that currently apply to advertisements and
sales literature generally would apply to retail communications.
Proposed FINRA Rule 2210(d)(1)(A) incorporates the current
standards of NASD Rule 2210(d)(1)(A) without substantive change.
Proposed FINRA Rule 2210(d)(1)(B) incorporates the current
standards of NASD Rule 2210(d)(1)(B) largely without change, except
that it would expressly prohibit promissory statements or claims. The
Department staff already interprets NASD Rule 2210(d)(1)(B) to prohibit
promissory language in member communications, and Incorporated NYSE
Rule 472(i) specifically prohibits promissory statements.
Proposed FINRA Rule 2210(d)(1)(C) incorporates the current
standards of
[[Page 46876]]
NASD Rule 2210(d)(1)(C) without change.
Proposed FINRA Rule 2210(d)(1)(D) generally incorporates the
standards currently found in NASD IM-2210-1(1), with only minor, non-
substantive changes.
Proposed FINRA Rule 2210(d)(1)(E) generally incorporates the
standards currently found in NASD IM-2210-1(2), although in a more
abbreviated fashion.
NASD Rule 2210(d)(1)(D) currently prohibits communications from
predicting or projecting performance, implying that past performance
will recur or making any exaggerated or unwarranted claim, opinion or
forecast. This provision permits, however, a hypothetical illustration
of mathematical principles, provided that it does not predict or
project the performance of an investment or investment strategy.
Proposed FINRA Rule 2210(d)(1)(F) would carry forward the current
prohibition of performance predictions and projections, as well as, the
allowance for hypothetical illustrations of mathematical principles.
The proposal also would clarify that FINRA allows two additional types
of projections of performance in communications with the public that
are not reflected in the text of NASD Rule 2210(d)(1)(D). First, FINRA
allows projections of performance in reports produced by investment
analyst tools that meet the requirements of NASD IM-2210-6.\42\ Second,
FINRA has permitted research reports on debt or equity securities to
include price targets under certain circumstances.\43\
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\42\ See NASD IM-2210-6 (Requirements for the Use of Investment
Analysis Tools). NASD IM-2210-6 would be codified as FINRA Rule 2214
under the proposed rule change.
\43\ See NASD Rule 2711(h)(7).
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Accordingly, proposed FINRA Rule 2210(d)(1)(F) would clarify that
it does not prohibit an investment analysis tool, or a written report
produced by such a tool that meets the requirements of FINRA Rule 2214.
Proposed FINRA Rule 2210(d)(1)(F) also would clarify that it does not
prohibit a price target contained in a research report on debt or
equity securities, provided that the price target has a reasonable
basis, the report discloses the valuation methods used to determine the
price target, and the price target is accompanied by disclosure
concerning the risks that may impede achievement of the price
target.\44\
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\44\ These standards mirror those required for price targets
contained in research reports on equity securities under NASD Rule
2711(h)(7).
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Proposed FINRA Rule 2210(d)(2) incorporates the standards currently
found in NASD Rule 2210(d)(2)(B) without substantive change.
NASD Rule 2210(d)(2)(C) requires all advertisements and sales
literature to: (i) prominently disclose the name of the member, and
allows a fictional name by which the member is commonly recognized or
which is required by any state or jurisdiction; (ii) reflect any
relationship between the member and any non-member or individual who is
also named in the communication; and (iii) if the communication
includes other names, reflect which products and services are offered
by the member. Proposed FINRA Rule 2210(d)(3) would apply these
standards to correspondence as well as to retail communications.
Members would be permitted to use the name under which a member's
broker-dealer business is conducted as disclosed on the member's Form
BD, as well as a fictional name by which a member is commonly
recognized or which is required by any state or jurisdiction.
NASD IM-2210-1(5) specifies that in advertisements and sales
literature, references to tax-free or tax-exempt income must indicate
which income taxes apply, or which do not, unless income is free from
all applicable taxes, and provides an example of income from an
investment company investing in municipal bonds that is free from
federal income tax but subject to state or local income taxes. Proposed
FINRA Rule 2210(d)(4)(A) would carry forward this rule for all retail
communications and correspondence.
NASD IM 2210-1(4) prohibits communications with the public from
characterizing income or investment returns as tax-free or exempt from
income tax when tax liability is merely postponed or deferred, such as
when taxes are payable upon redemption. Proposed FINRA Rule
2210(d)(4)(B) would carry forward this prohibition for all
communications.
Proposed FINRA Rule 2210(d)(4)(C) would add new language concerning
comparative illustrations of the mathematical principles of tax-
deferred versus taxable compounding.
First, the illustration would have to depict both the taxable
investment and the tax-deferred investment using identical investment
amounts and identical assumed gross investment rates of return, which
may not exceed 10 percent per annum. Second, the illustration would
have to use and identify actual federal income tax rates. Third, the
illustration would be permitted (but not required) to reflect an actual
state income tax rate, provided that the communication prominently
discloses that the illustration is applicable only to investors that
reside in the identified state. Fourth, the tax rates used in the
illustration that is intended for a target audience would have to
reasonably reflect its tax bracket or brackets as well as the tax
character of capital gains and ordinary income. Fifth, if the
illustration covers an investment's payout period, the illustration
would have to reflect the impact of taxes during this period. Sixth,
the illustration could not assume an unreasonable period of tax
deferral.
Seventh, the illustration would have to include the following
disclosures, as applicable:
The degree of risk in the investment's assumed rate of
return, including a statement that the assumed rate of return is not
guaranteed;
The possible effects of investment losses on the relative
advantage of the taxable versus tax-deferred investments;
The extent to which tax rates on capital gains and
dividends would affect the taxable investment's return;
Its underlying assumptions; \45\
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\45\ These assumptions may include, for example, the age at
which an investor may begin withdrawing funds from a tax-deferred
account, the actual federal tax rates applied in the hypothetical
taxable illustration, any state income tax rate applied in the
illustration, and the charges associated with the hypothetical
investment.
---------------------------------------------------------------------------
The potential impact resulting from federal or state tax
penalties (e.g., for early withdrawals or use on non-qualified
expenses); and
That an investor should consider his or her current and
anticipated investment horizon and income tax bracket when making an
investment decision, as the illustration may not reflect these factors.
Much of this language reflects previous guidance that FINRA has
provided regarding tax-deferral illustrations.\46\ By placing this rule
language in proposed FINRA Rule 2210, FINRA is clarifying that these
standards apply to any illustration of tax-deferred versus taxable
compounding, regardless of whether it appears in a communication
promoting variable insurance products or some other communication, such
as one discussing the benefits of investing through a 401(k) retirement
plan or individual retirement account. Of course, any communication
concerning variable insurance products also must comply with standards
specifically applicable to such communications.\47\
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\46\ See ``NASD Reminds Members of Their Responsibilities
Regarding Hypothetical Tax-Deferral Illustrations in Variable
Annuity Illustrations,'' NASD Member Alert (May 10, 2004).
\47\ See NASD IM-2210-2; see also Securities Exchange Act
Release No. 61107 (December 3, 2009), 74 FR 65180 (December 9, 2009)
(Notice of Filing File No. SR-FINRA-2009-070) (Proposed Rule Change
To Adopt FINRA Rule 2211 (Communications With the Public About
Variable Insurance Products)).
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[[Page 46877]]
NASD Rule 2210(d)(3) currently requires communications with the
public, other than institutional sales material and public appearances,
that present the performance of a non-money market mutual fund, to
disclose the fund's maximum sales charge and operating expense ratio as
set forth in the fund's current prospectus fee table. Proposed FINRA
Rule 2210(d)(5) would maintain this standard for retail communications
and correspondence.
NASD Rule 2210(d)(1)(E) currently provides that, if any testimonial
in a communication with the public concerns a technical aspect of
investing, the person making the testimonial must have the knowledge
and experience to form a valid opinion. Proposed FINRA Rule
2210(d)(6)(A) carries forward this standard for communications.
NASD Rule 2210(d)(2)(A) requires any advertisement or sales
literature that includes a testimonial concerning the investment advice
or investment performance of a member or its products to prominently
disclose: (i) The fact that the testimonial may not be representative
of the experience of other customers; (ii) the fact that the
testimonial is no guarantee of future performance or success; and (iii)
if more than a nominal sum is paid, the fact that it is a paid
testimonial. Proposed FINRA Rule 2210(d)(6)(B) carries forward these
disclosure requirements for retail communications and correspondence,
and requires disclosure regarding payment if more than $100 in value
(rather than a ``nominal sum'') is paid for the testimonial.
Proposed FINRA Rule 2210(d)(7) would revise in several ways the
standards currently found in NASD IM-2210-1(6) applicable to
communications that contain a recommendation.
First, the proposal would apply these standards to retail
communications and public appearances. Currently the standards apply
only to advertisements and sales literature.
Second, NASD IM-2210-1(6)(A) requires disclosure of certain
specified conflicts of interest to the extent applicable. These
disclosures include: (i) If the member was making a market in the
recommended securities, or the underlying security if the recommended
security is an option or security future, or that the member or
associated person will sell to or buy from customers on a principal
basis; (ii) if the member and/or its officers or partners have a
financial interest in the securities of the recommended issuer and the
nature of the financial interest, unless the extent of the financial
interest is nominal; and (iii) if the member was manager or co-manager
of a public offering of any securities of the recommended issuer in the
past 12 months. Proposed FINRA Rule 2210(d)(7)(A) would carry forward
the first and third disclosures, but would modify the second disclosure
to limit it to financial interests of the member or any associated
person with the ability to influence the content of the communication,
unless the extent of the financial interest is nominal. This change
would substantially narrow the number of parties whose financial
interests have to be disclosed, particularly for large members with
numerous officers and partners.\48\
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\48\ FINRA has found that the current rules governing
disclosures of financial interests in connection with
recommendations contained in advertisements and sales literature,
which apply to financial interests of all officers and partners, do
not lead to useful disclosure when a firm has a large number of
officers or partners. See NASD IM-2210-1(6)(A)(ii).
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Proposed FINRA Rule 2210(d)(7)(B) would require a member to
provide, or offer to furnish upon request, available investment
information supporting the recommendation, and if the recommendation is
for an equity security, to provide the price at the time the
recommendation is made. This provision would carry forward the current
requirements of NASD IM-2210-6(B).
Third, proposed FINRA Rule 2210(d)(7)(C) would amend the provisions
governing communications that include past recommendations, which are
currently found in NASD IM-2210-1(6)(C) and (D) and Incorporated NYSE
Rule 472(j)(2). The new proposed standards mirror those found in Rule
206(4)-1(a)(2) under the Investment Advisers Act of 1940, which apply
to investment adviser advertisements that contain past
recommendations.\49\
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\49\ Proposed FINRA Rule 2210(d)(7)(C), like Rule 206(4)-
1(a)(2), generally would prohibit retail communications from
referring to past specific recommendations of the member that were
or would have been profitable to any person. The rule would allow,
however, a retail communication or correspondence to set out or
offer to furnish a list of all recommendations as to the same type,
kind, grade or classification of securities made by the member
within the immediately preceding period of not less than one year.
The list would have to provide certain information regarding each
recommended security and include a prescribed cautionary legend
warning investors not to assume that future recommendations will be
profitable.
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Fourth, proposed FINRA Rule 2210(d)(7)(D) expressly would exclude
from its coverage communications that meet the definition of ``research
report'' or that are public appearances by a research analyst for
purposes of NASD Rule 2711 and that include all of the applicable
disclosures required by that rule. Proposed FINRA Rule 2210(d)(7)(D)
also would exclude any communication that recommends only registered
investment companies or variable insurance products.\50\
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\50\ FINRA is proposing to exclude communications that recommend
only registered investment companies or variable insurance products
because it believes that recommendations of these products do not
raise the same kinds of conflicts of interest as recommendations of
other types of securities, since they are pooled investment vehicles
rather than securities of a single issuer. Nevertheless, there may
be other types of sales-related conflicts of interest raised when
members recommend such securities. FINRA has addressed these types
of conflicts through its rules governing sales of these products.
See NASD Rule 2830 (Investment Companies Securities) and FINRA Rule
2320 (Variable Contracts of an Insurance Company); see also
Securities Exchange Act Release No. 64386 (May 3, 2011), 76 FR 26779
(May 9, 2011) (Notice of Filing File No. SR-FINRA-2011-018).
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Currently, a ``public appearance'' is defined as ``participation in
a seminar, forum (including an interactive electronic forum), radio or
television interview, or other public appearance or public speaking
activity.'' \51\ Public appearances are a separate category of
communications within the broader term ``communications with the
public.'' As such, public appearances must meet the same standards that
apply to all communications with the public, such as the requirements
that they be fair and balanced and not include false or misleading
statements. However, public appearances are not subject to the
principal pre-use approval requirements of NASD Rule 2210(b)(1)(A), nor
must a member file a public appearance with the Department.
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\51\ NASD Rule 2210(a)(5).
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In the interest of simplification, the term ``public appearance''
is no longer a separate communication category. Nevertheless, proposed
FINRA Rule 2210(f) sets forth many of the same general standards that
would apply to public appearances that exist currently. Public
appearances would have to meet the general ``fair and balanced''
standards of proposed paragraph (d)(1). Unlike the current rules
governing public appearances, the disclosure requirements applicable to
recommendations in proposed paragraph (d)(7) also would apply if the
public appearance included a recommendation of a security. The proposal
also would require members to establish appropriate written policies
and procedures to supervise public appearances, and makes clear that
scripts, slides, handouts or other written (including electronic)
materials used in connection with public appearances are
[[Page 46878]]
considered communications for purposes of proposed FINRA Rule 2210.\52\
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\52\ The requirement to establish supervisory policies and
procedures for public appearances is consistent with NASD Rule
3010(b) and Incorporated NYSE Rule 472(l).
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Use of Investment Company Rankings in Retail Communications
Proposed FINRA Rule 2212 would replace NASD IM-2210-3 with regard
to standards applicable to the use of investment company rankings in
communications. The standards generally would remain the same. FINRA
has revised the standards applicable to investment company rankings for
more than one class of an investment company with the same portfolio.
Such rankings also must be accompanied by prominent disclosure of the
fact that the investment companies or classes have different expense
structures. The proposal would add a new paragraph (h) that would
exclude from the proposed rule's coverage reprints or excerpts of
articles or reports that are excluded from the Department's filing
requirements pursuant to proposed FINRA Rule 2210(c)(7)(I).
Requirements for the Use of Bond Mutual Fund Volatility Ratings
Proposed FINRA Rule 2213 would replace NASD IM-2210-5 with regard
to standards applicable to the use of bond mutual fund volatility
ratings in communications. The standards would remain the same as in
NASD IM- 2210-5.
Requirements for the Use of Investment Analysis Tools
Proposed FINRA Rule 2214 would replace NASD IM-2210-6 with regard
to standards applicable to the use of investment analysis tools. The
standards generally would remain the same with some minor changes.
Currently NASD IM-2210-6 requires a member that offers or intends to
offer an investment analysis tool, within 10 days of first use, to
provide the Department access to the tool and file with the Department
any template for written reports produced by, or advertisements and
sales literature concerning, the tool. Proposed FINRA Rule 2214(a)
would require members to provide the Department with access to the tool
and to file any template for written reports produced by, or any retail
communication concerning, the tool within 10 business days of first
use. This revision makes the access and filing requirement time frame
consistent with other filing requirements under proposed FINRA Rule
2210(c).
The proposal also would move some language that is currently
contained either in NASD IM-2210-6's text or in footnotes to
Supplementary Material that follows the Rule. Proposed Supplementary
Material 2214.06 would provide that a retail communication that
contains only an incidental reference to an investment analysis tool
would not have to include the disclosures otherwise required for retail
communications that advertise an investment analysis tool, and would
not have to be filed with FINRA unless otherwise required by FINRA Rule
2210.\53\ In addition, the Supplementary Material would provide that,
if a retail communication refers to an investment analysis tool in more
detail but does not provide access to the tool or the results generated
by the tool, the communication would only have to include the
disclosures required by paragraphs (c)(2) and (c)(4) of proposed Rule
2214. Proposed Supplementary Material 2214.07 provides additional
detail regarding disclosure required by paragraph (c)(3) of Rule 2214.
This language is currently found in footnote 4 to IM-2210-6. However,
FINRA has added a specific requirement to disclose whether the
investment analysis tool is limited to searching, analyzing or in any
way favoring securities in which the member serves as an underwriter.
---------------------------------------------------------------------------
\53\ This provision is consistent with footnote 3 to NASD IM-
2210-6.
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Communications With the Public Regarding Security Futures
Proposed FINRA Rule 2215 would replace NASD IM-2210-7 with regard
to standards applicable to communications concerning security futures.
Proposed FINRA Rule 2215 would revise the current standards in several
respects.
First, portions of NASD IM-2210-7 apply only to advertisements.
Proposed FINRA Rule 2215 would apply these provisions to all retail
communications.
Second, NASD IM-2210-7(a)(1) requires members to submit all
advertisements concerning security futures to the Department at least
10 days prior to use. Proposed FINRA Rule 2215(a)(1) would require
members to submit all retail communications concerning security futures
to the Department at least 10 business days prior to first use. Both
the current and the proposed filing provisions would require a member
to withhold the communication from publication or circulation until any
changes specified by the Department have been made.
Third, the proposal would amend the provisions that require
communications concerning security futures to be accompanied or
preceded by the security futures risk disclosure document under certain
circumstances.\54\ As revised, a communication concerning security
futures would have to be accompanied or preceded by the risk disclosure
document if it contained the names of specific securities.
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\54\ See NASD IM-2210-7(b).
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Fourth, proposed FINRA Rule 2214(b)(4)(D) would clarify that
communications that contain the historical performance of security
futures must disclose all relevant costs, which must be reflected in
the performance.
Communications With the Public About Collateralized Mortgage
Obligations
Proposed FINRA Rule 2216 would replace NASD IM-2210-8 with regard
to standards applicable to retail communications concerning CMOs. The
standards would remain the same as in IM-2210-8.
As noted above, FINRA will announce the implementation date of the
proposed rule change in a Regulatory Notice to be published no later
than 90 days following Commission approval. The implementation date
will be no later than 365 days following Commission approval.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\55\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. FINRA believes that the proposed rule change will help
ensure that investors are protected from potentially false or
misleading communications with the public distributed by FINRA member
firms.
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\55\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
[[Page 46879]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
In September 2009, FINRA published Regulatory Notice 09-55 (the
``Notice'', requesting comment on the rules as proposed therein (the
``Notice proposal''). A copy of the Notice was filed with the
Commission as Exhibit 2a. The comment period expired on November 20,
2009. FINRA received 23 comments in response to the Notice. A list of
the commenters in response to the Notice was filed with the Commission
as Exhibit 2b, and copies of the comment letters received in response
to the Notice were filed with the Commission as Exhibit 2c.\56\ The
text of Exhibits 2a, 2b and 2c are available on FINRA's Web site at
http://www.finra.org, at the principal office of FINRA and at the
Commission's Public Reference Room. A summary of the comments and
FINRA's response is provided below.
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\56\ See Exhibit 2b for a list of abbreviations assigned to
commenters.
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Communication Categories
Interactive Electronic Communications
Cornell, Cutter, PIABA, SIFMA, StockCross, Vanguard and Wells Fargo
generally supported the proposed consolidation of the six current
communication categories under NASD Rule 2210 into three categories
under proposed FINRA Rule 2210(a). Fidelity and the ICI suggested that
FINRA add a new separate communication category for ``interactive
electronic communications,'' which would include real-time interactive
electronic communications made through social media Web sites, and that
FINRA allow this communication to be supervised in a manner similar to
the supervision of correspondence.
FINRA does not believe adding a fourth communication category for
interactive electronic communication categories is necessary. However,
as discussed below, FINRA has modified the principal review and
approval requirements under proposed paragraph (b) to allow retail
communications that are posted on online interactive electronic forums
to be supervised in the same manner as correspondence.\57\ FINRA
believes that this modification of the principal review and approval
requirements achieves the same result sought by Fidelity and the ICI.
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\57\ See proposed FINRA Rule 2210(b)(1)(D)(ii).
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Definition of Correspondence
The Notice proposal defined ``correspondence'' as any written
(including electronic) communication that is distributed or made
available to 25 or fewer retail investors. The Notice proposal likewise
defined ``retail communication'' as any written (including electronic)
communication that is distributed or made available to more than 25
retail investors.
The proposed definition of ``correspondence'' generated a number of
comments. The CAI, the ICI, TLGI, MBSC, NPHI, TD Ameritrade, Vanguard
and WilmerHale objected to treating communications to more than 25
retail investors as retail communications rather than correspondence.
These commenters argued that the 25-investor cutoff is arbitrary, and
that given the challenges in monitoring whether a communication is
limited to 25 or fewer recipients, members would be forced to treat all
letters and emails as retail communications. These commenters
recommended that FINRA revise the proposal to include within the
definition of ``correspondence'' emails to existing retail customers,
regardless of the number of recipients.
NASD Rule 2211(a)(1) defines ``correspondence'' as ``any written
letter or electronic mail message and any market letter distributed by
a member to: (A) One or more of its existing retail customers; and (B)
fewer than 25 prospective retail customers within any 30 calendar-day
period.'' However, NASD Rule 2211 also requires a member to have a
registered principal approve prior to use correspondence that is
distributed to 25 or more existing retail customers within any 30
calendar-day period and makes any financial or investment
recommendation or otherwise promotes a product or service of the
member.\58\
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\58\ See NASD Rule 2211(b)(1)(A).
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FINRA is not revising the definition of ``correspondence'' to
include e-mails or written letters to existing retail customers without
limit as to the number of recipients. However, to address the concern
raised by the commenters, FINRA has revised the proposed principal
approval requirements to exclude communications to retail investors
that do not make any financial or investment recommendation or
otherwise promotes a product or service of the member.\59\ This
revision will continue to allow members to distribute non-promotional
e-mails and other communications to retail investors without having a
principal approve them prior to use.
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\59\ See proposed FINRA Rule 2210(b)(1)(D)(iii).
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Unlike the current definition of ``correspondence'' under NASD Rule
2211, the Notice proposal's definition of ``correspondence'' did not
reference a 30 calendar-day window within which to count the number of
recipients. Cutter, the ICI, Morgan, SIFMA, WGSI and WilmerHale all
objected to the elimination of the 30 calendar-day period. In response
to these comments, FINRA has revised the definition of
``correspondence'' to include written communications distributed or
made available to 25 or fewer retail investors within any 30 calendar-
day period. FINRA likewise has revised the definition of ``retail
communication'' to include written communications that are distributed
or made available to more than 25 retail investors within any 30
calendar-day period.
The current definition of ``correspondence'' includes ``market
letters,'' which are defined as ``any written communication excepted
from the definition of `research report' pursuant to NASD Rule
2711(a)(9)(A).'' \60\ The Notice proposal's definition of
``correspondence'' did not include market letters. Forefield and Wells
Fargo opposed the elimination of market letters from the definition of
correspondence. These commenters requested that FINRA either revise the
definition to include market letters, or provide an exception from the
principal approval requirements for market letters.
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\60\ See NASD Rule 2211(a)(5).
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In the interest of keeping the definition of ``correspondence'' as
straightforward as possible, FINRA is not revising the definition to
include market letters. However, FINRA has revised the principal
approval requirements to allow members to supervise any retail
communication that is excepted from the definition of ``research
report'' pursuant to NASD Rule 2711(a)(9)(A) in the same manner as
correspondence.\61\ FINRA believes that the same rationale it used to
provide members with more flexibility in supervising market letters
continues to exist, and thus has made this change to the principal
approval requirements.\62\
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\61\ See proposed FINRA Rule 2210(b)(1)(D)(i).
\62\ See Notice to Members 09-10 (February 2009).
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Definitions of Institutional Communication and Institutional Investor
The Notice proposal defined ``institutional communication'' as
``any written (including electronic) communication that is distributed
or made available only to institutional investors.'' TD Ameritrade
commented that ``or made available to'' should be deleted from the
definition and replaced
[[Page 46880]]
with ``intended for an audience of.'' With this change, TD Ameritrade
noted that members could post to Web sites that are intended for
institutional investors without having to make it password-protected.
FINRA disagrees with this comment. If members were merely required
to ``intend'' that a communication reach institutional investors, they
could effectively distribute the communication to anyone simply by
including a disclaimer regarding its intended audience. This rule
change would make the distinction between institutional communications
and retail communications virtually meaningless.
The Notice proposal defined ``institutional investor'' to include
persons described in NASD Rule 3110(c)(4) (definition of
``institutional account''), government entities and subdivisions,
certain employee benefit and qualified plans that have at least 100
participants, members and their registered personnel, and persons
acting on behalf of institutional investors. Fidelity requested that
FINRA clarify that if an employer offers multiple employee benefit
plans, the plans may be aggregated for purposes of calculating the
number of participants. FINRA has revised the definition of
``institutional investor'' to allow aggregation of multiple plans
offered by a single employer.
Fidelity, SIFMA and WilmerHale argued for expanding the definition
of ``institutional investor'' to include non-retail entities with
assets under $50 million.\63\ FINRA believes that the definition is
already sufficiently broad, and that entities that have assets of less
than $50 million often require the same investor protections regarding
sales material as a retail investor.
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\63\ Under NASD Rule 3110(c)(4), a person who does not fall
within one of the enumerated categories must have total assets of at
least $50 million to be considered an institutional account. The SEC
recently approved the adoption of NASD Rule 3110(c)(4) as FINRA Rule
4512(c) without material change. See Securities Exchange Act Release
No. 63784 (January 27, 2011), 76 FR 5850 (February 2, 2011) (Order
Approving File No. SR-FINRA-2010-052). FINRA Rule 4512 becomes
effective on December 5, 2011. See Regulatory Notice 11-19 (April
2011).
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SIFMA and TD Ameritrade argued that the rule should make clear that
if a member provides an institutional communication to another member,
the first member is not responsible if the second member forwards the
communication to retail investors. FINRA believes that, while one
member generally is not responsible for the actions of another, such a
determination will be subject to the facts and circumstances. Moreover,
a member may not provide an institutional communication to another if
the member has reason to believe that it will be forwarded to retail
investors. Accordingly, FINRA declines to make this change.
FINRA has added a Supplementary Material to FINRA Rule 2210 to
clarify the extent to which a member's internal communications would be
considered institutional communications. The Supplementary Material
provides that a member's internal written (including electronic)
communications that are intended to educate or train registered persons
about the products or services offered by a member are considered
institutional communications pursuant to paragraph (a)(3) of proposed
FINRA Rule 2210. Accordingly, such internal communications are subject
to both the provisions of proposed FINRA Rule 2210 and NASD Rule
3010(d).
Definition of Retail Communication
The Notice proposal defined ``retail communication'' as ``any
written (including electronic) communication that is distributed or
made available to more than 25 retail investors.'' ``Retail investor''
was defined as ``any person other than an institutional investor.''
Generally ``retail communication'' would include communications that
currently fall under the definitions of ``advertisement'' and ``sales
literature.''
The CAI and NPHI both expressed concern that combining
advertisements and sales literature into a single category might lead
FINRA staff to apply the same standards to all retail communications
regardless of the intended audience. These commenters recommended that
FINRA provide guidance that it will continue to take into account the
anticipated audience for a proposed retail communication when
determining what disclosures and other content standards to apply.
FINRA notes that proposed FINRA Rule 2210(d)(1)(E) provides that
``[m]embers must consider the nature of the audience to which the
communication will be directed and must provide details and
explanations appropriate to the audience.'' While proposed FINRA Rule
2210's content standards apply to all retail communications, the level
of detail and explanation required for a particular retail
communication will depend on the audience to which it is directed.
It may be unclear whether the definition of ``retail investor''
includes persons who are not customers of a member. Accordingly, FINRA
has revised the definition to add at its end ``regardless of whether
the person has an account with a member.'' \64\
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\64\ As noted above, FINRA also revised the definition of
``retail communication'' to add at its end ``within any 30 calendar-
day period.''
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Approval and Recordkeeping
Review and Approval of Retail Communications
FINRA Rule 2210(b)(1)(A) in the Notice proposal provided that ``an
appropriately qualified registered principal'' must approve each retail
communication before the earlier of its use or filing with the
Department. SIFMA and Wells Fargo commented that the proposal should
provide greater guidance as to which principal registration category is
required to approve different categories of retail communications.
FINRA believes that this issue is already addressed in the registration
rules for principals and supervisors.\65\ Accordingly, FINRA does not
believe that it would be appropriate or useful to restate those rules'
provisions in the rules governing communications with the public.
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\65\ See NASD Rules 1020 et seq.
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In a similar vein, Morgan, SIFMA and WilmerHale requested
clarification as to whether a Series 9/10 general securities sales
supervisor would be permitted to review and approve retail
communications and correspondence. Currently, Series 9/10 supervisors
are qualified to review and approve correspondence and sales
literature, but are not qualified to approve advertisements as defined
in NASD Rule 2210.\66\ While the scope of a Series 9/10 supervisor's
activities are not part of this rule proposal, FINRA notes that it has
separately proposed to adopt new FINRA rules that would allow a general
securities sales supervisor to approve both correspondence and retail
communications.\67\
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\66\ See NASD Rule 1022(g)(2)(C)(iii).
\67\ See Regulatory Notice 09-70 (December 2009), Attachment B
(proposed FINRA Rule 1230(a)(10)) (eliminates current restriction on
Series 9/10 supervisors approving advertisements).
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The ICI requested confirmation that the principal approval
requirements do not apply to the updating of templates contained in
retail communications. FINRA does not intend to revise its earlier
interpretive position with regard to the updating of templates as
stated in a 2002 interpretive letter to T. Rowe Price Associates,
Inc.\68\ Moreover, proposed paragraph (c)(7)(B) would add an exclusion
from the filing
[[Page 46881]]
requirements for retail communications that are based on templates that
were previously filed with the Department, the changes to which are
limited to updates of more recent statistical or other non-narrative
information.
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\68\ See Letter from Thomas M. Selman, NASD, to Forrest Foss, T.
Rowe Price Associates Inc., dated January 28, 2002 (interpreting the
approval, filing and recordkeeping requirements of NASD Rule 2210 as
generally not applying to statistical updates contained in pre-
existing templates).
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SIFMA recommended that FINRA reiterate its previous interpretive
guidance regarding the supervision of electronic communications as set
forth in Regulatory Notice 07-59.\69\ FINRA is separately addressing
the staff guidance contained in Regulatory Notice 07-59 regarding the
supervision of electronic communications as part of its proposal to
adopt new FINRA Rule 3110.\70\
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\69\ See Regulatory Notice 07-59 (December 2007).
\70\ See Securities Exchange Act Release No. 64736 (June 23,
2011), 76 FR 38245 (June 29, 2011) (Notice of Filing File No. SR-
FINRA-2011-028).
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The CAI, Cornell, Fidelity, the FSI, MBSC, NPHI, SIFMA, Vanguard,
and WGSI commented that FINRA should address the supervision
requirements for social networking sites and include them in the
revised proposal filed with the SEC. After Regulatory Notice 09-55 was
published for comment, but before this filing with the SEC, FINRA
published Regulatory Notice 10-06, which provides guidance on blogs and
social networking Web sites.\71\ Among other things, that Notice
addressed the supervision of social media sites and specified that
members may adopt supervisory procedures similar to those outlined for
electronic correspondence in Regulatory Notice 07-59. FINRA is now
codifying this guidance as part of proposed FINRA Rule 2210. Proposed
paragraph (b)(1)(D)(ii) specifies that the requirements of paragraph
(b)(1)(A), which require a principal to approve retail communications
prior to use, will not apply to retail communications that are posted
on an online interactive electronic forum, provided that the member
supervises and reviews such communications in the same manner as
required for supervising and reviewing correspondence pursuant to NASD
Rule 3010(d).
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\71\ See Regulatory Notice 10-06 (January 2010).
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In addition, given the rapid changes to technology used to
communicate with customers, FINRA believes it will be useful going
forward to have exemptive authority with regard to the principal pre-
use approval requirements applicable to retail communications in
certain circumstances. Accordingly, FINRA has added a new proposed
paragraph (b)(1)(E) that would authorize FINRA to grant an exemption
from the principal approval requirements of paragraph (b)(1)(A) for
good cause shown and to the extent that such exemption is consistent
with the purposes of Rule 2210, the protection of investors, and the
public interest.
Review and Approval of Research-Related Retail Communications
FINRA Rule 2210(b)(1)(B) in the Notice proposal provided that,
``[w]ith respect to research reports on debt and equity securities, the
requirements of paragraph (b)(1)(A) may be met by a Supervisory Analyst
approved pursuant to NYSE Rule 344.'' This language duplicated an
identical provision in NASD Rule 2210(b)(1)(B). SIFMA and WilmerHale
requested that FINRA clarify that a supervisory analyst also may review
and approve research-related communications that are not research
reports, such as market letters, research notes and economic analyses.
FINRA does not believe such a clarification is necessary. Proposed
paragraph (b)(1)(D)(i) would except from the requirements of paragraph
(b)(1)(A) any retail communication that is excepted from the definition
of ``research report'' pursuant to NASD Rule 2711(a)(9)(A), provided
that the member supervises and reviews such communications in the same
manner as required for supervising and reviewing correspondence. NASD
Rule 2711(a)(9)(A) excludes from the definition of ``research report''
a broad range of research-related communications, such as discussions
of broad-based indices, commentaries on economic, political or market
conditions, and certain other research-related communications.\72\ By
allowing firms to supervise and review these communications in the same
manner as firms supervise and review correspondence, FINRA believes
that firms will have sufficient flexibility to address the concerns
raised by SIFMA and WilmerHale.
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\72\ Currently NASD Rule 2211(a)(1) includes within the
definition of ``correspondence'' any ``market letter.'' ``Market
letter'' is defined as any written communication excepted from the
definition of ``research report'' pursuant to NASD Rule
2711(a)(9)(A). See NASD Rule 2211(a)(5). Thus, the proposal would
allow members to continue to supervise market letters in the same
manner as they supervise correspondence.
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Administrative Communications
FINRA Rule 2210(b)(1)(D) in the Notice proposal excluded from the
principal approval requirements of paragraph (b)(1)(A) ``any retail
communication that is solely administrative in nature.'' The CAI,
Cutter, Fidelity, the FSI, Invesco, the ICI, MBSC, Morgan and SIFMA
noted that currently NASD Rule 2211 does not require principal pre-use
approval of e-mails and written letters to existing retail customers
(without limit) as long as the communication does not make an
investment recommendation or promote a product or service of the
member.\73\ These commenters argued that FINRA should make clear that
these communications are included within the ``solely administrative''
exception. PIABA expressed concern that this exception could be used by
members as a loophole to avoid principal review, and recommended that
FINRA better define which communications fall within this exception.
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\73\ See NASD Rule 2211(b)(1)(A).
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In response to these comments, FINRA has revised paragraph
(b)(1)(D) to eliminate the reference to ``solely administrative''
retail communications, and instead to exclude ``any retail
communication that does not make any financial or investment
recommendation or otherwise promote a product or service of the
member.'' This language is currently used in NASD Rule 2211(b)(1)(A)
with regard to the requirements for supervising correspondence that is
sent to 25 or more existing retail clients, and thus maintains the same
standard members face today with regard to such correspondence. In
addition, FINRA believes the revised text better defines the scope of
this exclusion. Members would still be required to supervise such
retail communications in the same manner as required for supervising
and reviewing correspondence pursuant to NASD Rule 3010(d).
FINRA is also adding a new paragraph (b)(1)(F) to clarify that,
notwithstanding any other provision of proposed FINRA Rule 2210, an
appropriately qualified principal must approve a communication prior to
a member filing the communication with the Department.
Recordkeeping Requirements
FINRA Rule 2210(b)(4) in the Notice proposal set forth members'
recordkeeping obligations with respect to each communication category.
Proposed paragraph (b)(4)(A)(ii) provided that, with respect to
institutional communications, records must include ``the name of the
person who prepared or distributed the communication.'' Fidelity, the
ICI and MBSC supported the requirement to maintain records of the
person who prepared a communication, but opposed a requirement to keep
records of the person who distributed the communication, which they
believed would be difficult to implement. TD Ameritrade recommended
that members be required to keep records of the person who prepared an
institutional
[[Page 46882]]
communication only where a registered principal has not approved it.
In response to these comments, FINRA has revised the recordkeeping
provisions. As revised, a member's records must include the name of any
registered principal who approved a communication and the date approval
was given.\74\ In the case of a retail communication or institutional
communication that is not approved prior to first use by a registered
principal, the records must include the name of the person who prepared
or distributed the communication. Thus, a member would not have to keep
records of the person who distributed a retail communication or
institutional communication, if the records included either the
registered principal who approved the communication, or the person who
prepared the communication.
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\74\ See proposed FINRA Rule 2210(b)(4)(A)(ii).
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FINRA Rule 2210(b)(4)(A)(iv) in the Notice proposal required
records to include ``the source of any statistical table, chart, graph
or other illustration used in the communication.'' Fidelity and the FSI
requested that FINRA clarify what is required regarding sources of
statistical tables or charts. For example, is it sufficient to have a
citation to a study, or must a record include a copy of the study
itself? In response to these comments, FINRA has revised proposed FINRA
Rule 2210(b)(4)(A)(iv) to require ``information concerning'' the source
of the table or chart. This revision reflects the current recordkeeping
requirements for sources of statistical tables or charts.\75\
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\75\ See NASD Rule 2210(b)(2)(B).
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Filing Requirements
Filing Requirements for New Members and Certain Rule Violators
FINRA Rule 2210(c)(1)(A) in the Notice proposal required a new
member to file with the Department all of its retail communications for
a one-year period beginning on the effective date a member becomes
registered with FINRA. This new member filing requirement differs from
NASD Rule 2210(c)(5)(A), which applies only to advertisements and
commences on the first date a new member files an advertisement with
the Department. Proposed paragraph (c)(1)(B) provided that, if the
Department determines that a member has departed from proposed FINRA
Rule 2210's standards, it may require the member to file all or part of
its communications at least 10 business days prior to use.
Cornell opposed the commencement date of the new member filing
period, arguing that this will decrease the time during which the
Department will monitor a new member's communications. FINRA disagrees
that the new filing period is insufficient. Members are still subject
to a filing requirement during their first year of operation and are
required to file certain retail communications thereafter. In addition,
members are always subject to spot-check procedures. Nevertheless, to
ensure that the starting date for this filing requirement is clear,
FINRA has revised this provision to specify that the one-year filing
period begins on the date reflected in the CRD[supreg] system as the
date the firm's FINRA membership became effective.
WilmerHale opposed the breadth of this expanded filing requirement,
which would cover communications that currently qualify as sales
literature and thus do not have to be filed. WilmerHale argued that
this expanded filing requirement would substantially hinder new firms'
operations. SIFMA similarly argued that this filing requirement should
exclude password-protected Web sites, since they are considered sales
literature rather than advertisements under current rules.
FINRA recognizes that it may be burdensome for new firms to file
all of their retail communications, including form letters and group e-
mails sent to 25 or more retail investors within a 30 calendar-day
period. Accordingly, FINRA has narrowed the scope of this filing
requirement to cover only retail communications that are published or
used in any electronic or other public media, including any generally
accessible Web site, newspaper, magazine or other periodical, radio,
television, telephone or audio recording, video display, signs or
billboards, motion pictures or telephone directories (other than
routine listings). This narrowing of the filing requirement would
require new firms to file only retail communications that currently
fall within the definition of ``advertisement'' under NASD Rule 2210,
thus not changing the scope of this filing requirement as compared to
current standards. The filing requirements of proposed paragraph
(c)(1)(A) would not apply to password-protected Web sites.
Fidelity commented that FINRA should be required to delineate the
administrative process that must be followed before it can impose a
pre-use filing requirement on members that have violated the
communications rules. FINRA believes that proposed paragraph (c)(1)(B)
specifies the steps FINRA must take before it may impose this
requirement. The paragraph states that the Department must notify the
member in writing of the types of communications to be filed and the
length of time the requirement is to be in effect. The paragraph also
states that any such filing requirement will take effect 21 calendar
days after service of the written notice, during which time the member
may request a hearing under FINRA Rules 9551 and 9559.
Retail Communications Concerning Structured Products
FINRA Rule 2210(c)(2)(B) in the Notice proposal required members to
file at least 10 business days prior to use, retail communications
concerning publicly offered CMOs, options, security futures, and any
other publicly offered securities derived from or based on a single
security, a basket of securities, an index, a commodity, a debt
issuance or a foreign currency (``structured products''). These pre-use
filing requirements would not apply to retail communications concerning
options or security futures that are submitted to another self-
regulatory organization having comparable standards, retail
communications in which the only reference to options or security
futures is contained in a listing of the member's services, and retail
communications that are subject to a separate filing requirement in
paragraph (c) of the proposed rule.
Cornell, the ICI, PIABA and Vanguard supported the pre-use filing
requirement for retail communications concerning structured products.
Fidelity commented that FINRA should list which products fall within
this requirement, and clarify that investment company products do not
fall within this requirement. Fidelity also recommended that this
filing requirement exclude factual material about structured products,
such as research reports and fact sheets, and that FINRA should allow a
member to use retail communications that are filed with the Department
if the member does not receive a response from FINRA within 10 business
days.
Invesco and SIFMA commented that the proposal should be revised to
eliminate the pre-use filing requirement for retail communications
concerning structured products, and instead allow members to file such
communications within 10 business days of first use. SIFMA also
recommended that the reference to retail communications concerning
options be stricken, since these communications are separately
regulated under FINRA Rule 2220. In addition, SIFMA requested that
FINRA exempt from this filing requirement retail communications
concerning structured products for which there is a
[[Page 46883]]
registration exemption under the Securities Act.
StockCross argued that the pre-use filing requirement for retail
communications concerning structured products will hinder business
since often these products have a limited offering period. Wells Fargo
suggested that retail investors will be put at a disadvantage relative
to institutional investors since retail investors will not be able to
receive sales material concerning structured products until after the
member receives Department staff's comments to filed communications.
WilmerHale also opposed the pre-use filing requirement for retail
communications concerning structured products. WilmerHale argued that
the burdens on members will strongly outweigh any benefit to investors.
For example, members would be prevented from sending group e-mails to
clients reminding them that their options are in the money without
first filing such an e-mail with FINRA at least 10 business days prior
to transmission. WilmerHale and SIFMA both expressed concern that FINRA
lacks the resources necessary to review such communications. WilmerHale
also recommended that FINRA exclude all research from the requirements
of proposed FINRA Rule 2210 and address any specific concerns under
NASD Rule 2711.
In response to these comments, FINRA is revising the filing
requirements for retail communications concerning options, CMOs and
structured products. FINRA agrees that FINRA Rule 2220 separately
imposes a filing requirement for advertisements and sales literature
concerning options; accordingly, it is unnecessary to include a
separate filing requirement for retail communications concerning
options under proposed FINRA Rule 2210. Thus, the reference to retail
communications concerning options has been deleted.
FINRA also agrees that there may be situations in which a pre-use
filing requirement would prevent members from distributing time-
sensitive retail communications concerning CMOs and structured products
in a timely manner. Accordingly, FINRA has revised the proposal to
permit members to file retail communications concerning CMOs and
structured products within 10 business days of first use, instead of at
least 10 business days prior to use.\76\
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\76\ See proposed FINRA Rules 2210(c)(3)(E) and (F).
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FINRA does not believe it is appropriate to attempt to list all
products that are derived from or based on a single security, a basket
of securities, an index, a commodity, a debt issuance or a foreign
currency. Members frequently develop new types of retail structured
products that would not be included in any list that FINRA created
today. Thus, FINRA believes that it is better to leave open the
possibility that retail communications concerning new products also
will fall under this filing requirement.
FINRA agrees that retail communications concerning registered
investment companies are not subject to the filing requirement covering
structured products communications, since they are already subject to a
separate filing requirement under proposed paragraphs (c)(2)(A),
(c)(2)(C) and (c)(3)(A). FINRA has added language to proposed paragraph
(c)(3)(F) to make this more clear.
FINRA does not agree that retail communications that only present
``factual information'' about structured products should be excluded.
Arguably all sales material is ``factual,'' and the determination of
which communications are not factual would be highly subjective. In
addition, the proposal already excludes from filing retail
communications whose only reference to investments is solely as part of
a listing of products and services offered by the member.\77\
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\77\ See proposed FINRA Rule 2210(c)(7)(L).
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FINRA agrees that the filing requirement should not apply to retail
communications concerning structured products that are not registered
under the Securities Act. As a general matter, the filing requirements
under NASD Rule 2210 do not apply to communications concerning
privately placed securities, since typically these securities are not
widely advertised. Accordingly, FINRA has added language to proposed
paragraph (c)(3)(F) to clarify that the filing requirement only applies
to retail communications concerning structured products that are
registered under the Securities Act.
FINRA disagrees with the assertion that it lacks the resources to
review retail communications concerning structured products. FINRA will
ensure that the Department has the necessary staffing to review such
material in a timely manner. Additionally, by allowing members to file
such communications concurrent with use, this revision takes some of
the time pressure off members that seek to distribute retail
communications prior to receiving staff comments.
FINRA also disagrees that proposed FINRA Rule 2210 should not apply
to research. While NASD Rule 2711 does impose some content standards on
research reports, it does not include the more general standards of
proposed FINRA Rule 2210 that require communications to be fair and
balanced. In addition, proposed FINRA Rule 2210 requires certain non-
independent research, such as research prepared by a member or its
affiliate on mutual funds or exchange-traded funds (``ETFs''), to be
filed with the Department.
Retail Communications Concerning Closed-End Funds
FINRA Rule 2210(c)(3)(A) in the Notice proposal required members to
file all retail communications concerning registered closed-end
investment companies. Currently, FINRA only requires members to file
such communications during a closed-end fund's IPO period.
Cornell, the ICI, PIABA and Vanguard supported this expanded filing
requirement. The ICI requested that FINRA clarify that its rules only
reach members that prepare closed-end fund communications, and not the
fund itself or its adviser. The ICI also requested that FINRA clarify
that a fund underwriter is not responsible for communications
concerning a closed-end fund prepared by an unaffiliated member.
FINRA rules apply to communications used by FINRA member firms.
While its rules do not apply to non-member firms, such as investment
companies and investment advisers that are not registered as broker-
dealers, they do apply to any communications used by a member,
regardless of which entity prepared the communications. Generally,
FINRA does not hold one member responsible for the actions of another
member, but considers each case separately based on the facts and
circumstances.
Wells Fargo opposed the requirement to file retail communications
concerning closed-end funds after the IPO period has expired, arguing
that trading closed-end funds on the secondary market does not raise
the same concerns as during the IPO period. FINRA disagrees with this
argument. FINRA currently requires members to file retail
communications concerning other types of investment company securities
that are traded on the secondary market, such as ETFs. In addition,
FINRA believes that investor protection concerns can arise from any
retail communication concerning a closed-end fund, regardless of when
it is distributed.
[[Page 46884]]
Filing Exclusions for Non-Material Changes and Templates
FINRA Rule 2210(c)(7)(A) in the Notice proposal excluded from the
filing requirements of proposed paragraphs (c)(1) through (c)(4)
``retail communications that previously have been filed and that are
used without material change, including retail communications that are
based on templates that were previously filed with the Department the
changes to which are limited to updates of more recent statistical or
other non-narrative information.'' NASD Rule 2210(c)(8)(A) includes the
same filing exclusion for previously filed advertisements and sales
literature that are used without material change, but does not contain
any express filing exclusion for templates.
The CAI, Fidelity, the ICI and MBSC expressed concern that proposed
paragraph (c)(7)(A) would narrow the current filing exclusion for
communications used without material change. By including the template
filing exclusion in the same paragraph, these commenters feared that
this filing exception would not allow non-material changes to narrative
information. FINRA did not intend to narrow the current filing
exclusion for retail communications that are used without material
change. Accordingly, FINRA has separated the filing exclusion for
previously filed retail communications that are used without material
change from the exclusion for certain previously filed templates.\78\
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\78\ See proposed FINRA Rules 2210(c)(7)(A) and (B).
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Filing Exclusion for Administrative Communications
FINRA Rule 2210(c)(1)(B) in the Notice proposal excluded from the
filing requirements retail communications ``that are solely
administrative in nature.'' This filing exclusion replaced a current
exclusion for advertisements and sales literature ``solely related to
recruitment or changes in a member's name, personnel, electronic or
postal address, ownership, offices, business structure, officers or
partners, telephone or teletype numbers, or concerning a merger with,
or acquisition by, another member.'' \79\
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\79\ See NASD Rule 2210(c)(8)(B).
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SIFMA requested that FINRA clarify that this exclusion covers
generic documents or excerpts describing a member's products or
services, even if they reference a product subject to the filing
requirements. Vanguard requested that this filing exclusion
specifically reference the list of items that is excluded under current
rules. Wells Fargo argued that this exclusion should not be limited to
the administrative items that are excluded under current rules.
SIFMA's interpretation of this filing exclusion is broader than
FINRA intended. However, FINRA acknowledges that ``solely
administrative in nature'' may be unclear to some members. Accordingly,
FINRA is revising this exclusion to cover retail communications that do
not make any financial or investment recommendation or otherwise
promote a product or service of the member. In this regard, the filing
exclusion covers the same retail communications that are excepted from
the principal approval requirements under proposed FINRA Rule
2210(b)(1)(D).
Other Filing Exclusions
FINRA Rule 2210(c)(7)(G) of the Notice proposal excluded from the
filing requirements reprints and excerpts of certain articles and
reports produced by independent third parties. SIFMA requested that
FINRA clarify whether that filing exclusion covered independent third-
party research reports concerning registered investment companies,
which are currently excluded from filing under NASD Rule 2210(c)(8)(H).
FINRA does intend this filing exclusion also to cover independent
research reports on registered investment companies which are excluded
from filing under the current rules.
FINRA Rule 2210(c)(7)(J) of the Notice proposal excluded from the
filing requirements communications that refer to investment company
securities, direct participation programs or exempted securities solely
as part of a listing of products or services offered by the member. TD
Ameritrade requested that FINRA expand this exclusion to allow members
to discuss the types of securities that can be traded through a member,
to include general descriptions of these securities, to explain the
functionality of online tools and trading platforms, and to present
related fees and commissions, as long as no actual security is named.
Cutter requested that this exclusion permit a listing of any type of
investment a member offers, not just the securities described in the
paragraph.
FINRA does not believe TD Ameritrade's proposed expansion would be
appropriate, since it would cover many types of retail communications
that normally require review by Department staff. FINRA agrees,
however, that a communication that refers to an investment solely as
part of a listing of a member's products and services should be
excluded from filing. FINRA has modified this filing exclusion
accordingly.\80\
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\80\ See proposed FINRA Rule 2210(c)(7)(L).
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The Notice proposal would have eliminated a current filing
exclusion for press releases that are made available only to members of
the media.\81\ The Notice proposal stated that FINRA staff found that
members almost always post press releases on their Web sites, thus
making them available to the general public, and making this filing
exclusion inapplicable. Fidelity, the ICI and MBSC commented that
members still rely on this filing exclusion, and thus objected to its
elimination. Based on these representations, FINRA has reinstated the
filing exclusion for press releases made available only to members of
the media.\82\
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\81\ See NASD Rule 2210(c)(8)(G).
\82\ See proposed FINRA Rule 2210(c)(7)(H).
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In 2006, FINRA published an interpretive letter stating that free
writing prospectuses are excluded from the provisions of NASD Rules
2210 and 2211.\83\ Based on this 2006 letter, Morgan, SIFMA and
WilmerHale requested that FINRA include a filing exclusion for free
writing prospectuses. In October 2010, FINRA published a Regulatory
Notice that withdrew, in part, the guidance provided in the 2006
interpretive letter.\84\ In the 2010 Notice, FINRA stated that broadly
disseminated free writing prospectuses present the same investor
protection concerns as communications governed by NASD Rules 2210 and
2211. Accordingly, FINRA announced that it now interprets FINRA Rules
2210 and 2211 to apply to free writing prospectuses distributed by a
broker-dealer in a manner reasonably designed to lead to broad
unrestricted dissemination. Based on this new guidance, rather than
exclude free writing prospectuses, FINRA is modifying the current
filing exclusion for SEC-filed documents not to cover broadly
disseminated free writing prospectuses filed with the SEC pursuant to
Securities Act Rule 433(d)(1)(ii).\85\ Thus, such free writing
prospectuses must be filed with FINRA to the extent that they
constitute a retail communication covered by another filing requirement
(such as a free writing prospectus concerning a structured product
registered under the Securities Act).
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\83\ See Letter from Lisa C. Horrigan, Assistant General
Counsel, NASD, to Eileen Ryan, Securities Industry Association, and
Sarah Starkweather, The Bond Market Association, dated August 1,
2006.
\84\ See Regulatory Notice 10-52 (October 2010).
\85\ See proposed FINRA Rule 2210(c)(7)(F).
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[[Page 46885]]
SIFMA recommended that FINRA add a filing exclusion for general
investment pieces that discuss an investment strategy but do not
recommend or promote a particular product or service of a member. FINRA
has revised the proposal to exclude retail communications that do not
make investment recommendations or promote a member's products or
services. However, depending on the facts and circumstances, a retail
communication that discusses investment strategies may in fact be
making investment recommendations or promoting a member's products or
services.
Filing Exemptions
NASD Rule 2210(c)(10) and FINRA Rule 2210(c)(9) of the Notice
proposal permitted FINRA to exempt a member from the pre-use filing
requirements of paragraph (c)(1)(A) for good cause shown. As discussed
above, FINRA has revised the principal review and approval requirements
to authorize FINRA to grant an exemption from the principal approval
requirements of paragraph (b)(1)(A) for retail communications for good
cause shown after taking into consideration all relevant factors, to
the extent such exemption is consistent with the purposes of Rule 2210,
the protection of investors, and the public interest. FINRA is
similarly revising proposed paragraph (c)(9) to authorize FINRA to
exempt a specific category of retail communications from the filing
requirements under the same circumstances described with respect to the
principal approval exemptive authority.
Other Filing Issues
NPHI requested that FINRA revise its filing requirements to be
triggered off the date a registered principal approves a communication,
rather than the date a member first uses the communication, since a
member may not know the exact date of first use. FINRA disagrees with
this recommendation since such a standard would allow members to delay
filing a communication indefinitely until a principal approved it.
Moreover, FINRA believes that it is important for members to keep
records of when a communication is used.
T. Rowe commented that members should be allowed to file retail
communications within 15 business days of first use, rather than 10
business days. FINRA disagrees with this recommendation since allowing
members to file 15 business days after the date of first use would
create too long a period between the first date a member distributes
its communication and the first date FINRA has an opportunity to review
the communication.
Proposed FINRA Rule 2210(c)(3)(A) requires a member that files a
retail communication that includes an investment company performance
ranking or comparison to include a copy of the ranking or comparison
used in the communication. T. Rowe recommended that members be allowed
to submit one performance ranking backup document and refer to that
document in future filings. FINRA does not agree with this comment,
since Department staff need the ranking or comparison used in a retail
communication when conducting their review, and reference to a ranking
document contained in a prior filing would slow the process.
Content Standards
General Comments
FINRA Rule 2210(d)(1)(F) in the Notice proposal generally
prohibited communications from predicting or projecting performance,
but permitted a hypothetical illustration of mathematical principles as
long as it does not predict or project performance. TD Ameritrade
commented that this provision should be revised to permit examples of
hypothetical transactions (such as the maximum gain or loss that would
occur based on an assumed change in market price), as long as the
assumptions are disclosed. FINRA does not believe the provisions should
be changed in this regard. If a hypothetical example is an illustration
of mathematical principles, it would be permitted. If, however, it is
really a projection of performance of a particular investment, FINRA
believes this practice should not be allowed.
FINRA does believe, however, that proposed paragraph (d)(1)(F)
needs to be clarified to indicate the circumstances under which a
projection of performance is permitted: in an investment analysis tool,
or a written report produced by such a tool, as permitted under
proposed FINRA Rule 2214, and a price target in a research report on
debt or equity securities, subject to certain conditions. FINRA has
revised proposed paragraph (d)(1)(F) to reflect these exceptions.
FINRA Rule 2210(d)(3)(B) in the Notice proposal required all retail
communications and correspondence to reflect any relationship between
the member and any non-member or individual who is also named. TD
Ameritrade recommended that this provision be revised to require such a
disclosure only where a relationship exists. FINRA believes no change
is necessary, since the paragraph requires a communication to ``reflect
any relationship between the member and any non-member or individual
who is also named.'' If no relationship exists, no disclosure is
required.
FINRA Rule 2210(d)(4)(C)(iii) in the Notice proposal provided that,
in a comparative illustration of the mathematical principles of tax-
deferred versus taxable compounding, the illustration may reflect an
actual state income tax rate, provided that the communication is used
only with investors that reside in the identified state. TD Ameritrade
commented that this provision should be revised to allow the use of an
actual state income tax rate as long as the material clearly discloses
that the rate only applies to residents of a particular state. FINRA
has revised this provision to allow illustrations to reflect an actual
state income tax rate if it prominently discloses that the illustration
is applicable only to investors that reside in the identified state.
FINRA also has revised the disclosure requirements in proposed
FINRA Rule 2210(d)(4)(vii) for such comparative illustrations.
Illustrations additionally must disclose the degree of risk in the
investment's assumed rate of return, including a statement that the
assumed rate of return is not guaranteed, and the possible effect of
investment losses on the relative advantage of the taxable versus tax-
deferred investments.
Disclosure of Expenses in Fund Performance Advertising
FINRA Rule 2210(d)(5) in the Notice proposal required retail
communications that present non-money market fund performance data to
disclose, among other things, the fund's maximum front-end or back-end
sales charges and total annual fund operating expense ratio, gross of
any fee waivers or expense reimbursements, as stated in the fee table
of the fund's prospectus or annual report, whichever is more current.
Currently NASD Rule 2210(d)(3) requires the sales charges and expense
ratio simply to reflect the current prospectus, and not a fund's annual
report.
Fidelity, the ICI and MBSC opposed the requirement to show the
expense ratio from either the prospectus or annual report, whichever is
more current. These commenters argued such a requirement would be too
burdensome and confusing to investors. American Funds argued that a
fund should be allowed to show current expenses based on a fund's
annualized monthly expense ratio, and not have to refer to the
[[Page 46886]]
prospectus. Vanguard supported the proposed change, but recommended
that the rule allow members to show the expense ratio from a fund's
prospectus if it reflects the fund's reasonable expectation of the
current year's expenses.
FINRA had made this proposed change based on earlier industry input
that members should be allowed to show expenses from an annual report
if it is more current than the prospectus. However, in light of
comments received on the Notice proposal and the importance for expense
disclosure to be comparable among funds, FINRA is retaining the
standard reflected in NASD Rule 2210(d)(3), and requiring sales charges
and expense ratios to reflect a fund's current prospectus.
The CAI requested confirmation that this disclosure requirement
does not apply to the presentation of performance of an underlying
investment option contained in a variable insurance product
communication. FINRA agrees the provision does not apply to such
communications.
FINRA Rule 2210(d)(5)(B) in the Notice proposal required a print
advertisement to disclose standardized performance and expense-related
information in a prominent text box. Fidelity, the ICI and MBSC
requested confirmation that this requirement only applies to print
advertisements and not other forms of retail communications, such as
Web sites. The ICI and MBSC also recommended that FINRA eliminate the
text box requirement and replace it with a prominence requirement
applicable to all retail communications.
Consistent with its application of NASD Rule 2210(d)(3), FINRA
confirms that the text box requirement only applies to print
advertisements. FINRA disagrees however, with the recommendation to
eliminate the text box requirement for print advertisements. FINRA
created this requirement due to past abuses in which non-standardized
performance was prominently displayed in print advertisements, while
disclosures regarding standardized performance and expenses were placed
in footnotes. FINRA believes that this requirement has helped to
prevent this kind of misleading presentation since the rule was
adopted.
Recommendations
FINRA Rule 2210(d)(7)(A) in the Notice proposal required retail
communications, correspondence and public appearances to contain
certain disclosures if the communication included a recommendation of
securities. The communication would have to disclose if the member was
making a market in the security (or an underlying option or future), if
the member or its associated person will sell or buy the security from
customers on a principal basis, that the member or any associated
person with the ability to influence the substance of the communication
has a financial interest in the recommended security, and if the member
was manager or co-manager of a public offering of any securities of the
recommended issuer in the past 12 months.
Cornell and PIABA both opposed limiting disclosures of financial
interests to the member and associated persons with the ability to
influence the substance of the communication. These commenters felt the
associated person standard was too narrow and vague. Fidelity
recommended that the disclosure standard for associated persons should
be limited to persons who are direct employees of the member or are
registered with the member, and who are directly and materially
involved in the preparation of the communication. Fidelity and Morgan
commented that disclosure should not be required unless an employee has
a direct and material financial interest in the recommended security.
This would exclude small investments and investments through mutual
funds.
Morgan, SIFMA and WilmerHale commented that it would be impossible
for a member to track which associated persons have the ability to
influence the substance of a communication, and that FINRA must provide
more guidance as to which associated persons the disclosure
requirements would apply. The FSI inquired as to whether the disclosure
standard would apply to a supervisor of a registered representative who
emails a securities recommendation to a customer. SIFMA commented that
the disclosure requirement should be limited to the member and its
officers and partners, and that the rule permit generic, non-specific
disclosures regarding financial interests, market making and
underwriting activities.
Morgan, SIFMA and WilmerHale commented that the provision not apply
to correspondence. WilmerHale also urged that the proposed rule exclude
retail communications and public appearances by research analysts,
since these situations are already covered by NASD Rule 2711.
In response to these comments, FINRA has revised proposed paragraph
(d)(7)(A). First, paragraph (d)(7)(A) no longer applies to
correspondence. Given that correspondence may not be delivered to more
than 25 retail investors within a 30-calendar-day period, FINRA
believes that it is not necessary to include the extensive disclosure
required for retail communications in communications sent to a more
limited audience.
Second, FINRA has added a requirement that a recommendation of
securities have a reasonable basis. This requirement is consistent with
NASD IM-2210-1(6)(A).
Third, FINRA has modified the requirement to disclose the financial
interests of any associated person with the ability to influence the
substance of the communication. Instead, the disclosure requirement
will apply to any associated person with the ability to influence the
``content'' of the communication. While this modification is minor,
FINRA believes that it will help clarify which associated persons must
disclose their financial interests. FINRA continues to believe that
persons who influence the content of a communication that includes a
recommendation have a material conflict of interest that should be
disclosed if the person also has a financial interest in the
recommended security.
Fourth, the disclosure requirement excludes financial interests
that are ``nominal.'' This revision makes the rule consistent with the
current disclosure requirements for advertisements and sales literature
that include securities recommendations under NASD IM 2210-1(6)(A)(ii).
Fifth, FINRA has excluded from this disclosure requirement public
appearances by research analysts, since they are already covered under
NASD Rule 2711. The proposed language also excludes research reports
for the same reason.
Proposed FINRA Rules 2210(d)(7)(C) revised the current disclosure
requirements for communications that contain past specific
recommendations.\86\ The revised provisions more closely reflect the
disclosure standards applicable to advertisements of investment
advisers that contain past specific recommendations. Wells Fargo
supported this change, but urged FINRA also to adopt the SEC's
interpretations of the Investment Advisers Act regarding
recommendations. While FINRA may look to past SEC interpretations of
its rules for guidance, FINRA declines to adopt any of the SEC
interpretations of the Investment Advisers Act regarding
[[Page 46887]]
recommendations for purposes of this filing.
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\86\ See NASD IM-2210-6(C) and (D).
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Other Comments
Fidelity, the ICI and Vanguard requested clarification as to
whether a member is responsible for content posted by third parties on
a member's Web site. These commenters also recommended that FINRA
develop interpretive guidance concerning the principles that members
should follow when developing communications intended for customers'
mobile electronic devices. For example, FINRA should address how
members may meet various disclosure requirements, such as the
requirement to disclose a member's name, fees, expenses and
standardized performance information.
FINRA previously addressed the issue of third-party content in
Regulatory Notice 10-06. FINRA also agrees that issues related to
communications intended for mobile electronic devices is important and
will consider further guidance or rulemaking as issues arise, but does
not believe this proposed rulemaking is the appropriate vehicle to
address all issues raised by new technologies. In the past, when FINRA
has reviewed a member's advertisement or sales literature that includes
a bond fund's 30-day yield, and the fund's affiliates have subsidized
or reimbursed the fund's expenses, FINRA staff has required the member
also to disclose the fund's yield that would have occurred had expenses
not been subsidized (the ``unsubsidized yield''). FINRA has imposed
this requirement based on language contained in the SEC's 1988 adopting
release for Rule 482 under the Securities Act.\87\ The ICI and T. Rowe
both objected to this requirement and requested that FINRA clarify that
disclosure of the unsubsidized yield is unnecessary in such
circumstances. Because this issue involves an interpretation of Rule
482 under the Securities Act, FINRA declines to provide guidance
through the proposed rule change.
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\87\ See Securities Act Release No. 6753 (February 2, 1988), 53
FR 3868 (February 10, 1988) (Order Approving File No. S7-23-86), p.
37.
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Public Appearances
Proposed FINRA Rule 2210(f) in the Notice proposal sets forth the
content and supervision requirements for members and associated persons
that participate in seminars, forums or radio or television interviews.
Paragraph (f)(1) specifies that the member or associated person must
follow the content standards of paragraph (d)(1), and if the member or
associated person recommends a security, paragraph (d)(7).
Fidelity, Invesco, the ICI and Morgan opposed requiring associated
persons that make recommendations in public appearances to meet the
content standards of paragraph (d)(7). These commenters argued that it
would be impossible to monitor or supervise. Invesco also argued that
this requirement creates an uneven playing field between broker-dealers
and investment advisers, since investment advisers do not have a
similar disclosure requirement.
FINRA disagrees with the comments that the disclosure requirements
regarding recommendations would be impossible to monitor or supervise.
Members that employ research analysts already must meet similar
requirements under NASD Rule 2711. Members could impose similar
policies and procedures for their associated persons who intend to
recommend securities in public appearances. The ICI requested
clarification that, if a member sponsors a seminar or forum, the member
is responsible only for its own presentation and not those of others.
This issue will be a matter of facts and circumstances, but generally a
member is only responsible for the communications of the member or its
associated persons, unless the member or its associated persons are
entangled with or adopt others' communications.
NPHI requested clarification as to whether a discussion of a
general product category constitutes a recommendation for purposes of
the public appearance disclosure requirements. If a member or
associated person merely discusses a general product category without
recommending a particular security, the disclosure requirements would
not apply. Similarly, T. Rowe asked whether the mere reference to a
security is a recommendation. Generally the mere reference to a
security is not a recommendation, but this issue will be a matter of
facts and circumstances.
Under NASD Rule 2210, ``public appearance'' is a separate category
of communications with the public.\88\ Proposed FINRA Rule 2210 does
not retain ``public appearance'' as a separate category of
``communications with the public.'' T. Rowe suggested that FINRA retain
its definition of ``public appearance,'' since otherwise an email to a
member of the media or private conversation might be viewed as a public
appearance. FINRA does not believe this is necessary. Proposed
paragraph (f)(1) makes clear that it applies only to ``a seminar,
forum, radio or television interview or * * * public appearances or
speaking activities * * *'' An email or private conversation would not
fall within this description.\89\ In addition, the language used to
describe a public appearance in proposed paragraph (f)(1) is similar to
the current definition of ``public appearance'' under NASD Rule
2210(a)(5).
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\88\ See NASD Rule 2210(a)(5).
\89\ Moreover, proposed paragraph (f)(1) expressly excludes
correspondence from the description of a public appearance.
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Proposed paragraph (f)(2) would require members to adopt written
procedures that are appropriate to a member's business, size,
structure, and customers to supervise its associated persons' public
appearances. The procedures must include, among other things,
surveillance and follow-up to ensure that such procedures are
implemented and adhered to. T. Rowe requested clarification as to what
level of surveillance and follow-up is required, particularly for one-
time appearances. T. Rowe also commented that there should be an
exception if a member approves appearances in advance. FINRA does not
believe it would be appropriate to pre-determine how a member must
supervise its associated persons' public appearances, since this will
vary depending on a member's business model, size, and the type of
public appearance involved. FINRA also does not agree that a member
should have no obligation to review public appearances after the fact
for compliance with applicable rules as long as it approves the
appearance in advance.
FINRA is making one additional change to the proposed paragraph (f)
in light of other changes to the proposed rule. Paragraph (f)(1) of the
Notice proposal also covered ``interactive electronic forums'' within
its description of a public appearance. To the extent participation in
an interactive electronic forum takes the form of a written
communication disseminated through an interactive Web site, FINRA
considers such a communication to be a retail communication rather than
a public appearance. However, as discussed above, proposed FINRA Rule
2210(b)(1)(D)(ii) allows a member to supervise and review retail
communications that are posted on online interactive electronic forums
in the same manner as required for supervising and reviewing
correspondence. Accordingly, FINRA has deleted ``(including an
interactive electronic forum)'' from proposed paragraph (f)(1).
[[Page 46888]]
Investment Analysis Tools
Proposed FINRA Rule 2214 of the Notice proposal codifies largely
without change current NASD IM-2210-6 (Requirements for the Use of
Investment Analysis Tools).\90\ Fidelity, the ICI, MBSC and T. Rowe
commented that Rule 2214 should be revised to allow members to present
projections of performance in retail communications even in cases where
the tool is not interactive with customers. These commenters argue that
a firm should be permitted to show projected performance of an
investment in a communication that is not based on information provided
by a customer independently or with the assistance of the member firm.
T. Rowe also commented that members should be allowed to use the data
generated by an investment analysis tool in sales material for target
date funds provided that these illustrations are limited to a
discussion of a fund's investment strategy and not used to project
performance.
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\90\ Certain of NASD IM-2210-6's text that appears either in the
Interpretive Material itself or in footnotes to the Interpretive
Material have been moved to Supplementary Material.
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FINRA disagrees with the comment that proposed Rule 2214 should be
revised to eliminate the requirement that an investment analysis tool
be interactive. The purpose of NASD IM-2210-6 and proposed FINRA Rule
2214 is to allow members to use interactive tools with customers to
show the likelihood of various investment outcomes under different
scenarios, thereby serving as an additional resource to investors to
evaluate their specific investment choices. It is not to allow the use
of performance projections in retail communications in all
circumstances as long as an investment analysis tool is used to create
the projections. In the case of retail communications concerning target
date funds that do not include projections, reliance on the proposed
rule is unnecessary, since it only applies to retail communications
that contain projections.
Supplementary Material 2214.06 provides that a retail communication
that contains only an incidental reference to an investment analysis
tool need not include the disclosures required by the proposed rule and
would not need to be filed with the Department. Vanguard commented that
proposed Rule 2214 should be revised to allow members not to include
all of the proposed rule's required disclosures as long as the
communication does not include the tool itself or any data or results
produced by the tool.
FINRA agrees that, under these circumstances, some of the proposed
rule's required disclosures, such as those required by paragraph (c)(1)
(a description of the tool's methodology) or paragraph (c)(3) (certain
disclosures in situations in which the tool analyzes only a limited
range of investments), are unnecessary. FINRA believes however, that a
retail communication that refers to an investment analysis tool in more
detail than an incidental reference but does not provide access to the
tool or the results generated by the tool must disclose that results
may vary with each use (as required by paragraph (c)(2)) and the
warning required by paragraph (c)(4) that the projections generated by
the tool are hypothetical and are not guarantees of future results.
FINRA has revised proposed Rule 2214.06 accordingly.
Security Futures
Proposed FINRA Rule 2215 (Guidelines for Communications with the
Public Regarding Security Futures) is the successor to current NASD IM-
2210-7. TD Ameritrade commented that paragraph (b)(1)(A)(iii), which
prohibits projections of performance in communications used prior to
the delivery of a security futures risk disclosure statement, should be
modified to permit examples of hypothetical transactions. This comment
is similar to another TD Ameritrade comment on proposed FINRA Rule
2210(d)(1)(F) (which also prohibits performance projections), and
FINRA's response is the same as discussed above.
Proposed paragraph (b)(2)(A)(iv) requires any communication
concerning a security future to include a statement that supporting
documentation for any claims, comparisons, recommendations, statistics
or other technical data will be supplied upon request. TD Ameritrade
commented that FINRA should clarify that this disclosure requirement
only applies if a communication actually includes a claim, comparison,
recommendation, statistics or other technical data. While this issue
will be a matter of facts and circumstances, FINRA agrees that no such
disclosure would be required if a communication does not contain any
statement or data that requires supporting documentation.
Transition Period
Fidelity, Invesco and NPHI requested that FINRA allow members at
least six months before having to comply with the new rules. The ICI
suggested a compliance date of 10 business days after the second
quarter ending following adoption of the final rule changes. PSD
requested nine months' lead time, and suggested that members should be
permitted to ``grandfather'' and continue to use communications that
were filed under the current rules. Alternatively, members should have
a minimum of two years from the date the new rules become effective to
continue to use communications filed under the existing rules.
FINRA plans on publishing a Regulatory Notice no later than 90 days
following SEC approval of the rule changes. The implementation date
will be no later than 365 days following SEC approval. In establishing
the implementation schedule, FINRA will consider members' need to adopt
and implement new policies and procedures necessary to comply with the
new rules.
In most cases, FINRA expects that communications that are in
compliance with the current communication rules will continue to be in
compliance with the new rules, and thus ``grandfathering'' of past
filed material will be unnecessary. To the extent a member has
questions about whether a previously filed communication continues to
be compliant under the new rules, the member should discuss this issue
with its assigned Department advertising analyst.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File
[[Page 46889]]
Number SR-FINRA-2011-035 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2011-035. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for Web site
viewing and printing in the Commission's Public Reference Room, 100 F
Street, NE., Washington, DC 20549, on official business days between
the hours of 10 a.m. and 3 p.m. Copies of such filing also will be
available for inspection and copying at the principal office of FINRA.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-FINRA-2011-035
and should be submitted on or before August 24, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\91\
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\91\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-19645 Filed 8-2-11; 8:45 am]
BILLING CODE 8011-01-P