In May 2015, FINRA issued Regulatory Notices 15-16 and 15-17, both relating to Rule 2210, Communications with the Public. The notices are a result of FINRA’s retrospective review of Rule 2210.1 Notice 15-16 contains a number of proposed amendments to Rule 2210.2 Notice 15-17 provides additional guidance, in the form of nine new Rule 2210 FAQs.3 The proposed amendments and the new FAQs cover a number of areas, a few of which are of particular interest to member firms selling structured products.
Proposed Amendments Designed to Broaden Exclusions from the Filing Requirements
Current Rule 2210(c)(1)(A) requires new member firms to file with the FINRA advertising department any retail publication that is published or used in any electronic or other media at least 10 business days prior to first use. A proposed amendment responds to concerns that FINRA reviews of member firms’ websites unnecessarily delay firms’ abilities to communicate with the public, without providing any counterbalancing investor benefit. The proposed amendment would require the filing of a firm’s website and material changes to the website within 10 business days after first use during the one-year period after the firm’s registration with FINRA’s Central Registration Depository system.
Under the current rule, once a firm files a retail communication based on a template, no further filing is required when the template is updated for new statistical or other non-narrative information. The proposed amendments would broaden the filing exclusion to cover updated non-predictive narrative descriptions of market events during the period covered by the communication, and factual descriptions of portfolio changes.
The other proposed amendments relate to registered investment companies, including:
- Excluding from the filing requirements investment company shareholder reports that have been filed with the Securities and Exchange Commission;
- Eliminating the requirement to file ranking and comparison backup material for retail communications that contain a fund’s performance ranking or performance comparison, and instead requiring firms to maintain backup materials as part of their records;
- Excluding from the filing requirements generic investment company retail communications that do not promote a particular fund or fund family, instead requiring the filing of retail communications that promote or recommend a specific registered investment company or family of registered investment companies; and
- Eliminating the filing requirements for investment company analysis tool report templates and retail communications concerning those tools.
The comment period expires on July 2, 2015.
Additional Guidance on Communications: New FINRA FAQs
Institutional Communications. Some structured product dealers provide institutional-only communications to other dealers, but do not necessarily have full control over any subsequent distribution of those communications by the third- party dealer. Accordingly, they may be reluctant to use these materials without assurances from the other dealer that the materials will not be distributed to retail investors. The new FAQ clarifies that institutional communications that are adequately labeled as such may be assumed to be distributed only to institutional investors, absent knowledge to the contrary by the member firm. A member firm may reasonably rely on a legend to the effect that the communication is for institutional use only. The advice in this new FAQ expands on the “reason to believe” standard expressed in Rule 2210(a)(4)4 and reiterates the advice previously given by FINRA relating to procedures designed to prevent institutional communications from being forwarded to retail investors.5 The FAQ provides a bit more comfort to broker-dealers who distribute materials of this kind to third parties.
Social Media. FINRA’s new FAQ also restated earlier guidance stating that posts on the interactive electronic forum portions of social media sites are excepted from the principal pre-use and filing requirements of Rule 2210. We note that the exception is predicated on a firm supervising such communications as they would correspondence under Rule 3110(b).6
FINRA is expected to release additional proposals arising from its review of the communications rules. Some of these are likely to relate to structured product offerings, including the long-awaited clarification of the use of “backtested” data in connection with proprietary indices and other newer market measures.