FINRA has proposed 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.
FINRA Rule 2210 would reduce the number of communication categories to the following:
- Institutional Communication would include communications that fall under the current definition of “institutional sales material,” i.e., communications that are distributed or made available only to “institutional investors.”
- Retail Communication would include any written (including electronic) communication that is distributed or made available to more than 25 retail investors. “Retail investor” would include any person other than an institutional investor, regardless of whether the person is an existing or prospective customer. The current categories of “advertisements” and “sales literature” would fall under Retail Communication.
- Correspondence would include any written (including electronic) communication that is distributed or made available to 25 or fewer retail investors, regardless of whether they are existing or prospective customers.
Approval, Review and Recordkeeping Requirements
Proposed FINRA Rule 2210(b) would require a registered principal to approve each retail communication before the earlier of its use or filing with FINRA. The proposal would maintain the current supervision and review standards for correspondence and institutional communications.
The rule would incorporate the recordkeeping requirements of Rule 17a-4 under the 1934 Act for retail and institutional communications and maintain the current requirements for correspondence.
Filing Requirements and Review Procedures
FINRA Rule 2210(c) generally incorporates the same filing requirements as NASD Rule 2210(c), subject to certain changes. For example, the proposal would require new firms to file, 10 business days prior to use, any retail communication prior to use for a one-year period beginning on the effective date of FINRA registration. Firms would also have to file, 10 business days prior to use, all retail communications concerning: (1) any registered investment company that includes self-rankings or bond mutual fund volatility ratings, and withhold them from use until making any changes specified by FINRA, and (2) closed-end funds, including those distributed after the fund’s initial public offering.
The current exclusions from filing would remain, with an added exclusion for retail communications based on templates previously filed with FINRA, so long as the changes are limited to updates of more recent statistical or other non-narrative information. The rule would also exclude retail communications that are solely administrative in nature and streamline the exclusion for independently prepared reprints (which would include investment company research reports).
FINRA Rule 2210(d) would reorganize, but largely incorporate, current content standards. The changes would include: (1) clarifying that the standards for comparative illustrations of tax-deferred versus taxable compounding apply whether the illustration appears in a communication promoting variable insurance products or some other communication, such as one discussing the benefits of investing through a retirement plan or account; (2) requiring disclosure for retail communications and correspondence that present mutual fund performance data of the maximum sales charge and total operating expense ratio based on the fund’s prospectus or annual report, whichever is more current as of the date of publication or submission for publication; (3) modifying disclosure requirements for retail communications and correspondence that include past recommendations to mirror Rule 206(4)-1(a)(2) of the Advisers Act; and (4) requiring the same disclosure from persons who recommend securities in public appearances as research analysts who recommend securities in public appearances.
Use of Investment Company Rankings in Retail Communications
FINRA Rule 2212 would apply the current requirements to all retail communications and exclude reprints or excerpts of certain articles or reports.
Requirements for the Use of Investment Analysis Tools
The requirements would remain the same and appear in FINRA Rule 2214.
A copy of the FINRA Regulatory Notice is available at http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p120005.pdf.