In February 2013, FINRA’s new rules relating to communications with the public became effective.1 These new rules have affected distributors who purchase and sell structured products from one another in connection with their initial distribution. As a result, in this article, we set forth a number of potential revisions to “selected dealer agreements” and similar documents that market participants may wish to consider in light of these new rules.2
Addressing FINRA Filing Requirements. In some offerings of structured notes, the underwriter may furnish free writing prospectuses to distributors that are intended to be provided to the distributor’s investors. Rule 2210(c)(3)(E) requires the filing with FINRA of certain free writing prospectuses relating to structured notes. Rule 2210(c)(7)(A) sets forth an exemption from filing where the relevant materials have been previously filed with FINRA.
In order to ensure that broker-dealers are aware of which materials have been filed, and which must be filed, distributors may request that underwriters advise them when a filing is necessary. A model provision could be:
If the [Underwriter] provides to the [Distributor] any free writing prospectus that would be required to be filed with FINRA pursuant to FINRA Rule 2210(c)(3)(E), then at the time it is so provided, [Underwriter] shall advise the distributor whether it has filed the free writing prospectus.3
If the underwriter does not intend to file these materials with FINRA (for example, because it does not intend to furnish them to retail investors), it may wish to add a provision to the effect of:
The [Distributor] acknowledges and agrees that the [Underwriter] has no intention or obligation to file any free writing prospectus under FINRA Rule 2210(c)(3), and the [Distributor] shall be responsible for any such required filing.
Content Requirements. Revised FINRA Rule 2210(d) sets forth the content requirements for retail communications. Among other things, it requires member communications to be based on principles of fair dealing and good faith, to be fair and balanced, and to provide a sound basis for evaluating the facts in regard to any particular security. Underwriters may seek representations from distributors that any materials that the distributor prepares4 conform with these requirements. Such documents are also subject to the principal review and record retention requirements of FINRA Rule 2210(b)(1) and (b)(4). A provision could be set forth as:
Any materials prepared by the [Distributor] in accordance with this Section __ shall conform to the requirements of FINRA Rule 2210(d). [Distributor] shall be responsible for ensuring that the principal approval and record retention requirements of FINRA Rule 2210(b)(1) and (b)(4) are satisfied with respect to such materials.
Avoiding Unplanned Retail Communications. Underwriters sometimes provide materials to distributors about structured products that are not intended for distribution to investors. Such materials may include, for example, more detailed explanations of a product and its use. FINRA Rule 2210(a)(4) provides that members may not treat communications as institutional communications if they have “reason to believe” that the communication will be forwarded to retail customers.
In order to help bolster an underwriter’s position that it satisfied this standard in connection with any materials, it may consider adding a provision to its agreements along the following lines:
[Distributor] shall not provide any written materials, whether in paper or electronic form (or any excerpt thereof), to any investors if the [Underwriter] has advised the [Distributor] through the use of legends, written instruction or otherwise that such materials are not intended to be so provided.
If an underwriter becomes aware that a recipient distributor is forwarding communications to retail investors, the firm must treat future communications with that distributor as retail communications until it reasonably concludes that the forwarding practice has ceased. In order to enable the underwriter to be aware of these circumstances, a provision could be set forth as follows:
If the [Distributor] or any of its employees has provided any materials of the type referred to in [the prior sentence] to any “retail investor” (as defined in FINRA Rule 2210(a)), it shall promptly cease doing so, and advise the [Underwriter] in reasonable detail of the circumstances under which such materials were provided.
Institutional Communications. Under the new rules, “institutional communications” must be subject to written procedures that address training and other issues relating to their preparation. They are also subject to record retention requirements. Accordingly, underwriters may wish to add relevant provisions to their agreements. A model provision could read:
If the [Distributor] prepares and distributes any institutional communications (as defined in FINRA Rule 2210(a)) with respect to the [Securities], it shall do so pursuant to written procedures that comply with FINRA Rule 2210(b)(3), and shall maintain such communications in accordance with FINRA Rule 2210(b)(4).
Correspondence. The new FINRA rules define “correspondence” as any written (including electronic) communication that is distributed or made available to 25 or fewer retail investors within a 30 calendar-day period. These documents are also subject to a supervisory review process and record retention requirements. Accordingly, underwriters may wish to add relevant provisions to their agreements. A model provision could read:
If the [Distributor] prepares and distributes any correspondence (as defined in FINRA Rule 2210(a)) with respect to the Securities, it shall do so pursuant to written procedures that comply with FINRA Rule 3010(d), and shall maintain such communications in accordance with FINRA Rule 3010(d)(3) and FINRA Rule 4511.
Relevant Agreement Forms. The new FINRA communication rules, other than the filing requirements, apply to structured products that are not registered securities. Accordingly, to the extent that an underwriter maintains several forms of distribution agreements, such as for structured certificates of deposit,5 the provisions above (other than those relating to FINRA filings) may be considered for those forms as well.