On March 10, 2014, FINRA filed with the SEC proposed amendments to its communication rules.3 Among other items, the proposal relates to the filing and content requirements for retail communications relating to structured products.4
Rule 2210, as amended effective February 2013, requires broker-dealers to file with FINRA “retail communications” concerning registered structured products. Rule 2210(c)(7)(F) exempted from this requirement prospectuses, preliminary prospectuses, offering circulars and similar documents that are filed by the issuer with the SEC.
Many market participants found Rule 2210’s filing requirements somewhat ambiguous as to the filing requirements for free writing prospectuses (FWPs) that are exempt from filing with the SEC under Rule 433. The most widely used of these types of documents are preliminary (or summary) “term sheets,” which are often provided to investors along with the longer red herring; these documents were typically not filed with the SEC, due to Rule 433(d)(5)(i). Since they were not filed with the SEC, they appeared to require filing with FINRA under the text of the rule. As a result, many brokers began to file these types of documents with FINRA; alternatively, a variety of issuers began to file them with the SEC, notwithstanding the exemption from Rule 433’s filing requirement, in order to benefit from the exemption from FINRA filing under Rule 2210(c)(7)(F).
In the proposed rule amendments, FINRA indicated that it intended the exclusions from its filing requirements to cover both prospectuses filed with the SEC and FWPs that are exempt from filing. However, the rules will continue to require broker-dealers to file FWPs with FINRA that are filed with the SEC under Rule 433(d)(1)(ii)—this provision applies to underwriter FWPs that are made available on a broad unrestricted basis, such as a website.
In addition, the proposed amendment clarifies that an FWP that is exempt from filing with the SEC under Rule 433 is not subject to FINRA’s content standards. However, we do not expect FWP disclosures to change significantly as a result of this clarification. These documents, if they contain material misstatements or omissions, can still result in liability under the federal securities laws. Accordingly, market participants will continue to carefully review their content, and whether they are appropriate for the target audience.
At an appearance in a December 2013 conference, FINRA representatives noted that, as a result of the Rule 2210 filing requirements, it had received more than 800 communications for review.5 FINRA indicated that it had issued comments on approximately 80% of these filings. Many of these were preliminary term sheets, filed with FINRA due to the uncertainties noted above. (Many of these filings also may have been somewhat repetitive, as they could relate to similar offerings that were made on a weekly or monthly basis.) As a result of the FINRA comment process, many market participants have had an opportunity to learn more about FINRA’s views as to structured product disclosures, and to make a variety of revisions to their documents to address these views.
FINRA indicated in its proposal that, if the SEC approves the proposals, FINRA will announce the effective date in a Regulatory Notice published within 60 days of the approval. The effective date will be no later than 30 days after that Regulatory Notice.