On Feb. 1, 2008, the SEC approved a proposal by FINRA (f/k/a NASD) to create an exception from the principal approval requirements for certain previously filed sales material. Rel. No. 34-57257; available at http://www.sec.gov/rules/sro/finra/2008/34-57257.pdf. The primary effect of this action is to relieve intermediary broker-dealer firms from having to re-approve certain mutual fund and variable insurance product sales materials that have already been approved, and filed with FINRA, by the fund's or variable product's underwriter. Highlights of this action are summarized below.
FINRA is expected to announce the effective date of the rule change in a Regulatory Notice, to be published within 60 days.
NASD Rule 2210 (Communications with the Public) requires that a registered principal of a FINRA member firm approve in writing all advertisements, sales literature, and independently prepared reprints (collectively, “sales material”) prior to use. In addition, certain types of sales material, such as advertisements and sales literature concerning mutual funds or variable insurance products, must be filed with the FINRA Advertising Regulation Department (Department). A registered principal at the fund’s or variable product’s underwriter typically approves sales material internally and files the material with the Department. Where funds and variable products are sold through intermediary firms, FINRA rules had also required registered principals at each intermediary firm that uses the underwriter’s sales material to re-approve in writing each of these items used by their firms. (However, the intermediary firm was not required to re-file the sales material with the Department if it was used without material change.) Because intermediary firms have selling agreements with multiple fund families and insurance companies (and vice versa), a very large number of items were subjected to this re-approval process.
The Rule Amendment
In order to eliminate what FINRA regards as a "compliance redundancy," it is amending Rule 2210 to create an exception to the principal approval requirements for intermediary firms that use the sales material of another firm. The exception applies only to sales material that another firm has filed with the Department, and for which the Department has issued a review letter indicating that the material "appears to be consistent with applicable standards."
An intermediary firm that relies on the exception will have to keep a record of the name of the firm that filed the sales material and a copy of the related FINRA review letter. In addition, the intermediary firm may not materially alter the sales material or use it in a manner that is inconsistent with any conditions stated in the Department’s review letter. For example, if the Department’s review letter was based in part on a representation by the filing firm that the sales material would be accompanied by a fund prospectus, the intermediary firm would be subject to this constraint.
Although FINRA anticipates that firms will use the exception primarily with respect to mutual fund and variable insurance product sales material, the exception is not limited to sales material for these products. Thus, the exception also applies to sales material for other products, such as real estate investment trusts or direct participation programs, provided the requirements are met. In addition, to the extent some firms might want to continue to review this sales material, they are free to do so. Note also that the rule change would not affect any relevant contractual obligations that exist between underwriters and intermediary firms, such as might be contained in dealer agreements between those parties.
Finally, the rule change also clarifies advertising recordkeeping requirements. Currently, Rule 2210(b)(2)(A) states that firms must maintain a copy of all sales material for a period of three years from the date of last use. Existing practice has been to assume that the recordkeeping requirement begins on the date of first use, and the the rule is being revised to codify this position.