Recently, the Financial Industry Regulatory Authority (FINRA) filed with the Securities and Exchange Commission (SEC) a proposal to adopt new rules governing FINRA member firms’ communications with the public (the Proposal).1 The Proposal would modify current National Association of Securities Dealers (NASD) rules and guidance, at the same time streamlining those rules.
Proposed FINRA Rule 2210 would replace current NASD Rules 2210 and 2211, certain Interpretive Materials that follow NASD Rule 2210 and portions of Incorporated New York Stock Exchange Rule 472. Each of the other Interpretive Materials that follow NASD Rule 2210 would be replaced by proposed FINRA Rules 2212 through 2216 and would adopt the same communication categories used in proposed FINRA Rule 2210. FINRA originally published the proposed rules in Regulatory Notice 09-55 in September 2009, and has now issued this Proposal amending the proposed rules based on input from comment letters on the original proposal.
The Proposal was published in the Federal Register Aug. 3, 2011, and the comment period for submissions to the SEC will end Aug. 24, 2011. FINRA member firms are encouraged to review the proposed rule changes in order to consider how they might adapt their current procedures to the modified review, approval and filing requirements. They might also consider submitting comments to the SEC on the Proposal.
Communication categories, which are included under proposed FINRA Rule 2210, are important because approval, filing and content standards may apply differently depending upon the category within which a communication falls. Under current NASD rules, there are six categories of communications: advertisements, sales literature, correspondence, institutional sales material, independently prepared reprints and public appearances. Proposed FINRA Rule 2210 would reduce the number of categories to three — retail communication, institutional communication and correspondence — incorporating advertisements, sales literature and public appearances within the definition of retail communication. The three categories are defined as follows:
- Institutional Communication would include communications that fall within the current NASD Rule definition of institutional sales material, which includes written and electronic communications that are distributed or made available only to institutional investors. “Institutional investors” are defined under NASD Rule 2211(a)(3), and this definition would be modified only to clarify that the term includes multiple employee benefit plans and multiple qualified plans offered to employees of the same employer, provided the plans have at least 100 participants in the aggregate.
The Proposal also clarifies that a FINRA member firm’s internal written and electronic educational or training communications to registered persons regarding the firm’s products or services would be institutional communications under proposed FINRA Rule 2210.
- Retail Communication would include written or electronic communications that are distributed or made available to more than 25 retail investors within any 30 calendar-day period. “Retail investor” would include any person other than an institutional investor, regardless of whether the person is an existing or prospective customer. Communications currently categorized under NASD Rules as advertisements, sales literature and public appearances generally would fall within the definition of retail communication under the Proposal. Also, independently prepared reprints that are distributed or made available to more than 25 retail investors would fall within the definition of retail communication.
- Correspondence would include any written or electronic communications that are distributed or made available to 25 or fewer retail investors within any 30 calendar-day period. This category corresponds generally to the same category under the existing NASD Rule. Current NASD Rule 2211 includes market letters within the definition of correspondence; however, under the Proposal, all communications sent to more than 25 retail investors within a 30 calendar-day period would be retail communications. Consequently, FINRA revised the principal approval requirements in the Proposal to allow member firms to supervise retail communications that are excepted from the definition of research report (NASD Rule 2711(a)(9)(A)) (e.g., market letters) as though they were correspondence.
Approval, Review and Recordkeeping Requirements
The Proposal would modify approval and review standards for retail communications, while maintaining the current standards for correspondence and institutional communications, which do not require pre-use principal approval.
Proposed FINRA Rule 2210(b) would require a principal to approve each retail communication before its use or filing with FINRA, whichever is earlier. Consistent with current exceptions, principal approval would not be required for retail communications that: a) are excepted from the definition of research report (see above); b) are posted to an online interactive electronic forum; or c) do not make a financial or investment recommendation or promote the member’s products or services. This last exception applies to what the Proposal calls “administrative or informational” correspondence. The proposed rule would include a provision giving FINRA the power to grant exemptions from the preuse principal approval requirement for the stated purpose of allowing flexibility due to changes in technology.
The principal charged with approving retail communications should be an “appropriately qualified registered principal,” according to the Proposal. Commenters had requested more specific guidance as to which principals should review communications. FINRA responded by indicating that member firms should determine the appropriate principal by reference to current registration rules for principals and supervisors (NASD Rules 1020 et seq.).
The Proposal would incorporate the recordkeeping requirements of Rule 17a-4 under the Securities Exchange Act of 1934 for retail and institutional communications and would maintain the current requirements for correspondence contained in NASD Rule 3010(d)(3) and FINRA Rule 4511.
Filing Requirements and Review Procedures
Proposed FINRA Rule 2210(c), regarding filing requirements for communications, generally would follow current NASD Rule 2210(c), but with several important changes.
The Proposal would expand the rule, which currently requires pre-use filing of advertisements and sales literature concerning specified types of securities or issuers, to require pre-use filing, 10 business days prior to use, of all retail communications concerning those same specified securities or issues. For example, pre-use filing would be required for retail communications concerning any registered investment company if those communications include self-rankings or bond mutual fund volatility ratings. Further, those communications may not be used until such time that changes specified by FINRA have been incorporated.
Other investment company retail communications would be subject to post-use filing requirements. The post-use filing requirements would remain largely the same, although they would be expanded to require filing, within 10 business days of use, all retail communications concerning specified securities and issuers. Also, communications regarding CMOs would need to be filed within 10 business days of use, rather than prior to use as is currently required.
The Proposal would require pre-use filing, 10 business days prior to use, of communications that are used in electronic or public media (e.g., those communications that currently fall within the definition of “advertisements”) for a one-year period for each new member firm, beginning on the effective date of FINRA registration. Under current rules, new FINRA member firms are required to pre-file advertisements for a period of one year from the date of the filing of the first advertisement.
Current exclusions from filing would remain. Additionally, the proposed rules would codify an 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.
Finally, the Proposal would give FINRA the power to grant exemptions from the filing requirements upon a showing of good cause.