On Dec. 20, 2007, the SEC issued for comment 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. 34-57010; available at http://www.sec.gov/rules/sro/finra/2007/34-57010.pdf. The primary effect of the proposal would be 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 the proposal are summarized below.


Before becoming effective, the proposed FINRA rule change must be approved by the SEC, following publication for public comment in the Federal Register. Comments on the proposal are due to the SEC no later than 21 days following publication of the Release in the Federal Register (publication expected during the first week of January 2008). If the proposal is approved by the SEC, FINRA will announce the effective date of the proposed rule change in a Regulatory Notice to be published no later than 60 days following SEC approval. The effective date will be the date FINRA publishes the Regulatory Notice announcing SEC approval.


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 also currently require 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 is not required to re-file the sales material with the Department if it is 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 currently are subjected to this re-approval process.

The Proposals

In order to eliminate what FINRA regards as a "compliance redundancy," it is proposing to amend Rule 2210 to create an exception to the principal approval requirements for intermediary firms that use the sales material of another firm. The exception would apply 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 proposed exception would 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 could 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 upon the 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 would apply 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, the proposal would allow them to do so. Note also that the proposed 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 proposed rule change would also clarify 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 proposal would revise the rule to codify this position.