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SEC Approves FINRA Proposal to Consolidate and Amend NASD and NYSE Communications Rules and Interpretations

On March 29, 2012, the SEC issued a release approving a FINRA proposal to adopt NASD Rule 2210 and 2211, and related interpretive materials, as FINRA Rules 2210 and 2212 through 2216, and to delete portions of NYSE Rule 472 and related supplementary materials.  The newly adopted FINRA rules are:

  • 2210 – Communications with the Public
  • 2212 – Use of Investment Companies Rankings in Retail Communications
  • 2213 – Requirements for the Use of Bond Mutual Fund Volatility Ratings
  • 2214 – Requirements for the Use of Investment Analysis Tools
  • 2215 – Communications with the Public Regarding Security Futures
  • 2216 – Communications with the Public about Collateralized Mortgage Obligations

The text of the new FINRA rules and related supplementary materials (collectively, the “New Rules”) is available in SR-FINRA-2011-035.

BACKGROUND

NASD Rules 2210 and 2211, and the interpretive materials following Rule 2210, govern FINRA members’ communications with the public, other than communications concerning options, which are governed by FINRA Rule 2220.  NYSE Rule 472, as incorporated into the FINRA rulebook following the merger of the NASD and NYSE regulatory operations, governs communications with the public of FINRA members that are also members of the NYSE.

CATEGORIES OF COMMUNICATIONS – REDUCTION IN NUMBER AND REDEFINITION

A significant change made by the New Rules is to redefine certain types of communications.  Prior to the New Rules, communications have been classified into the following categories: advertisement; sales literature; correspondence; institutional sales material; public appearance; and independently prepared reprint, with each category subject to different procedures.  The definitions of advertisement and sales literature have over time taken on meanings that may not be obvious from their plain language.  A key difference between advertisements and sales literature is that advertisements are materials made available to the public, while sales literature is material that is made available only to customers.  Thus, material available on a password-protected area of a member firm’s website could be treated as sales material.

Under FINRA Rule 2210, the categories of communications are reduced to the following three:

  • Correspondence – any written communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period;
  • Retail communication – any written communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period; and
  • Institutional communication – any written communication that is distributed or made available only to institutional investors, but does not include a member’s internal communications used to train or educated registered persons about the products or services of the member.

“Written communications” are defined to include electronic communications.  “Institutional investor” is generally defined under FINRA Rule 2210 as in NASD Rule 2211, and includes registered investment companies, insurance companies, banks, registered broker-dealers, registered investment advisers and other entities and natural persons with at least $50 million in assets, and also certain persons acting solely on behalf of an institutional investor.

CHANGES TO FILING REQUIREMENTS

FINRA Rule 2210, which is summarized below, reflects existing filing requirements for communications with certain changes and additions.

First Year Filing.  For its first year after becoming a FINRA member, a firm must file with FINRA, at least 10 business days before first use, all retail communications intended to be published or used in publicly available media, except for broker-prepared free writing prospectuses, which may be filed within 10 business days of first use.  Under the current rule, the one-year period does not begin to run until a member firm first seeks to use an advertisement, even if the firm has been a member for months or years before first using an advertisement.  FINRA Rule 2210 preserves FINRA’s authority to determine that a member should be required, based on its prior filing experience, to continue to make pre-use filings after the first year. 

Pre-Use Filing.  Pre-use filing will be required for retail communications (1) concerning registered investment companies that include self-created rankings; (2) concerning security futures (unless submitted to another self-regulatory organization); and (3) including bond mutual fund volatility rankings.  Communications concerning collateralized mortgage obligations (“CMOs”) will have to be filed within 10 business days after first use, rather than prior to first use as currently required. 

Filing After First Use. The following materials will have to be filed within 10 business days after first use:

  • All retail communications concerning registered investment companies not subject to the first year or pre-use filing requirements;
  • Retail communications concerning, or written reports produced by, an investment analysis tool;
  • Retail communications concerning registered CMOs; and
  • Retail communications concerning structured products, such as equity- or index-linked notes.

FINRA Rule 2210 also codifies prior FINRA guidance by modifying the exclusion from filing available for prospectuses filed with the SEC or any state to expressly provide that free writing prospectuses filed with the SEC pursuant to Rule 433(d)(1)(ii) under the Securities Act of 1933 (the “Securities Act”) are not within the exclusion.  In addition, retail communications that are posted on an online interactive electronic forum and press releases issued by closed-end investment companies that are listed on the NYSE pursuant to section 202.06 of the NYSE Listed Company Manual are excluded from the filing requirements.

PROHIBITIONS ON PROJECTIONS

FINRA Rule 2210 maintains the current prohibition in the content standards against communications predicting or projecting performance, implying that past performance will recur or making any exaggerated or unwarranted claim, opinion or forecast.  As in the current rule, hypothetical illustrations of mathematical provisions will be permitted, providing that they do not predict or project the performance of an investment or investment strategy.  Rule 2210 clarifies that FINRA allows two additional types of projections of performance in communications with the public:  (1) projections of performance in reports produced by investment analysis tools otherwise meeting the requirements of the rules and (2) price targets in research reports on debt or equity securities.

The content standards of FINRA Rule 2210 do not apply to prospectuses, preliminary prospectuses, fund profiles and similar documents that have been filed with the SEC, but do apply to investment company prospectus published pursuant to Securities Act Rule 482 and a free writing prospectus filed with the SEC pursuant to Securities Act Rule 433(d)(1)(ii).

IMPLEMENTATION DATE

FINRA has advised the SEC that it intends to publish a regulatory notice by 90 days following SEC approval of the rule changes, or by June 27, 2012, and that the implementation date for the New Rules will be no later than 365 days following SEC approval, or by March 29, 2013, in order to afford member firms time to alter their internal policies and procedures in response to the requirements of the New Rules.

REQUEST FOR COMMENTS

The SEC has requested public comment on its approval of the New Rules.  Comments may be submitted no later than April 25, 2012.

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