The Securities and Exchange Commission ("SEC") recently approved the Financial Industry Regulatory Authority's ("FINRA") proposed revisions to its rules on Communications with the Public.1 The new rules, which become effective on February 4, 2013, are a comprehensive reworking of the approval, filing and content requirements, particularly as to retail communications. The new rules are quite detailed and provide some significant change from the existing rules. We have prepared an attached guide as a tool to assist broker-dealers in understanding and complying with these rules.
Reorganization of Rules and Categories of Communications
New FINRA Rule 2210 will replace the current NASD Rules 2210 and 2211, and various Interpretive Materials will be replaced by FINRA Rules 2212 through 2216, except for IM-2210-2, which is the guidance for Communications with the Public About Variable Life Insurance and Variable Annuities.
The new rules streamline the categories of communications from six to three. The current categories of: advertisements, sales literature, correspondence, institutional sales material, independently prepared reprints, and public appearances will be replaced by three: (i) Correspondence, (ii) Retail Communications, and (iii) Institutional Communications. These categories, as well as the definitions of "retail investor" and "institutional investor," are described on Exhibit A. FINRA now has clarified that internal communications are not covered by the Communications with the Public rule, even though they were considered covered by prior interpretations of NASD 2210.2 However, firms still must supervise these internal communications, including those that train or educate registered representatives under NASD Rule 3010 to ensure compliance with suitability requirements and general just and equitable principles of trade, and that internal trading and education materials are fair and balanced. 3
Approval and Review
FINRA Rule 2210(b)(1)(A) will now require that an "appropriately qualified registered principal of the member must approve each retail communication before the earlier of its use or filing with FINRA's Advertising Regulation Department." A Series 16 supervisory analyst can approve research reports on
debt and equity securities, as well as certain research-related retail communications.4 Certain categories of communications are excluded from the preapproval requirement.5 The approval requirements and the exceptions are set forth in Exhibit B-1 and B-2.
Under FINRA Rule 2210, members must maintain all retail communications and institutional communications for a time and in a manner consistent with existing SEC Rule 17a-4.6 The copy of the communications and the dates of first and last use is required, as is the name of the registered principal who approved, or if not approved prior to first use, the name of the preparer or distributor of the communication. If the broker dealer is relying on the exception that another firm has already received FINRA approval (FINRA Rule 2210(B)(1)(C)), the broker dealer must retain a copy of the FINRA approval letter. Firms also have to maintain a record of the source of any statistical table, chart, graph or other illustration used in the communication.
For all FINRA members, certain types of retail communications have to be filed with FINRA at least 10 business days prior to first use. The member may not publish or circulate the communications until any changes specified by FINRA have been made. These categories are: (1) communications concerning registered investment companies that include self-created rankings; (2) communications regarding securities futures with certain exceptions; and (3) communications that include bond mutual fund volatility ratings.7 If FINRA determines that a member has departed from the content standards, it can require that all of that members communications be filed within 10 days of first use for a period FINRA sets forth. 8 Alternatively, FINRA may decide there is good cause shown to exempt a member from the pre-use filing requirements. 9 The new rules still require that certain other categories of retail communications be filed within 10 business days of first use or publication, even though they are not broadly disseminated. These include retail communications: (i) regarding public direct participation programs; (ii) templates for investment analysis tools; (iii) registered investment companies, including communications concerning closed-end funds; (iv)publicly offered structured or derivative products; and (v) concerning registered CMOs. 10
The new rule provides that new members have additional requirements for the first year after their FINRA membership becomes effective. The member must file with FINRA at least 10 business days prior to its first use of any broadly disseminated retail communications that are published or used in any electronic or public media. 11
Exclusions from Filing Requirements
Certain categories of communications are excluded from the filing requirements as under the old rules, with some modifications. These include : (A) retail communications that have already been filed and are to be used without material change; (B) retail communications that are based on templates that were previously filed with FINRA, where the changes are limited to updating statistical or "other non-narrative information"; (C) retail communications that "do not make any financial or investment recommendation or otherwise promote a product or service of the member"; (D) retail communications that only identify the listed securities stock symbol; (E) retail communications that only identify the member or offer securities at a stated price; (F) fund profiles, and similar documents that have been filed with the SEC or any state, but not investment company "omitting prospectuses" or free writing prospectuses; (G) with some exceptions, retail communications that announce a member is participating in a private placement; (H) press releases given to the media only; (I) reprints of published articles that the member or its affiliate hasn't published, commissioned or altered; (J) correspondence; (K) institutional communications; (L) a listing of products or services offered by the member; (M) postings on an interactive electronic forum; and (N) press releases issued by NYSE listed closed-end investment companies.
These filing requirements and exclusions are outlined in Exhibits C and D.
The new rules continue the same general content standards as NASD Rule 2210, in that communications "must be based on principles of fair dealing and good faith, must be fair and balanced and must provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry, or service." 12 Additionally, members cannot "make any false, exaggerated, unwarranted, promissory or misleading statement." 13
The new rule retains certain specific content standards of the current rule, with some modification as follows:
- As set forth in the Notice to Members 12-29, predictions or projections of performance continue to be prohibited, but hypothetical illustrations of mathematical principles are still permitted. The new rule also continues existing requirements that correspondence and retail communications prominently disclose the firm's name, reflect any relationship between the member and any non-member or individual who is also named in the communication, and reflect which products or services are being offered by the member if the communication contains other names. It permits the use of communications that do not identify the member for purposes of recruiting personnel.
- The disclosures previously required in sales literature or advertisements that include a testimonial are now extended to include: (i) if the firm is using a paid testimonial and whether it paid more than $100; (ii) that the testimonial is no guarantee of future performance, and (iii) that it is only representative of one customer's experience.
- Retail communications that contain a recommendation must have a reasonable basis for the recommendation, and must include disclosure if (i) the broker dealer is a market maker in the security or the firm or an associated person will sell to or buy from customers on a principal basis; (ii) the member or an associated person that is directly and materially involved in the preparation of the content of the communications has a financial interest in any of the
- securities of the issuer whose securities are recommended (and the nature of the financial interest, unless it is nominal); and (iii)the member was a manager or co-manager of a public offering of any securities of the issuer whose securities were recommended in the preceeding 12 months.
- Retail communications containing past recommendations may not generally refer, directly or indirectly, to past specific recommendations that were or would have been profitable to any person. However, the rule permits a retail communication to include a list of all recommendations of the same type, kind, grade or classification made by the member in the preceding period of a year or more, as long as it includes a legend and a disclaimer that investors should not assume the recommendation will be profitable.
Although public appearances are no longer considered a separate category of communication, associated persons making a public appearance must adhere to the general content standards that apply to all other communications, and present a reasonable basis for any recommendations made. The rule also contains specific provisions regarding recommendations made during public appearances, and requires members to "establish written procedures...to supervise its associated persons' public appearances." Scripts, handouts, or other written materials "used in connection with" public appearances are communications under the new rule, and "must comply with all applicable provisions."
The new rules on communications with the public are highly technical and depend on an analysis of the form of the communication, the substance of the communication, and the intended recipients. The attached charts will help broker-dealers as they review and revise their current procedures to ensure their compliance with the new rules. Broker-dealers should also be mindful of how these new requirements may affect their general supervisory obligations.
1 See FINRA Regulatory Notice 12-29 http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/ p127014.pdf
2 See Regulatory Notice 12-29, at .6.
3 Regulatory Notice 12-29 at n.5.
4 FINRA Rule 2210(b)(1)(B).
5 FINRA Rule 2210(b)(1)(D). Under this provision, the approval requirement does not apply to retail communications that are not research reports and do not make financial or investment recommendations or promote a product, or any retail communications that are posted on an online interactive electronic forum.
6 SEA Rule 17a-4 requires broker-dealers to preserve certain records for a period of not less than three years, the first two in an easily accessible place. The format is generally defined as "electronic storage media" with various specifications.
7 FINRA Rule 2210(c)(2).
8 FINRA Rule 2210 (c)(1)(B).
9 FINRA Rule 2210(c)(9).
10 FINRA Rule 2210(c)(3).
11 FINRA Rule 2210(c)(1)(A). The FINRA Rule lists the methods of disseminations as a generally accessible website, newspaper, magazine or other periodical, radio, television, telephone or audio recording, video display, signs or billboards, motion pictures or telephone directories. Id.
12 FINRA Rule 2210 (d)(1)(A).
13 FINRA Rule 2210(d)(1)(B).
To view the Exibits click here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Specific Questions relating to this article should be addressed directly to the author.