The Securities and Exchange Commission (SEC) recently issued Release No. 34-66049, which seeks comments on the Financial Industry Regulatory Authority's (FINRA) second amendment (the Second Amendment) to proposed FINRA Rule 2210 (the Rule), which was issued in July 2011, regarding FINRA member firms' communications with the public. The Second Amendment signals FINRA's retreat on certain aspects of the Rule that commenters argued would add unnecessary compliance burdens for broker-dealers.
The first amendment (the First Amendment) was published in November 2011, requesting comments and beginning proceedings to determine whether to approve or disapprove the proposed rule change. The Second Amendment was accompanied by a rebuttal letter from FINRA responding to comments received on the First Amendment. The SEC requests that comments on both the First Amendment and the Second Amendment be submitted by Jan. 18, 2012.
The Rule, if adopted, would modify current National Association of Securities Dealers (NASD) rules and guidance regarding communications with the public, at the same time streamlining those rules.1 The Rule would replace the six communication categories that exist under existing NASD Rule 22102 with three consolidated categories: institutional communication, retail communication and correspondence. The Rule and accompanying proposed FINRA Rules 2212 through 2216 would also prescribe revised approval, review, recordkeeping, filing and content requirements for covered communications. The First Amendment narrowed certain Rule requirements related to public appearances and retail communications that included recommendations. Commenters argued that the proposed changes in the First Amendment were not sufficient.
The Second Amendment eases the compliance burden on broker-dealers in certain respects. First, the Second Amendment will exclude from the filing requirements under the Rule retail communications posted on online interactive electronic forums, such as posts to the social media websites Facebook and Twitter. While such communications would still be defined as retail communications, they would be exempt from the pre-use approval requirements for retail communications, and could instead be supervised, for example, using post-use review procedures.3
The Second Amendment also revises the Rule to exclude from the definition of institutional communication a member's internal communications used for the training and education of registered persons regarding the member's products or services. These internal communications would instead continue to be subject to an arguably less comprehensive review under NASD Rule 3010. However, in its rebuttal letter, FINRA contended that NASD Rule 3010, together with the books and records requirements, effectively applies the "same review and content standards" as was originally proposed in the Rule. The final substantive change to the Rule in the Second Amendment allows a new member subject to pre-use filing requirements to file a broker-prepared free writing prospectus that has been filed with the SEC to be filed with FINRA within 10 days of first business use, as opposed to the previous proposed requirement that it be filed at least 10 days prior to first use.
The above amendments to the Rule ease the requirements originally proposed, but also place greater responsibility with internal compliance teams to monitor the content of the communications. FINRA noted in its rebuttal letter that internal policies and procedures should be reasonably designed to ensure that communications are "fair, balanced and accurate."
The Second Amendment, as well as the Rule and the First Amendment, may be accessed at: http://www.finra.org/Industry/Regulation/RuleFilings/2011/P123894 .
The Investment Management Alert summarizing the First Amendment can be read at: http://www.drinkerbiddle.com/SEC-Requests-Comments-on-FINRAs-Amendment-to-Proposed-Communication-Rules .
1 For a more complete description of the Rule, see our previous Investment Management Alert at: http://www.drinkerbiddle.com/finra-proposes-new-rules-regarding-communications-with-the-public-08-18-2011 /.
2 We note that FINRA is in the process of consolidating the FINRA Rulebook that eventually will consist solely of FINRA Rules. Currently, and until the completion of the rulebook consolidating process, the rulebook contains NASD Rules and incorporated New York Stock Exchange Rules, in addition to the FINRA Rules.
3 FINRA has previously issued guidance on the application of the federal securities laws and FINRA rules to the use of social media by broker-dealers. (See FINRA Regulatory Notice 10-06 (Jan. 2010) at http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p120779.pdf ; and FINRA Regulatory Notice 11-39 (Aug. 2011) at http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p124186.pdf .
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