Alert January 15, 2008

FINRA Proposes to Eliminate Principal Pre-Approval Requirement for Sales Material Previously Filed by Another Member

FINRA has proposed amendments to NASD Rule 2210 that would create an exception from the principal pre-approval requirements for certain sales materials.  Under the current requirements, a registered principal of a FINRA member firm must give written approval to advertisements, sales literature and independently prepared reprints (collectively, “sales material”), prior to their use.  The proposed amendments would create an exception to Rule 2210’s registered principal pre‑approval requirements allowing a member firm to use sales material without principal pre-approval, if another firm had filed the sales material and received a letter from FINRA stating that the sales material appears consistent with applicable standards.  A firm relying on the exception could not materially alter the sales material or use it in a manner inconsistent with any conditions in FINRA’s review letter.

Although FINRA expects that the exception would be relied on primarily by intermediaries with respect to mutual fund and variable insurance product sales materials prepared by those products’ underwriters, it would be available for sales material for other products, such as REITs or direct participation programs, that also meet the exception’s requirements.  Under the proposed rule amendments, a firm could continue to review sales material received from other firms even if the exception were available.  The proposed amendments would not affect existing contractual obligations between underwriters and intermediary firms, which may, for example, prohibit an underwriter from sending sales material directly to an intermediary’s representatives.

The proposed amendments would make a related change to the sales materials recordkeeping requirements so that a firm relying on the principal pre‑approval exception would have to maintain a record of the name of the firm that filed the sales material and a copy of the related FINRA review letter.  Unrelated to the principal pre-approval exception, the proposed amendments would codify existing practice that the recordkeeping requirement for sales material apply beginning with the date of first use.  The SEC release announcing the proposed amendments indicates that FINRA will announce the effective date of the amendments in a Regulatory Notice that will be published no later than 60 days after SEC approval.  Comments on the proposed amendments are due by January 18, 2008.