Alert October 06, 2009

FINRA Requests Comments on Proposed Amendments to Rules Governing Communications With the Public

On September 21, 2009, the Financial Industry Regulatory Authority (FINRA) posted Regulatory Notice 09-55 requesting comments by November 20, 2009 on proposed new rules governing member communications with the public.  The new rules would replace current NASD Rules 2210 and 2211, the Interpretive Materials that follow NASD Rule 2210, and portions of Incorporated NYSE Rule 472.  Although the proposal is based on FINRA’s existing rules, it would replace the existing six categories of communication with three new communications categories and revises certain approval, filing and content requirements.  Elements of the proposal are highlighted below.

Communications Categories

Currently NASD Rule 2210 divides communication into six separate categories: (i) advertisement, (ii) sales literature, (iii) correspondence, (iv) institutional sales material, (v) independently prepared reprint, and (vi) public appearance.  FINRA is proposing to consolidate those six categories into the following three: (i) institutional communication, which would include communications that fall under the current definition of “institutional sales material,” (ii) retail communication, which would include any written communication that is distributed or made available to more than 25 retail investors, and (iii) correspondence.  Communications that currently qualify as advertisements and sales literature generally would fall in the proposed retail communication.

Approval Requirements

Principal Approval.  The proposed rule changes would require an appropriately qualified registered principal of the firm to approve each retail communication before the earlier of its use or filing with FINRA.  This proposal eliminates the requirement in NYSE Rule 472 that a “qualified person” approve in advance each advertisement, sales literature or other similar type of communication by an NYSE member firm.  The proposed rule generally maintains the supervision and review standards for correspondence currently found in NASD Rules 2210 and 3010(d). 

Filing Requirements

Filing Requirements for New Firms.  FINRA rules currently require a firm that has previously not filed advertisements with FINRA or another self-regulatory organization to file its initial advertisement with FINRA at least 10 business days prior to use, and continue the practice for one year after the initial filing.  The proposed rule alters the filing requirement in two respects.  First, the requirement to file would cover all retail communications, rather than just advertisements.  Second, the proposal triggers the one‑year filing requirement beginning on the effective date a firm becomes registered with FINRA, rather than on the date an advertisement is first filed with FINRA. 

Pre-Use Filing Requirement.  The proposal would expand the current pre-use filing requirements so that communications concerning any registered investment company that includes self-created rankings, and retail communications that include bond mutual fund volatility ratings would have to be filed with FINRA at least 10 business days prior to first use and withheld from use until changes specified by FINRA staff have been made.  The proposal would expand the filing requirements for materials relating to closed-end investment companies to include retail communications distributed after the fund’s initial public offering. 

Content Standards

The proposal largely incorporates the current content standards applicable to communication with the public that are found in the current rules.  For example, content standards that currently apply to advertisements and sales literature generally would apply to retail communications under the proposal.  Some of the proposed modifications are as follows: 

New Language on Application of Tax-Deferred vs. Taxable Illustrations.  The proposal adds  requirements based largely on existing FINRA guidance concerning comparative illustrations of tax‑deferred versus taxable compounding, which would apply to any illustration, regardless of whether it appears in a communication promoting variable insurance products or some other communication, such as one discussing the benefits of investing in a 401(k) plan or individual retirement account.  FINRA previously published this proposed rule language as part of a proposed rule change governing communications regarding variable insurance products in Regulatory Notice 08-39 (as discussed in the August 5, 2008 Alert).

Mutual Fund Performance Data.  The current rule requires communications with the public, other than institutional sales material and correspondence, that present the performance of a non‑money market mutual fund to disclose the fund’s maximum sales charge and operating expense ratio as set forth in the fund’s current prospectus fee table.  The proposal alters this standard by requiring disclosure of the maximum sales charge and total operating expense ratio reflected in the fund’s prospectus or annual report, whichever is more current as of the date the communication is submitted for publication.

Communications that Contain a Recommendation.  The proposal revises the standards currently found in existing FINRA guidance for communications that contain a recommendation in part by extending those standards beyond just advertising and literature to retail communications, correspondence and public appearances.  The proposal also extends the “fair and balanced”  disclosure requirements to associated persons who recommend securities in public appearances.  The current rule only applies to research analysts making public appearances.