Alert October 26, 2010

FINRA Withdraws Interpretive Guidance on Application of Rules on Communications with the Public to Free Writing Prospectuses

On October 21, 2010, FINRA issued Regulatory Notice 10-52 partially withdrawing interpretive guidance it had provided concerning the application of NASD Rules 2210 and 2211, governing communications with the public, to free writing prospectuses.  FINRA advises that it will now treat free writing prospectuses that are distributed by a broker-dealer in a manner reasonably designed to lead to broad unrestricted dissemination as advertisements subject to the requirements of Rules 2210 and 2211, including the content standards of the rules and the need to file with FINRA, if applicable.

In 2006, following rulemaking by the SEC permitting the use of free writing prospectuses, the Securities Industry Association and The Bond Market Association (the precursors to the Securities Industry and Financial Markets Association, or “SIFMA”) requested interpretive guidance from the NASD concerning the treatment of free writing prospectus under NASD Rules 2210 and 2211 and also NASD Rules 2710 and 2710 (now FINRA Rules 5110 and 5120).  On August 1, 2006, the NASD issued a letter confirming that it interpreted free writing prospectuses to be excluded from the provisions of Rule 2210 (which applies to communications with the public generally) and Rule 2211 (applicable to correspondence and institutional sales material).  Regulatory Notice 10-52 amends that guidance to provide that Rules 2210 and 2211 will be interpreted to apply to those free writing prospectuses distributed by a broker-dealer in a manner reasonably designed to lead to broad unrestricted dissemination, meaning that such material will be subject to the content standards and spot-check, supervisory review and filing requirements of Rules 2210 and 2211, to the extent otherwise applicable.

FINRA notes that its new interpretation is not intended to change its prior guidance with respect to the application of FINRA Rules 5110 and 5120 to free writing prospectuses.