Alert August 02, 2011

FINRA Proposes to Consolidate and Amend NASD and NYSE Communications Rules and Interpretations

The SEC issued Release No. 34-64984, publishing a rule proposal by FINRA to adopt NASD Rule 2210 and 2211, and related interpretive materials, as FINRA Rules 2210 and 2212 through 2216, and to delete portions of NYSE Rule 472 and related supplementary materials.  The new rules are:

  • 2210 – Communications with the Public;
  • 2212 – Use of Investment Company Rankings in Retail Communications;
  • 2213 – Requirement for the Use of Bond Mutual Fund Volatility Ratings;
  • 2214 – Requirements for the Use of Investment Tools;
  • 2215 – Communications with the Public Regarding Security Futures; and
  • 2216 –  Communications with the Public about Collateralized Mortgage Obligations


NASD Rules 2210 and 2211, and the interpretive materials following Rule 2210, govern FINRA members’ communications with the public, other than communications concerning options, which are governed by FINRA Rule 2220.  NYSE Rule 472, as incorporated into the FINRA rulebook following the merger of the NASD and NYSE regulatory operations, governs communications with the public of FINRA members that are also members of the NYSE.

In September 2009, FINRA published Regulatory Notice 09-55 (the “Notice”), requesting comment on a proposal to consolidate the NASD and NYSE communications rules and to amend them as described in the Notice.  The rules as proposed in the current rule filing (the “Proposal”) follow the outlines proposed in the Notice, with a few revisions resulting from comments received by FINRA.  The text of proposed FINRA Rules 2210 and 2212 through 2216 is available in SR-FINRA-2011-035, FINRA’s filing with the SEC seeking approval of the Proposal.

New Definitions

The principal change made in the Proposal is to redefine the types of communications.  Under the current NASD rules, communications were divided into the following categories:  advertisement; sales literature; correspondence; institutional sales material; public appearance; and independently prepared reprint.  The definitions of advertisement and sales literature have over time taken on meanings not obvious from the language of the rule.  A key difference between the two categories is that advertisements are made available to the public, while sales literature is generally made available only to customers and not to the public.  Thus, material available on a password-protected area of a member firm’s website could be treated as sales material.

The Proposal would reduce the categories of communications to the following three:

  • Correspondence – any written communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period;
  • Retail communication – any written communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period; and
  • Institutional communication – any written communication that is distributed or made available only to institutional customers.

“Communications” would consist of correspondence, retail communications and institutional communications.  “Written communications” would include electronic communications.  “Institutional investor” would generally be defined under proposed FINRA Rule 2210 as in NASD Rule 2211, and would include registered investment companies, insurance companies, banks, registered broker-dealers, registered investment advisers and other entities and natural persons with at least $50 million in assets.

Changes To Filing Requirements

Proposed FINRA Rule 2210 would adopt existing filing requirements with some changes and additions, as discussed below.

First Year Filing.  During the first year after it becomes a FINRA member, a firm would be required to file with FINRA, 10 business days before first use, all retail communications intended to be published or used in publicly available media.  Under the current rule, the one-year does not begin to run until a member firm first seeks to use an advertisement.  The Proposal would not alter FINRA’s authority to determine that a member will be required, based on its prior filing experience, to continue to make pre-use filings after the first year.

Pre-Use Filing.  Pre-use filing would be required for retail communications (1) concerning registered investment companies that include self-created rankings; (2) concerning security futures (unless submitted to another SRO); and (3) including bond mutual fund volatility rankings.  Communications concerning collateralized mortgage obligations (“CMOs”) would have to be filed within 10 business days after first use, rather than prior to first use as currently required.

Filing After First Use.  The following materials would have to be filed within 10 business days after first use:

  • All retail communications concerning closed-end registered investment companies, not limited to the IPO period as in the current rule;
  • All retail communications concerning government securities (not limited to advertisements, as under the current rule);
  • Retail communications concerning, or written reports produced by, an investment analysis tool;
  • Retail communications concerning registered CMOs.
  • Retail communications concerning structured products, such as equity- or index-linked notes.

Proposed FINRA Rule 2210 would also codify prior FINRA guidance by modifying the exclusion from filing available for prospectuses filed with the SEC or any state to expressly provide that free writing prospectuses filed with the SEC pursuant to Rule 433(d)(1)(ii) under the Securities Act of 1933 are not within the exclusion.

Prohibition On Projections

Proposed FINRA Rule 2210 would maintain the current prohibition in the content standards on communications predicting or projecting performance, implying that past performance will recur or making any exaggerated or unwarranted claim, opinion or forecast.  As in the current rule, hypothetical illustrations of mathematical provisions would be permitted, providing that they do not predict or project the performance of an investment or investment strategy.  The proposed rule would clarify that FINRA allows two additional types of projections of performance in communications with the public:  (1) projections of performance in reports produced by investment analysis tools otherwise meeting the requirements of the rules and (2) price targets in research reports on debt or equity securities.

Request For Comments

The SEC has requested public comment on the Proposal, which must be submitted no later than 21 days after the Proposal’s publication in the Federal Register.