Alert November 15, 2011

FINRA Issues Guidance on Advertising Issues

FINRA issued Regulatory Notice 11-49 (the “Notice”) providing guidance to members related to the application of NASD Rule 2210 (Communications with the Public) and the filing of communications for review with FINRA’s Advertising Regulation Department.  The Notice states that FINRA intends to periodically issue guidance to the industry concerning significant interpretive issues or other issues related to FINRA rules governing communications with the public.  The issuance of the Notice appears to respond to a recommendation in the July 2011 report on mutual fund advertising issued by the Government Accountability Office (which was discussed in the August 2, 2011 Financial Services Alert) that the SEC take steps to ensure that FINRA develops mechanisms to ensure industry-wide notification of new interpretive positions for its mutual fund advertising rules.  In addition to the following topics, the Notice also addresses the use of FINRA’s name in trademarks and members’ identification of related prior filings when submitting new materials for review:

Exchange Traded Funds.  The Notice reminds FINRA members that NASD Rule 2210(c)(2), which requires FINRA members to file advertisements and sales literature concerning registered investment companies with FINRA within 10 business days of first use or publication, applies to advertisements and sales literature, including research reports, concerning exchange traded funds (“ETFs”) and to exchange traded products that meet the definition of a “direct participation program” under FINRA rules.

Treasury Inflation-Protected Securities Funds.  The Notice states that a number of mutual funds, including ETFs, invest heavily in Treasury Inflation-Protected Securities (“TIPS”) Funds and that because SEC rules governing the calculation of a mutual fund’s current yield do not prescribe a method for treating the inflation adjustment component of TIPS, various treatments of the inflation adjustment component of TIPS for purposes of disclosing the mutual funds’ yield have evolved.  To address the inconsistencies among these treatments, FINRA has interpreted NASD Rule 2210(d) to include the following requirements for advertisements and sales literature that include the current yield of a mutual fund that invests in TIPS: (1) if the fund’s current yield is adjusted monthly based on changes in the rate of inflation, then the communication must explain that these changes can cause the yield to vary substantially from one month to the next; and (2) if an advertisement or item of sales literature includes an exceptionally high current yield for a fund that invests in TIPS, it must disclose that the yield is attributable to the rise in the inflation rate, which might not be repeated.