For some, Advertising Regulation remains one of the great mysteries of life, so guidance on the topic from FINRA is always welcomed.  FINRA's latest publication, Regulatory Notice 11-49, provides guidance on certain issues related to the application of NASD Rule 2210 and the filing of communications for review with FINRA’s Advertising Regulation Department.  Today's topics are:

1. Exchange-Traded Products
2. Treasury Inflation-Protected Securities (TIPS) Funds
3. Use of FINRA in Firm Trademarks
4. Cross-referencing New Filings for Review to Related Prior Filings.
5. FINRA Advertising Staff Contacts

1.  Exchange-Traded Products. NASD Rule 2210(c)(2)(A) requires a firm to file ads and sales literature concerning RICs - including mutual funds, variable contracts, continuously offered closed-end funds and UITs - with FINRA within 10 business days of first use or publication.  This filing requirement applies to any and all ad or sales literature concerning an ETF that's registered under the Investment Company Act of 1940 (1940 Act ETF). These filing requirements apply, as well, to all ads and sales literature concerning 1940 Act ETFs, including research reports. Accordingly, firms must file research reports on these 1940 Act ETFs that fall within the definition of “advertisement” or “sales literature” within 10 business days of first use or publication. Similarly, NASD Rule 2210(c)(2)(B) requires a firm to file ads and sales literature concerning public direct participation programs (DPPs) with FINRA within 10 business days of first use or publication.  Ads and sales literature concerning exchange-traded products that are organized as grantor trusts and that meet the definition of “DPPs" under FINRA Rule 2310(a)(4) also must be filed within 10 business days of first use or publication. 2.  Treasury Inflation-Protected Securities (TIPS) Funds. TIPS are marketable Treasury securities whose par value is adjusted based upon changes in the Consumer Price Index (CPI).  With inflation (rise in the CPI), the par value of TIPS increases;  with deflation (drop in the CPI), the par value decreases. A number of mutual funds and 1940 Act ETFs invest primarily in TIPS.  Often, firms will advertise a TIPS fund’s current yield as permitted by Securities Act Rule 482.  Generally speaking, a fund’s current yield is a percentage return expressed on an annualized basis that reflects the dividends and interest earned by the fund net of expenses for the 30-day period named in the communication. Because TIPS have an inflation adjustment component that's not specifically addressed in SEC rules governing calculation of a mutual fund’s current yield, firms have adopted various treatments of the inflation adjustment when calculating a TIPS fund’s yield.  Some firms have included the inflation adjustment in a TIPS fund’s current yield calculation, while other firms have not.  This discrepancy in the calculation method has led to significant differences in the yield advertised by similar TIPS funds for the same periods.

FINRA is concerned that investors may not understand that these differences in advertised yield are largely attributable to the different methods used to calculate current yield, rather than differences in performance of the funds themselves.

Due to this concern, FINRA has interpreted NASD Rule 2210(d) to require certain disclosures in ads and sales literature that include a TIPS fund’s current yield.  Specifically, 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.  If an ad or piece of sales literature includes an exceptionally high current yield for a TIPS fund, the material must disclose that the yield is attributable to the rise in the inflation rate, which might not be repeated. 3.  Use of FINRA in Firm Trademarks. NASD Interpretive Material 2210-4 strictly limits how firms may indicate their FINRA membership.  Firms may do so only in one of 3 ways:

1. in a communication with the public that complies with the standards of NASD Rule 2210 and neither states nor implies that FINRA or any other corporate name or facility owned by FINRA, or any other regulatory organization, endorses, indemnifies or guarantees the firm’s business practices, selling methods, the class or type of securities offered, or any specific security;
2. in a confirmation statement for an OTC transaction that includes a specified legend; or
3. on a firm’s website, so long as the firm provides a hyperlink to the homepage of FINRA’s website in close proximity to the firm’s indication of FINRA membership.

Firms and their associated persons should understand that they may not include the FINRA® trademark or references to FINRA membership in any trademark of the firm or associated person - to do so would violate IM-2210-4 and are likely to cause confusion and to infringe upon FINRA’s trademark rights. 4.  Identify Related Prior Filings When Submitting New Filings for Review. When filing material for review by Advertising Regulation, firms should identify the reference number of any communication previously submitted and already reviewed by FINRA that is similar to the current communication filing.   This will help the staff to provide a more consistent and efficient review process.

- e.g., firms should identify a past different filing that FINRA staff reviewed that includes the same or similar marketing content as the current filing.  If a firm files a revised version of an ad that  - in response to prior FINRA staff comments - the firm should identify the reference number of the prior filing so that prior staff comments can be addressed.

5.  FINRA Advertising Regulation Staff Contacts. If you still have questions, about these topics, contact:   Thomas Pappas, VP: (240) 386-4553; or  Amy Sochard, Director:  (240) 386-4508.   For further details, go to:   [FINRA RegNote 11-49, October 2011]