The New FINRA Rules Go Into Effect in February.  Get Answers Now.

[ by Howard Haykin ]

February 4, 2013, the effective date for FINRA's new rule governing Communications With The Public, is fast approaching and the regulator continues to receive requests for clarification about the original guidelines that FINRA published in June 2012, under Regulatory Notice 12-29.

As noted in that publication, FINRA is adopting new FINRA Rules 2210 and 2212 through 2216 (collectively, the "Communications Rules"), that were drafted largely from provisions currently in NASD Rules 2210 and 2211, and NASD Interpretive Materials 2210-1 and 2210-3 through 2210-8.  Certain provisions of Incorporated NYSE Rule 472 and certain Supplementary Material and Rule Interps related to NYSE Rule 472 have been deleted.

FINRA's latest guidance in this area can be found in either of two places:  (i) FINRA Regulatory Notice 13-3, January 2013;  and, (ii) in the newly published Regulatory Notice 13- has its latest Regulatory Notice in a Q&A format, and posted a set of questions and answers on the Advertising Regulation page on the FINRA website.

FINRA Staff Contacts.   Direct questions concerning this Notice to:   Thomas Pappas, VP and Director, Advertising Regulation  [(240) 386-4553];  or Joseph Savage, VP and Counsel, Investment Companies Regulation  [(240) 386-4534].

Compliance Insights presents FINRA's Qs&As in their entirety immediately below.

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FINRA Rule 2210:  Questions and Answers.

Internal Communications 
 
Q1. FINRA Rule 2210(a)(3) defines "institutional communication" to exclude a firm's internal communications. Does "internal communication" include training and educational material prepared for use with registered representatives ("RRs") of affiliated broker-dealers?\

No. "Internal communication" refers to communications within a firm. If a firm uses material to train or educate registered representatives of other broker-dealers (whether affiliated or unaffiliated), the material would be considered an institutional communication. 

Transitional Filing Issues
 
Q1.  If a firm previously has filed with the FINRA Advertising Regulation Dept an advertisement or item of sales literature under NASD Rule 2210 filing requirements, and intends to continue using this material on or after 2/4/13, must the firm re-file this material under FINRA Rule 2210?

No. However, if the firm makes material changes to a previously filed retail communication, the firm will be required to re-file the communication.

Q2. If a firm is using a retail communication that is not subject to a filing requirement under NASD Rule 2210 (and has not been previously filed), but will become subject to a filing requirement under the new FINRA Rule 2210, and the firm intends to continue to use the retail communication on or after 2/4/13, must the firm file this material with FINRA?

Yes. The firm must file the retail communication with FINRA within 10 business days of 2/4/13 - i.e., by 2/19.  For example, a firm would need to file a retail communication concerning a closed-end fund that is used after the IPO period, or a retail communication concerning a registered structured product, if the firm had not previously filed this communication with FINRA. A new filing requirement could also apply to a communication that is deemed correspondence under the existing rule but would be considered a retail communication under the new rule.
 
Firms are not required to file the manager's discussion of fund performance in shareholder reports concerning closed-end funds that were published prior to 2/4/13 and that remain available for review on a firm's website after that date. Given the age of these reports, FINRA does not consider them to be promotional in nature.

Q3. Will FINRA accept submissions of retail communications required to be filed for the first time under the new rule prior to 2/4/13?

Yes. If a firm files before 2/4.  FINRA will review the communication under the content standards of NASD Rule 2210. However, the firm will be deemed to have met its filing requirements under the new rule and will not be required to re-file the material after 2/4, provided it is used without material change.\

New Member Firms

Q1. How does the new rule change the filing requirements for new member firms?

Under NASD Rule 2210, a firm that has not previously filed advertisements with FINRA (or with a registered securities exchange having comparable standards) must file its initial advertisement with FINRA at least 10 business days prior to use and must continue to file its advertisements at least 10 business days prior to use for a period of one year.
 
FINRA Rule 2210 revises this standard in 2 respects

• First, a new firm's 1-year filing period commences on the date reflected in the CRD system as the date that FINRA membership became effective, rather than on the date the firm files its first advertisement with FINRA. However, the filing requirement only applies to a subset of communications that fall within the definition of "retail communication": those that would have been considered "advertisements" under NASD Rule 2210, such as print or public media advertisements or generally accessible websites.

• Second, if the retail communication is a free writing prospectus that has been filed with the SEC pursuant to Securities Act Rule 433(d)(1)(ii), the firm may file the retail communication within 10 business days of first use rather than 10 business days prior to first use.

Q2. If a firm that has not previously filed an advertisement with FINRA files its initial advertisement less than 1 year before 2/4/13, will the firm have to continue filing after 2/4/13?

 In such a case, the firm must continue to file its advertisements with FINRA through 2/1/13 (the last business day before the effective date of the new rule) pursuant to NASD Rule 2210(c)(5)(A). Starting on 2/4/13, the 1-year filing period will be based on the firm's membership effective date as listed in the CRD system. The firm will only be required to file its retail communications until 1 year after the CRD date. If that 1-year period will have already expired as of 2/4/13, the firm will no longer be required to file retail communications under FINRA Rule 2210(c)(1)(A) on and after that date.

 
Q3. What if a firm has never filed an advertisement with FINRA before 2/4/13, but its membership had been effective for more than 1 year as of that date?

In that case, the firm would not be required to file any retail communications pursuant to FINRA Rule 2210(c)(1)(A) on or after 2/4/13.

Structured Products
 
Q1. New FINRA Rule 2210(c)(3)(E) requires a firm to file within 10 business days of first use or publication retail communications concerning any security that is registered under the Securities Act of 1933 and that is derived from or based on a single security, a basket of securities, an index, a commodity, a debt issuance or a foreign currency (registered structured products). What types of products does this filing requirement cover?

While it is not possible to list all registered structured products, examples include exchange-traded notes that are not registered under the Investment Company Act but are registered under the Securities Act, registered reverse convertibles, registered structured notes, registered principal protection notes, and any other registered security that includes embedded derivative-like features. See Regulatory Notice 12-03 for some examples of registered structured products.
 
The purpose of this filing requirement is to have firms file with FINRA retail communications about structured products that are registered under the Securities Act. It is not intended to create a duplicative requirement for retail communications that are already subject to filing, such as retail communications concerning mutual funds, closed-end funds, exchange-traded funds that are registered under the Investment Company Act, variable insurance products, direct participation programs or collateralized mortgage obligations.
 
While this filing requirement applies to retail communications concerning registered structured products, it does not apply to issuer-prepared prospectuses, including issuer-prepared free-writing prospectuses, that are filed with the SEC.

Recommendations

Q1. Do the disclosure requirements regarding recommendations apply to a mutual fund portfolio manager's discussion of the fund's past performance (such as a manager's discussion that accompanies an annual or semi-annual report)?
 

No. While these discussions must comply with the other provisions of new FINRA Rule 2210, FINRA does not consider a portfolio manager's discussion of a fund's past performance to be a firm's recommendation of the individual securities included in the discussion.\
 

Appearances
 
Q1. If an RR makes a scripted presentation at a seminar for prospective retail investors, what is the responsibility of the firm with which the representative is associated to supervise the presentation?

A sales script used in a seminar is considered a retail communication under new FINRA Rule 2210 (assuming the script is used with more than 25 retail investors within a 30 calendar-day period).
 
The firm with which the RR representative is associated is responsible for approving prior to use any retail communication used as part of the seminar presentation. If a retail communication is subject to a filing requirement under FINRA Rule 2210, the firm also must file the communication with FINRA. FINRA Rule 2210(f)(3) requires each firm to establish written procedures that are appropriate to its business, size, structure and customers to supervise its registered representative's public appearance. These procedures must provide for education and training, documentation of such education and training, and surveillance and follow-up to ensure that representatives implement and adhere to the procedures.
 

Q2. Is an RR required to disclose the firm's name during a public appearance?

The requirement in FINRA Rule 2210(d)(3) to disclose a firm's name applies to retail communications and correspondence. Accordingly, sales scripts, slide presentations and brochures used in connection with a public appearance must disclose the firm's name. An RR is not required to disclose the firm's name as part of non-scripted, extemporaneous remarks during a public appearance.

END NOTE 1.  NASD Rule 2211 defines "correspondence" as any written letter or electronic mail message and any market letter distributed by a member to:  (A) one or more of its existing retail customers; and  (B) fewer than 25 prospective retail customers within any 30 calendar-day period.

New FINRA Rule 2210 defines "correspondence" as any written (including electronic) communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period.  If a written (including electronic) communication is distributed or made available to more than 25 retail investors within any 30 calendar-day period, it is considered a "retail communication" under FINRA Rule 2210(a)(6).  It is possible that a communication that a firm currently is distributing to more than 25 existing retail customers within a 30 calendar-day period would be "correspondence" under NASD Rule 2211 but would be a "retail communication" under FINRA Rule 2210.
 
End Note 2.  See FINRA Rule 2210(c)(7)(F).

For further details, go to:   [FINRA RegNote 13-3, January 2013].