FINRA Is Thinking About Changing Its Communications Rules


Financial Industry Regulatory Authority (FINRA) posted a regulatory notice  on proposed new rules governing member communications with the public: Regulatory Notice 09-55.pdf-icon

The new rules would replace current NASD Rules 2210 and 2211, the Interpretive Materials that follow NASD Rule 2210, and portions of Incorporated NYSE Rule 472.

The proposal would replace the existing six categories of communication with three new communications categories and revises certain approval, filing and content requirements. These changes make the rules easier, but seem to make it harder for FINRA members to participate in social media. I am surprised that FINRA did not try to squarely address the use of the popular internet and web 2.0 tools.

Communications Categories

Currently NASD Rule 2210 divides communication into six separate categories:

  1. advertisement
  2. sales literature
  3. correspondence
  4. institutional sales material
  5. independently prepared reprint
  6. public appearance.

The principal approval, filing and content standards apply differently to each category.

FINRA is proposing to consolidate those six categories into the following three:

  1. institutional communication, which would include communications that fall under the current definition of “institutional sales material,”
  2. retail communication, which would include any written communication that is distributed or made available to more than 25 retail investors
  3. correspondence, which would include any written (including electronic) communication that is distributed or made available to 25 or fewer retail investors

Communications that currently qualify as advertisements and sales literature generally would fall in the proposed retail communication.

Approval Requirements

The proposed rule changes would require an appropriately qualified registered principal of the firm to approve each retail communication before the earlier of its use or filing with FINRA.

Filing Requirements for New Firms.

FINRA rules currently require a firm that has previously not filed advertisements with FINRA to file its initial advertisement with FINRA at least 10 business days prior to use, and continue the practice for one year after the initial filing. The proposed rule would require filing of all retail communications  (the new category), rather than just advertisements. The proposal would have the one-year filing requirement beginning on the effective date a firm becomes registered with FINRA, rather than on the date an advertisement is first filed with FINRA.

Pre-Use Filing Requirement.

The proposal would expand the current pre-use filing requirements so that communications concerning any registered investment company that includes self-created rankings, and retail communications that include bond mutual fund volatility ratings would have to be filed with FINRA at least 10 business days prior to first use and withheld from use until changes specified by FINRA staff have been made. The proposal would expand the filing requirements for materials relating to closed-end investment companies to include retail communications distributed after the fund’s initial public offering.

Press Releases

The proposal eliminates a current filing exclusion for press releases that are made available only to members of the media. Most firms post press releases on their Web sites, making them available to the general public.

Content Standards

The Proposal reorganizes, but largely incorporates, the current content standards applicable to communications with the public. Content standards that currently apply to advertisements and sales literature generally would apply to retail communications.

Public Appearances

Public appearances would have to meet the general “fair and balanced” standards and the standards applicable to recommendations
if the public appearance included a recommendation of a security. If you recommend securities in public appearances generally you would be subject to the same disclosure requirements under proposed FINRA Rule 2210(f) as research analysts that recommend securities in public appearances pursuant to NASD Rule 2711(h). The proposal requires firms to establish appropriate written policies and procedures to supervise public appearances, andmakes clear that scripts, slides, handouts or other written and electronicmaterials used in connection with public appearances are considered communications with the public for purposes of proposed FINRA Rule 2210.

The comment period for the proposed rules ends November 20.