RCA - March 1998 - Advertising Update - Registered Principal Approval Required

The NASD Conduct Rules require a registered principal to approve in writing advertising and sales literature prior to use. While most advertising compliance personnel are aware of this standard, some may not recognize that they have an additional approval responsibility when filing material with the Department. Specifically, when filing communications pursuant to one of the requirements set forth in NASD Conduct Rule 2210(c), a registered principal must approve the material before it is sent to the Department.

The NASD adopted this requirement in 1995 in light of a concern that members were using the Department's staff as a stand-in for their own compliance efforts.

While the staff continues to offer advice and assistance to members in preparing compliant advertising, its primary role is regulatory rather than advisory. The staff reviews material with an eye towards detecting rule violations. Firms and their compliance personnel are responsible for ensuring that only compliant communications are used. Thus, the Conduct Rules specify that members file only those advertisements or sales literature that have been reviewed and approved by a registered principal.

This internal approval is critical in situations where the rules permit firms to file communications after they are used. For example, a member firm can use a mutual fund advertisement, and then wait until up to 10 days before filing the communication with the Department. When a firm takes advantage of this so-called "post-use" filing requirement, the internal review and sign-off of the registered principal plays an essential role in ensuring that the firm's communications with the public are compliant.

The Advertising/Investment Companies Regulation Department staff must surveil and enforce members' compliance with this internal approval requirement. To facilitate this effort, the Department has modified its procedures to accept only those filings that include documentation of a registered principal's approval. Members must identify the name of the registered principal who reviewed and approved the communication and the date of the approval on the cover sheet or letter accompanying the filing.

Date Of First Use

As part of its review, the Advertising/Investment Companies Regulation Department staff must also determine whether a member has filed its advertising or sales literature in a timely manner pursuant to the filing requirements set forth in NASD Conduct Rule 2210(c). Since 1995, the Rule has required members to identify the date of first use (or intended first use, if a communication has not been used yet), when filing communications with the Department. The cover sheet provided on page 15 prompts members to provide this date-of-first-use information as well as documentation of the internal approval.