FINRA Rule 2210 Questions and Answers
1. 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 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.
1. If a firm distributes only to institutional investors a non-independent third-party research report as defined in NASD Rule 2711(h)(13)(E), is the firm required to have a registered principal or supervisory analyst approve the report prior to distribution?
No. A third-party research report that is distributed only to institutional investors as defined in FINRA Rule 2210(a)(4) is considered an institutional communication under FINRA Rule 2210(a)(3). FINRA Rule 2210(b)(3) permits a firm to distribute an institutional communication without having a registered principal approve the communication prior to distribution, provided that the firm establishes and implements certain written procedures for the supervision and review of such communications.
NASD Rule 2711(h)(13)(C) requires a registered principal or supervisory analyst to approve third-party research reports distributed by the firm unless the report meets the definition of "independent third-party research report."1 However, this rule is not intended to require registered principal or supervisory analyst approval of a third-party research report that meets the definition of institutional communication. Accordingly, a firm may supervise such a report in the same manner as any other institutional communication pursuant to FINRA Rule 2210(b)(3).2
Transitional Filing Issues
1. If a firm previously has filed with the FINRA Advertising Regulation Department an advertisement or item of sales literature under NASD Rule 2210 filing requirements, and intends to continue using this material on or after February 4, 2013, 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.
2. 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 February 4, 2013, must the firm file this material with FINRA?
Yes. The firm must file the retail communication with FINRA within ten business days of February 4, 2013 (i.e., by February 19, 2013). For example, a firm would need to file a retail communication concerning a closed-end fund that is used after the initial public offering 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.3
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 February 4, 2013, 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.
3. Will FINRA accept submissions of retail communications required to be filed for the first time under the new rule prior to February 4, 2013?
Yes. If a firm files before February 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 February 4, provided it is used without material change.
New Member Firms
1. 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 two respects. First, a new firm's one-year filing period commences on the date reflected in the Central Registration Depository (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.
2. If a firm that has not previously filed an advertisement with FINRA files its initial advertisement less than one year before February 4, 2013, will the firm have to continue filing after February 4, 2013?
In such a case, the firm must continue to file its advertisements with FINRA through February 1, 2013 (the last business day before the effective date of the new rule) pursuant to NASD Rule 2210(c)(5)(A). Starting on February 4, 2013, the one-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 one year after the CRD date. If that one-year period will have already expired as of February 4, 2013, the firm will no longer be required to file retail communications under FINRA Rule 2210(c)(1)(A) on and after that date.
3. What if a firm has never filed an advertisement with FINRA before February 4, 2013, but its membership had been effective for more than one 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 February 4, 2013.
1. Is a firm required to file the Management's Discussion of Fund Performance (MDFP) of a registered investment company shareholder report if the report is distributed only to existing fund shareholders?
No. FINRA requires firms to file the MDFP and sales material portion of a registered investment company's annual or semi-annual report if a member intends to use the report to market the fund to prospective investors. This filing requirement does not apply to shareholder reports that are provided only to existing fund shareholders.
Retail Structured Products
1. 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. 4
1. 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.
1. If a registered representative 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 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.
2. Is a registered representative 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. A registered representative is not required to disclose the firm's name as part of non-scripted, extemporaneous remarks during a public appearance.
1. See NASD Rule 2711(h)(13)(C), (D) and (E).
2. Unless FINRA specifically directs a firm to file its institutional communications pursuant to FINRA Rule 2210(c)(1)(B), a firm is not required to file its institutional communications with the Advertising Regulation Department. If a firm chooses voluntarily to file a third-party research report that qualifies as an institutional communication, however, an appropriately qualified principal must approve the report prior to filing. See FINRA Rule 2210(b)(1)(F).
3. 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.
4. See FINRA Rule 2210(c)(7)(F).