Frequently Asked Questions Regarding FINRA Rule 2272 (Sales and Offers of Sales of Securities on Military Installations)

Background

The Military Personnel Financial Services Protection Act ("Military Act") was enacted to protect members of the U.S. Armed Forces from unscrupulous practices regarding sales of insurance, financial and investment products. Congress amended Section 15A(b) of the Securities Exchange Act of 1934 with the enactment of the Military Act to require FINRA, as a registered securities association, to adopt rules governing the sales or offers of sales of securities on the premises of any military installation to members of the U.S. Armed Forces or their dependents.¹

In August 2015, the SEC approved the adoption of FINRA Rule 2272 (Sales and Offers of Securities on Military Installations). Consistent with the statutory requirement, Rule 2272 governs sales and offers of sales of securities by member firms on the premises of any military installation to members of the U.S. Armed Forces or their dependents.² Rule 2272 is effective March 30, 2016.³

Frequently Asked Questions

Q1. Does Rule 2272 apply to offers and sales of securities to retired, discharged or separated members of the U.S. Armed Forces or their dependents?

A1. Yes. FINRA interprets Rule 2272 broadly to apply to offers and sales of securities on the premises of any military installation to active duty, retired, discharged or separated members of the U.S. Armed Forces or their dependents.

Q2. Is there a directory of military installations for use by member firms in complying with Rule 2272?

A2. The Department of Defense maintains a directory of installations on its website. While the Department of Defense's directory may be a useful starting point for member firms, it is not an exhaustive list. It is important to note that Rule 2272(a) broadly defines "military installation" to include "any federally owned, leased or operated base, reservation, post, camp, building or other facility to which Service Members are assigned for duty, including barracks, transient housing and family quarters." Member firms must conduct their own diligence to determine whether a location would be a "military installation" pursuant to Rule 2272.

Q3. Does Rule 2272 apply to written communications (including electronic communications) received by a member of the U.S. Armed Forces on the premises of a military installation?

A3. FINRA interprets Rule 2272 to apply to in-person meetings on the premises of a military installation. Outside the context of an in-person meeting on the premises of a military installation, the receipt of written communications (e.g., written communications related to an individual's brokerage account or investments in a retirement plan) by a member of the U.S. Armed Forces on the premises of a military installation would not trigger the requirements of Rule 2272. FINRA reminds member firms that written communications received by a member of the U.S. Armed Forces or a dependent thereof either on or off the premises of a military installation would be subject to applicable FINRA rules, including, but not limited to, FINRA Rule 2210 (Communications with the Public).

Q4. Does Rule 2272 apply to a meeting between a representative and a member of the U.S. Armed Forces that occurs off the premises of a military installation?

A4. No. Rule 2272 applies to offers and sales of securities on the premises of a military installation. FINRA reminds member firms that offers and sales of securities off the premises of a military installation must comply with applicable FINRA rules, including suitability requirements, and that any misleading representation made to a member of the U.S. Armed Forces or a dependent thereof would be otherwise prohibited by FINRA rules.

Q5. Do the disclosure requirements of Rule 2272(b) apply when a representative agrees to meet a member of the U.S. Armed Forces on the premises of a military installation?

A5. Yes. If a representative arranges with a member of the U.S. Armed Forces or a dependent thereof to meet the individual on the premises of a military installation, Rule 2272 would apply to the meeting on the premises of the military installation. Rule 2272(b) mandates that the member firm, clearly and conspicuously, disclose in writing to the individual: (1) the identity of the member firm offering the securities; and (2) that the securities offered are not being offered or provided by the member firm on behalf of the Federal Government, and that the offer of such securities is not sanctioned, recommended or encouraged by the Federal Government.

Furthermore, Rule 2272(b) requires that this disclosure be provided by the member firm to a potential investor prior to engaging in sales or offers of sales of securities to the investor. Accordingly, a member of the U.S. Armed Forces or dependent thereof would need to be provided the disclosure prior to the representative engaging in sales or offers of sales of securities to the potential investor on the premises of the military installation (e.g., the representative would need to provide the disclosure at the beginning of his or her meeting with the potential investor). FINRA interprets Rule 2272 to require that the disclosure be provided only once by the member firm and not before each sale or offer of securities to the member of the U.S. Armed Forces or dependent thereof.

Q6. Does Rule 2272 apply to referral fees or incentive compensation paid to bank employees in connection with offers and sales of securities on the premises of a military installation to members of the U.S Armed Forces and their dependents?

Yes. Pursuant to Rule 2272(d), consistent with Section 15A(b)(14) of the Exchange Act, a member firm may not cause a bank employee to receive a referral fee or incentive compensation in connection with sales or offers of sales of securities on the premises of a military installation with any member of the U.S. Armed Forces or a dependent thereof, unless the bank employee is an associated person of a registered broker-dealer who is appropriately qualified consistent with FINRA rules, and the payment complies with applicable federal securities laws and FINRA rules. Accordingly, FINRA believes that member firms may not participate in or be a party to a referral program, including any third-party networking arrangement under SEC Regulation R, where the member firm knows or has reason to know that persons other than appropriately qualified associated persons of a registered broker-dealer will receive referral fees or incentive compensation in connection with sales or offers of sales of securities on the premises of a military installation with any member of the U.S. Armed Forces or a dependent thereof.

1. See 15 U.S.C. 78o-3(b)(14).

2. See Securities Exchange Act Release No. 75633 (August 6, 2015) (Order Approving File No. SR-FINRA-2015-009).

3. See Regulatory Notice 15-34 (October 2015).